Response to the Natural Capital Committee Annual Report

Response to the Sixth Annual Report of the Natural Capital Committee for England: ‘A golden opportunity to endorse blended finance for 25 Year Environment Plan delivery’

Organisers of The Natural Capital Investment Conference respond to the NCC’s latest annual report say:  “The government needs to catalyse blended finance options if the UK is to fulfill its ambition for environmental restoration.”

The Natural Capital Investment Conference is on 28th February 2019 at The Royal Society, London.  The conference is organised by Ecosystems Knowledge Network.

 

5th February 2019 - The latest annual report of the Natural Capital Committee (NCC) provides a thorough assessment of the UK Government’s progress with implementing its goal to improve the environment within a generation. While there is much to welcome, the principles for delivering policy are open to question. In advising government, the NCC needs to be clear on the role of the private sector in financing the level of environmental restoration that will be crucial in climate resilience.

Improving the environment within a generation is the headline goal of the 25 Year Environment Plan, launched by the Prime Minister one year ago. The document covers an array of environment-related topics old and new. Alongside environmental infrastructure projects such as the Northern Forest, it has something to say about everything from the ivory trade to vehicle emissions. In its latest report, the NCC is asserting itself more clearly than before as the body to keep implementation of the whole Plan in check. As such, the group of eight professors led by Oxford economist Dieter Helm is embracing a herculean task.

The Committee’s Terms of Reference ask it to provide “independent advice on protecting and improving natural capital.” It is easy to argue that everything affecting the condition of the environment is related to the state of natural capital. But given the brilliant array of environmental initiatives already established in the UK, it is our view that the Committee should prioritise the state of the eight broad habitats that were the subject of the UK’s biggest environmental census - the 2011 National Ecosystem Assessment.

 

Three principles for delivery

This report introduces three principles to govern the delivery of the 25 Year Environment Plan: public money for public goods, the polluter pays and environmental net gain.  We address each of these as follows:

Public money for public goods:  It is vital to remember that even if public goods arising from the environment are, strictly-speaking, non-excludable, they are spatially-determined. This means that there are often clearly identifiable groups of beneficiaries that have a financial interest in maintaining these goods (ecosystems services). Water utilities seeking to reduce drinking water production costs and insurers seeking to reduce flood risks are two examples.

The Strategic Outline Case for natural capital finance, commissioned by Defra last year, clearly identified models for funding environmental restoration that do not rely solely on the taxpayer. The very logic of natural capital, with its focus on maintaining assets that yield specific benefits of economic significance, points to a blended finance model. If the narrative of public money for public goods is to be promoted, there needs to be more detail on what it means.

The polluter pays:  This age-old principle is a central tenet of sustainable development. As such, it seems reasonable for the Natural Capital Committee to use it. But in a globalised world with complex and entangled supply chains it is hard to identify “polluters.” For instance, if a newly-built home is flooded, who is the person doing the harm? Is it the homeowner (who almost certainly isn’t carbon neutral), the housing developer, the Local Planning Authority, land managers upstream, or national government?

Natural capital encourages systemic thinking. Rather than elevating the polluter pays principle, the priority should be to give businesses, citizens and government the financial incentives to make choices and provide financial services that are ultimately restorative of our environment. Natural capital thinking promotes payments to protect self-interest.

Environmental net gain: Of the three principles, this is the one that puts us in the mindset of restoring natural assets. Beyond compensating for losses, an unanswered question is how much developers can be pushed to paying for substantial net gains. Will the net gain element of developer payments really make a dent in the scale of financing required for delivery of the 25 Year Environment Plan?

We need to be careful with the notion that environmental gain occurs solely or mainly alongside reparations for harm. While the NCC’s pragmatism in singling out developers is understandable, the economic case for restoring natural capital is much broader and stronger. This case has been articulated very well by the Natural Capital Committee over its six years. Before the Committee gives advice to government on environment net gain, we need hard evidence of what this policy might achieve in terms of delivering the 25 Year Environment Plan. This means dialogue with developers.

 

The finance question

Given its remit to advise Government, much of the attention of the Natural Capital Committee in this latest report is focused on metrics and governance. Nonetheless, finance is surely an area that needs to be a focus. References to “investment” in the latest report appear to have been written with the public purse in mind. Disappointingly, the role of the private investor is not mentioned.

When it comes to finance, the Natural Capital Committee should take a wider view and consider the global growth of climate finance, social finance, conservation finance and impact investment around the world. In advising on the delivery of a 25 Year Environment Plan that has become so broad, it may wish to consider its interface with those at the heart of our financial capital and driving responsible investment. For example, specifications on Corporate Natural Capital Accounting surely offer a way into this. In addition, it is not too late to get natural capital restoration into the Green Finance Strategy that the Government is expected to publish this year. This can be done by expanding on what the Green Finance Task Force said about the role of natural capital in climate resilience.

 

In conclusion

Blended finance for environmental restoration is not a holy grail. The delegate list for the Conservation Finance Investors Conference in New York last month was dominated by financial services representatives not environmentalists. Closer to home, the Greater Manchester Natural Capital Investment Plan was showcased last week featured input from financial experts at Triodos Bank, Environmental Finance, Abundance Investment and Co-operative Bank.

Our government needs to take account of blended finance options if the UK is to fulfil its ambition for environmental restoration. The UK is on the cusp of a great opportunity to use natural capital investment to realise the ambition it laid out in the 25 Year Environmental Plan.  Missing this will have severe implications for the future quality of our natural resources and our economy’s and society’s resilience to climate change.

 

Read the NCC 6th Annual Report here:  https://www.gov.uk/government/publications/natural-capital-committees-sixth-annual-report

 

Contact Bruce Howard, Conference Director, Natural Capital Investment Conference on email bruce@ecosystemsknowledge.net

 

The Natural Capital Investment Conference brings together experts in finance and environmental management to explore investment models in the environment based on its economic value to business and wider society. The next conference takes place on 28th February at the Royal Society in London. The conference is organised by the national Ecosystems Knowledge Network which, like the Natural Capital Committee for England, was a specification in the UK Government’s 2011 Environment White Paper.  Full details at ecosystemsknowledge.net/naturalcapitalconference