An environment for investment

Bruce Howard is Director of the UK-wide Ecosystems Knowledge Network and leading the organisation of the 2019 Natural Capital Investment Conference. In this first of a blog series leading up to the conference, he sets out the challenges and opportunities for investing in the fabric of the environment. References are listed at the end.

Sheep grazing in proximity to Canary Wharf, London. (C) Shutterstock.com

With the onslaught of economic and social pressures facing the UK, we depend on our natural environment for wellbeing and prosperity more than ever before.  Environmental economists are now adept at estimating the value of many aspects of our environment.  A report prepared for the Greater London Authority, National Trust and Heritage Lottery Fund last year estimated that Londoners avoid £950 million per year in health costs due to the City’s public parks. Similarly, a recent study of the public goods of a 1,000 hectare upland farm in Northern Ireland put its value, excluding food and its educational value, at £3.1 million per a year.

Eyebrow-raising values like these don’t reflect real money changing hands; but when combined with moral arguments, they might mean the environment will no longer be seen as a charity case, paid for by piecemeal grants, lottery tickets and the personal projects of wealthy people. We would never dream of financing our energy infrastructure or our higher education system like we fund the upkeep of our woodland, peatland or coastline.

The million, or perhaps it should be billion, pound question is how to finance the environmental restoration that many people now argue makes both economic and moral sense. It is a question that Theresa May will need to reflect on as she seeks to fulfil her 25 Year Environment Plan ambition for “ours to be the first generation to leave the environment in a better state than we found it.”

“We would never dream of financing our energy infrastructure or our higher education system like this.”

Does anyone have a few spare billion pounds?

The Natural Capital Committee for England, Chaired by Oxford economist Professor Dieter Helm, has talked-up the need for “investment” in our natural capital. (Natural capital is a metaphor for the environment seen through an economic lens.) Our understanding of what “investment” actually means in practice is, however, poor.

The July 2018 Environmental Audit Committee Report on HM Government’s 25 Year Environment Plan exposed the fact that there are only two ideas in circulation:

First is the post-Brexit redeployment of the £3.2 billion currently spent on the Common Agricultural Policy.  The basic premise behind this is that any spend of this money in future should support the provision of the public goods arising from rural land, including farmland. It may be that future payments to those who manage the land that hosts our ‘natural capital’ can be geared towards this. However, given the high value of the environment for businesses, local communities and our health system, should we not think more creatively about who pays for the restoration of it in rural areas? At least, let’s talk about mixing public finance with private finance and philanthropy. To do this we will need new agents to commission services.

The second idea about paying for natural capital restoration is that of ‘net gain’ payments from developers. This money is meant to pay for compensation for the impacts of built development, plus some element of overall benefit. Potentially, these payments could take into account not just biodiversity, but elements of environmental benefits (‘ecosystem services’) like flood risk reduction.  The Environmental Audit Committee report suggested that net gain payments equate to “private investment”. There are two problems with this:

  • While it is true that local or national government could invest funds it collects from developers, it is not private investment. Investment is about money paid willingly with the expectation of economic return.
  • Even though net gain schemes are important individually, there isn’t the evidence to say that collectively they will make a difference to national natural capital restoration needs. When biodiversity offsetting (a forerunner of net gain payments) was proposed by HM Government as a mechanism for compensating for habitat loss due to development in England, a report by consultants GHK suggested that less than 10,000 hectares of land could be subject to this each year.  On this basis it is hard to imagine how net gain payments could make any significant impact on the natural capital across the 13 million hectares of land in England, let alone the whole of the UK. If there is evidence that net gain payments could make a substantial difference to our emerging grand plans for environmental restoration, we urgently need this in public domain.

To deliver on our environmental restoration ambitions across the UK, we need to see agri-environment payments and net gain payments as part of a bigger mix of finance for natural capital on land. We also need to to find genuine new finance for the marine environment.

"To deliver on our environmental restoration ambitions across the UK, we need to see agri-environment payments and net gain payments as part of a bigger mix of finance for natural capital on land. We also urgently need to find new finance for the marine environment."

There are also governance questions to be addressed; could local authorities, or other bodies acting in the public interest, act as commissioners of the environmental services provided by land in public, private or third sector ownership?

The way forward - a new blend of finance

The inaugural Natural Capital Investment Conference in March 2018, with lead sponsor Triodos Bank, shone a spotlight on the need for a business case for new mixes of public and private investment into the environment.

The reasons for the lack of business case are primarily a lack of understanding and inclination.  The financial services sector hasn’t had a chance to explore the options for growing green finance beyond low carbon engineered technologies.  While flagship projects such as the £500 million Northern Forest in England are on the table, the necessary pipeline of large scale (or at least replicable) projects attractive to private investors isn’t yet flowing. The organisations that look after our environmental needs must understand the requirements of the different parts of the financial services sector.

Aerial view of Sunderland coastline with housing and light industry. (C) Shutterstock.com

As well as the inclination, we also need an innovation mindset. Organisations such as RSPB, WWF and Business in the Community are already thinking through new models for innovative finance. Surrey Nature Partnership has published a Natural Capital Investment Plan. Greater Manchester has recently commissioned an investment plan, led by Environmental Finance Ltd. What role is your organisation playing in this arena?

There are reasons to feel optimistic that we can secure new forms of blended finance, including genuine investment:

  • London has asserted itself as a global leader in green finance. Innovative financial services businesses who want to make a positive contribution to society operate throughout the UK. Isn’t now the time to deploy our green finance expertise, currently centred on ‘low carbon’ engineered technologies, to tackle the opportunities and needs for financing the fabric of the environment?
  • The UK is a global pioneer in social finance; finding innovative ways to tackle social problems. Shouldn't we be deploying our world-class green and social finance expertise on the challenges and opportunities for financing environmental restoration?

"Shouldn't we be deploying our world-class green and social finance expertise on the challenges and opportunities for financing environmental restoration in the UK?”

Over the last decade, climate finance – centred on 'low-carbon' technologies like solar power - has grown with government support. As the Green Finance Task Force stated in its report of March 2018, we need to similarly support investment in natural capital because of the climate resilience it delivers. Surely there is now a case for government to create the conditions for investment in the environmental infrastructure that deliver climate adaptation.  HM Government's proposed new Environmental Impact Fund could be a vital for pump priming innovation in blended finance that includes genuine investment.

The financial services industry needs to recognise that green investment can go well beyond engineered technologies.  Asset-owing environmental organisations need to understand the risk profiles, returns and the social impact that investors are looking for. Let's innovate, taking green and social investment to the heart of the UK's environmental infrastructure challenges. 

Join the discussion

Eye-brow raising economic values for the environment are generated to start informed debate about who pays for what and why. Our contribution to this is the Natural Capital Investment Conference, the next of which will take place in London on 28th February 2019. We are bringing together experts in environment and finance in London to discuss the future for blended finance with genuine investment. Alongside this, we have launched a Natural Capital Investment Forum for ongoing debate and shared learning.

At Ecosystems Knowledge Network our mission is to equip people to deliver wellbeing and prosperity through a healthy natural environment. 

Acknowledgements

Helpful comments from Jonathan Porter (Countryscape) and Paul Morling (RSPB) on this blog are gratefully acknowledged. The views expressed in this article are the author's own and do not necessarily reflect the views of any of the organisations referred to.

References

Economic valuations - two of many such studies profiled in the Natural Capital Assessment Gateway

Natural Capital Committee for England (the fourth report, published in 2017, includes over 30 references to "investment")

Surrey Nature Partnership (March 2018) Natural Capital Investment Plan for Surrey.

Business in the Community (July 2018) The Business Case for Water Resilient Cities

Environmental Audit Committee Report on the 25 Year Environment Plan (July 2018)

GHK (2011) Costing potential actions to offset the impact of development on Biodiversity. Final report submitted to Defra by GHK in association with eftec. No. J30258464 

Green Finance Task Force Report (March 2018)