Green finance must reach beyond low carbon

Decarbonisation is not the final word in the pursuit of clean growth and green finance argue Bruce Howard and Sarah Jane Chimbwandira.

The UK Government’s Clean Growth Strategy states that clean growth equates to growing national income while cutting greenhouse gas emissions. While decarbonisation of any economy is laudable and necessary, the green finance community needs to look beyond carbon. It is not the be all and end all of being clean or green.  In this article, we explain why.

First and foremost, to focus solely on low carbon engineered technologies green finance is to ignore the convincing evidence for the role of the natural environment in business growth and economic resilience. The Natural Capital Committee for England, chaired by Oxford economist Professor Dieter Helm, has demonstrated that investment in environmental restoration makes economic sense at both the national and corporate levels. The Green Finance Taskforce – a specification in the UK Clean Growth Strategy – refers to the key role of the ‘fabric’ of the environment (natural capital) in climate resilience.

In the UK, the Natural Infrastructure Scheme illustrates the potential for a new breed of green finance. The architects of this are Green Alliance, an environmental think-tank, and the UK’s largest non-government land-owner, The National Trust. They are seeking to reduce the £2.4 billion of costs each year faced by business and government due to river flooding and poor water quality in England. They have suggested that if a group of ten farms worked together to introduce ‘soft’ engineering measures to slow the flow of water and improve water quality, this would save £4.7 million over 15 years compared to business as usual options. Based on this value, a scalable market in avoided costs could result across the whole country. New contracts could be formed between land-managers and buyers of environmental outcomes such as infrastructure businesses and water utilities. Such agreements are not unprecedented. In South West England, the water utility is already involved in a £11 million scheme with farmers to reduce water treatment costs.

"... a scalable market in avoided costs could result across the whole country."

Alongside the Natural Infrastructure Scheme, several locations in the UK are formulating Natural Capital Investment Plans. These are co-ordinated efforts to blend multiple sources of public and private finance associated with decarbonisation and the plethora of benefits that a restored environment provides. The plan for Surrey – an economic powerhouse in England – sets out actions to link the demand for environmental restoration (the economic logic for restoring natural capital assets) with the supply side (investors seeking investments with conservation impact). Key to this is the harnessing of multiple revenue streams; compensation funds from developers as well as businesses seeking to protect property and have a healthy workforce. The leader of this project – Surrey Nature Partnership – is working to establish a £20 million Natural Capital Investment Fund by 2023.

Greater Manchester – one of the UK’s biggest city regions – is set to publish its Natural Capital Investment Plan in early 2019.  

The emerging natural capital investment arena is distinctive from conservation finance because it is about restoring the basic functions of the environment to business and the economies to which they operate. For this, new financing mechanisms are required that deliver returns for investors. It is about redefining the balance between public and private financing of the natural environment, recognising that both public and private benefits flow from a healthy natural environment.

"It is about redefining the balance between public and private financing of the natural environment, recognising that both public and private benefits flow from a healthy natural environment."

There are, of course, good reasons why green finance to date has focused on investment in manufactured technologies that provide lower greenhouse gas emissions per unit of output.  These technologies are associated with known risk profiles and revenue models. Government support has been forthcoming. But innovative financial services businesses must surely look to the emerging revenue streams associated with the smorgasbord of services that environmental features, such as woodland and wetland, provide. Included in this, is the carbon-sequestration value of soils, marine habitat and peatland. Governance and brokering of this emerging investment market remains complicated, but there is no fundamental reason why it could not be resolved. Trading platforms for environmental services are emerging. Some sectors of the financial services industry, such as insurance, are well-placed to invest in natural assets, even if ownership of those assets is complicated.

It is notable that Macquarie’s Green Investment Group includes the enhancement of the natural environment and biodiversity among its five ‘green purposes’. With growing talk within the private sector of the importance of natural capital, enhancement must surely mean actions to restore the core functions of the environment. It is different to protecting the environment – and people – through greenhouse gas emissions reduction. We urgently need investors to partner with environmental initiatives to demonstrate the business case for natural capital investment, and how it is scalable. The Natural Capital Investment Conference, taking place in London on 28th February 2019, is our way of stimulating this.

This week the UK is enjoying styling itself as “Green Great Britain and Northern Ireland”. The overwhelming focus of this week is on low-carbon. Decarbonisation should not, however, the be all and end all of a greener nation, a greener business or a greener financial services sector. There is ample room for innovation in investment in the natural environment itself, based on revenue streams associated with securing much valued environmental services such as flood risk reduction and water quality improvement.

"Decarbonisation should not be all and end all of a greener nation, a greener business or a greener financial services sector." 

Dr. Bruce Howard is organising the Natural Capital Investment Conference in London on 28th February 2019. He is Director of the UK-wide Ecosystems Knowledge Network, which was initiated by UK Government in 2011 to exchange best practice in managing the environment for wellbeing and prosperity.

Sarah Jane Chimbwandira is Director of Surrey Nature Partnership, which earlier this year published a Natural Capital Investment Plan. She is also a trustee of the Ecosystems Knowledge Network.

Article first appeared, October 2018