Across the globe nearly 200 countries, including the United Kingdom, have now signed international agreements to conserve 30% of land and seas by 2030. There is irrefutable evidence that global and national economic drivers have contributed significantly to the nature and climate emergencies, and with it, the recognition that for nature to recover and to achieve a transition to a low carbon, sustainable economy, much more investment and ‘green finance’ needs to be mobilised to meet those agreed global and national pledges. 

The UK Government was the first to develop a Green Finance strategy in 2019 and was the first G20 nation to mandate companies to report their climate impacts and are now working globally to develop similar reporting requirements for biodiversity and nature. Alongside the Government’s goal for Britain to become Net Zero by 2050, the publication of the influential review “The Economics of Biodiversity: The Dasgupta Review” outlined clearly the urgent need for action as well as the economic opportunities this action presents. The review states unequivocally that “The world cannot tackle climate change and build long term economic resilience without protecting and enhancing nature.”

The 2021 Green finance institute report ‘The Finance Gap for UK Nature’ estimated that there is funding gap of between £44 billion and £97 billion required to meet all our goals for 2030. This is the gap between what is available publicly and what is estimated to be needed. As gaps go, that’s a pretty large one and the UK government has a stated goal in the Green Finance Strategy ‘to raise at least £500m per year of private finance into nature’s recovery by 2027 and more than £1bn by 2030’. 

But what does the term green finance actually mean?

At its simplest, green finance is any structured financial activity – a product or service – that’s been created to ensure a better environmental outcome. It includes an array of loans, debt mechanisms and environmentally positive investments that are used to encourage the development of green projects or minimize the impact on the climate of more regular projects. Or a combination of both

Typical projects that fall under the green finance umbrella include: 

• Renewable energy and energy efficiency 
• Pollution prevention and control 
• Biodiversity enhancement and restoration 
• Climate change adaptation and mitigation 
• Circular economy initiatives 
• Sustainable use of natural resources and land   

Through changes in regulation and legislation as a result of the ambitious 2021 Environment Act, building on the 25 Year Environment Plan and the Environmental Improvement Plan, the government has introduced a range of publicly funded initiatives to kick start the green economy.  However, the Green Finance Strategy makes it clear that the UK government cannot fill the funding gap alone.  It is vital that if we want our nature to thrive and flourish and deliver massive benefits for society, we need to bring in private finance at a huge scale – so there has been a surge in what we prefer to refer to as Nature Markets in the UK and globally.  

Within the private sector, there is a growing number of coalitions of businesses who are recognising the critical role that the natural environment plays in their operations, particularly around production challenges in the UK relating to the volatility of overseas crops to unpredictable weather conditions and extreme conditions such as flooding and drought,  and  the growing customer expectation across a huge spectrum of financial and business organisations that sustainability is taken more seriously - it is now a key part of the decision or procurement process. Many organisations are looking to, not only improve how they deliver their own business activities, but also allocating significant resource to nature recovery projects as part of their commitment to a longer-term environmental strategy. As a result, a range of new mechanisms and funding streams are being developed enabling large sums of investment, through both statutory and voluntary Nature Markets.

How do Nature Markets work?

It may be easier to think of this in terms of Nature Markets. As in all markets there is a buyer (a business that’s identified a need) and a seller (Project Developer), and a platform or mechanism to bring the two together – often with a framework, guidance or law that ensures the transaction is conducted to high standards.  As with any market there are also Investors who have an interest in seeing the market succeed. In the case of Nature markets, there are Voluntary Markets where Buyers decided to purchase Nature Credits, and Statutory Markets where legislation makes it a requirement.

What could Green Finance support in Somerset? 

It’s really important that green finance is used strategically, with transparent standards, and at scale, if it is to contribute as needed and make a real difference. A key way of guiding investment in nature is through the Local Nature Recovery Strategies (LNRSs) - instruments of the 2021 Environment Act. Somerset Council is one of 48 responsible authorities appointed by DEFRA to develop a LNRS in their county in England. Somerset Wildlife Trust is working in partnership with Somerset Council on the creation of our LNRS, acting as a conduit to the sector wide members of the Local Nature Partnership, and ensuring that the consultation process allows all residents of the County to contribute. The Strategy will agree priorities for nature recovery and propose actions in the areas which will have the greatest impact county wide. For the strategies to be effective, they must have ambitious delivery plans, innovative investment mechanisms and be regularly reviewed and monitored.

What projects are the Trust currently involved in?

Somerset Wildlife Trust have already been pioneering green finance mechanisms.  The restoration and rewetting of damaged peat soils at Honeygar – the Trust’s first wilding site on the Somerset Levels, is bringing Soil Association validated, high integrity carbon credit units to the market thorough the Wilder Carbon Standard. The Trust was also successful in securing funding for one of 22 pilot landscape recovery projects in the first round of DEFRA Environmental Land Management funding, working with 15 landowners to finance nature recovery through nature market approaches.

Alongside schemes like Wilder Carbon and ELMS Landscape Recovery there are a wide range of other mechanisms that exist. These include the established Peatland and Woodland Carbon Codes for voluntary carbon credits, and mandatory Biodiversity Net Gain (BNG) for development - an area the Trust’s consulting arm, First Ecology, is already supporting a range of landowners to develop projects for Somerset Wildlife Trust and other eNGOs, and are uniquely placed to provide support, advice and guidance for many of these new initiatives, which are often long term in nature and hence require certainty of oversight beyond individual generations.

Why do private companies invest in nature markets (what are the products)? 

Regulatory Obligations (Statutory market)

The UK Green Finance Strategy 2019, as well as setting out its aims for Mobilising Green Investment also outlined Sustainability Disclosure Requirements (SDR) for companies over a certain size. It provides a comprehensive, regulatory framework that mandates companies and financial institutions to disclose both their negative and positive impacts on the environment and society, for example carbon emissions. 

Some businesses are required to set and report on progress to environmental targets under other  legislation such as the EU Corporate Sustainability Reporting Directive, and require the use of green finance initiatives to achieve the targets.

The Environment Act 2021 laid down the UK’s environmental policies and among other things set out the legal framework for new statutory duties for local authorities on nature recovery including Biodiversity Net Gain (BNG), Biodiversity Reporting.

BNG is now mandatory for major developments including Nationally Significant Infrastructure Projects (NSIPs). All new planning applications will have to provide BNG +10%, i.e. a 10% gain in biodiversity value from the pre-development baseline to get planning approval. This gain can be demonstrated onsite or offsite. The number of units of Biodiversity Gain is calculated using a metric devised by DEFRA and these units can be sold to developers from offsite locations to allow them to meet their requirements. Proximity of the improvement to the development is rewarded, with the unit cost to developer increasing as the distance from the development increases.

In Somerset, water quality is of huge concern, and never more so than for the Somerset Levels and Moors – where excessive nutrient pollution has led to the condition status of all the Somerset Levels and Moors SSSI sites being ‘Unfavourable – declining’ - the worst status before ‘destroyed’. Nutrient Neutrality (NN) requires that new housing developments in certain river catchments like the Brue should not add more 'nutrient pollution' to the water system.  As a result, new developments there must ensure there is no net increase in nutrients. Nutrient credits may have to be purchased to achieve that goal. These are interesting new ways of diversifying land use, and many landowners are considering how they can contribute to the whole farm economy.

Voluntarily (Voluntary market)

Many companies recognise that their business model depends on the natural world, or their biggest risks are related to the environment (ie insurance companies) so consider it essential business planning to invest in nature. Others know their stakeholders or customers expect them to take significant environmental actions. 

For example, the Voluntary Carbon Market is active globally. In the UK there are three Standards governing VC transactions: Peatland Carbon Code, Woodland Carbon Code and Wilder Carbon. Businesses need to purchase carbon credits because they cannot reach their net zero goals without them, so purchase credits from projects such as woodland creation or peatland restoration where the carbon storage or removals from the atmosphere and monitored and independently verified.

Wilder Carbon

Somerset Wildlife Trust has chosen to work with Wilder Carbon to sell carbon credits on our Honeygar site (where we are rewetting the peat, thereby reducing the amount of the greenhouse gases being released into the atmosphere by 40,627 tonnes). Developed by Kent Wildlife Trust, it best aligns with our values:

• Buyers must be approved & shown to have a scientifically measurable carbon reduction strategy they are actively delivering and publicly reporting on
• Project Developers must be approved as Trusted Delivers with a track record of delivering high quality habitat creation and management projects
• All projects must deliver a biodiversity uplift as well as reduce carbon emissions
• All projects are independently verified by the Soil Association at regular intervals.

In Somerset, the Somerset Catchment Market (SCM) offers sellers and buyers of Nutrient credits and BNG units the opportunity to trade these services. The market is already proven and provides all the necessary processes and legal agreements for farmers and landowners to sell their ecosystem services and for developers to purchase them. Market Round 2 recently settled for Phosphorus Mitigation in the Tone and Parrett catchment areas.  

How do Nature Markets work?

Buyers first identify their needs. Project Developers are usually land owners who want to deliver more for nature and/or find new ways of generating income from their land. A Project Developer needs a baseline assessment and a forecast of potential for biodiversity or carbon or nutrients, then a financial forecast for the potential income and expenditure to deliver the project.

Once figures are agreed, the project needs a Management and Monitoring Plan and legal contracts to set out what happens if the land does not respond as expected, or if the land manager deviates from the Management Plan. All projects will have an independent verifier at set intervals to ensure the aims are being realized.

The projects must be managed for the agreed aims for a set long-term period: BNG is 30 years, carbon is 50 years and phosphates is 80 years. Legal agreements must be in place to ensure that if the land is sold the aims must still be delivered according to the management plan.

Corporates are both potential investors and potential buyers of ecosystem services as they seek to become carbon neutral or meet their other Environmental and Social goals. Aviva is a prime example, providing the Wetlands Wildlife Trust (WWT) with £20m for new saltmarsh creation and £37m to The Wildlife Trusts (TWT) for Temperate Rainforest Restoration and associated research. Large corporates in Somerset are indicating interest in investing in nature projects in the county so we are starting to have meaningful dialogue with them about the ways in which they can support our work, under the watchful eye of our stringent corporate due diligence team. We can also look beyond Somerset, including to global businesses, helping to bring green investment into some of our most valuable natural landscapes.

What other green finance products are there out there? 

There are an increasing number of green finance products coming into the market place, including loans from environmental impact investors and philanthropic lenders which can be made to individuals, organisations or through aggregation models that bring together multiple smaller landowners in robust and secure legal frameworks.

Other green finance public funds include the Natural Environment Investment Readiness Fund (NEIRF), which is providing £10m of grants up to £100k to enable nature projects to be taken to a point where they could attract private investment.  The Big Nature Impact Fund is another government initiative, seeded with £30M from DEFRA and aiming to attract private sector investment to nature friendly landscape regeneration.  

The government has also issued rounds of green bonds from 2021, which are a type of investment that provides a fixed income and aims to raise capital for climate, sustainability and environmental projects.

How does Somerset Wildlife Trust plan to operate in this sector?

“While these new nature markets are required to meet the funding gap for delivery of nature’s recovery in the UK, as with any new area of economic activity there are reasons to tread carefully. These include the uncertainty of mechanisms and markets themselves which are relatively untried and unproven, but more importantly, as an environmental charity we must be confident that the approach we take is improving nature and the environment in Somerset and globally.  

"We are careful to engage in high integrity solutions only, such as Wilder Carbon, that requires buyers of nature credits to be on a journey to reduce any harms to nature and climate BEFORE they purchase any credits. We follow best practice guidance from DEFRA, The Wildlife Trusts and other eNGOs to make sure we are operating the highest possible standards, such as the Mitigation Hierarchy for biodiversity to make sure that first principles of avoid harm, reduce then mitigate and compensate harm come before any purchasing of offsite credits. We carefully conduct due diligence on any buyers and investors, and have clear criteria for developing projects to make sure that our number one priority is enabling nature’s recovery. We are clear that we will refuse buyers if they don’t match our values and standards. Our approach is to test and trial the various mechanisms available to landowners and be transparent in our learning so that we can support, encourage and advise other landowners on the best fit for their land holdings. 

Simon Clarke, Head of Nature Recovery adds a final comment, “It’s critical that we generate the level of finance required to fund our ambitions for nature in the county. Blending the 60 years of knowledge, skills and experience of our land management teams, the ecological skills of our consulting arm, First Ecology (SWTC), and our new team of green finance experts, we have built an extremely effective team that can now help support landowners across the country to explore these new opportunities and diversify their income in a range of different ways. There’s no doubt that it’s new and unchartered territory , but one we must navigate and map for the benefit of nature’s recovery.” 

• Do you own land that might be suitable for green finance? Not sure where to start? Our consulting arm, First Ecology offers a free, no obligation half hour consultation with landowners to help.  Email tilly.heasman@firstecology.co.uk 

Need some help with the jargon? We think the Green Finance Institute jargon buster might be able to help: https://www.greenfinanceinstitute.com/gfihive/farming-toolkit/glossary-…