This article was first published in the Financial Times.
The UK is one of the most nature-depleted countries in the world.
To date, the UK’s been fairly sheltered from the environmental extremities experienced across the globe: severe heat, wildfires, extreme flooding, storms and droughts. What’s become apparent however is our unprecedented decline in nature. We’ve lost around half of our biodiversity since the industrial revolution. Nearly 1 in 6 species are threatened with extinction. We’ve lost 54% of flowering plant species. Suddenly the environmental crisis feels a lot closer to home.
Natural capital is a way of valuing the natural world. It describes nature as a collective of ‘natural assets’ – things such as air, plants, water and animals. These assets in turn provide value to humans in the form of essential services, often described as ‘ecosystem services’. Examples include food provision, pollination, flood mitigation and climate regulation. Whilst everyone recognises that nature is essential for human life, without being able to measure its value, it’s easy to miss (or ignore) the potentially devastating impacts of nature loss on societies and economies. Natural capital is a way of capturing and communicating that value, enabling more informed investment decision making.
So, what is the value of nature to the economy? An analysis in 2023 found that “more than half (55%) of the world’s gross domestic product (GDP), equivalent to an estimated US $58 trillion, is moderately or highly dependent on nature”. However, what springs to mind is a simple message from Tony Juniper, Chair of Natural England, at a recent conference: “the financial system fell out of the natural one”. If we don’t preserve our natural systems, there doesn’t seem much point worrying about the financial one. We cannot underestimate our reliance on nature.
Nature is becoming a focus within policy. In February 2024, the UK Government introduced a mandatory 10% Biodiversity Net Gain (BNG) requirement for all new major planning developments. As well improving habitat quality compared with a pre-development condition, the BNG legislation has also created an emerging nature market, where excess biodiversity units (the outputs of the BNG metric developed by DEFRA) can be registered and sold to other developers unable to meet the 10% gain provision through their own means. Nature markets will present a growing and significant investment opportunity as focus on nature intensifies.
But how do we measure something as diverse as nature? It is incredibly location specific; how can we compare the biodiversity impact of an investment in Devon to one in the Scottish Highlands?
Or mainland Europe? Even the DEFRA BNG metric uses habitat state as a proxy for biodiversity, removing the need to draw upon complex ecological data.
Materiality is key; understanding where and how your business interacts with nature. Guidance is emerging to support with this, such as the Taskforce on Nature-related Financial Disclosures (TNFD), which helps organisations identify their nature-related dependencies, impacts, risks and opportunities. However, there is still work to do to convert biological datasets into simple and comparable datapoints to support strategic decision making.
Working in the renewables industry, solar PV assets have a fantastic opportunity to support nature. For our UK portfolio, we’ve been undertaking annual ecological surveys to build a biodiversity baseline from which we can identify opportunities to protect or enhance nature. As a result of measures implemented on site, one of our solar farms recently became the first site in the UK to receive the inaugural Wild Power® gold certification.
Nature loss presents clear risks to businesses and investors. Emerging nature-related law and increasing regulatory and disclosure obligations could drive compliance costs; more stringent lending requirements may restrict access to capital; and the economic valuation of nature will likely impact the valuation of companies reliant upon it. At the same time, as the economic value of nature is realised, there will be urgent need to redirect capital flows towards activities which restore and protect natural systems.
In 2022, the Guernsey Financial Services Commission, Guernsey’s financial services regulator, launched the Natural Capital Fund Regime; the world’s first regulated natural capital and biodiversity investment fund designation. The regime is intended to enhance investor access to natural capital focused investment, specifically opportunities which generate returns whilst also making a positive contribution to, or significantly reducing harm to, the natural world. Under the Natural Capital Fund Rules, a scheme’s objectives must align with either:
the UN’s Convention on Biological Diversity’s Post-2020 Global Biodiversity Framework’s 2030 Action Targets;
the UN’s Sustainable Development Goals 12-15; or
the EU Taxonomy for Sustainable Activities’ Environmental Objectives (c) to (f).
The introduction of the Natural Capital Fund regime demonstrates Guernsey’s continued determination to remain at the forefront of the sustainable investment sector, with the regime anticipated to supplement the £5.3 billion already channelled into sustainable investments by Guernsey Green Funds.
The financial sector must act now to help reverse nature loss, whilst seizing the opportunity of this emerging investment trend.
