Environmental, social and governance (ESG) investors were once considered a niche group. However, today investors are becoming increasingly concerned that extreme weather, climate change and ecosystem breakdown will impact business operations and the planet so they are adapting their portfolios in response. Asset managers globally are expected to increase their ESG-related assets under management to US$33.9 trillion by 2026 (21% of assets under management), which is a 46% increase compared to 2021 (PWC, 2022). This momentum will drive the market for nature-based solutions.

The UN has identified that nature-based solutions are still significantly under-financed. According to its calculations, current finance flows into nature-based solutions must double by 2025 and triple by 2030 if the world wants to halt biodiversity loss, limit climate change to below 1.5°C and achieve land degradation neutrality by 2030.

In the UK, there is a funding gap of £44–£97 billion over the next decade to deliver the nation’s key nature goals. Public and philanthropic funding alone will not be able to fill this gap, therefore, accelerating private finance in nature-based solutions is paramount. However, post-CAP policy is diverging in its approach to private market development, highlighting the role government has to play in delivering for nature recovery.

WHAT IS GOVERNMENT DOING TO DEVELOP MARKETS FOR NATURE-BASED SOLUTIONS?

1. Market standardisation
   
   Providing government-backed guidance on data monitoring, reporting and verification reduces market uncertainty – for example, the government-endorsed Woodland Carbon Code and Peatland Carbon Code, and funding the development of the minimum requirements for soil carbon codes. The principles for responsible investment in Scotland are also a type of market standardisation, intended to boost investor confidence. Government also has a critical role to play in establishing the regulatory baseline for land use – a high standard puts additional costs on land managers, but a baseline is needed to create fairness and prevent backsliding.
2. Create demand drivers
   
   Direct regulation, for example introducing mandatory biodiversity net gain (BNG) and nutrient neutrality requirements, increases demand for nature-based solutions to unlock development. The Environment Act also introduces new water and waste regulation alongside the polluter pays principle, forcing water companies to consider innovative nature-based solutions. The task forces on nature and climate-related financial disclosures are examples of ways that government can nudge companies into creating environmental targets that increase demand for nature-based offsets.
3. Controlled public investment
   
   (see table below) Governments are committing to providing public money for nature-based solutions through a range of support schemes. These payments incentivise and regulate land management actions and outcomes, but poor design can risk undermining private markets.
4. Government underwrites risk
   
   There are three key ways government can support emerging environmental markets by de-risking projects for early developers, investors and buyers:

• Price guarantees – for example, the Woodland Carbon Guarantee, which provides a government-guaranteed base price for woodland carbon credits, but with the ability for project developers to sell to the private market instead if open market carbon prices exceed it.
  
  
• Design stage/planning grants – to improve the viability of a project, often used to support the proof of concept, establish a baseline or monitoring and verification system and develop a pipeline of projects. Examples include Peatland Action funding, the Investment Ready Nature Scotland Grant Scheme and the Natural Environment Investment Readiness Fund and Big Nature Impact Fund in England.
  
  
• Concessional finance – provided by public entities on more favourable terms in order to mobilise commercial capital. Concessional loans can include subsidised interest rates, first-loss guarantees, impact-linked loans or results-based financing.

PUBLIC INVESTMENT INTO NATURE-BASED SOLUTION DELIVERY

England, Scotland and Wales are at different stages of post-CAP policy development, adopting varying approaches to supporting farmers and land managers to deliver nature-based solutions through funding support schemes. The governments also take different approaches to enabling blended and private finance to fund nature-based solutions. We analyse the approaches within the table below.

ADDITIONALITY: A BARRIER TO OVERCOME

When a nature-based project is accredited for the environmental services it delivers, there is a need to ensure that the credits issued represent real environmental improvement. To ensure integrity and efficiency in these markets, the nature-based project that generates the environmental services must be “additional”, in other words, was not already being provided. A lack of clarity and consistency around what tests for additionality should be required is creating uncertainty in the marketplace, particularly where more valuable services (such as carbon sequestration) are not deemed to be additional to low-value agricultural activity. Fundamentally, one piece of land delivers multiple services, and whether it’s meat, wool and milk from sheep grazing or biodiversity uplift, carbon sequestration and flood mitigation from tree planting, all of these services must be recognised and valued.

WHAT DOES THIS MEAN FOR LAND VALUES?

Despite government action to support the growth of private finance for nature-based solutions, there remains uncertainty around the viability of returns from environmental income streams. Therefore we are seeing a bias towards investors purchasing rural land outright rather than investing in specific nature-based projects. While land values on the whole benefit from this, there is growing evidence of strong competition for the largest properties where institutional-scale capital can be deployed, which has a positive impact on the values achieved for the owners of these properties.

As more investors are looking to purchase rural land, the demand is highest for land with the greatest nature-based solution income potential. This includes land for afforestation and peatland restoration, as these projects are well supported by existing government schemes. Indicative of this is the rising value of poorer quality pasture land, most suitable for woodland creation, which has increased 12.4% since December 2021 and by more than any other type of farmland. Demand for land that can deliver nutrient neutrality and BNG solutions will be localised due to the mitigation hierarchy and catchment requirements that strengthen landowners’ negotiating positions. Greater clarity on soil carbon standards and the adoption of a pragmatic approach to additionality could unlock new funding into productive farmland.

Further governance and clearly defined first principles are needed to create better functioning nature-based income streams and shift the bias towards investing directly into solutions rather than speculatively into rural assets. No matter how this segment of the market evolves there will always be a role for investors to deliver more resilient, multifunctional and dynamic landscapes that the country requires.

_{Read the articles within Spotlight: The Farmland Market below.}