When it comes to investing in natural capital, the perennial issue is one of clashing cultures and foreign languages. Often those who care deeply about nature and the environment are not financial experts, and may even mistrust the financial system. On the other hand, financial actors can view conservationists as tree-huggers with no idea of how the ‘real world’ works. Both tribes speak complex, technical languages that sound alien to the outsider.
All the more need, then, for conferences like Natural Capital Investment 2018, run by the Ecosystems Knowledge Network. The conference on March 1st, the first day of Spring, attracted enthusiastic and intrepid participants, as proven by their commitment to reach the venue at the British Library from all corners for the UK despite Storm Emma and her heavy snow.
Exploring natural capital investments
First, we heard from the financial sector. Bevis Watts of Triodos Bank provided a useful taxonomy of natural capital investments (see table below), with three broad groupings of projects and potential sources of finance for each. Many financial institutions want to back these types of projects, but there is a first-mover inertia as the market waits for proof that such projects deliver bankable outcomes. Enter the aptly-named Environmental Finance Ltd., an organisation that creates and partners with organisations like, say, WWF who develop innovative, investable environmental projects, often with corporates. Taking a blended finance approach, Environmental Finance helps to ensure that such projects are structured to deliver quality returns for investors, local communities and the environment at large.
However, we must be realistic about the current levels of investment in nature: for every one dollar invested in enhancing natural capital, there are many multiples funding projects that will undermine it, as organisations from Christian Aid to Greenpeace have recently highlighted. Reversing this will require systemic change in the financial system. And Emma Knight-Strong of the Green Investment Group reminded that scale from an investment perspective is not just about size, but about having a consistent pipeline of similar, replicable projects. Given the diversity of natural capital projects from catchment to catchment and country to country, assuring investors of replicable, dependable profits is a challenge.
Much can be learned from the emerging field of Social Impact Investments. Triodos Bank spoke about their work on Social Impact Bonds that deliver solutions to intractable, costly social problems. Like many environmental issues, these problems are not considered ‘bankable’. However, financial vehicles can be developed to channel funds from government and socially-motivated high net worth private investors, who both have an interest in solving these issues. A bond like this usually requires three to four actors: an organisation, like a local authority, seeking a solution to a problem and commissioning an intervention; an organisation like an NGO, with the expertise to trial the suggested intervention; a consultancy to provide advice; and social investors to provide capital.
Environmental Impact Bonds do exist, too. Quantified Ventures provided a case study from Washington DC, where a $25 million tax-exempt bond was issued to address water quality issues in the Potomac river owing to combined sewer overflows systems. In this case, instead of constructing a new US$3 billion tunnel (grey infrastructure), the project delivered 365 acres of green infrastructure across the city (e.g. gardens, permeable pavements, green roofs, and rain barrels) to help absorb excess stormwater and reduce the amount flowing into combined city pipelines.
Financing was secured via a ‘Pay For Success’ model, which linked interest payments for investors to the performance of the green assets. This performance was gauged with a small pilot of 20 acres of green infrastructure. Interest pay outs were then based on the probability that the green infrastructure would:
• Underperform - 2.5% probability
• Perform as expected - 95% probability
• Outperform - 2.5% probability
The policy landscape – how the UK is preparing for natural capital investments
Renowned conservationist and the new Director of Advocacy and Campaigns at WWF, Tony Juniper, spoke of the carbon consensus – the near-unanimous view at international level that urgent action on climate change is needed. The Paris Agreement and, in the UK, the Climate Change Act (2008) have been instrumental in achieving this consensus and catalysing action. Now, there is a need for the ‘Environment Act’, to spark the same consensus for nature. Such an Act would require buy-in not just from Defra, but from the Treasury as well.
The UK’s recently published 25 Year Plan to Improve the Environment was also discussed in detail. Shirley Trundle, Director for National Environmental Policy at Defra ran through some of the highlights: embedding environmental net gain as a principle for all new development; achieving zero avoidable plastic waste by 2042; and facilitating domestic carbon offsetting (that is, making it as easy as possible for companies to offset carbon within the UK, by investing in peatlands and woodlands among other things).
The next few months will see the government developing metrics to assess progress against this plan. One of the critical questions is how to define and measure environmental net gain. It was agreed that the plan should not gather dust on the shelf, but rather should be reviewed every 5 years, in line with election cycles and allowing each government to add their ideas and ramp up the ambition.