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  • Writer's pictureFiona Smith

The what, why and how of natural capital finance

Finance for natural capital action needs to be scaled up and sped up if we are to see net gain of biodiversity. Tax incentives are a good way to do it, writes Paul Harris, Deputy Chair, Irish Forum on Natural Capital The growing acceptance of natural capital valuation as a critical tool for business is a welcome development in the transition to a new paradigm where the economy is viewed as part of the environment, rather than vice versa.

In order to progress this transition there is a need for increased financial capital deployment to facilitate natural capital action across the economy. This has been acknowledged by the European Union who, through the European Investment Bank, have launched a €100m Natural Capital Finance Facility (NCFF) in an effort to provide financial backing to a range of showcase projects across Green Infrastructure, Biodiversity Offsets and Payment for Ecosystem services. (Read more about the NCFF here)

Trees, wetlands and hills under a cloudy sky
Pic: Kevin Bosc via Unsplash

Too little too late?

Whilst this development is welcome, it is likely to prove too little too late to make a significant impact in reversing the depletion of freshwater, forests and biodiversity that has been a feature of the European environment for many years.

The overarching tone of the European Commission Mid-term review of the EU Biodiversity Strategy to 2020 is one of controlled pessimism: action is being taken to address biodiversity loss, but the outcomes are not turning the tide. The implications for the European economy as a result of this failure are ominous, more so given the forecasts of increased food demand and population growth in the face of climate change impacts. The success of the NCFF is likely to be muted by these factors.

The shortcomings of the European response to biodiversity loss and the lack of adequate financial capital provision to meet this challenge offer a unique opportunity for Ireland. Why?

We know that the priority for Ireland is investment through the Irish Strategic Investment Fund (ISIF) into areas of the economy that will offer a return coupled with economic growth.We also know that agriculture, food and tourism are massively important to the Irish economy. Investment in these areas could enhance natural capital at the same time as delivering jobs and opportunities – particularly in rural areas. But we'd need to use different metrics to measure success, such as the 'GDP Plus' idea being piloted by the Natural Capital Coalition.

The role of tax incentives in driving action

Of course, the responsibility for provision of financial capital need not fall entirely on the shoulders of public finance (ISIF). Innovative tax enablers would attract a significant amount of money that could be co-invested alongside state funds. For example, the successful s.486B Companies Act structure, which previously conferred tax benefits to companies who invested in renewable energy companies, could be adjusted to provide similar advantages for companies investing in Irish natural capital for a period of years.

The benefits for companies investing in such a structure would be multiple: a reduction in tax liability, constructive CSR considerations and positive environmental accounting aspects which would be beneficial for companies subject to the upcoming Non-Financial Reporting amendment to the Accounts Directive.

"Investment in a natural capital fund with the proceeds deployed in restoring                 biodiversity or natural capital would be an attractive mitigant for companies,                 particularly if this afforded tax benefits."

​Under this legislation, which is due to come into force by 2017, certain companies employing over 500 staff will be obliged to assess their environmental impact and detail their policies of mitigation. Investment in a natural capital fund with the proceeds deployed in restoring biodiversity or natural capital would be an attractive mitigant, particularly if this afforded tax benefits.

The emergence of impact investing may also offer a route to increased volume of financial capital for natural capital deployment. The adoption of the US model for programme-related investments might prove beneficial to family offices and philanthropic trusts domiciled in Ireland. Further, Revenue might give consideration to a variance in Deposit Interest Relief Tax (DIRT) for investors in dedicated natural capital investments.

In summary, the provision of financial capital is critical for the development and restoration of natural capital in Europe. The need for urgent action is self-evident. With its diversity of habitats and high potential for multiple beneficial outputs of financial capital working for biodiversity and natural capital repair, Ireland is well-placed to develop a leadership position in this area. Imaginative and bold taxation mechanisms can be successfully employed to deliver the investment that will create jobs and prospects in critical sectors of the Irish economy and secure an attractive position at the vanguard of an important growth area.

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