Financing Restoration

Federated Hermes’ Senior Investment Manager Andy Turnbull explains how the firm’s nature impact strategy capitalises on the UK’s flourishing voluntary carbon markets. 

The UK voluntary carbon market (VCM) has expanded significantly in recent years, responding to surging investor interest in funding projects and increased corporate demand, driving an increase in the price of offsets.

Two frameworks have been officially recognised and backed by the UK government to date: the Woodland Carbon Code (WCC), and the Peatland Code (PC). Other frameworks, such as the Soil Carbon Initiative – a third-party regenerative agriculture commitment and verification programme –  have also emerged in parallel.

More recently, the UK announced the launch of a statutory biodiversity credit scheme, introduced alongside the mandatory Biodiversity Net Gain (BNG) – a government strategy aiming to develop land and contribute to nature recovery.

Although biodiversity credits have been operating on a voluntary basis for several years in various local authorities across the UK, the scheme has now become nationwide and mandatory through the latest legislation.

“Broadly speaking, the UK has got a good, long history of regulatory frameworks for developing these sorts of projects,” said Andy Turnbull, Senior Investment Manager at Federated Hermes. “When you’re planning and consenting a project, it’s got a really robust system to work through to make sure that you’re delivering the best on the ground. The UK’s land and property rights are also stronger than in many other countries where carbon projects are being developed.”

These specific features of the UK natural capital market have helped to contribute to recent premiums in VCM credits, relative to other VCMs globally.

“Biodiversity credits from the BNG market form part of the mix of projects we will invest in, using the government’s own metrics to calculate the biodiversity uplift,” said Turnbull. “There’s a framework in place to assess the start state of the habitat or the site that you’re developing, and ecologists and auditors record the progress against those metrics. Overall, there’s quite a lot of science behind the outcomes that you’re producing.”

Follow the trend

Aiming to capitalise on the positive state of play, Federated Hermes launched the UK Nature Impact Fund last year, alongside environmental impact investment adviser and fund manager Finance Earth.

The fund is described as a private markets blended finance strategy with seed money from the Department for Environment, Food and Rural Affairs (Defra), and has been designed to address the UK climate and biodiversity crises specifically.

“We’ll be investing into the restoration of nature and biodiversity across land, rivers, coastal communities and the marine environment, aiming to remove millions of tonnes of carbon dioxide from the atmosphere and other greenhouse gases,” said Turnbull. “Regionally, we’ll be improving air, soil and water quality, increasing public access to nature and creating skilled green jobs – which is all part of the ‘Just Transition’.”

Having received £30 million in investment support from Defra, the vehicle aims to invest in high-integrity nature-based solutions, targeting projects and impactful businesses operating across the nature restoration value chain.

“One of the reasons the fund has a UK focus first and foremost, is because the VCM and biodiversity market are in a pretty good place,” said Turnbull. “The two government-backed and recognised carbon frameworks [WCC and PC] are globally recognised as having robust methodologies and quality science behind them.”

The impact fund will look to help accelerate nature recovery in the UK by supporting key targets and objectives set out by the government – such as protecting 30% of land by 2030 in line with the Global Biodiversity Framework, unlocking infrastructure and housing developments, and “levelling up” by creating skilled green jobs across rural areas and coastal communities.

“One of the ways in which we will generate returns for our institutional clients is by investing into nature restoration projects, such as creating new biodiverse woodlands or restoring peatlands,” Turnbull explained. “These projects will generate high-quality carbon credits, which we will then be able to sell to deliver financial returns for our investors. The integrity of the UK VCM is important, and high-quality carbon credits form a key feature of our strategy.”

In addition, the team will develop BNG projects, which will generate biodiversity units and should bring further diversification to the sources of financial gains for investors. The fund also incorporates a complementary private equity allocation designed to maximise portfolio synergies by investing in nature restoration-related business.

Moving with the times

According to Federated Hermes, the UK Nature Impact Fund is the first vehicle designed to invest across the full spectrum of UK nature solutions at an institutional level.

The firm has long engaged in sustainable investing, including through its Biodiversity Equity fund – albeit a public markets vehicle.

“Other firms have previously focused on timber or agriculture, but this blending of ecosystem service markets – including carbon and biodiversity credits – and the ability to invest into businesses operating across the supply chain is new,” Turnbull added. “We think that’s a first and will really help accelerate nature restoration in the UK.”

The investment team looks to invest in small- and medium-sized unlisted companies operating in the natural capital space, aiming to create the market infrastructure around this.

“With our clients’ capital, we will be investing directly into major restoration projects which will restore habitats, increase biodiversity, whilst also creating positive social impact,” Turnbull continued. “That’s about as direct an impact you can have: by actively developing and funding those projects and providing the finance.”

The investment manager claimed that such projects can be more impactful for the climate transition than efforts to defund oil and gas, for example, or using voting rights to push for more sustainable policies within businesses.

“The biodiversity and nature crisis are so stark in the UK and globally that projects need to happen on the ground,” he added.

Seizing the moment

The UK government and its respective administrations have, however, been setting ambitious targets in recent years with regards to tree planting, peatland restoration, and tackling the nature and climate crises.

By 2025, it has pledged to fund at least 35,000 hectares of peatland restoration projects, including through the Nature for Climate Fund, and to plant 30,000 hectares of woodland across the UK.

“There’s been some really positive work, and there’s a good pathway there,” said Turnbull. “We see an opportunity for private finance to help accelerate the delivery of those targets, and to capitalise the government’s levelling-up agenda and the just transition.”

Many of the projects and businesses targeted by Turnbull and the UK nature team are often based in fragile rural or coastal communities – in the uplands of England, Wales and Scotland – which can benefit from such investments to build a more prosperous future.

“Everyone appreciates that public finances may be tight at the moment, but opportunities do exist – like the VCM or the biodiversity market – to generate solid revenues and returns for investors whilst creating more jobs and helping the government deliver on climate targets,” Turnbull claimed. “There’s a real chance to address some of the most pressing concerns on nature and climate in the UK, and I would hope this is an agenda that all parties can get on board with.”

Against the backdrop of receding climate commitments, the UK government should seize the opportunity to attract private finance and engage the investment market to play its part on nature restoration and the climate transition.

“Things like the peatland restoration market are not so common in other countries around the world, so the UK is still leading the way on that,” Turnbull said. “But good support needs to continue and sensible policies should be developed, or others will catch up. Climate and biodiversity are global issues, and so is the investment universe that revolves around them.”

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