There is another way to do ESG investing for nature, according to Jan Stannard, Acting CEO of Heal Rewilding.
For reasons we all understand, investment is critical if nature is to recover. There is a relatively quick and straightforward way to invest in nature recovery projects in the UK which doesn’t seem to be on the radar for many potential investors who have the willingness and resources to make a rapid and meaningful difference to both nature and climate.
This approach to investment is already out of the starting blocks and below is an example of a well-known FTSE 250-listed company which has led the way. By highlighting this option for using private capital for nature and climate, the hope is that other ESG investors will be inspired to follow.
Before outlining this magic bullet – because that’s the contention – let’s recap on the compelling reasons for continuing to read this piece.
The global index of ‘biodiversity intactness’, a major project by the Natural History Museum, ranks the health of natural environments throughout the world. Being in 1st place is the winning position. The UK is ranked 189th. The state of our nature is near rock bottom, almost as bad as it could possibly be.
If the UK’s position was not pitiful enough, England is doing far worse. It is in 234th place, meaning there are 233 countries and territories in the world doing better when it comes to the state of nature. At what else, as a country, is England so badly ranked? Based on need, any business almost anywhere in the world thinking about where to support nature recovery should focus on England as an absolute and overwhelming priority.
Awareness of the need for action drove the government, under then-Prime Minister Theresa May, to announce the 25-year Environment Plan. In 2021 the Environment Act brought in a legally binding target to halt biodiversity loss by 2030.
However, from where I sit, deeply embedded in the nature recovery sector, this target will be missed by a country mile.
The UK government has set an ambitious target to stimulate at least £500 million of private investment per year by 2027 to support nature recovery – rising to at least £1 billion per year by 2030. The ‘Financing Nature Recovery UK’ report from the Broadway Initiative, Finance Earth and the Green Finance Institute puts the best case at a £44 billion gap and a central estimate at £56 billion, or £5.6 billion a year for this decade. The report identifies six ‘substantial’ barriers to environmental market development which are complex and challenging to overcome.
Finding out progress to date in terms of hard cash into the bank accounts of those owning or managing land is challenging. The ‘25 Year Environment Plan Annual Progress Report – April 2021 to March 2022’ has no figures in it. Online searches uncover plans, frameworks, recommendations, roadmaps and paths but no hard numbers.
No-one is arguing against the necessity of plans, frameworks, recommendations, roadmaps and paths in bringing about systemic change. And there’s no debate about nature recovery projects being investible. The government is putting £10 million through its Natural Environment Investment Readiness Fund (NEIRF) into developing projects to the point they can provide a return on investment to organisations in the private sector interested in the benefits provided by natural assets to tackle climate change and nature loss. You’ll know the roster: carbon sequestration, biodiversity improvements, natural flood management and reduced water treatment costs, for example. Earlier this year Heal secured the maximum NEIRF grant of £100,000 to go through this process, primarily to develop the business case for carbon and biodiversity net gain. It is likely to be 18 months before any investment arrives. There’s nothing amiss with the NEIRF fund and how it works, but there is unavoidable complexity which takes time.
The evidence, therefore, is that the flow of private sector investment into nature recovery has barely begun to develop. What’s also becoming clear is that the operative word is ‘investment’. For those in the private sector looking to make equity investments which rely on natural capital markets and mechanisms, it’s slow and complicated. These markets are not settled or are in very early stages. There are some standards, but others are still emerging, exemplified by the most recent round of NEIRF funding, analysed by Accelar, which included £558,000 in funding in projects focusing on the creation of standards and codes.
With the latter, though there are carbon codes for woodland and peatland, there is no established code yet for nature recovery areas (rewilding sites), where a natural mix of habitats develops in ways which are optimal for biodiversity and bioabundance. Another is the valuing of biodiversity impact through a form of biodiversity credits – outside of the biodiversity net gain market – which is still in development. These are all manifestations of time being needed before there is a smoothly oiled machine funnelling private capital to those on the ground, forgive the pun, helping nature to recover.
But nature simply doesn’t have the time to wait for the well-oiled machine. The gap between theory and practice is vast and not close to being solved even when it is becoming more urgent by the day. In 2019, we knew from the State of Nature report that 41% of British species have been in decline for over 50 years, with decline ‘continuing unabated’. In May this year, the government reported a ‘worrying and persistent environmental decline’. Nature recovery will not happen at all unless the private sector helps to fund it, starting right now. Nature takes decades to recover and there are seven years left before we reach 2030.
From the government’s perspective, and I’ve spoken to people who confirm this, private sector investment means both equity investment AND debt investment. But in my experience over the last two years, potential ESG investors only think about the former. The word ‘investment’ naturally triggers equity concepts: shares, dividends, stake and profits. That makes complete sense from the perspective of an organisation operating from that basis. The forms of return – share value increasing, the payment of dividends, the opportunity to sell a stake for a profit – are the currency of investment as equity.
Here lies the rub. Charities can’t take equity investment because they don’t have an equity-based entity structure. Equity investment in nature recovery can be made in private businesses managing land or in a special investment vehicle set up for the purpose by a charity. But there is a much simpler approach that ESG investors can use alongside, or even instead of, equity investment.
That approach is debt investment: an investor lends capital, the loan is eventually repaid with interest over the agreed-upon loan term, while also returning to society a whole range of non-financial impacts ranging from increased biodiversity, clean water, clean air, better soil health, social good through access to nature. All of these impacts can be measured and reported upon. This form of investment works well for a charity. The amounts don’t need to be huge and there can be standard lending agreements.
The other term for this financing approach is ‘impact lending’ and that, I think, could be the problem. That phrase lacks the essential word ‘investment’. My guess is that ESG investors don’t see themselves as impact lenders. They might see themselves as debt investors, though mainly in the realm of sovereign and corporate bond investments. However, even with the development of the green and other sustainability focused bond markets, uncertainty remains about how proceeds are used. Institutional investors in the lending market are much less common. Over the past decade or so, institutional investors have grown their loan exposures, often in partnership with private equity firms. Could their mandates evolve further in this time of crisis?
Direct Line Group has offered a proof of concept. They are providing £3m in debt investment (impact lending) to Heal over a medium timescale at advantageous rates, towards the acquisition of our first two new sites for nature. I can’t reveal the terms, but I can say that as a result of the company recognising that they could deliver this form of support quickly and effectively, the impact on us, as a new charity focused on nature recovery in England, has been transformative. We are using this lending as the cornerstone financing for our foundation rewilding site, which we are on track to acquire in the south of England, followed by our second site in the north. But we need more lending like this to achieve our goals, as do so many other charitable organisations.
There need to be more Direct Lines – ESG investors who can make cash available for a set number of years, who can expect returns both in the form of interest (ideally fixed at lower levels than commercial lending) and impact, and have their capital repaid. It is so simple and quick that I don’t understand why the capital flows of this type are not at flood levels.
When you next see the words ‘investment’ and ‘nature recovery’, think debt as well as investment, and then we may have half a chance of making real headway in this existential challenge of our times.