Uncertainty around policy and payments are the biggest barriers to private finance for environmental restoration, according to a major new report by the Ecosystems Knowledge Network.

The inaugural report – which will be repeated annually – found that lack of clarity over future funding, governance and legal issues, as well as poor access to data and investment readiness support – represent serious challenges to this emerging sector.

“There is no getting away from the fact that public funding and philanthropy won’t get us the environment that business and wider society sorely need,” says Dr Bruce Howard, Director of the Ecosystems Knowledge Network. “Nature is no longer a charity case. The introduction of private finance for restoration of land, water and nature provides opportunity for land managers, corporates and the financial services sector. While the nature finance project pipeline is in its infancy, it is going to be crucial in the transition to net zero, in climate adaptation and in the reversal of biodiversity decline.”

The six-month review included 219 nature finance projects analysed by 54 consultees, and found that nature finance projects are emerging as an important aspect of green – and blue enterprise.

Biodiversity units were the most frequently sold environmental benefit (66% of projects), followed by carbon credits (61%) and natural flood management services (42%). Following these were payments for nutrient reduction (33%) and ecotourism (19%).

However, only 24% of projects are currently generating a revenue (of which 16% are seeking and 12% have secured repayable finance to cover the costs incurred before reaching income generation). That’s partly because of the infancy of the sector and stage of individual project development. Those receiving grant support were most likely to seek repayable finance and expect revenue generation, emphasising the importance of such support to the sector. Another 45% are not currently generating revenue but expect to within the next five years, while 31% have no revenue plans.

Charities are running the greatest number of projects (30%), while local government comprised 24%, private sector companies 21%, private landowners 21% and voluntary and community organisations 8%.

“While dominated by conservation charities, there is potential for finance benefits like carbon storage and biodiversity restoration to provide income for a wide range of landowners throughout the UK,” says Dr Howard. “But the low representation of private landowners is significant, because three fifths of the land in England and Wales is owned by private individuals.”

In addition, only 3% of respondents were tenants – worrying, given the important role tenant farmers play in land management across the UK, he adds. “Clarity on market rules is urgently needed, as many respondents reported concerns about how to sell environmental outcomes to private buyers and attract private investment. For many private land managers, the opportunity cost of allocating time and other resources to the pursuit of nature finance is currently too great.”

Land managers were also nervous of selling ecosystem services credits too early, and missing out on higher prices as demand rises. “In some cases carbon markets are actually restricting nature restoration work, not enabling it. Farmers and their advisers are also concerned about becoming park-keepers rather than producing high quality food at the same time as improving the environment,” says Dr Howard.

“The challenge for nature finance in all parts of the UK is to progress from the current disparate mix of a few hundred aspiring but experimental projects to the presentation of a co-ordinated set of opportunities for buyers of ecosystem service credits and other finance providers. If stakeholders’ concerns can be allayed, then nature finance can become an integral part of green enterprise and a key dimension of helping rural and coastal economies to become more resilient and sustainable.”

• The full report can be found here:

https://ecosystemsknowledge.net/resources/nature-finance/nature-finance-review-2023/

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