Nature markets – are we breaking free of the perpetual pilot phase?

Many farms and estates are increasingly looking at nature market opportunities for their business. The introduction of mandatory Biodiversity Net Gain (BNG) in England from January 2024 has heightened interest. But are the markets ready?

This week, a new report from the Broadway Initiative, The State of UK Nature Markets 2023, takes stock of progress towards sustainable finance for nature.

Government environmental targets for climate, nature and water quality are all dependent, to a more or less extent, on the establishment of well-functioning nature markets. Nature markets are essentially mechanisms for buyers and sellers of ecosystem services to come together and agree what is to be delivered and at what price. So far so economics 101, but establishing these markets is no simple matter.

There has been a lot of time and money spent by government and business in establishing the markets. This includes the introduction of the Woodland Carbon Code and the development of the Biodiversity Metric 12 years ago. In the intervening years there have been many pilot projects and funding to stimulate the markets such as the Natural Environment Investment Readiness Fund (NEIRF).

It is important that these markets work well as they will provide the means to deliver environmental benefits over the long term and help address nature and climate crises. It will also provide an opportunity for landowners and managers who are willing to commit to long term land use and management change to access a new market for work that has for too long been undervalued or had no value.

The UK Government has made a commitment to have £500m private sector investment in nature markets per year by 2027 and £1bn per year by 2030. This will be driven in part by compliance markets in England. Compliance markets are underpinned by regulation, such as mandatory BNG and Nutrient Neutrality. Meanwhile, voluntary markets for off-setting residual carbon emissions or compensating for impacts on nature is growing. New corporate reporting requirements and consumer expectations are driving businesses to be more environmentally responsible, whilst for others it is a core part of their values and important in marketing.

Last year the CLA worked with the Broadway Initiative and others on the Financing UK Nature Recovery Report that made a series of recommendations to government to drive progress in establishing the nature markets. The report was referenced in the Defra Nature Markets Framework report in March 2023. This latter report signaled a change in pace from government with a new project on Nature Investment Standards that aims to build confidence in the UK market through high integrity standards. Despite this progress, the analysis in their most recent report highlights many areas that still need attention. These include:

• A plan for robust governance of nature markets to maintain integrity and confidence.
• Building knowledge and capacity of landowners, regulators and local authorities to deliver the nature-based project.
• Address the supply-demand imbalance.

It was reported that the supply side pipeline remains weak, i.e., land coming forward for nature-based projects to create biodiversity units, or carbon or nutrient credits, due to a perception of high risk and limited revenues. Lack of clear demand signals from buyers and concerns about high legal costs and uncertainty around tax treatment were also noted.

Many of the findings of the recent report ring true based on feedback from CLA members. There is a cohort who have taken part in pilots or have forged ahead in full knowledge of the risks, and have nature market contracts, but the vast majority are still in the investigation stage.

For those interested in finding out more about nature market opportunities, the CLA is running a Natural Capital Roadshow over the winter months. The first events in the South East before travelling to each region throughout England and Wales. Find out more below.