The House of Commons Environmental Audit Committee has launched a new inquiry into the current and potential future role of natural capital in the green economy, and the Government’s proposals to increase private investment in measures to support nature recovery.

In the February 2021 report of his review of the economics of biodiversity, commissioned by the then Chancellor of the Exchequer in March 2019, Professor Sir Partha Dasgupta defined natural capital as the stock of renewable and non-renewable natural assets (e.g. ecosystems) that yield a flow of benefits to people (i.e. ecosystem services).

The term ‘natural capital’ is used to emphasise it is a capital asset, like produced capital (roads and buildings) and human capital in the shape of knowledge and skills.

In its July 2021 response to the Dasgupta report, the Government committed to “ensuring economic and financial decision-making, and the systems and institutions that underpin it, supports the delivery of nature positive future’. The headline goal of this ‘nature positive’ future is twofold: to leave the environment ‘in a better state than we found it’, and to reverse biodiversity loss globally by 2030.

In the 2021 Spending Review the Government set a goal to “grow annual private investment flows to nature” in England to at least £500 million every year by 2027 and to more than £1 billion by 2030.

An essential element of the Government’s strategy to enable firms to mobilise this investment is the development of high-integrity nature markets. The Nature Markets Framework, issued in March 2023, provides further detail on how the Government plans to support the flow of private finance to support the ‘nature positive economy’.The Framework is intended to support the development of these markets by setting out principles, standards and governance arrangements for their operation.

In her foreword to the Framework, the Secretary of State for Environment, Food and Rural Affairs recognises that many of the valuable ecosystem services provided by nature, such as carbon sequestration, clean water, biodiversity and natural flood management, are still ‘systematically undervalued’ in the UK economy.

The Framework provides:

• a set of core principles for market operation: the Government has undertaken to monitor these markets and support their development in line with the core principles;
• a restatement of the current rules for how farmers and others managing land and coastal assets can access markets and combine income streams, together with an indication of plans for policy development;
• an arrangement with the British Standards Institution on the development of high-integrity nature investment standards, to support the development of new markets and the scaling up of existing ones, and
• an indication of the next steps required to clarify and to develop the institutional and regulatory roles and the market infrastructure required to ensure good governance of these markets.

In the 2023 Green Finance Strategy, issued alongside the Nature Markets Framework, the Government undertook to consult on “the specific steps and interventions needed to support the growth of high integrity voluntary markets and [to] protect against greenwashing”, and to deliver a “UK Green Taxonomy”: definitions of which economic activities should be labelled as green, intended to support the quality of standards, labels and disclosures used in green finance.

The Committee is planning to examine the following principal questions in the course of its inquiry:

• What potential contribution can private capital investment make to measures to secure nature recovery?
• How can investment best be aligned with environmental benefits, so as to achieve or surpass the Government’s targets for nature recovery?
• What measures are necessary to (a) establish and (b) maintain the high-integrity markets in ecosystem services which are expected to attract private investment? What confidence do investors currently have in the UK’s arrangements for these markets?
• What contribution will data from the Natural Capital and Ecosystem Assessment (NCEA) programme make to the objective measurement of changes in environmental outcomes?
• How can the proposed UK Green Taxonomy support high-quality investments which deliver genuine benefits to nature? What financial disclosures should the taxonomy require?
• How can the operation of natural capital markets ensure genuine net gains for nature? How do such markets address the risk of ‘greenwashing’ of investments and the offsetting of natural recovery in the UK against environmental degradation elsewhere?
• What role can the UK’s financial markets play in developing the flow of international capital into the development of the UK’s natural capital?
• What role does the UK have in establishing international standards for natural capital investments, alongside other jurisdictions and financial centres?

As part of the new inquiry, the Committee seeks to understand whether the Government’s policies to promote natural capital and investment in biodiversity protection is adequate. It will look at the role private investment can make, and how the UK might develop world-leading markets in natural capital assets while avoiding the ‘greenwashing’ of investments.

Environmental Audit Committee Chairman, Rt Hon Philip Dunne MP, said:

“Nature and biodiversity are declining at an alarming rate in the UK, and adequate safeguards must be embedded to avoid any further loss. The financial sector will have a significant role to play in promoting the development and enhancement of the nation’s natural capital – from air to water, soil to forests – as the UK economy begins to embrace the economics of biodiversity.

“The Committee seeks to understand how the UK’s markets in natural capital are developing, and whether the frameworks that have been put in place, and the measures being encouraged by Ministers, are sufficient to promote investment in nature recovery while establishing the UK as a leading financial centre for nature positive investment.

“We will look at measures to prevent greenwashing in the natural capital sector so that the investment and policies really do make a material and nature positive difference to environmental recovery and levels of biodiversity across the UK.

“I encourage anyone engaged in the development of natural capital markets to contribute to our inquiry.”

Call for evidence

Written submissions addressing any or all of the terms of reference set out above, or other related issues in the Government’s suite of policies to develop natural capital markets, are invited, to be submitted to the Committee not later than 5.00 pm on Friday 22nd September 2023.

Click here to access the Call for Evidence