The degradation of the UK’s natural environment is slowing economic growth and could lead to an estimated 6 – 12% reduction in the UK economy in coming years.[1] This decline stems from the breakdown of nature's essential benefits, driven by changes in land and sea use, over-exploitation of resources, climate change, pollution, and invasive species. Damage to the natural environment poses significant risks to the UK’s financial sector, which relies on economic stability and resilient supply chains.
The urgency to protect and restore nature is gaining recognition. However, a financing gap of $942 billion annually exists for addressing global biodiversity loss.[2]
One mechanism for mobilising finance to mitigate global biodiversity loss is the creation of biodiversity credits and nature markets, as referenced in Target 19 of the Global Biodiversity Framework. Nature markets, including biodiversity credits and offsets, provide opportunities for private investment in conservation and sustainable land use, while integrating nature and climate finance for greater economic and environmental returns.
The UK aims to lead in developing high-integrity nature markets, as shown by their launch of the ‘Principles for Voluntary Carbon and Nature Markets Integrity’ at COP29 in Baku, Azerbaijan.
With its strong expertise in green finance and experience in energy and environmental markets, the UK’s financial and professional services industry is well-positioned to support the growth of nature markets in the UK. It can do this by mobilising investment into projects that deliver ecosystem services and positive outcomes for biodiversity, assessing and managing nature-related risks, and unlocking new economic opportunities for nature. However, various barriers remain to private sector participation in nature markets in the UK.
Barriers to scaling nature markets in the UK
This paper identifies the following barriers to private sector participation in nature markets:
- Lack of policy and regulatory clarity: the fragmented regulatory framework for nature markets creates uncertainty for the supply and demand of credits.
- Measurement & Verification Issues: diverse metrics and methodologies make it difficult to standardise and price biodiversity credits accurately.
- Greenwashing concerns: investors remain hesitant to invest due to evolving regulations and unclear standards. There is also a lack of trust in the integrity of credits and concerns about reputational damage.
- Uncertain legal treatment: the legal status of credits and offsets in the UK remains unclear, leading to uncertainties about ownership and applicable dispute laws.
- Limited demand signals: inconsistent market signals and limited return data make it challenging for investors to assess risk and value.
- Skills and resourcing gap: limited expertise in nature markets within the financial and public sectors has created hesitancy in market engagement.
Policy recommendations
Consultation with our members and key stakeholders identified the following recommendations for the government to scale nature markets in the UK to mobilise finance for nature at a greater pace and scale and support the government to deliver the goals and targets of the Global Biodiversity Framework:
- Provide policy and regulatory certainty: develop market guidelines, market access rules, tax treatment clarity, investment standards, and governance arrangements to build landowner and investor confidence.
- Introduce long-term policy measures: for example, through publishing the updated Environment Improvement Plan (EIP) and providing further detail on the policy measures and tools to deliver the recently published National Biodiversity Strategy and Action Plan (NBSAP). This would provide long-term policy certainty to investors.
- Expand the use of mandatory nature markets: broaden the scope of Biodiversity Net Gain (BNG) to include additional high-impact sectors.
- Concessional capital and financial incentives: develop blended finance mechanisms and introduce tax incentives to de-risk and incentivise nature-related investments.
- Capacity building: implement targeted training programs and knowledge-sharing initiatives and develop standardised frameworks and data platforms to upskill the public and private sectors.
- Consider statutory intervention: introduce legislation to ensure legal certainty and protection for trades made on credit and offset registries.
- Create a pipeline of investable nature restoration projects: build on the Nature Markets Framework (NMF) to create high-integrity voluntary nature markets.
- Integrate nature and climate: embed nature restoration into national net zero frameworks and transition plans, integrating nature-based carbon credits into schemes such as the UK Emissions Trading Scheme.
Government action in these areas would provide industry with greater policy and regulatory clarity and resources and more favourable economic conditions to incentivise nature-related investments and support the scale-up of high-integrity nature markets in the UK.
The establishment of a robust, high-integrity nature market in the UK would generate environmental and economic benefits and support climate mitigation and adaptation and the delivery of the goals and targets of the Global Biodiversity Framework.
To capitalise on this opportunity, the government must work with the private sector to create a pipeline of investable nature projects, build capacity and deliver greater integration of nature and climate policies.
[1] Green Finance Institute (GFI), ‘Assessing the Materiality of Nature-Related Financial Risks for the UK’, (April 2024), available at: https://hive.greenfinanceinstitute.com/gfihive/assessing-the-materiality-of-nature-related-financial-risks-for-the-uk/
[2] BloombergNEF (BNEF), ‘Gap Between Current Biodiversity Finance and Future Funding Needs Widens to $942 Billion’, (October 2024), available at: https://about.bnef.com/blog/gap-between-current-biodiversity-finance-and-future-funding-needs-widens-to-942-billion-according-to-bloombergnef/?utm_source=chatgpt.com