Infra Bank in Focus

The role of UKIB in natural capital markets

16 November 2022

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As the Bank publishes a discussion paper on its role in natural capital markets, Kate McGavin and Helen Williams, job-share Director of Strategy and Policy, share why this is a growing area of interest and opportunity.

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The word infrastructure commonly conjures up images of steel and skyscrapers, roads and railways, cranes and concrete… But increasingly it is being applied to a softer, greener landscape as we re-evaluate what we want to prioritise and protect in our living environment. The UK Infrastructure Bank wants to demonstrate how these definitions can happily inhabit the same space and use its capital to grow the UK’s natural capital market.

The UK is one of the most nature-depleted countries in the world, and the decline in many of our species and habitats has yet to be reversed. These losses have significant implications not only for our enjoyment of the natural world, but also for the benefits nature provides to society and the economy. From helping us fight climate change by locking up carbon, to providing clean water, and even the food on our plate, the natural world is an essential form of infrastructure – one we will need more of in future.

At UKIB, we recognise the importance of natural capital to delivering on our mission to tackle climate change and support regional and local economic growth. Nature’s worth to society – that is, the true value of the various goods and services it provides – is not adequately reflected as so much of it has no monetary charge attached. This has led us as a society to underinvest in our natural capital assets.

However, the tide is beginning to turn. Natural capital markets are emerging to put a price on the services provided by nature and create new opportunities to invest in them. We have spent the past few months working to understand the dynamics of these emerging markets for natural capital and the role we could play in them. Government, investors, project developers, green groups and many others have lent us their valuable perspectives over this period.

We have published a paper which set out our initial thinking on how UKIB might invest in and help grow natural capital markets.

The picture that has emerged to us so far is of a nascent market, with emerging business models and revenue streams, and a limited number of small projects, often under £1 million in size. It is also of a market developing at pace, with support from the likes of Defra’s Natural Environment Investment Readiness Fund (NEIRF) and NatureScot’s Investment Ready Nature Scotland (IRNS) grant scheme, both of which are working to increase the pipeline of investable projects available to investors.

We are interested in amplifying the benefits of these initiatives, for example by investing in large-scale natural capital projects as they emerge, or by refinancing groups of promising ongoing projects. Whilst our minimum ticket size for private sector deals is around £25 million, we can look at approaches that aggregate projects to get over this hurdle. Furthermore, our view is that investing in diversified portfolios of projects will also enable us to reach earlier-stage segments of the market, whilst managing the risks of doing so.

Whilst we are keen to deploy across the natural capital market, we have identified three areas of the market that benefit from more established business models, clearer policy drivers, and developed market infrastructure: the voluntary carbon market, biodiversity net gain, and water services. Initially, we expect to build our expertise and concentrate our efforts in these segments of the market, whilst remaining open to wider opportunities as they come forward.

Fundamental to all of this is our desire to invest in natural capital in a responsible manner. To secure the long-term supply of land needed for nature-based solutions, landowners, rural communities and other stakeholders will need confidence in natural capital markets and their ability to generate value for them fairly and over the long term. At the same time, to deliver for climate change mitigation, carbon offsetting must only be used to address unavoidable residual emissions.

We look forward to hearing your thoughts and continuing the conversation with a range of organisations on this important, emerging sector. Please get in touch at naturalcapital@ukib.org.uk.

 

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Related information

You can read the discussion paper setting out our initial thinking on how we can invest in and support the growth of natural capital markets.

Please get in touch at naturalcapital@ukib.org.uk