Natural Capital: A Place-Based Impact Investing Perspective

20 June 2024

Introduction

In May 2024, The Good Economy’s Place-Based Impact Investing team partnered with Tamara Giltsoff to convene a range of stakeholders including institutional investors, farmers, wildlife trusts, public sector bodies and philanthropic funders for a roundtable discussion framed around the following question:

Is action needed to guide natural capital market development and investor interest to include more of a focus on outcomes for people and places?

This note captures some of the key themes and recommendations emerging from that conversation.

Call to Action

If you are interested in exploring the ideas set out in this note, including being part of an action-oriented group of co-funders / investors seeking to help influence this emerging market from a place-based perspective please reach out to Tamara Giltsoff who is leading a consultation on a concept note for pooled innovation funding for Natural Capital.

The Role of Natural Capital in Place

Natural Capital is an emerging asset class. Much of the focus to date has been on Natural Capital’s contribution to addressing the challenges posed by climate change and threats to nature and biodiversity. Whilst these issues are both daunting and urgent, there is a risk that an opportunity is missed to address the role of Natural Capital in place, including its impact on community, health, culture and employment.

People are central to developing and stewarding nature’s value to place as well as nature returns to investors and buyers. As such local communities and businesses are vital to a holistic investing approach to Natural Capital and nature market development. 70% of UK land is under agricultural management, so farmers, land managers and landowners are particularly critical to the success of nature recovery and the long-term stewardship of nature, as well as unlocking nature-based economies in places.

Farming and food resilience must go hand-in-hand with nature recovery and protection. Farming is as place-based as it gets, and farmers are vital actors in the development and participation of nature markets and the long-term stewardship of nature.

Holistic investing means understanding farmers, land managers, and other local stakeholders as ‘entrepreneurs’ and ‘innovators’ for nature, providing the critical human and social capital needed for nature to thrive and nature to deliver value to investors, buyers and communities. And they will need to be backed by policy, funding and investment to operate as pioneers.

Natural Capital is key to unlocking three urgent crises – and we have not yet risen to the challenge

Natural Capital has a critical role to play in climate change mitigation and adaptation, reversing the precipitate decline in biodiversity and providing healthy, productive and appealing environments for communities across the country (and globally). However, existing policy and practice is falling short in enabling Natural Capital to play its part across each of these agendas. For example, the Biodiversity Net Gain (BNG) framework as currently defined is not sufficient to close the financial gap on biodiversity as it primarily focuses on mitigating the impacts of development projects. While it ensures that property development does not harm biodiversity, it does not address the broader financial needs required for global biodiversity conservation efforts[1]. Also, existing models do not encourage a holistic approach to maximising the potential contribution of land across these dimensions. Something needs to change.

Investment in Natural Capital and environmental outcomes buying need to be as holistic and joined up as nature is

Roundtable Takeouts

Nature is holistic, complex and nested in place. But investors typically operate in silos of asset classes, investment theses, and financial instruments – seeking investments that fit these. Equally, nature market buyers, who procure environmental outcomes through the purchase of biodiversity and carbon credits or pre-financing of nature transition, typically demand outcomes that are relevant to their commercial, operational or marketing objectives. These objectives often don’t mirror how nature behaves in places and what nature needs to thrive as an entire ecosystem, or what a place might need from investment in nature to thrive economically and socially.

Calls to Action

Approaches to investing in Natural Capital need to be as holistic as nature is. This will require managers to work across asset classes and with other types of investors and funders, as well as with the outcome buyers. It will also require buyers to procure holistically, perhaps operating as buyer collectives and pooling capital, placing value on the totality of environmental outcomes in a place and the value of nature to the place.
Outcome buyers, who might be corporate businesses where there is significant nature risk in their value chain, can also operate as investors in this mix – providing risk capital or innovation funding to seed pioneering nature ventures alongside guaranteeing the purchase of environmental outcomes to validate the commercial model of projects.
NC investors and environmental outcome buyers need to help build nature markets together. Their interests are not identical, but they are inextricably linked. Given the urgency of the situation, and the need to create a model that works for all parties, we cannot afford to wait for government policy and regulation to drive emerging practice.

Risk capital is needed to support pioneers developing innovative new models of nature recovery, nature-based solutions, and regenerative agriculture and food systems

Roundtable Takeout

Institutional scale investors are keen to invest in Natural Capital but need to see proven models before committing capital at scale. The danger is that institutional investors and asset owners stick to proven (but sometimes socially and environmentally suboptimal) models of investment e.g. monoculture forestry and timberland or intensive agriculture, which might not deliver holistic environmental or social outcomes to places (or worse, could result in poor social and economic outcomes for places).

Calls to Action

Support for early-stage ‘nature innovators’, including within farming, food and landscape scale recovery, in the form of pioneer investment and innovation funding, needs to be unlocked and organised as part of the holistic investing approach we have described. This type of risk capital might come from impact investors, philanthropy, public money, and even corporate innovation capital willing to seed and catalyse nature ventures and nature-based solutions and help innovators to validate commercial models and evidence the outcomes through measurement and data collection. Capital will need to be joined up and will require different actors to work together at stages of nature market development with the objective of giving confidence to institutional investors longer-term. This seed type investment and funding is needed to validate and demonstrate the buyer-side of the market, as well as put to test the regulatory and policy mechanisms driving these markets.
There are innovative examples of financing nature outcomes, such as the first of its kind UK Nature Impact Fund, launched by Finance Earth and Federated Hermes, and supported by Defra taking a £30 million first loss position within the fund. However, there is less ‘innovation funding’ available for farmer and land nature entrepreneurs who are operationalising large-scale nature recovery ventures, regenerative farming operations, or new food businesses, unless it is directed at AgriTech. We see an opportunity for corporate, institutional and impact partners to deploy strategic investment in the form of ‘innovation funds’ into early-stage Natural Capital ventures, alongside help to build financially viable business models, with the primary objective of action learning and participating in this nascent market. This type of funding for innovation, typically backed by corporates, impact investors, and government (sometimes as pooled funds), exists in other sectors and plays a significant role within international development finance where there are complex, systemic challenges to address.
Strong investor engagement built around agreed standards for guiding and measuring the social impact of Natural Capital is needed to help steer investment and outcomes buying towards a place-based approach – to deliver optimum outcomes for environment, economy and people collectively.
Local stakeholder participation in the development of Natural Capital projects and nature ventures is also critical – both to ensure that opportunities to contribute to local outcomes such as health and employment are captured, and so that communities see Natural Capital investment as a positive contribution to their communities rather than an imposition to be resisted.

Recommendations:

Holistic Investing and Outcomes Buying as a Collaborative Venture

A new type of convening is needed to bring together environmental outcome buyers, Natural Capital investors, and local communities to co-design investment opportunities, to co-invest, and to co-procure outcomes that align with how nature behaves. This might include impact investors and funders, public funds, development finance, corporate innovation and / or Corporate Social Responsibility (CSR) funding, and institutional investors as participants.
The focus should be on unlocking the outcomes buyer side of the market initially by convening a collaborative group of buyers willing to take a risk position as advance market buyers, or even as early seed investors or innovation funders in pioneering ventures or farm operations, to allow Natural Capital projects to shift from pilot phases into action learning and business model validation phases.

Holistic Learning as the PBII NC Network

To maintain momentum and build common approaches, a Place-Based Impact Investing Network for Natural Capital (modelled on the existing PBII Network) should be established. This group would likely include representation from the main constituencies comprising the Natural Capital investment ecosystem, including institutional investors, farmers, wildlife trusts, local and combined authorities and corporate outcome buyers.
This group would be practically focused, working collectively to develop a set of shared norms and practices to move nature markets forward in a way that works for all parties, including local communities.

Holistic Guidance and Standards

Guidance and standards for the development of Natural Capital propositions, as well as for investors and buyers, should be developed to encompass social and economic impacts in addition to environmental ones.
Frameworks and metrics should be designed to allow places to express their unique needs whilst enabling institutional investors to deploy impact-oriented capital at scale and pace, without placing a disproportionate burden on local investees.