A Government Framework for Nature Markets

“In order to mobilise investment through nature markets, we need to ensure that participants have clarity and confidence in the market framework: the principles and standards that should be used to structure investments, and the governance arrangements to ensure that these new, emerging markets will operate transparently and deliver benefits for nature, the economy and local communities.”

We and many others have been calling on the Government to support the emerging natural capital markets by helping to set governance frameworks to bolster confidence for sellers, buyers and investors. Defra has now set out its position in Nature markets: A framework for scaling up private investment in nature recovery and sustainable farming, published on 30th March 2023.

The framework sets out:

• Core principles to ensure markets operate with integrity and deliver positive outcomes

• Current rules for how farmers and land managers can access markets and combine income streams, and plans to further develop policy in this area

• A new arrangement with the British Standards Institution to develop a suite of high-integrity nature investment standards to enable new markets to develop and emerging markets to scale up and operate soundly

• Next steps to clarify and develop institutional and regulatory roles and market infrastructure needed to ensure good market governance

Core Principles

“Integrity is the bedrock of nature markets.”

“Markets should incentivise environmentally rich multi-functional use of land and the marine environment and pay competitively for environmental improvements, and be as easy as possible to engage in (within the bounds of systems needed to ensure integrity) to allow investment to scale up.”

Principles for the design and operation of nature markets

Principles to ensure market integrity:

• Additionality

• No double counting

• Robust quantification – verified through agreed methodologies and standards

• Delivery of lasting benefits – mitigating risk through, for example, use of buffers, insurance, or phasing of verification

• Transparency – using publicly accessible registries

• Verification & validation

 Principles to maximise societal outcomes:

• Ease of access – for sellers, buyers and investors, providing opportunities for all participants to scale up

• Incentivising multifunctional land and seascapes – supporting delivery of multiple benefits and paying competitively for environmental improvements

• Openness to innovation – supporting development of new tools to grow these markets and share information

Market rules

Stacking & bundling - “We will support greater use of stacking as well as explicit bundling.” However, opportunities for stacking and bundling are currently limited by:

• the number of nature markets which exist

• the availability of suitable methodologies to create units for the full range of ecosystem services

• the nature of demand and

• additionality considerations.

The first phase of rules (announced 21/2/23) allows BNG and nutrient neutrality to be stacked on the same land and will allow both to be stacked with voluntary markets (e.g. carbon) where there is additional habitat improvement. These rules will apply until March 2025 while further work is done on whether more stacking opportunities can be enabled.

Additionality tests - Defra proposes to look more carefully at financial additionality tests, which require the credit finance to be critical to the project. It will investigate alternative approaches such as a single test to apply across all nature markets which would support stacking while maintaining integrity.

Combining public and private finance - A combination of public and private funding will be encouraged provided that there is no double counting. Where public grants deliver different outcomes to private funds, there will be no duplication – so grants might fund upfront capital costs which then enable a landowner to offer habitat enhancement generating environmental credits to the private market. Defra wants private funding to be able to be stacked with SFI or Countryside Stewardship schemes and it will be an integral part of Landscape Recovery. It will consider how those private markets can be enabled rather than crowded out and will develop the rules of the schemes accordingly.

Using ELM schemes to enable access to private markets

Defra is considering:

·       better support for collaboration between land managers, enabling landscape or catchment scale action

·       harmonising the approach to farm carbon audits

·       how technical advice and support can be delivered by the private sector, Arm’s Length Bodies and government.

An update is to be published within the next 12 months.

BSI to develop standards for nature markets

BSI has been asked to design a process for the development of standards for nature markets, with an over-arching set of governing principles, thematic standards for different sectors and individual standards for different markets, each aligned with the other. Accreditation processes will need to be aligned with emerging global standards, such as the work being done by the Integrity Council for Voluntary Carbon Markets.

Market governance and infrastructure

The paper highlights the need for governance approaches to be aligned across the UK to enable scaling of markets. Government’s role will be to focus on

·       Ensuring that market data is systematically and publicly available

·       Enabling a transparent system of market registries to support trading, including secondary markets to enable aggregation

Next Steps

Defra has pledged to work closely with stakeholders to review and develop its proposals, evaluate existing approaches and understand the social impact that nature markets may have.

31st March 2023