A glance through the pages of Private Debt Investor reveals debt investment strategies have diversified greatly in recent years but, from my own experience of fundraising in the past two years, they have only just started to reach a corner of the market where funding is urgently needed and could prove transformational for nature and climate.
Infrastructure investing has grown as an area of debt investing, though nature recovery projects in the UK are not yet on the radar for most infrastructure debt providers, despite several attractive boxes that could be ticked by backing them, including the potential for long-term returns and achieving seven UN sustainable development goals.
What’s more, this approach can make a meaningful difference to the underlying natural assets, is relatively quick and straightforward, and is already out of the starting blocks with a major insurance company.
By highlighting the option of using private debt capital directly to help nature and climate, the hope is that other investors with ESG requirements will be inspired to follow. But before laying out what’s new about this potential financial wonder-drug, let’s recap on why funding is so urgently needed.
In a global ranking of the health of natural environments, the UK’s ‘biodiversity intactness’ was near rock bottom, ranked 189th, with England doing even worse, in 234th place, when it came to the state of nature.
Based on need, any business almost anywhere in the world that is thinking about where to support nature recovery should focus on England as an absolute and overwhelming priority. It was this urgent need that led to the UK government setting legally binding targets to halt biodiversity loss by 2030 through the 2021 Environment Act.
However, while a portion of the public purse is being spent annually on land management and environmental protection, at the current rate of investment these targets will be missed by a long way.
A £56bn funding gap
Downing Street wants to stimulate at least £500 million ($620 million; €580 million) of private investment per year by 2027 to support nature recovery – rising to at least £1 billion per year by 2030. But the Financing Nature Recovery UK report from the Broadway Initiative, Finance Earth and the Green Finance Institute calculated that there is still a £56 billion funding gap for nature, or £5.6 billion a year for this decade. The report identifies various and “substantial” obstacles to environmental market development that are complex and challenging to overcome, with barriers to investment including “limited sources of revenue from nature to fund investment at the scale required”.
Acting as a cornerstone investor, the government is putting £10 million through its Natural Environment Investment Readiness Fund into developing projects to the point where they can provide a return on investment to organisations in the private sector interested in the benefits provided by natural assets to tackle climate change and nature loss. These cover carbon sequestration, biodiversity improvements, natural flood management, reduced water treatment costs and more.
But the evidence of the flow of private sector investment into nature recovery indicates a trickle so far.
What’s also becoming clear is that the operative word is ‘investment’, with private sector investors making equity investments using natural capital markets and mechanisms that are slow and complicated. These markets are not settled or are in very early stages, while the creation of standards, codes and metrics to value biodiversity impact gain are still in development.
But nature simply doesn’t have the time to wait. The gap between theory and practice is vast and not close to being solved, even when it is becoming more urgent by the day. The State of Nature 2019 report, for example, showed that 41 percent of British species have been in decline for over 50 years, with this decline “continuing unabated”. In May 2022, the government acknowledged a “worrying and persistent environmental decline”. Nature recovery will not happen at all unless the private sector helps to fund it, starting right now.
From the government’s perspective, and I’ve spoken to people who confirm this, private sector investment means both equity and debt investment. But in my experience over the past two years of looking to raise funds, so many potential conversations have ended due to the fact that charities cannot take equity investment as they don’t have an equity-based entity structure. This leaves an important investment gap that must be filled by debt investors.
There need to be more Direct Lines (see below) – ESG investors who can make cash available for a set number of years, who can expect returns both in the form of interest (ideally fixed at lower levels than commercial lending) and impact, and have their capital repaid. It is so simple and quick that I don’t understand why the capital flows of this type are not at flood levels.
When you next think of potential ESG infrastructure investments, think of nature recovery and how simple this process can be, and then we may have half a chance of making real headway in this existential challenge of our times.
Jan Stannard is founder trustee and acting chief executive officer of Heal Rewilding, a UK charity aiming to heal nature and act on climate change.
How it works in practice
The approach is a simple debt investment: an investor lends capital, the loan is eventually repaid with interest over the agreed loan term, while also returning to society a whole range of non-financial impacts ranging from increased biodiversity, clean water, clean air, better soil health, and social good through access to nature. All these impacts can be measured and reported upon. This form of investment works well for a charity. The amounts don’t need to be huge and there can be standard lending agreements.
Direct Line Group has offered a proof of concept. It is providing £3 million in debt investment (impact lending) to Heal over a medium timescale at advantageous rates, towards the acquisition of our first two new sites for nature. I can’t reveal the terms, but can say that as a result of the company recognising that they could deliver this form of support quickly and effectively, the impact on us, as a new charity focused on nature recovery in England, has been transformative.
We are using this lending as the cornerstone financing for our foundation rewilding site, which we are on track to acquire in the south of England, followed by our second site in the north. But we need more lending like this to achieve our goals, as do so many other charitable organisations.