The health and maintenance of our natural capital – particularly in the case of clean water and fertile soils – helps underpin the sustainability and quality of society, food supply, and our environments. Dan Hird, head of corporate finance, explores the transformative role the private sector can play in restoring our natural capital.
Natural Capital can be defined as the world’s stocks of natural assets, which include geology, soil, air, water and all living things. The health and maintenance of these – particularly in the case of clean water and fertile soils – helps underpin the sustainability and quality of society, food supply, and our environment.
Our mission at Triodos Bank is to make money work for positive social, environmental and cultural change. If natural capital investment is harnessed in the right way we see another opportunity to do just that.
We’re all familiar with the consequences of consumer overspending – overdrafts; credit cards; and expensive credit agreements that all present opportunities to spend beyond our means. This model of unsupported – and sometimes reckless – use of capital can also be applied to our natural environment. When we take too much from our natural assets – whether through deforestation or overfishing – we threaten biodiversity and risk destabilising environments and communities. Ultimately, we risk bankrupting of our greatest gift.
We must think about how we fund the preservation of our planet and its resources to ensure stability and sustainability to its inhabitants. In the government’s recently issued 25 Year Plan to Improve the Environment, they recognise the impact that a natural capital model can have on preservation: “When we give the environment its due regard as a natural asset – indeed as key contributor – to the overall economy, we will be more likely to give it the value it deserves to protect and enhance it”.
If we start to marry the languages of the natural capital and finance capital worlds we start to realise that the environmental, social and economic ‘price’ of not acting to preserve our natural assets is huge. As the 25 Year Plan goes on to acknowledge, “When we use a natural capital approach, we are more likely to take better and more efficient decisions that can support environmental enhancement and help deliver benefits such as reduced long-term flood risk, increases in wildlife, and a boost to long-term prosperity.”
A notable proportion of natural capital funding to-date has been grant-based. However, against a backdrop of austerity, public funding is under pressure and so we must continue to look to private capital to play a transformative role. At Triodos Bank we’ve seen first-hand through our work with social impact bonds how carefully managed involvement of private investment in the provision of social good can be very successful – the same could potentially be true of the natural capital sector.
Triodos Bank UK’s primary focus are forms of finance concentrated on these pioneering finance models that create a link between the retail consumer and Natural Capital investment. The range of services we are seeking to provide are:
- Addressing market failures through bridging finance as well as education and awareness work.
- Designing and implementing Environmental Impact Bonds (EIB)
- Financing Natural Capital outcomes through Social Impact Bonds (SIB)
We need to start laying the foundations
Whilst natural capital investment remains an embryonic concept and is not a silver bullet, global precedents have emerged – not least the concept of ‘Nature Conservation Notes’, where individual investors can support projects where financial returns are generated through conservation land sales, carbon markets and premium agricultural products. Investment, whether from green-minded banks or environmentally-focused institutional investors, is available for deployment in the right projects. On top of this, UK savers are increasingly looking to direct their savings and investments into local, environmentally conscious schemes; low interest rates and demand from impact-driven investors are providing some much-needed momentum to the natural capital investment movement.
Some form of financial return is needed to access this investment and such returns have not been readily accessible in the sector to-date. A challenge sometimes levied is that ‘investment-ready deals’ are few and far between. The Natural Capital Investment Conference sought to address this by bringing together key stakeholders – the natural capital community, investors and government – and encouraging honest dialogue. This is the best way to deliver tangible opportunities for investing.
Of course, blending public and private funding is likely to remain the key. In the charitable space we’ve seen the introduction of social investment tax relief (SITR) as a means of encouraging individual investment. Government initiatives, such as supportive regulatory and tax environments, and financial incentives such as funding first loss layers, or providing grant funding to access investment-readiness advisers are likely to play an equally catalytic role here too.
The Conference will provide clarity on what ‘investment-readiness’ means and how we can collectively create clear models for investable projects. This is crucial for identifying what’s needed from all stakeholders to get deals done and bring about positive environmental change.
Dan has been with Triodos Bank since 2008 and has built the corporate finance business. He previously spent six years within KPMG Corporate finance advising on a range of mergers and acquisitions, management buy-outs and fundraising deals before establishing his own corporate finance business that completed over 80 transactions over a seven year period. Dan also has five years experience as a Finance Director of two large private companies in the retail and manufacturing sectors.