Guy Thompson, Managing Director at Entrade, outlines how the nature restoration fund can deliver environmental improvements. This was initially posted on The Aldersgate Group website

In a perfect world, regulation and incentives would take a pan-economy approach, as a recent Frontier Economics report for the Aldersgate Group pointed out. 

But we don’t live in a perfect world.  The false dichotomies generated by the growth agenda are fast undermining any prospect of a better deal for nature in this Parliament and already forcing tactical policy choices. However, the case for a more strategic approach to delivering environmental improvement is increasingly recognised by authoritative voices.

Take the hot topic of planning and housing.  It’s a symptom of an environmental regulatory system that isn’t working.  An illustration of the problem is the nutrient neutrality crisis, which the Home Builders Federation estimates is holding up 160,000 new build houses across England.  Whilst the bats and newts narrative has been overplayed by the PM and Chancellor, the government must be right that it’s not efficient for developers to be sourcing their own environmental mitigation.  Its answer, unveiled in a Planning Reform Working Paper published just before Christmas, is to legislate for a Nature Restoration Fund.  Could this be a template for a strategic approach to nature recovery?

By committing to using funding from development to deliver environmental improvements at a scale that will have the greatest impact, the Nature Restoration Fund could certainly be the kernel of a new approach to financing nature recovery.  A blueprint for scaling up private investment in nature through environmental markets was published in 2022 and government has published a Nature Market Framework, which it is slowly implementing.  The purpose of nature markets should be to efficiently deliver verified environmental improvements – not offsets.  Properly regulated nature markets are the only way of securing funding for nature at a level that will make the difference

The Working Paper articulates all the right sentiments about taking a more holistic view of nature recovery and going beyond offsetting.  It pays lip service to growing nature markets and states that the government wants to "ensure competition and innovation in securing impactful and good value for money interventions".  However, the devil, as ever, will be in the detail.

To live up to the ambition for the Fund set out in the Working Paper, the Planning and Infrastructure Bill will need to:

1. Establish the proposed Nature Restoration Fund as a backstop for a high integrity private nature market. The fund should be a last resort mechanism, like the statutory Biodiversity Net Gain credit scheme. This will leave headroom for private schemes aligned to the delivery of nature recovery strategies to provide more efficient solutions.  This means setting the price of the credits generated by the scheme to reflect the true economic cost of delivering the projects on the ground, including the long-term land use and maintenance payments to landholders.  In line with the economic cost of establishing nature-based projects on the ground, this price needs to be variable across the country.  Alternatively, if the intention is to move away from project-by-project assessments, the Fund could stimulate the market in the places where it is operational by purchasing mitigation from nature service providers.
2. Establish an independent system of oversight. The success of the scheme will hang on an independent, science-based and transparent approach to monitoring, reporting and verification. Delivery bodies, such as Natural England, will be materially conflicted in being both a statutory advisor in planning decisions and the beneficiary of the funds that developers must pay as a result of that advice. This would compound the existing conflicts arising from being the body that either makes or proposes rules for schemes such as nutrient neutrality (the metrics, calculators and guidance and registration) and interpreting and administering the rules.  An independent governance framework would provide transparent environmental outcomes, improved science and a level playing field for private schemes.

Without a clear road map for how the Nature Recovery Fund can scale to enable a whole-economy approach to nature recovery, the scheme risks entrenching existing challenges.  As Richard Benwell points out, this also risks repeating the past history of botched planning reforms.

Planning reforms are an opportunity to take a new approach to financing nature recovery by establishing high integrity nature markets that can make more efficient use of the multiple funding steams available to incentivise positive land use change.  Environmental mitigation for developers is only one source of funding and land-use planning is just one (reactive) delivery lever.

Water companies, retail and financial institutions and other businesses want to address the impacts of their supply chain on the natural environment.  The Government needs to support the establishment of a strong governance mechanism that ensures nature markets can and do deliver, and set the Nature Recovery Fund up to enable this.   The fact that nature markets have not developed to date is because of regulatory failure, not market failure.  The incoherent system of environmental regulation and delivery landscape – coloured by decades of agri-environment grant schemes – are the main causes of these problems.  Without this more strategic approach, the proposed planning reforms may ease the pressure on the planning system but will not, on their own, speed up nature recovery.