Investment will flow from nature-related disclosures, says Glen

John Glen, chief economy secretary to the Treasury, endorsed the ongoing development of a new framework for nature-related disclosures in a speech earlier this week in which he called for a rewiring of the global financial system to help preserve biodiversity and natural ecosystems. He said there was not only a moral imperative to do so but an economic case too, citing estimations that around 54% of global GDP is either moderately or highly dependent on nature.

The Taskforce on Nature-Related Financial Disclosures (TNFD), established in 2021 and whose members include conservation experts and representatives from financial institutions and corporations around the world, released a beta version of a new nature risk management and disclosure framework last year. It has subsequently developed further iterations and is due to publish a finalised framework later this year. The purpose of the framework is to encourage a shift in the flow of finance away from businesses and projects that have a negative impact on nature to those that deliver positive outcomes. The TNFD’s work is endorsed by G7 and G20 countries.

Glen said the UK government “remains fully committed” to supporting the progress of the TNFD framework and to “encouraging market engagement and capacity building”. He said the framework “will support businesses and financial institutions to assess, manage and disclose their risks, impacts and dependencies on nature and take action”.

He said: “Once institutions begin generating decision-grade data and disclosures on their nature related risks, impacts and dependencies, we expect to see the investment start rolling in.”

The design of the TNFD framework is being based closely on the existing framework for climate-related disclosures developed by the Taskforce on Climate-related Financial Disclosures (TCFD). Several policymakers and regulators around the world – including in the UK – have imposed mandatory climate-related disclosure obligations on businesses on the basis of the TCFD framework, which is otherwise voluntary for organisations to adopt.

In his speech, Glen said the UK government intends to build on the TCFD requirements with “new economy wide sustainably disclosure requirements (SDRs)”. He said this will require businesses to report “on how they impact and are impacted by climate and the environment”. The UK rules, he said, would “incorporate the global baseline standards for sustainability reporting being developed by the International Sustainability Standards Board”. The ISSB consulted on standards for sustainability reporting last year and recently confirmed that the first two standards (S1 and S2) are expected to be issued at the end of June 2023 and will become effective starting January 2024.

Glen also provided an insight into how the UK government intends to update its existing green finance strategy, which was first published in 2019. The government held a call for evidence in relation to updating the strategy last year.

The refreshed strategy, Glen said, “will have a new policy framework for nature markets”. He said that framework “will provide clearer principles and policy guardrails for the development of new nature markets, including new arrangements to accelerate the adoption of robust standards for investing in a broader range of ecosystem services”.

Glen said: “We cannot expect farmers and conservation experts to commit to projects, or investors to mobilise resources at significant scale, without a robust, stable and reliable market framework. Nor can we expect the public and environmental experts to trust these markets where there are concerns about lack of transparency and the potential for greenwashing.”

The new green finance strategy will also set out how the UK government intends to “to strengthen and scale up voluntary carbon markets worldwide”, according to Glen.

Environmental law expert Fiona Ross of Pinsent Masons said: “We have already been seeing significant interest in natural capital markets, including the development of carbon sinks and habitat banks in the UK to generate carbon offsets, biodiversity net gain and nutrient neutrality credits. The announcement of an updated finance strategy and policy framework for such markets, and in particular a broader range of ecosystems services, is a welcome signal that the government wants to further encourage and incentivise the development of these markets, and sees them as crucial in scaling up investment in nature based solutions.”

“The voluntary carbon market has not been without its difficulties, and it will be interesting to see what the updated green finance strategy includes in terms of strengthening and scaling up the market worldwide. The Taskforce on Scaling Voluntary Carbon Markets (TSVCM) has been working on core carbon principles for voluntary carbon offsets for publication later this year, and we would expect the updated green finance strategy to take account of this and other work by the TSVCM,” she said.

Climate and sustainability expert Sharon E. Smith of Pinsent Masons said Glen’s comments were welcome and follow the government’s recently published environmental improvement plan 2023 and commitments made at the UN Biodiversity Conference COP15 in Montreal late last year, where urgent action was called for to reverse biodiversity loss and work towards a nature positive economy.

Smith said: “John Glen’s comments that the UK-economy wide SDRs will not only require businesses to report on how they are impacted by climate and the environment, build on TCFD requirements, and incorporate the ISSB’s global baseline standards, but also require businesses to report on how they impact climate and the environment suggests the government is looking to establish a comprehensive double materiality approach, at least in relation to climate, biodiversity, and other environmental disclosures. The extent to which the SDRs will also incorporate social disclosures and operate alongside a UK green and/or social taxonomy remains to be seen.”

“A double materiality approach would likely be welcomed by a broad range of stakeholders interested in companies’ sustainability disclosures and could facilitate greater interoperability with the EU Corporate Sustainability Reporting Directive, which embeds a double materiality approach, and the TNFD framework under which it is proposed businesses consider their dependencies and impacts on nature as well as, and in considering, their nature related risks and opportunities,” she said.

In his speech, Glen also confirmed that the government had pledged £30 million into a new fund – the Big Nature Impact Fund – which it hopes will serve to catalyse private sector investment in a range of nature projects. The fund is being managed by Federated Hermes and Finance Earth.

Glen said: “The blended capital will catalyse and invest in a portfolio of high-integrity nature projects, generating revenue from ecosystem services such as carbon sequestration, biodiversity and water quality. The investee projects will create biodiverse woodlands, restore peatlands and create other priority habitats.”

“By taking a blended finance approach and aggregating these projects up to an investible level, the Fund will help lower transaction costs and reduce risks, bringing the risk profile of these projects in line with institutional investors’ appetite. The aim is to develop a track record for private sector investment in nature recovery at scale for others to follow and to help close the funding gap for nature,” he said.