(Bloomberg) -- Last year Britain’s King Charles III warned delegates to the COP28 climate summit that “nature’s unique economy” was in grave danger, and unless humans acted to restore it, “our own economy and survivability will be imperiled.” Now the monarch is taking part in a multi-million-dollar financial experiment to harmonize man’s relationship with the natural world, and using some of his vast landholdings as a laboratory.
The king signed over part of his Sandringham Estate to a private company that will restore its wetlands, meadows and ancient forest over the next 30 years. The company will estimate the improvement to the biodiversity and health of the land, and package that into a tradable biodiversity credit.
Dozens of landowners across England are inking similar deals. Under a new English law, homebuilders and developers must compensate for the ecological harms of construction, and purchasing these “biodiversity net gain” credits is one way to comply.
England’s law is one attempt to counter a crisis of nature loss that spans the planet. Since 1970, animal populations on Earth have declined by almost three-quarters. Species are disappearing at such a fast rate that some scientists have declared the world’s sixth mass extinction event is underway. Damage to the ecosphere on this scale — resulting in a loss of crop pollinators, less timber from native forests and a decline in marine fisheries — may cut the global gross domestic product by as much as $2.7 trillion per year, according to World Bank estimates.
Staving off that threat will be the focus of the 16th United Nations Biodiversity Conference (COP16) in Cali, Colombia, next week. Two years ago, almost 200 governments signed the landmark Kunming-Montreal Global Biodiversity Framework, which calls for countries to reverse the loss of nature by the end of the decade and to raise $700 billion a year for that purpose.
In Cali, delegates will check in on progress, with only 28 countries and the European Union so far having submitted their plans to meet the 2022 agreement. They’ll also discuss how to fund conservation on a planetary scale, including via the biodiversity credits market and other “innovative schemes” such as green bonds.
About 150 miles north of Sandringham, a slightly different experiment is rolling out at Castle Howard in Yorkshire, the grand setting of Brideshead Revisited and the Netflix series Bridgerton. Ecologists are starting to restore a 178-hectare (440-acre) plot to use as the basis for a new kind of biodiversity credit, “nature shares.” The prospective corporate buyers of these shares aren’t motivated by compliance with England’s law, but are under pressure to voluntarily report on, and mitigate, their impact on the natural world.
“I’ve watched the insects disappear, I’ve watched the bird life change. I’ve watched the look of the countryside change throughout my entire life,” said Nick Howard, who along with his wife Victoria runs the Castle Howard estate, which is owned by a family company. “There is something slightly speculative about” the project, he acknowledged, “but at some stage we have to put our money where our mouth is — we actually have to step into it and do something.”
Interest is rising in the financial sector. JPMorgan Chase & Co., Standard Chartered Plc, Bank of America Corp. and Deutsche Bank AG are among lenders sending staff to COP16. Several big banks have recently created new senior nature-focused roles. Barclays Plc has partnered with Environment Bank — the company behind the projects at both Sandringham and Castle Howard — to bolster England’s compliance market. And a record number of banks now have so-called debt-for-nature swaps in the pipeline, through which countries refinance their debt and allocate savings toward conservation.
Earlier this year, UBS Group AG held its first-ever conference dedicated to the theme, and it was oversubscribed. The number of biodiversity-labeled exchange-traded and open-end funds has risen to 30 from 21 in the past year, while fund assets rose to $3.9 billion, according to Morningstar Direct data.
Terry Anderson, a veteran conservationist and forester who’s working with famed hedge fund investor Kyle Bass to generate biodiversity credits in the US, said the market is now “becoming more real, so it’s a good time to be jumping in.”
Asset manager Gresham House and its investors are backing Environment Bank. “Broadly, we think the opportunity set is pretty big,” said Peter Bachmann, managing director of sustainable infrastructure at Gresham House. The UK government “has effectively put a value on nature, and that’s a really powerful tool for change.”
But even as some financiers talk of habitat banks and nature shares, others are struggling to figure out how to make money from saving species. The level of demand for credits is unclear. And some critics say new nature markets are ultimately a distraction from the main task at hand: to stop financing activities, like forest-clearing agriculture and mining projects, that result in nature’s destruction.
England’s new mandatory market has been slow to materialize. There are just 13 projects on the national register. Since the biodiversity net gain law took effect in February, 25 credits have been allocated to six new developments, according to data published on the register.
“Expectations are fairly tempered,” said Helen Avery, director of nature at the Green Finance Institute.
There also are fears that the nascent market will follow the path of its older sister, the carbon credits market, which has all but crashed due to overblown claims. Demand and prices have been on a downward trajectory since 2022, after a series of greenwashing scandals.
Bachmann of Gresham House acknowledged the shadow it casts. “Every corporate has been burned by carbon credits in some way,” he said, so perceptions are “negative generally around nature markets. It’s our job to regain trust, and demonstrate it works.”
To the untrained eye, the Nova 1 field on the Castle Howard estate looks like a wispy grass prairie edged on one side by an old, dense forest.
But to Emma Toovey, chief ecology officer at Environment Bank, it’s a “green desert,” the kind of monoculture few bugs survive in. “It’s a fake habitat.”
Nova 1’s clay soil gets sticky in the winter and rock-solid in the summer. Farming the plot and its surrounds — as Castle Howard’s owners did for decades — required digging ditches, using underground pipes for irrigation and pummeling the land with chemical fertilizers. Now it’s no good for agriculture, and not much good for anything else.
But if all goes to plan, the fake habitat will become a real, lush one. Environment Bank and Castle Howard plan to till Nova 1 and nearby fields and plant wildflowers there, using seeds collected in part from the grassy top of the mausoleum where seven generations of Howard’s ancestors lie. They’ll fill in ditches and plug the irrigation pipes so water can flow freely.
In the fields too rich from decades’ worth of fertilizer, they’ll sow hungry crops like oats or barley, which can suck up the excess nutrients and return the soil to a gentler balance. They’ll open up the conifer forest and plant some native broadleaf species. Longhorn cows will be released to eat down the grass, turning the soil with their hooves. Pigs will chew through the undergrowth. Eventually turtle doves will, hopefully, thrive.
What Toovey and Nick Howard, who took over the estate about a decade ago, want is to restore the land to its former glory as a patchwork of mixed woodlands, wildflower meadows, scrub, becks and streams. “We want the land to do what the land wants to do,” Toovey said. But this time, for profit.
Over 36 years — the term of the contract between the estate and Environment Bank — Toovey expects the diversity and abundance of flora and fauna at Castle Howard to grow by at least 190%. Her company has estimated what it’ll cost to get there, added some contingency and margin, and divided that into square-meters-based units that are priced accordingly. These are offered to companies that are looking to voluntarily contribute to nature-friendly projects.
Environment Bank hasn’t sold any of the nature shares yet, but it’s in conversation with firms in the finance, agriculture, beauty and pharmaceuticals sectors, Toovey said, some of them based locally in North Yorkshire.
The company won’t disclose the target price for each nature share, but expects them to go for more than those in England’s compliance market. Compliance credits have sold for roughly £30,000 (about $39,000) each on average, according to Avery of the Green Finance Institute. Gresham House, Environment Bank’s backer, says it expects £30 million worth of credits will be purchased from the site over the next five years.
Bachmann foresees the buyers’ shares appreciating in value as biodiversity goes up, much like a forestry asset — although he acknowledges it is a “totally new accounting asset class.”
For Howard, the deal means the land generates more revenue than it would if he tried to continue farming it. “There is a bottom-line element,” he says. But “it starts off with a responsibility for the land.”
Environment Bank has leased the land from Howard and contracted back its management to him and his team. The company pays Howard tenancy and management fees, and if revenue from the credits hits a certain threshold, there’ll also be a 50-50 split in that. Environment Bank and its backers at Gresham House will shoulder the risk of weak demand.
The teams have been surveying the parcel, collecting data to set a baseline for measuring improvement. At least once a year, they’ll deploy drones, camera traps and audio devices, and test for so-called environmental DNA, to track which species are present on the land. And they’ll rate the habitat types, health and distinctiveness, according to a UK government metric.
Although Environment Bank can market the nature shares immediately, the land’s transformation will take a lot longer. That means the shares are generated and sold based on projected, not achieved, biodiversity gains. This is necessary, Toovey said, to finance the project. The team is “very conscious” of greenwashing risks and working to police them, according to Bachmann. But it’s an arrangement that has experts concerned, particularly in the context of a new, unregulated market.
“That’s a huge systemic risk to the integrity of these markets,” said Sophus Zu Ermgassen, an ecological economist at the University of Oxford, noting that promises of future environmental benefits are often unfulfilled.
“Without enforcement power, there’s a very strong probability [such projects] do not deliver the impact, and no one can hold them particularly accountable,” he said.
It’s possible to design projects that guard against this risk. Colombia, one of the most diverse countries in the world and the host of COP16, has a compulsory biodiversity offsetting market, as England does. The company Terrasos sells hectare-based credits in this market for about $15,000 each, but the transaction is completed only once a project has reached certain ecological milestones. Terrasos also allocates a percentage of revenue from the credits to a sinking endowment — a kind of pension fund to keep the projects alive for 30 years, even once all the credits have been sold.
The bulk of Terrasos’s business so far has been to generate biodiversity credits that miners and road builders buy to comply with Colombian regulations, said Mariana Sarmiento, who founded the company about a decade ago.
But under those rules, companies also must source credits from near the site of their ecological impact. That meant “there were some sites that, regardless of their conservation value, would never be able to access that kind of capital,” Sarmiento said. So roughly a year ago, Terrasos started to sell credits outside of Colombia’s regulated market.
When companies choose — but aren’t obligated — to buy credits, it requires a different kind of strategy, she discovered.
“It’s a completely different business model,” Sarmiento said. “You’re really trying to motivate people to buy something … companies are saying, ‘We need to tell a story to our investors and clients.’”
For opponents of market-based approaches to saving biodiversity, they are a false solution and optimizing them is beside the point. More than 270 nonprofits, think tanks and academics recently signed an open letter expressing “grave concerns” about “risky” biodiversity credits, offsets and related trading mechanisms. The emphasis on them is misguided, they say, and will “only delay urgent action on addressing the root causes of biodiversity loss.”
But Timothy Male, executive director at the Washington-based Environmental Policy Innovation Center, argues resistance to offsetting “makes no sense” because the world will never succeed in cutting its impact on nature to zero. Companies need to compensate for their impacts, and a regulated market offers the rules and risk-mitigation structures required to make that work, he said.
Against this backdrop, and despite efforts spearheaded by the European Commission and initiatives like the UK- and France-backed International Advisory Panel on Biodiversity Credits, the voluntary market is struggling to establish itself. Outside of countries where offsetting is mandated, demand is flat. The problem is global, Avery said.
“There’s a lack of appetite from governments to push businesses to start paying,” she said. “If we don’t unlock business, we really don’t get anywhere.”
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