1st Report – The role of natural capital in the UK's green economy

The Government should undertake an impact assessment of the Planning and Infrastructure Bill to assess how the Nature Restoration Fund would interact with and impact upon the operation of Biodiversity net gain and of broader Government initiatives to encourage investment into nature markets. The Committee expects this impact assessment to be published prior to the first day of the Bill’s Report stage in the House of Commons, to assist the House in understanding the implications of the Bill’s provisions for the development of natural capital markets. (Recommendation, Paragraph 32)

Natural capital assets are an essential foundation of the UK and global economy, and we consider that a natural capital approach is vital if the overall value of nature to the UK is to be properly evaluated and developed. (Conclusion, Paragraph 34)

The work done so far in Government to incorporate natural capital approaches into policymaking and the overall evaluation of the economy is welcome: but there is little evidence to how this approach genuinely informs Ministerial and Cabinet decisions on the economy. The Government is yet to demonstrate how it is fully integrating natural capital and natural capital risk into all of its decisions, including financial decisions. We note with concern that the environment and nature are not expressly included in the remits of any of the Mission Boards of the current administration. (Conclusion, Paragraph 35)

We recommend that in its response to this report the Government provide an assessment of the extent to which a natural capital approach is currently incorporated into decisions on policy, how risks to current levels of natural capital are taken into account, and what measures are in place to mitigate those risks. (Recommendation, Paragraph 36)

We expect the Government to use the June 2025 Spending Review to set out how it has taken a natural capital approach to the evaluation of spending decisions as well as to set out how the approaches taken will grow the UK’s stock of natural capital; and what the expected benefits of this approach will be for nature and the wider economy. (Recommendation, Paragraph 37) 55 Market supply

Taxpayer purchase of ecosystem services alone is no longer a sufficient mechanism to deliver the overall improvement in ecosystem services necessary for the scale of nature recovery required. (Conclusion, Paragraph 49)

The Committee agrees with the Government’s current approach to driving investment into nature recovery through drawing in private finance. Whatever the source of the funds, policy should ensure that farmers and land managers are supported to deliver ecosystem improvements while also farming to produce food. (Recommendation, Paragraph 50)

The supply of natural capital schemes to the market is inherently limited by the land space which is in practice available for nature restoration. There are constraints in the UK in delivering projects at the scale seemingly required for the international market. Therefore there is merit in the Governments support for nature recovery at scale, provided that communities impacted by development also see the benefits of nature recovery. (Conclusion, Paragraph 62)

There is a clear role for Government in encouraging landowners and land managers to engage in the use of land to increase the stock of natural capital assets. One way to do this is through incentivising the allocation of land to natural capital schemes, thereby developing their supply to the market. We recognise the work already undertaken under the Nature Markets Framework to encourage landowners to recognise the potential benefits of participation in nature recovery. (Conclusion, Paragraph 63)

The Government should keep under review the effect of its fiscal policy on the availability of land for natural capital investment. In particular, the effect of the inclusion of environmental improvement schemes within the scope of APR relief from April 2025, combined with the changes to APR thresholds to be introduced in April 2026, ought to be monitored for their effects on the supply of land to environmental improvement projects. Care must be taken to ensure that fiscal policy provides appropriate incentives to deliver genuine ecosystem enhancements, rather than providing opportunities to shelter capital from tax obligations, and that it does not encourage the removal of prime land from food production in a way which compromises the UK’s food security. We recommend that the Government report to the House on the operation of APR relief in relation to environmental improvement schemes no later than three months from the end of the 2026–27 financial year. (Recommendation, Paragraph 64)

The Government’s projections for changes in land use in England by 2050, contained in its current consultation on a Land Use Framework, indicate a potentially substantial increase in the land area allocated to nature recovery, either alongside or instead of agricultural production. 56 Implementation of any land use framework, and the policy instruments put in place to support changes of use, will require careful scrutiny to ensure continued support for food security in England alongside initiatives for nature recovery. (Conclusion, Paragraph 65)

We welcome the consultation on a Land Use Framework and look forward to its publication. We recommend that in the Framework Ministers clarify how environmental land management schemes and other nature funding for farmers ought to complement wider nature restoration efforts and funding for nature restoration projects. We expect the Government to set out, by means of the Framework, how Ministers plan to ensure continued food security, given the projected reduction in the land area to be used for food production in England. (Recommendation, Paragraph 66)

To ensure the effective delivery of its commitments to protect 30% of land in England for nature, the Government will need to consider how to make environmental land management more accessible and attractive to landowners and land managers. This will require the removal of any existing barriers to engagement and a thorough review of incentives, so as to give the sector certainty in the returns to be received from allocating land to environmental protection. As well as supporting landowners directly through taxpayer purchase of ecosystem improvements, the Government ought to prioritise delivery of measures designed to encourage provision of offsite BNG schemes for investment. (Conclusion, Paragraph 87)

We recommend that as part of the forthcoming Land Use Framework the Government undertake a thorough review of its approach to incentivising the allocation of privately held land to nature recovery, in particular in respect of changes of use of agricultural land to deliver more environmental benefits alongside agricultural production, or in respect of changes away from agricultural use. This should include a review of current barriers to the supply of land for nature recovery projects supported by private investment. (Recommendation, Paragraph 88)

Ministers have set out the criteria they plan to use to establish whether land in England is considered to be ‘protected’ for the purposes of the 30by30 commitment. We note that an area is to be considered ‘protected’ if it can be shown that it is “protected against loss or damage to important biodiversity values, through legal or other effective means”. (Conclusion, Paragraph 89)

We recommend that in its response to this report the Government clarify— • what it considers to be ‘effective means’ of protection against loss or damage to important biodiversity values for the purposes of designating land in England as ‘protected’ for the purposes of the 30by30 commitment; 57 • how it is proposed to monitor whether land designated under the commitment continues to be protected from biodiversity loss and damage, and • what recourse is available to Ministers to ensure protection in circumstances where the arrangements in place for protection have proved ineffective. (Recommendation, Paragraph 90)

For successful nature markets to be delivered there needs to be an effective balance between efficiencies of scale and local accountability which brings about local buy-in and transparency, ensuring that offsets are being delivered to a high standard. A method for this to be achieved is through facilitating developers to pool their BNG requirements across multiple developments, while ensuring that the benefit from nature restoration is available to local communities. (Conclusion, Paragraph 91)

The Government should continue to demonstrate leadership on natural capital markets by evaluating and reviewing the BNG policy and whether its design, metrics, and implementation remain effective in increasing investment into natural capital projects and delivering measurable improvements in nature recovery. Estimates of the investment to be generated from BNG (currently £9.6 billion over ten years) should be kept under regular review, with the Government publishing annual updates of progress. (Recommendation, Paragraph 92)

We are concerned to note that the Government has not yet published full details of its approach to the investment of revenues from the sale of BNG credits. The Government must demonstrate that it is committed to this approach to nature renewal, rather than treating it as another source of revenue to the Exchequer. We recommend that Ministers publish as soon as possible their plans for the use of such revenues as remain after the costs of administering the credit sale scheme have been met. (Recommendation, Paragraph 93) Market demand

Compliance, or an expectation of compliance with a future regulation, is a significant driver of demand for nature markets. Clarity and investor confidence in regulatory rules and functions is essential to maintaining stable demand and driving opportunities for investment. (Conclusion, Paragraph 121)

Regulatory requirements are typically seen as an obstacle to market efficiency. In the case of BNG, compliance consistency is fundamental to trust in the system and the fair and transparent operation of the market. (Conclusion, Paragraph 122) 58

We recommend that the Government consult on measures to increase compliance as a market driver, potentially through expanding BNG requirements or mandating corporate disclosure of nature-damaging activities. (Recommendation, Paragraph 123)

The Government should also ensure that on-site gains have sufficient transparency and scrutiny of delivery—through sufficient funding of local authorities to deliver checks, and provision to local authorities of the capacity to undertake enforcement action—with a commitment to reforming the delivery of on-site gains if widespread non-compliance is detected. We recommend that Ministers now commit to reviewing the effectiveness of on-site delivery of BNG at the end of the third BNG reporting year in February 2027, and to issuing the report of the review by the end of May 2027. (Recommendation, Paragraph 124)

For the Government to determine whether it has delivered on its target to deliver £1 billion of private investment into nature recovery annually by 2030, it must have primary data on relevant financial flows to provide a thorough understanding of investment levels, which it currently lacks. (Conclusion, Paragraph 125)

The Government should urgently address the gaps in its data and understanding around the level of investment into nature recovery projects. We recommend that within 12 months of the date of publication of this report the Government provide a report to the House on current and projected levels of private investment into nature recovery in England and performance against the targets set by Ministers in the 2021 Spending Review. (Recommendation, Paragraph 126) Market structure and mechanisms

It is vital to develop a substantial baseline to measure natural capital improvement metrics against. This is already taking place in some respects (e.g. Natural Capital Ecosystem Assessment (NCEA) data for woodlands) but the current programmes arguably do not provide sufficient granularity to support decisions at farm level. The British Standards Institute’s nature investment standards principles, both published and in development, should provide the baseline requirements that all natural capital markets should meet to ensure genuine net gains for nature in regard to additionality and other standards. (Conclusion, Paragraph 139)

The Government must continue to work with both public and private sector organisations, including the British Standards Institute and the International Sustainability Standards Board, so as to establish a clear and robust 59 baseline assessment methodology against which all gains will be measured. The Government should do this not later than 12 months of the date of publication of this report. (Recommendation, Paragraph 140)

The ability for nature credits to traced through clear and transparent means is key to ensuring market integrity. Although a register of BNG sites available for offsite investment has now been established, the public interface is still not fully accessible and overall visibility of financial flows into onsite and offsite BNG schemes is low. (Conclusion, Paragraph 150)

We recommend that not later than 12 February 2026—the start of the next biodiversity net gain reporting year—the Government establish a comprehensive and publicly accessible register of: • the location of onsite and offsite assets being developed under statutory provision for biodiversity net gain; • the identity of investors in such assets, and • the identity of the owners of statutory biodiversity credits issued by Government. Such a register will provide improved transparency. (Recommendation, Paragraph 151)

The Government must set out unequivocally its support for BNG policy and ensure that it continues to deliver genuine habitat net gains and supports a thriving market in natural capital credits. The Government should make use of Nationally Significant Infrastructure Projects as a method to drive support for BNG. (Recommendation, Paragraph 155)

Our inquiry has found many financial mechanisms that can be employed to fund nature recovery: nature markets are one piece of the puzzle. Natural capital assets cannot be directly traded with the same ease as carbon dioxide allowances or carbon credits, owing to their inherent locational basis. In addition to complexities of measurement, the Nature Markets Framework requires nature credits to be non-fungible, as they must be traceable. Units are therefore not interchangeable: the flow of goods in nature markets cannot be traded in the same way as fungible goods such as coffee or crude oil. (Conclusion, Paragraph 166)

The Government should clearly define its expectation for the level of nature recovery in England which is likely to be achieved through the operation of nature markets, and should set out the criteria against which progress will be evaluated. In doing so, the Government should set, and publish, a target for the growth of the UK’s natural capital as well as establishing milestones in pursuit of that target. (Recommendation, Paragraph 167) 60

Nature and biodiversity are highly location specific and a market which trades in biodiversity credits must account for this. The UK Government should ensure that the UK market has integrity and strong regulation that minimises the risk of the UK market offshoring its nature degradation. Care should be taken to ensure that credits traded through the UK market do not support market practices which put financial stability at risk. (Recommendation, Paragraph 168)

To achieve success in nature markets, the Government must produce the full suite of documents that will be fundamental to its success, including the Land Use Framework, the Government responses to the consultations on a UK Green Taxonomy and on raising integrity in voluntary carbon and nature markets, rules on the stacking and bundling of natural capital assets, and fulfilment of the remaining commitments made in the Nature Markets Framework 2023. Should it not have published these documents by the time of its response to this report, the Government should set out a timeline for the publication of each. Nature restoration schemes and policies must be designed to deliver long term assurance to investors. As far as possible, domestic policies should align with recognised international standards, for example using the approach of the International Sustainability Standards Board. (Recommendation, Paragraph 169)

At such an early stage it is difficult to assess the full impacts of the biodiversity net gain policy. The Government should remain steadfast in its commitment to implementation of this policy: any indication that it could be rolled back would cause uncertainty in the market and would have a negative impact on investment in nature restoration initiatives. (Recommendation, Paragraph 170) 61