The UK government should establish a domestic regulator for the carbon offset market to help incentivise capital flows into nature protection and restoration, according to one of the nation’s leading pension funds.

Scottish Widows has published a special report on biodiversity to outline the seriousness of the ongoing nature crisis and to outline actions the UK government as well as the pensions industry can take to reverse the trend.

It highlighted the opportunity to use the voluntary carbon market to drive nature-related investments, and said it could “really shift the dial” if the government moved to establish a regulator in that market.

“The financing gap for nature preservation is billions of pounds but this can be reduced via voluntary corporate actions with money flowing into areas like peatland and soil restoration, forest and ocean conservation,” Scottish Widows said.

“Demand for good quality carbon offsets will only continue to grow and if these offsets are structured with nature-related co-benefits, then this becomes a win-win, helping to secure both decarbonisation and nature preservation.”

While voluntary carbon has seen a meteoric rise over the past three or four years, only a handful of nations globally regulate which types of carbon offsets domestic companies can use in order to make various carbon neutral or emissions reductions claims.

Scottish Widows said the opacity of the voluntary carbon market is an issue for companies that may have to spend billions buying credits, and that the lack of regulation “breeds mistrust, particularly as a number of bad actors have been exposed in the past”.

“[A regulator] could set quality standards that corporations looking to do the right thing could trust, enabling them to allocate money with confidence in these offsets having additionality and really delivering on those climate and nature goals,” the pension fund said.

BE ACTIVE

Scottish Widows added a number of other steps the government should take as well in order to “avoid ecological meltdown”.

Those included developing policy frameworks with clearly defined targets formulated as scenarios relevant to investors.

“Allowing for investment decisions being taken that are consistent with the policy, will enable our industry to realise its full potential and provide the requisite level of support,” it said.

It called on the government to integrate nature-related risks and targets into all policy and regulatory matters as well as to deliver and implement clear governance and accountability.

“Given the journey that the net zero legal targets have been on, and given the importance of nature, it is not unreasonable to expect to see a similar direction of travel in future with respect to nature, eventually seeing nature considerations turning into legal targets to support the goals of the Global Biodiversity Framework and embedded across all relevant regulatory functions,” the fund noted.

“For government to lead by example, we ask that it commits to integrated ‘net zero’ and ‘nature-positive’ impact tests to ensure that all policy decisions are aligned with long-term climate and nature goals.”

Meanwhile, the fund also outlined a number of steps the pension industry itself could take to improve its performance on nature and biodiversity matters.

Those included basic steps like increasing awareness, building capacity, and assessing portfolio exposure to the nature crisis.

According to Scottish Widows, many actors in the industry are faced with uncertainty over how to meet their duty seeking nature positive action from investee companies due to the lack of clearly defined metrics and differing expectations as to what constitutes good practice.

“As understanding of biodiversity evolves, participation across relevant collective engagement initiatives is a key opportunity to articulate a clear joined-up vision, understand impact, and support transformative action that will create opportunity for value generation,” the report said.

“The conclusion of COP15 saw the launch of Nature Action 100, followed by an announcement of a Principles for Responsible Investment-led collaborative nature stewardship initiative. Pension schemes should consider joining these and other associated initiatives, which also open up avenues to collectively engage with specific sectors on pathways to biodiversity loss.”

By Stian Reklev – stian@carbon-pulse.com

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