By Simon Scholl, Triodos Bank
In 2024, Triodos Bank lent £3.85 million to Avon Needs Trees to restore a forest in southwest England. The loan was relatively straightforward: land as collateral, tree planting as the capital investment, and sales of biodiversity units to property developers as the revenue stream to repay the debt.
It was a regulation that changed the underlying economics that made it possible: England’s Biodiversity Net Gain (BNG) scheme, which requires developers to demonstrate a 10% biodiversity improvement before receiving planning permission. That policy created the structural, predictable demand that turned a nature restoration project into a bankable cash flow. This is particularly relevant for projects that currently lack a viable commercial model, like investments aimed at strengthening resilience in agricultural value chains.
We think the EU Nature Credits approach can learn from this experience, which has given us a clear view of what works and what does not, and what the role of banks in nature credits could be.
A persistent misconception in nature finance discussions is that banks will be primary buyers of nature credits: they will not. A bank like Triodos mainly provides a loan to a project developer or land steward. That loan is repaid through proceeds from BNG units or ‘nature credits’ sold to third-party buyers. The bank enables the nature project, but it does not pay for nature restoration.
What this means in practice
Triodos Bank support projects early on with financial structuring expertise but like other banks only finances once cash flows are sufficiently predictable. We prefer to finance tangible capital investments, such as land acquisition and tree planting, that generate a cashflow-producing asset and can serve as collateral. We focus on downside protection to get our loan repaid, not upside participation to gain higher returns. Bank financing typically covers 50-70% of project costs. The remainder requires risk-bearing capital.
Credits cannot compensate for a weak foundation
Nature credits can under the right circumstances complement a robust regulatory and nature-aligned subsidy-incentive system but cannot substitute this. However, a credit market built on weak regulatory foundations and unreformed subsidies is unlikely to deliver the socio-ecological outcomes it promises. It risks becoming a market that primarily serves investor interests instead of nature and society. So, let’s dive into the necessary ingredients.
- Regulate harmful finance and reform harmful subsidies
Right now, for every dollar invested in protecting nature, $30 are spent destroying it from private and public sources combined. Harmful public subsidies, estimated at €34-48 billion annually in the EU, must be reformed and redirected toward nature-positive activities. Mobilising private capital without fixing that equation is a drop on a hot stone.
- Compliance markets are the only correct route
The fundamental challenge for any effective nature credit market design is who will buy credits, at what price, and for what reason. Without a credible answer to that question, you can build the most scientifically rigorous, high-integrity credit framework, but hardly an additional euro will flow into the projects on the ground. In our assessment, mandatory compliance mechanisms, rather than voluntary offsetting mechanisms, are the only promising route to making bank financing viable – if they give the right incentives. England’s BNG system illustrates this clearly. For example, by requiring developers to demonstrate a 10% biodiversity improvement as a pre-condition for planning permission, it creates structural, predictable demand for certified biodiversity units.
A recent empirical study and scientific paper confirm this: regulatory requirements are the primary driver of private sector engagement with biodiversity. Global biodiversity compliance markets generated a financial flow of an estimated $7.1 bln in 2023, nearly 700 times the $8-10 mln that voluntary international biodiversity credits have produced in the last five years with over 90 individual schemes.
- Stringent environmental and social integrity is non-negotiable
Environmental integrity is non-negotiable. No-go zones for irreplaceable ecosystems must be absolute. Credits must reflect verified, additional ecological outcomes. The mitigation hierarchy must be applied before any purchase is permitted, meaning that compensation should be the absolute last resort in complying with a regulatory nature conservation and restoration mandate. Credits must finance restoration locally, within the same landscape where harm occurs. Land stewards and local communities must be the primary beneficiaries of credit revenue, not financial intermediaries.
- Bank financing needs to be orchestrated or stacked with other funding sources
Bank debt is one layer of a broader capital architecture and market design that must also account for other complementary forms to attract the right type of funding needed by Nature-based Solutions (NbS) projects.
- Project equity: investors accept higher risk and participate in governance. This ranges from early-stage investors committing capital at feasibility stage to long-term land transformation strategies. Triodos is developing the Value Nature Fund to provide precisely this type of long-term equity capital to NbS projects in Europe and North America.
- Blended finance combining public or charitable capital to mobilise private financing is appropriate as a temporary, transitional mechanism during early market development. It is not a permanent substitute for commercially viable business models. Triodos applies the InvestEU Sustainability Guarantee to certain NbS loans, enabling projects that otherwise would not meet conventional lending criteria.
The European Commission has more efficient and effective options to finance nature restoration – including taxing polluters and reforming subsidies – that create more positive impact at lower societal cost. If it pursues nature credits anyway to bring in private finance for nature, success depends on getting the conditions right.
Simon Scholl is a member of the EU expert group on Nature Credits, and Nature-based Solutions strategist at Triodos Bank.
Any opinions expressed in this commentary reflect the views of the authors and not of Carbon Pulse.
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