Environmental marketplaces: UK progresses with plans for a wider series of nature markets

Nature markets provide a mechanism for the trading of credits for environmental output or outcomes from nature-based activities such as biodiversity enhancement or nutrient mitigation. In contrast, carbon markets and associated carbon credits focus primarily on carbon sequestration and offsetting greenhouse gas emissions.

Established nature markets already exist for the delivery of mandatory biodiversity net gain (BNG) as well as for nutrient mitigation. However, the full potential of nature markets is yet to be unleashed: it is recognised that they have the potential to assist with other nature-based mitigation schemes including for the delivery of nature-based carbon credits and for water neutrality.

The widening of nature markets would offer businesses a more expansive compliance platform and diversification of opportunity to help mitigate their environmental impact.

Framework and standards

In 2023, the UK government published its framework for nature markets that set out policy approaches and the core principles for their operation. The framework aimed to ensure the delivery of positive outcomes, rules on how land managers can access these markets and a proposal to develop a suite of high-integrity nature investment standards.

Subsequently, the British Standards Institution (BSI), working together with the government, has developed and established an overarching set of investment standards for nature markets (BSI Flex 701). The standards cover both the supply and the demand side of nature markets and seek to develop a comprehensive framework to guide actions that ensure consistency and high integrity across all nature markets.

BSI Flex 701 looks to promote the high integrity of credits, encourage nature markets to achieve positive environmental outcomes and safeguard against the risks of activities in these markets that could cause negative, unintended environmental consequences.

This BSI Flex is also intended to serve as a foundation for standards on specific aspects of nature markets in the UK, enabling market participants to pursue conformity assessments to demonstrate their high integrity. And it aims to facilitate the provision of information from nature markets that prevents and aids in the detection of greenwashing.

Market integrity consultation

The government in its recent consultation on nature market integrity sought views on the implementation of these standards and indicated that it is planning to go further than the creation of a single set of market standards.

The consultation document outlines the government's timeline for the arrival of further market-specific BSI standards. A nutrients standard is expected to be published for consultation imminently while standards for biodiversity and natural carbon are under development following consultation feedback in January and March respectively.

In theory, the government is aiming for market-specific standards to work in harmony with the overarching standard. However, the jigsaw of how these regulations and standards fit together and function remains to be seen.

Nature credits

The EU is also grappling with the development of nature market regulation with a similar emphasis on high-integrity credits. On 7 July, the European Commission released a "roadmap" for developing nature credits. The roadmap outlines a potential route for growth of these markets via the linking of nature credits to existing carbon certification under the principle of "co-benefits".

This mirrors the UK's own explorations into "stacking" of nature credits – a primary policy focus within the recent market integrity consultation. However, there is still a lack of detail as to how co-benefits or stacking could work in practice. Without more detail, there is a risk that nature markets will be unable to deliver on their full potential for fear of double-counting and failing to demonstrate true "additionality" towards net zero and nature goals.

UK investment ready

Beyond developing principles and investment standards for nature markets, the government is supporting landowners to become "investment ready" on the supply side. The Natural Environment Investment Readiness Fund awarded nearly £8 million in grants to projects that produce revenue from ecosystem services between 2021 and 2023 before it closed.

However, the government has continued to offer a free, interactive "toolkit" to help farmers assess and understand how they can use their land to participate in nature markets. The government's Projects for Nature platform, which is currently being piloted, also offers opportunities for businesses to invest in nature projects albeit not as a means of formal mitigation but rather as a way to help them to finance nature's recovery and align with their own nature priorities.

The government is also investigating and recently consulted on the feasibility of "stacking" credits, which involves the sale of multiple, separate environmental outputs or outcomes from the same supply area. It is also exploring local nature recovery strategies (LNRS) to ensure that nature markets are situated in the right places by mapping the most valuable areas for nature with specific proposals for improving habitats and wider environmental goals.

Each LNRS responsible body could also market opportunities to potential investors and keep track of projects in their area of responsibility through a register, as has been seen with BNG credits. The confirmation and detail on these proposals is now pending after the consultation closed on 10 July.

Role of private sector

More broadly, the government has issued a call for evidence on expanding the role of the private sector in nature recovery. Businesses, investors, nature service providers such as farmers and land managers, environmental organisations and the public have been asked for their input on how the government can collaborate with the private sector.

The government is gathering input on how to utilise effective policy measures to enhance business investment in protecting and improving the natural environment, foster business innovation in environmental protection; and manage any risks that may arise from increased business investment in the natural environment. The consultation remains open until 7 August.

Osborne Clarke comment

With the various government publications in the last few years, there is growing policy recognition and support for nature markets and their potential to assist with the UK's nature recovery strategy. However, the specific details and expanse of areas that will be encompassed by nature markets remain to be clarified.

Until the government issues its response to the consultation on nature markets – most likely later this year – clarity is needed on how the BSI's overarching investment standard for nature markets will interact with its forthcoming market-specific standards, as well as wider government and local policy.

If the stacking of nature credits follows the EU's similar proposal of co-benefiting multiple credits, businesses will need to keep a sharp eye on the development of these regulations to ensure that they remain compliant and do not fall prey to accusations of greenwashing.

Once the government has ironed out the details, the benefits of nature markets should start to spread to all involved. Providers of environmental-based credits should be able to look forward to a more standardised and transparent accreditation process. Buyers of these credits will be assured of their high integrity, while also benefiting from a gradual increase in the number and variety of credits available for purchase.

Businesses should, therefore, keep abreast of the government's response to its various consultations and monitor developments across and within each nature market.

This is the third Insight in our series on Environmental Marketplaces, which has also covered UK-EU emission trading schemes and carbon border adjustment mechanisms and voluntary carbon markets.

Fabian Trotman Drake assisted with this Insight.