Unlocking Carbon Markets and Supporting Natural Capital

What is natural capital? 

Natural capital is the term given to elements of the natural world that have value to society and can be considered assets, for example biodiversity, water and forests. We derive "ecosystem services" from natural capital, such as the pollination of crops by insects or natural flood defences. Natural assets are also crucial to many of our day-to-day goods, including fuel, clothing and building materials. 

Increased awareness of the significance of natural capital has led to businesses engaging with the topic. For some, it's a result of legal requirements, such as the biodiversity net gain regime in England, and for others it's on a voluntary basis. The disclosure recommendations and guidance published by the Taskforce for nature-related Financial Disclosures (TNFD) and European Sustainability Reporting Standards (ESRS) have given businesses an approach to follow should they wish to consider their nature-related dependencies and impacts, as well as associated risks and opportunities. 

As our understanding of the impact of business on natural capital improves, early engagement may give you a competitive edge, whether by ensuring you are on top of any new legislative changes, or ensuring you are prepared for business scrutiny by your key stakeholders. 

What are carbon markets? 

Carbon markets facilitate the trading of carbon credits. These markets are essential for assisting nations and businesses in achieving their emissions reduction goals, such as a carbon neutrality or net zero target, and addressing climate change. They function through both regulatory and voluntary frameworks.

Understanding the different types of carbon markets and their respective risks and advantages enables businesses to make well-informed decisions regarding their involvement in these dynamic systems. 

Given the complexity of these areas, it will be important for your business to develop a carefully tailored carbon market and natural capital strategy. Our expert lawyers can help.

What you need to know now

Understanding the types of carbon markets as well as the various mechanisms and the associated legal risks and business opportunities is essential to ensure your business has a carbon management strategy in place and is set up to succeed on your sustainability goals.

The legislative approach to natural capital is still evolving and it's an area where new obligations are likely to be introduced. For example, additional reporting may be required as a result of the adoption of TNFD-related requirements and the ESRS. There may also be incentives or penalties introduced to reduce the use of certain natural assets, such as carbon or water, for example as a result of the implementation of the EU's Water Resilience Strategy.

To prepare for the introduction of new measures, you are well-advised to start considering your business's impact on nature now. You can do this by making sure you are up to date on any mandatory and voluntary regimes that may apply to you.

What's on the horizon?

Carbon markets are expected to expand globally with increased integration, stricter regulations, and technological advancements enhancing transparency and monitoring. Growing public awareness and pressure for sustainable practices alongside increased investment will shape this evolving space.

In respect to natural capital, we are seeing increasing measures being put in place to encourage businesses to consider the impact of their operations on nature. While some of these are currently voluntary, such as disclosing against the framework introduced by the Taskforce for Nature-related Financial Disclosures, mandatory obligations are also being introduced. These include the EU Deforestation Regulation, Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D). In addition, the European Commission has launched a roadmap for establishing a nature credits market in the EU. While the mandatory measures may currently be limited, the pressure on your business to engage with this agenda is likely to increase, for example from consumer choices or shareholder action.

How we can help you

We can support you on all aspects of carbon markets and natural capital, including:

• navigating the mandatory and voluntary carbon markets
• biodiversity net gain, including assisting with purchase agreements for offsite biodiversity units
• nature markets
• biodiversity strategies for your business
• planning requirements relating to nutrient and water neutrality
• corporate reporting requirements, for example the EU Deforestation Regulation or Corporate Sustainability Due Diligence Directive
• complying with legal requirements regarding waste and resources
• sustainability requirements for packaging and products
• mitigating greenwashing risk for communication around emission reduction and nature preservation measures