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Making COP count

How Triodos developed a market for natural capital

Author: ICAEW

Published: 16 Jan 2024

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Making COP count: investor appetite for nature-positive projects is growing, but more needs to be done to develop the market.

Triodos was ahead of the game when it came to sustainable banking, with the seeds of its inception going back as far as 1968. It became a proper bank in 1980 and expanded into the UK in 1995. A consideration for nature in its investment criteria was there at its foundation. Now, it’s becoming more prominent.

“Some of the UN reports highlight the level of unprecedented decline in species and ecological ecosystems,” says Tom Dyke, Corporate Finance Manager at Triodos. “In the UK, we’re in a pretty bad state; a number of recent reports have confirmed that. We need to determine how we ensure new nature-based business models are developed to attract private investment, because ultimately there’s a massive funding gap to deliver nature recovery.”

Private markets will have to play a massive part in developing nature-positive approaches to business, says Dyke. The focus on trying to finance projects that deliver nature recovery has been increasing over the past five years. 

Triodos partnered with Defra, the Environment Agency and the Esmée Fairbairn Foundation, scouring England for pilots and credible projects with potential to develop investable models and attract private investment. There is demand from investors for these projects, but also a need for more data on financial returns. 

“There are potential issues and challenges around stakeholder alignment,” says Dyke. “Ultimately you need to get a group of stakeholders behind the vision for a project, which is not something they have really embarked upon before. Landowner interests, buyer of ecosystem service interests, investor interests, project developer interests – these all have to align. Then there are hard decisions to be made around exactly what needs to be done, and where, within that landscape.” 

There are also some long-standing tensions between these stakeholders that need to be addressed, says Dyke. Perhaps some of this has been caused by government policy regarding what needs to be prioritised and done on the land itself. The absence of proven models has also created some hesitancy. The question is, how to work with these stakeholders to create an investable proposition. 

“How do you ensure buyers have confidence in the contract structures they’re entering into, and that they’re ultimately getting the ecosystem services and the outputs they want from agreeing to pay for a project? How do landowners get comfortable with the level of risk they’re taking on? For example, if something is delivered and it doesn’t do what it says it does, but they didn’t design it, just agreed to host or maintain it on their land, where does the risk sit? There’s a lot of complexity to it.” 

These projects won’t attract private capital if you don’t have buyers at the table. They provide the income and commercial model for the project that enables change to happen. Those buyers need to have confidence in what they’re purchasing. 

“The new Taskforce on Nature-related Financial Disclosures (TNFD) framework is hopefully going to be a big part of the solution,” says Dyke. “Hopefully in the UK [its recommendations] will become mandatory for businesses and financial institutions. It would align with the approach taken by the Task Force on Climate-related Financial Disclosures (TCFD) and would be a very positive step. But that in itself isn’t going to be enough. You need to create other demand side drivers.” 

Codes and standards are important for investors, says Dyke. They provide clarity on what activities positively impact the environment, nature and biodiversity, and what is detrimental. 

The Broadway Initiative has done a lot of work recently to outline the challenges and current state of UK nature markets. Market design, governance and operation all need to be firmed up. “That's a big ask, considering you’re actually talking about quite a few different markets,” says Dyke.

Triodos is currently doing a lot of work to develop its approach and standards for investing across the broad spectrum of different nature-based projects. Further bulletins can be expected, although the bank has already made announcements on its net zero strategy (‘As One to Zero’) and released a biodiversity white paper which outlines its view on the role of finance in preserving and fostering biodiversity, as well as the bank’s approach to date. 

“For example, on the buyer side, we want buyers to demonstrate they’re engaging with these markets for the right reasons. Have they made commitments to delivering net zero themselves? Are they on target for that? How can you be comfortable that this isn’t just a greenwashing strategy. You can accept that organisations are on a journey, but if we don’t engage with organisations at the start of that journey, we will never get anywhere.”

On some of the pilots Triodos has worked on, it has encouraged the establishment of not-for-profit companies, or companies with asset locks embedded in their constitutions, to ensure that it is ultimately utilised to deliver further positive impact. “That’s not a hard requirement for us, but it’s something we’re looking at and have continued to advocate.

“We’re ultimately experts in finance and we need to recognise that. So we will be led by other organisations, who are experts in nature conservation and restoration, who can help inform the process. We’ve got long-standing partnerships with quality organisations – the Soil Association being a prime example. We’re continually evolving this with a team at our head office in the Netherlands, and our other operations across Europe are feeding into this about their experience on the ground in different areas.”

Triodos is a mid-tier bank with a loan book in the UK of around £1.1bn, Dyke says, but change and investment needs to happen at the largest financial institutions to deliver nature recovery both in the UK and the rest of the world. That itself will not excuse Triodos from pivoting its loan book. It has made commitments to deliver finance to the right projects. “That is a top priority; ensuring that the level of funding from other sources, particularly financial institutions, ultimately gets delivered to nature-based projects that need it.”

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