Transitioning the UK’s agricultural sector towards nature-positive and nature-first practice is critical to achieving environmental goals and meeting the demands of climate change.
Despite some strong(-ish) levers around baselining, auditability, transparency and additionality coming from the space and geospatial communities, significant challenges are said to exist and persist in the current financial landscape - particularly around blended finance fatigue and the absence of scalable, transferable solutions.
The mechanisms around scaling transition finance appear super-challenging. So much so, we found the review of “Scaling Transition Finance: Findings of the Transition Finance Market Review” difficult reading. To some readers, it could appear that there is too much to do, before we can get started.
But what if we could somehow get moving, and with an accelerated timetable? Maybe we are being optimistic (or even over-optimistic), however it does feel like it just needs a bit of simplification.
UK Agriculture and Funding Post EU
In the UK agriculture we have systems in place, albeit evolving. Two key mechanisms include:
ELMS (Environmental Land Management Scheme) for systemic intervention – it’s the nature-first and nature-positive stuff that UK government wants land holders to be doing, but at scale and in collaboration for regional level impact. It includes the public good undertakings that include developing riparian vegetation and even re-meandering of streams, or dedicating areas to connected biodiversity.
SFI (Sustainable Farming Initiative) is farm-based intervention with payments for that look very similar to subsidies but are focussed on transitioning UK farmers to regenerative practice, including reintroduction of wildflower meadows and hedgerows for bees, insects and birds aimed to support pest control on nearby land parcels that remained crop-farmed.
There are however some key gaps though that could be used to deploy private equity.
What if we focussed on approach that aims to simplify the complexity, fill funding gaps that are present in agricultural communities because of their core farming practice and drive strategic actionable change?
The Here and Now: Transition Finance in Agriculture
As mentioned, ELMS and its components including SFI offer incentives to action, yet the UK Government recognises these programs alone cannot meet the financial demands of a full transition. More, they tend toward up-front or short-term payments on activity, and lack the follow through to outcomes and impact.
The estimated £1.2 billion annual funding gap needed to achieve nature-positive agriculture by 2030 underscores the urgency of developing innovative financial solutions from blended and particularly patient alternative finance sources.
The existing programs focus on activity-based financial rewards - often failing to incentivise long-term systemic change. They overlook performance assessment, additionality and impact.
We do hear a lot about investors being hindered by the lack of standardised, scalable products in ecosystem services with an established market price - this is to some extent the more uncertain world of private equity, so sits neatly with the most ambitions actors and those with some nature related technical competence.
We remain interested in working with ambitious leaders who are buoyed by a sense of purpose and action and immediacy, even if in the end we find that the initial perceptions of value are slightly over or understated.
What next? Address the most pertinent issues requires consideration of parallel approaches:
Identifying and bridging finance gaps in existing land sector schemes, while
Developing alternative financial products to attract private capital.
Identifying Finance Gaps in ELMS and SFI
The ELMS framework represents a positive step towards valuing nature-positive outcomes, but several gaps limit its effectiveness:
Systemic Underfunding: Until early 2024, and under the former UK Government, payments under the SFI and Countryside Stewardship were often considered insufficient to cover the full costs of implementing nature-positive practices, such as regenerative farming or rewilding projects. The boost in SFI has seen take up soar, however since the summer shift to a UK Labour Government, it is understood not to be financially sustainable. Yet to be confirmed, it’s estimated that a reduction of £100M in SFI is expected under the weight of cross-departmental government expenditure and sustained high cost of borrowing.
Lack of Holistic / Transition Cost Incentives: The schemes predominantly reward specific actions (e.g., planting hedgerows) rather than outcomes (e.g., carbon sequestration or biodiversity gains). Transitioning to sustainable practices involves upfront costs, such as new equipment, training, and temporary productivity losses, which are not considered to adequately addressed these longer-term outcomes.
Insufficient Private Sector Integration: This is the big-ticket item for which we are trying to make some strides. Current schemes do not effectively leverage private capital, leaving a significant funding gap for ecosystem services that could attract patient investors.
Let’s bridge these gaps - with financial products that focus on scalability, clear impact metrics, and robust return potential.
Developing Financial Products to Meet the Need
To create actionable frameworks rather than insurmountable systems, we propose the following practical steps for developing financial products that drive nature-positive agriculture…
Start with Simplicity:
Identify the practice-based needs: Working with regional farm clusters, understand to what extent certain practice-level change with simple outcome-based metrics might be prioritised by agricultural communities.
Determine where the value sits and where and when it should be distributed: Investors are not providing grant funding; they need a measurable return even if initially slightly under or over-stated. Where and how are landowners and land managers prepared to release this to gain access to finance they otherwise would not be able to?
Create simple standardised metrics: Simple universal metrics for measuring the impact of nature-based solutions, such as biodiversity uplift or soil health improvement, to streamline project evaluation. The UK satellite remote monitoring community, coupled with ecologists can do this. There will be conjecture about where the bar should be initially, and we should focus on pragmatic scalable algorithm and data costs that serve the market – with a sense of improvement and variance reduction through time.
Accelerated Approvals: Introduce fast-track pathways for smaller, high-impact projects that meet predefined sustainability criteria. Again, this is not about money up front for an activity, but about a process of “if this, then that” through time, drawing on simple standardised metrics. Not all landowners applying in a time box shall necessarily be eligible, investors may consider both the financial credentials and the additionality potential of landholdings to AAA a fund with anticipated variability.
Then link the outcomes to nature impact:
Green Bonds for Ecosystem Services: Through issuance of bonds tied to specific outcomes, such as woodland creation, grassland creation, freshwater quality improvement, coastal habitat creation, we focus on delivery.
Pay-for-Performance Models: Develop mechanisms where payments are triggered by verified ecosystem service outcomes (as impact) rather than activity completion.
Regenerative Farming Loans: Offer concessional loans to farmers transitioning to regenerative practices, with repayment linked to productivity gains.
Develop Nature Impact Funds: Create funds specifically focused on high-impact, scalable nature-based projects, with transparent returns that clearly articulate financial and environmental returns, using robust data and reporting frameworks.
Building Momentum
The transition to nature-positive and nature-first agriculture requires immediate action that prioritises simplicity and scalability. By snuggling into the gaps left by existing funding schemes of ELMS and SFI, and through the development of innovative financial products that share value and pay for impact rather than activity, the UK can bridge the funding gap while ensuring measurable ecosystem service outcomes.
Transition Finance Market Review: Scaling Transition Finance: Findings of the Transition Finance Market Review - https://www.theglobalcity.uk/insights/scaling-transition-finance