Linking ecosystem services and businesses through Green Bonds

Nature provides us with a range of benefits. For instance, there is evidence to suggest that creating woodlands can help in purifying water. Improved water quality is critical for human health and wellbeing, agricultural yield, fisheries and recreation among several others. Therefore, a key aim of several government policies is to protect and enhance the water environment (e.g. Forestry Commission England's Corporate Plan, the Woodlands for Wales Strategy and the Scottish Forestry Strategy).

However trees cannot simply be planted everywhere. Apart from the bio-physical limits of soil and temperature, the scope of woodland creation is restricted by the lack of adequate financial instruments and by land-use constraints. One possibility to increase woodlands for enhancing water quality is to encourage farmers to create woodlands via financial incentives. Similar to agri-environment schemes for pollination services, some countries (e.g. France and Germany) have initiated payment for water schemes. However, for such a scheme to be viable, such financial instruments need to be long term and easy to access. There is a strong need for a sustainable business model that is deliverable and efficient. This 6 months project aims to buy a researcher's time to design such a novel business model. The objective is to encourage farmers to create woodlands using a specific economic instrument called Green Bonds.

Green Bonds are an efficient tool to link sustainable development goals with creating a space for nature. Green investments are currently the fastest growing asset class at 19% per annum. Unlike other short term financial instruments, Green Bonds have the added value of being long term. This is a huge asset to forestry based interventions given the time lag between the investment and accrual of ecosystem services. Furthermore, there is considerable potential for expanding the remit of Green Bonds for enhancement of ecosystem services. While the vast majority of the $233 billion of Green Bonds investments has been used for reducing carbon emissions (e.g. 12% was invested for the transport sector), only 6% has been invested in nature conservation. In this project, the researcher will consult with a range of different stakeholder groups to investigate the potential of using a Green Bond scheme for payment for water purification in the South Downs, UK. This is a challenging task as the success of a financial instrument such Green Bonds for woodland creation depends on a range of factors (e.g. the type of tree species planted, location of the farm, the temporal and spatial scale of the planting and the financial instrument, the opportunity cost of the plantation effort in terms of revenue lost elsewhere, rate of change of water quality and quantity and subsequent reduction in water treatment costs). In addition, perhaps the most critical deciding factor is the policy acceptability among different stakeholder groups. Understanding their values and perceptions is pivotal for the success of any financial instrument. The proposed project will delve into these details over the span of six months in the context of Portsmouth Water and farmers in the South Downs area.

The direct impact of this project will be to reduce water treatment costs for water companies. Reduced nutrient loads and pesticides in ground water through woodland creation will improve the quality of the agricultural and fisheries produce. Enhanced woodland cover will also help to meet the growing need of wood fuel for heating: a niche market which is increasing in popularity over the last decade for aesthetic purposes.

The proposed business model will be the first of its kind in the UK. While France and Poland have committed to several billion dollars of sovereign Green Bonds, the UK is yet to open its account. It is expected that this novel project will pave the path for the first sovereign Green Bonds to be initiated in UK.