Nature Finance – Opportunities, Challenges, and What Comes Next?

Nature Finance – Opportunities, Challenges, and What Comes Next

In this episode, we delve into the fast-evolving world of nature finance — with a focus on schemes emerging in England, and insights relevant to the global shift toward blended finance for nature recovery. As governments increasingly look to private investment to complement public funding, what’s working, what’s not, and where is this movement headed?

We explore the key challenges facing nature finance today, from market design to policy uncertainty, and discuss promising innovations that could shape the future of investment in biodiversity and ecosystems.

Hosted by: Raphaella Mascia

Guests:

Professor Alexander Teytelboym
Department of Economics, University of Oxford
Alexander Teytelboym is a Professor of Economics whose research focuses on market design—including matching markets, auctions, and network economics. He applies economic theory to pressing policy challenges in areas such as environmental protection, energy systems, and refugee resettlement.

Dr Sophus zu Ermgassen
Department of Biology, University of Oxford
Dr Sophus zu Ermgassen is an ecological economist specialising in biodiversity finance, sustainable infrastructure, and nature-positive policy and investment. His research has been featured in The Guardian, BBC Countryfile, Sky News, The Financial Times, and the ENDS Report. He advises the UK government through roles with Natural England’s Biodiversity Net Gain Monitoring and Evaluation group, the UK Treasury’s Biodiversity Economics working group, and the International Advisory Panel on Biodiversity Credits. He has also contributed to UK Parliamentary reports and briefings on biodiversity and just sustainability transitions.

Alqayam (Al) Meghji
Senior Policy Advisor, Department for Environment, Food and Rural Affairs (Defra)
Al Meghji is a Senior Policy Advisor at Defra, bringing together technical engineering expertise and strategic policy insight across water, energy, and land use. His work addresses the intersection of natural resources and climate resilience under demographic and environmental pressures, with a focus on unlocking private investment to complement public funding in nature recovery.

Disclaimer: The views expressed in this podcast are those of the speakers and do not necessarily reflect the official positions of Defra, the UK Government, or the University of Oxford.

The Leverhulme Centre for Nature Recovery is interested in promoting a wide variety of views and opinions on nature recovery from researchers and practitioners.

The views, opinions and positions expressed within this podcast are those of the speakers alone, they do not purport to reflect the opinions or views of the Leverhulme Centre for Nature Recovery, or its researchers.

The work of the Leverhulme Centre for Nature Recovery is made possible thanks to the support of the Leverhulme Trust.

Transcript

Nature Recovery Podcast 

Stephen Thomas
Welcome to the Nature Recovery podcast. We're going to take a closer look at some of the solutions to counter biodiversity decline, and we'll find out more about the people behind these ideas.

Raphaella Mascia
Hello, welcome to the Nature Recovery podcast. I'm Raphaella Mascia. Today, we will be discussing nature finance in the UK, including potential opportunities as well as challenges to financing nature recovery in England. Specifically, we will be talking with numerous Oxford researchers, who have a wide array of expertise on this field, and we're really excited to see what they have to say.

Alex Teytelboym
Hello, I'm Alex Teytelboym. I'm a Professor of Economics at the Economics Department at Oxford, and my expertise is market design. So I think about how to make marketplaces work in many different contexts. And one of the contexts in which I think it's very important to get markets to work is ecosystem protection and nature restoration.

Raphaella Mascia
We are here today to talk a little bit about how this research that you just mentioned connects to nature finance in England currently, and I wanted to ask, what are the main issues or challenges that you see in nature finance in England currently?

Alex Teytelboym
So I think the biggest challenge with nature finance in England and in other countries around the world is the way that finance thinks about nature. Most systems, most marketplaces, most government schemes that finance nature think of nature as a homogeneous, substitutable good — and it's not. I think the main challenge for finance is to recognise that nature operates interdependently and at scale. If finance does not support projects that are large scale, strategic and interdependent, it might end up doing more harm than good, potentially.

One of the main concerns I have with nature finance is the reliance of policymakers on the promise of voluntary markets. They're not going to deliver. The only way in which we're going to be able to corral sufficient funds to restore nature and protect biodiversity is by compliance measures. It's not going to be enough to hope that the co-benefits of otherwise commercially viable projects are going to deliver things at a sufficient scale that's going to be necessary. All the successes of market design in carbon or in nature that we know — wetlands programmes in the US, or for carbon, the EU Emissions Trading Scheme — have come because of compliance, and I think the policymakers in the UK are correctly thinking about creating compliance frameworks and compliance-based markets. But they should spend much less time thinking about and hoping for the voluntary activities to deliver things.

Raphaella Mascia
What are you seeing as the most promising opportunities to overcome these challenges in nature finance, in England and elsewhere?

Alex Teytelboym
I think the UK government has done a very good thing in introducing, for example, the Biodiversity Net Gain framework and various frameworks in recent years that are encouraging finance to flow into nature. But they're far below what is really the potential of both finance and markets to deliver ecologically optimal outcomes.

And I think the first thing that we need to think about is not so much how we raise money for nature, which is a huge concern of policymakers, but also how we spend it. And a lot of the way in which we spend money at the moment for nature does not recognise what is special about it. It's the fact that things operate at scale and in space. And we need to provide finance for projects in which there might be multiple landowners present at the same time, in which people might need to cooperate, in which a lot of features of the landscape need to work well together. And that is not happening at the moment.

Most projects are small scale, or most projects encourage people to do things at a low scale that do not aggregate very well. So the frameworks are beginning to be put in place to do strategic investment in nature, but we have not properly figured out ways of how money should be spent. So some of the work that I've done with my colleagues here at Oxford has shown that you can use different financing mechanisms — we call them combinatorial auctions. They're used elsewhere to allocate other public resources. They allow you to fund projects which are interdependent and spatially coordinated.

The reason why this is very difficult is because when you want to fund a project that is large and interdependent, there is very little competition. This project might be completely bespoke, there's very little competition, and so it's very difficult to get value for money. One of the things that is crucial in this is to simultaneously have projects that are large scale, but also make sure that you actually spend this money in the best way possible. And one of the things that the combinatorial auction idea that we have tested does is precisely to get this balance between competition — and therefore value for money — and coordination — and therefore high-quality ecological outcomes.

A combinatorial auction operates in many ways that are similar to a standard auction. So here we're talking about procurement auctions. So we want to procure activities on the landscape at the lowest cost. So bidders who bid the least, you would imagine, should be more competitive. What's interesting about the combinatorial auction is that it has two extra features relative to a standard auction, where if you bid the least, you win.

The first part is that you're scored on an ecological outcome. So the quality of what you provide really matters. There is a scoring aspect to it — if you are providing a better ecological service, that is going to make you more competitive. But the second thing, and that's really the combinatorial part that really matters, is that we don't score the bidders individually. We score bidders together as groups. So it could be that Alex's bid and Sophie's bid together are what's really going to create the ecological value. And even though they individually might look quite expensive or maybe not ecologically that valuable, it's the combination of these two bids that is actually what's delivering value for money.

And so here you can see how there is a balance between, on the one hand, this ability to spatially coordinate by scoring combinations of bids and looking at the value for money of a group of bids, versus the competition — which is that in the end, bidders are trying to win in this auction anyway. So that's one potential way to get the balance between spatial coordination and value for money right.

There are other settings in England where auctions are being used to procure various environmental services. So, for example, water companies have used auctions to prevent runoff of nitrogen into rivers. These are much simpler auctions. They don't typically require any scoring or any combinatorial bidding, but it shows you that landowners are actually quite comfortable and quite used to working in these kinds of environments. They can expect that if they're competitive, they may or may not get a subsidy to do a particular action on their land.

I think a lot of the problems in nature finance come down to the fact that we think of nature as if it's carbon. We're very good at carbon finance. We've been doing it for a long time, and in the UK we've been one of the leaders in thinking about climate change, modelling climate change, creating frameworks and institutions for climate change. And I think as a result of this amazing success, we have become hostages to it. And we are thinking about nature so much like it is carbon.

The main difference is that carbon emissions, wherever they come from, are the same. A tonne of carbon in England is the same as a tonne of carbon in India. So the only thing that you really need to do is figure out what the price of carbon could be. And if you translate that logic onto nature, you sort of conclude that all you need is to have a single price for this thing called nature — which of course doesn’t make any sense. And if you did that, then what you would find is restoration and recovery activities on landscapes do not happen in a coordinated way.

And that's why we need to think beyond these simplistic markets, which work amazingly well for carbon — the European Emissions Trading Scheme being one example of this — but they're not going to work that well in the context of nature. And BNG, for all its faults, is already proving that point on its own. So BNG is really set up in this way that I’ve described. And I think you can already see that what's emerging from the evidence is precisely what I described, which is this bitty restoration. And we need to move beyond bitty recovery and restoration into coordinated, large-scale restoration that nevertheless delivers value for money.

Raphaella Mascia
Thank you so much, Alex, for coming and talking to us about your work and your take on blended finance in England currently.

Alex Teytelboym
Thank you so much for having me.

Sophus zu Ermgassen
So I'm Sophus zu Ermgassen. I'm the Nature Finance Lead at the University of Oxford Nature Positive Hub, which is a collaboration between the Department of Biology and Geography. It's closely affiliated with the science of nature recovery.

Raphaella Mascia
Thank you so much for coming and joining us today. Let's get started with the question: what do you think are currently the challenges for nature finance in England specifically?

Sophus zu Ermgassen
That's a great question. I mean, basically everything is a challenge when you're moving from a world — basically the whole of contemporary history — where nature conservation has been publicly funded. It has been considered a public good that has been publicly supported.

Toward a world where there’s overwhelming weight behind the rhetoric that governments don't have the money to do public goods, right? And therefore, we need to commodify and create private revenue streams to deliver public goods — which is the world we currently live in. Then you're faced with the most incredible set of challenges in converting a public good into a private good. The most overwhelming challenge is to commodify public goods. And this means — I mean — they just don't really fit.

So commodifying a public good implies a huge process to give the kind of physical form, to render a commodity something which is basically not suited to being a commodity. So every single bit of that process is really hard.

Let’s talk about some of the challenges quite specifically. If we move away from that kind of big feature, one is the validity of your metrics. As scientists, this is something we get bogged down by quite a lot.

In order to commodify nature — to render it into a commodity that can then attract private investment, that enables it to be bought and sold — you need to basically define a set of rules that determine how your nature gets measured. And in the major nature markets from which we’re constructing all these natural capital assets in England — and that’s basically the rules behind the Woodland Carbon Code, the rules behind Biodiversity Net Gain (BNG), possibly the rules behind nutrient neutrality (although we’ll see if that’s going to be absorbed fully into the Nature Restoration Fund) — the validity of those metrics is really, really important and actually really challenging as well.

There are definitely concerns about the validity of, I think, all of the UK’s environmental markets — the specific ways that we measure nature in all of them. So I think with the Woodland Carbon Code, there are real questions about additionality and leakage. And with Biodiversity Net Gain, there are huge issues with the potential validity of the biodiversity metric.

For example, the work of Natalie Duffus, who’s a PhD student at the Department of Biology, demonstrates that there’s no correlation between the observable field biodiversity — that’s species richness or abundance of invertebrate diversity in habitat patches — and the biodiversity metric score. What does that tell us? It tells us that the biodiversity metric is measuring something — and that something is not actually observed biodiversity. It’s measuring something else.

This means that if you're constructing an entire market around optimising for or increasing the value of the biodiversity metric, there's a big chance that biodiversity actually doesn't follow — because there's no correlation between biodiversity and the specific metric you're using. So that’s a major challenge.

I wear two hats. I wear a kind of ecological effectiveness hat — from an ecological perspective — and then the other hat is investability: how can we actually get investment flowing into these natural capital assets?

I’ve been doing a lot of work interviewing biodiversity finance experts and investors over the last three years for a separate project. And I would say the number one barrier to the investability of natural capital assets is the government’s incredible fluctuation around the rhetoric and policies that relate to natural capital.

It doesn’t help that every time farmers or land managers are trying to build business models around delivering natural capital assets, various administrations come in — or try and repeal nutrient neutrality, a major market on which revenue streams for quite a lot of natural capital businesses were dependent — or introduce the Nature Restoration Fund, which potentially makes BNG surplus.

All of these things send huge uncertainty shocks through the natural capital industry.

Now, when you're selling natural capital commodities, remember: their value is 100% determined by the way that you choose to measure it — the way you choose to measure the specific commodity that's being bought or sold — and also the governance that underpins it.

That is: the amount of confidence you have as an investor that the thing will actually be delivered in reality.

That's the nature of intangible goods. They don't work like normal markets. If you buy a toothbrush and you don't like it, you can just choose a different one next time. But with natural capital markets, you can't do that. You can't feel a biodiversity unit or credit.

So its value is 100% determined by the quality of the measurement and the quality of the governance that underpins it. And whenever there’s a big regulatory shock, that threatens — and spooks — investors, because they think, “Oh my God, this commodity that I’m producing might actually have no value because the regulation that gives it value might just be repealed.”

That kind of uncertainty is a major risk challenge.

There’s also this major challenge — a lot of people think if you expand voluntary markets, it's a kind of easy win. It’s like free money flowing into nature conservation. If it's voluntary, then you don’t have to force anybody to do it, you don’t have to pick any political fights.

But people underestimate how perilous voluntary markets are. The huge integrity scandals revealed in the international voluntary carbon market a few years ago — through the Verra investigation — have sent huge shockwaves through the natural capital industry.

Basically, investors just have a huge amount of suspicion toward any form of voluntary market. Every voluntary market is one scientific integrity scandal away from losing all its value. That’s not the same for regulated markets, where there’s a mandatory driver of demand — someone has to buy those units to meet a regulatory objective.

So, yeah, that’s a major challenge. A big part of the UK’s natural capital markets framework is depending on the expansion of voluntary markets — but the government has to be aware that they’re extremely fragile.

Raphaella Mascia
Thank you for sharing those insights. Now, when you talk about the challenges, do you see any opportunities — whether in research or other fields, private or elsewhere — for overcoming such challenges? Or just opportunities in general for improving nature finance?

Sophus zu Ermgassen
In my recent work, there are zillions of opportunities for overcoming some of these barriers. There are lots of ways in which conventional natural capital projects don’t fit the needs of mainstream investors, and there are lots of interesting financial and legal innovations trying to bridge that gap.

The classic example is: conservation projects each require quite small pockets of investment that are basically of no interest whatsoever to a mainstream investor, because every individual investment carries the same kind of due diligence and transaction costs — regardless of the deal size.

So a mainstream investor wants to be able to lay down a huge amount of capital. An obvious solution is to aggregate a bunch of small projects into a large project aggregator, reducing the transaction costs per project to make it manageable and appealing to mainstream investors.

There are loads of opportunities, and I’d say lots of these interesting innovations are already happening.

In terms of how we scale up natural capital investment: the number one thing we can do in the UK is to crack down on poorly governed on-site delivery of Biodiversity Net Gain.

BNG is the major market in England — because it’s the only one that has a strong mandatory driver of demand. It's the only one people actually are forced to buy. For many years now, we've revealed data showing that the vast majority of BNG units will be delivered on-site — within the built environment of the developments being regulated.

According to Defra’s original BNG impact assessment, they thought that off-site markets would deliver 25–50% of all BNG units. But our data since 2020 has shown it's more like 7%. Recent evaluations post-mandatory also show it's about 7%. That means there is vastly less demand for off-site BNG solutions than everyone — except I guess us — was expecting.

The metric is flexible enough to allow large housing developers to promise to meet all their BNG liabilities within their developments. So while there are individual buyers of off-site BNG units, they’re tiny — small developers or fractional needs.

The best thing we can do to scale natural capital investment is to crack down on units being promised within the built environment that are extremely unlikely to be delivered.

We recently audited a set of developments delivering BNG and asked: what proportion of the units are actually unlikely to be delivered? It was about 25% of the entire policy. Local authorities are held responsible for delivery, but they don’t have the capacity to do that job.

So what we advocate is: don’t permit developers to promise future condition increases for habitats on-site, because government has no capacity to ensure those promises are kept. If you force that demand into the off-site market, instead of allowing risky on-site units, you could increase investment via BNG by a factor of four overnight.

Another major opportunity is to deliver much better strategic objectives. In one way, the Nature Restoration Fund is aiming to do this — but I think its implementation has been seriously compromised.

There are promising ways we can better connect revenue streams from natural capital markets like BNG or the Woodland Carbon Code with Local Nature Recovery Strategies (LNRSs). We’ve got a big ongoing project at Oxford to do exactly this — to link BNG with LNRSs. That’s a major opportunity.

Raphaella Mascia
OK. Thank you for sharing that. Do you have any other last thoughts that you'd like to share broadly on the topic of nature finance in England?

Sophus zu Ermgassen
A major question that comes up every time we think about blended finance is: what is the right amount of blending? What is the right amount of subsidy?

This is a really tricky question for a policymaker, because it's basically unknowable to everyone except the project proponent. Only they know how much money they would need to make their project profitable. Government can’t access that information.

So we need to think really carefully about our mechanism design to make sure we’re not just overpaying for environmental goods and services via blended finance.

The other thing I’m really curious about is the long-term goal of blended finance. People say, “Look — blended finance and de-risking helped drive the expansion of the renewable energy industry.”

But my collaborators and I say: renewables are fundamentally different from nature in lots of interesting ways. The biggest is the technological learning curve in renewables — which you don’t have in nature.

In renewables, getting enough capital flowing triggered innovation and cost reductions. But I don’t know if the same thing happens in nature markets. Can technological improvements really improve the efficiency of delivering nature? I'm not convinced.

So I question whether this blended finance model — this de-risking model — will work in the same way as it does for renewables.

Raphaella Mascia
Thank you so much. I appreciate you sharing your thoughts and expertise.

Sophus zu Ermgassen
Thanks very much.

Alqayam Meghji
I’m Alqayam Meghji. I’m one of the policy leads for Landscape Recovery, working in Defra. I trained as an engineer, but then moved into sustainable finance — first internationally, and now at the domestic level as well.

Raphaella Mascia
What do you think are the challenges for nature finance in England specifically?

Alqayam Meghji
I was thinking about this question, and there are a couple of ways to frame it. Starting at the broadest level — in terms of supply and demand of finance into nature recovery — the demand side is where we’re actually seeing some of the biggest challenges.

In the projects we’ve got in Landscape Recovery, they’re looking at a wide range of potential investors and buyers. There are challenges on the investment side and on the buyer side.

On the investment side, the issue is: this is mostly return-seeking investment — debt or equity. The challenge is return certainty. If I'm a bank investing, how do I know I’ll get my money back — plus a viable return?

In nature, there’s no strong track record like in infrastructure, where you’ve got tolls, shadow tolls, or other pricing mechanisms that provide that certainty. So investment in nature recovery is often considered high-risk. The cost of that capital — the terms — are often in the double-digit percentages.

Then there’s the buyer side — people buying biodiversity, carbon, or natural flood management/water quality benefits. Outside of regulatory markets like BNG or a bit of nutrient neutrality, the demand is patchy and place-based. In England, it’s not homogeneous.

So if you’re in West Cumbria, away from development pressure, your access to the BNG market is much lower than someone in a peri-urban area. That affects your financial forecast. Projects in remote areas are more dependent on public or philanthropic funding.

That kind of funding — corporate social responsibility, for example — is smaller in scale than what you can get through regulatory routes. That’s a challenge.

At the broader market level: only a few codes are robustly backed by government — woodland carbon, BNG, nutrients. There’s work going on with the British Standards Institute to create codes for new markets — but it’s slow.

Without agreed codes, metrics, monitoring, and traceability, even if there’s demand, uncertainty persists. Buyers don’t know how to value or trust the products.

Landscape Recovery and other programs like the Natural Environment Investment Readiness Fund (NERF) aim to overcome some of these barriers. But we don’t want to get stuck in pilot mode. We need to move to scale — even if not everything is perfect.

We need to say: “95% of this works. That’s good enough. Let’s move.” Because if we wait until 2035 to get everything right, we’ll have missed the window for big, meaningful restoration.

Raphaella Mascia
So what do you think are the opportunities to overcome these challenges? What mechanisms are you currently looking at?

Alqayam Meghji
I’ve already mentioned our work with the British Standards Institute — creating frameworks for governance and monetisation.

On the demand side, tools like the Taskforce on Nature-related Financial Disclosures (TNFD) — the nature equivalent of the TCFD on the climate side — could help. Once companies understand their reliance on nature, or their "nature bottom line", they may start investing in resilience and restoration.

We’re hoping Landscape Recovery and other projects across the country will help unlock those demand drivers.

If you can demonstrate return on investment — the demand is real — I’m not worried about the capital side. That will come.

In Landscape Recovery specifically, we’ve been given a safe space to innovate — 56 projects, lots of flexibility with public funds. If we can use that to catalyse private finance, that’s a big win.

It’s rare to have that kind of room to experiment in the public sector. We must use it to develop new solutions — and embed what works into standard Defra operations.

In the next five years, it’s about moving forward. Lack of consensus is often a barrier — but we don’t need unanimity. We need a basic level of agreement and a tolerance for risk.

If we wait for perfect, we’ll never move. We can agree on what "good" looks like now — move — and refine the rest over time. Otherwise, we stay in the pilot phase forever.

Raphaella Mascia
Thank you so much.

Stephen Thomas
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