This is a guest blog by Tom Gegg, who previously worked in the nature finance team at Palladium – a company delivering several of the UK Government’s flagship international climate and environment programmes. 

In recent years, I’ve worked with a range of actors in the natural capital space on initiatives aiming to unlock private investment for native woodland creation in Scotland. I’m not alone – attracting private finance into nature has been a key priority for the Scottish Government in recent years. With public budgets under pressure, the expectation has been that private investors can help plug the funding gap – easing pressure on public spending while supporting Scotland’s nature targets.

To date however, this work has stalled. Despite the hype, investors are not yet deploying money at significant scale. This blog post shares some of the things I learnt from this experience, what I think needs to change if we are to hit Scotland’s tree planting targets, and where the money needs to come from.

Scotland needs to ramp up funding for woodland creation if it’s going to meet its climate and nature targets. Although there is disagreement over how big Scotland’s funding gap for nature really is, I estimate around £6.6bn is needed over the next 25 years. 

While some progressive companies and universities have started to provide new nature projects with upfront funding support, the vast majority of the money still comes from government grants. Instead of lobbying for a bigger subsidy budget, my colleagues and I wanted to show that private investors could pick up some of the slack and help to fund projects – without necessarily having to buy the land underneath the trees. Our aim was to strike a careful balance: funding new, biodiverse woodlands in a way that offered a fair deal to land managers and neighbouring communities, a viable return for investors, and better value for money for taxpayer. 

To figure out how to make this work, we approached many of Scotland’s large estates and worked with local environmental charities to map out where marginal farmland could be converted into new native woodlands. We analysed ecological and heritage constraints, designed planting plans, negotiated with land agents and modelled how much everything would cost and how to fund it.

Alongside this, we worked with asset managers to design a fund structure that would raise the capital we needed. We pitched to some of the UK’s biggest pension funds and insurance companies. If we could raise the money – we were aiming for a first close of £100 million – and agree terms with one or two first-mover landowners, then we could prove our new model worked. 

We came up with a relatively simple model, largely copied from the renewable energy sector. The idea was that equity investors would provide the money for tree planting and fencing costs that grants don’t cover, as well as funding woodland maintenance work over several decades. The investors would also make an annual payment to the hosting landowners, which would be roughly the same as they get from sheep farming subsidies today. In exchange, the investors would own a portion of the carbon credits from the project, which they would be able to sell in the future and – hopefully – make a profit. If carbon prices rise to around £150 per tonne by 2050, which is broadly what the UK government expects – then these investments could generate a modest rate of return of about 8%. 

We pitched this idea to many of the UK’s biggest investors: pension funds, insurance companies and university endowments. Some made tentative commitments, but the majority – though interested to learn about the sector – didn’t take the leap. 

Growing trees is a very slow way to make money. The timeframe needed to sequester the carbon and make an income from selling the credits was just too long for most investors. If they invested instead in say a wind farm, then once the turbines are built revenues from electricity sales start to roll in fairly quickly. Not so for woodland. Sales of verified carbon credits (or timber) can only begin at scale after 15 years. This means that debt finance remains challenging, as there is no revenue coming in to make the interest payments. Even for more patient equity investors, they saw no guarantee that carbon prices would rise enough to justify waiting all that time. Without the opportunity to boost profits by owning and eventually selling the underlying land, our projects were simply too slow and risky to justify the single digit returns we were offering to investors. 

Some investors do of course already invest in forestry, but they focus on commercial plantations – where the long payback period is balanced out by a less risky source of revenue (selling timber) and by owning the underlying land, which can boost returns to double digits

Some of my peers in the nature finance sector, struggling with the same problems, have called for government to step in and make these projects less risky for investors by using ‘blended finance’. This would involve using public money to either protect investors from losses (by providing first loss capital) or guarantee revenues (via Contracts for Difference, as we do in the renewables sector). 

I don’t think that spending additional subsidies – this time paid out to investors rather than landowners – is the best solution to this problem. As we frequently hear on the news, the government’s budget is tight. Increasing subsidies isn’t going to be affordable or very good value for money for the taxpayer. 

We didn’t get rejected by everyone – some investors were interested in funding our projects. We found our strongest traction with public sector investors, in institutions like the UK’s National Wealth Fund (NWF). These investors could accept a more modest level of profit, wait patiently for a long time before making returns, and had mandates that valued a wider set of outcomes for society, beyond just profit. However, they weren’t allowed to invest on their own – the mandates of public investment banks like the NWF and the Scottish National Investment Bank (SNIB) mean they can only invest alongside private investors. If those investors don’t want to do it, then they can’t either. 

I have come to believe that these public investment banks need to be bolder and fund things that the private sector isn’t ready to support. The government could find the money to do this. Unlike funding for subsidies, the UK Treasury has much more ‘fiscal headroom’ to raise funding for investments by issuing new gilts, because it can expect to eventually get that money back again. In our case, extra funding for Scottish woodlands would be offset by the value of the carbon credits the government would receive in return, which could later be sold onto the market – allowing HMT to earn its money back.

If public investors did step up and do what private investors cannot, it wouldn’t mean there is no role for businesses. Scotland has many excellent forestry and ecology specialists: these are the firms that will survey the land, manage the nursery supplies, plant the trees and provide the long-term oversight that new woodland projects need. Over time, a wider set of UK businesses – those that are genuinely committed to reaching Net Zero – can buy the carbon credits from these woodlands, paying back the government’s investment. 

This public investment model has already worked elsewhere. Since the 1990s, Costa Rica has restored over a million hectares of its rainforest. It did this by paying landowners an income to restore nature, with funding it collected from the nation’s biggest polluters. There’s no reason why the same thing wouldn’t work in Britain.

I have learnt that, right now, most private investors don’t want to fund new woodlands, and I think we should stop expecting them to. Neither should we ask taxpayers to bend over backwards to persuade them. Instead, the government should put aside the subsidies and take on the role of a long-term investor – this is what’s needed to deliver Scotland’s nature recovery and net zero targets.