After some contentious wrangling, last week saw the EU narrowly pass a substantial new regulation for restoring nature, in line with the European Green Deal.

The Nature Restoration Law integrates an overarching restoration goal aimed at the long-term recovery of nature in the EU’s land and sea regions, with binding restoration targets for specific habitats and species. Restoration measures mandated by the law will cover 20% of the EU’s land and sea areas by 2030, with the ultimate objective of encompassing all ecosystems in need of restoration by 2050.

However, the law has been a subject of criticism as its current form weakened the proposal and delayed its implementation. The amendments to the proposal was influenced by claims (refuted by scientists) from the European People’s Party (EPP) and other groups that the nature restoration law would negatively impact the economy and food security.

What does the Nature Restoration Law mean for finance?

Growing awareness of the interconnection between nature, the economy, and finance has led to the recognition of the economic dependence on nature and the services it provides, where nature and its services support over half of the global GDP. Sectors like construction, agriculture, food, and health heavily rely on nature’s contributions.  However, with approximately 40% of the world’s land degrading, the associated economic costs are high. To put it into perspective, soil degradation alone is costing the EU more than EUR 50 billion annually.

There is a crucial case for investment into the preservation and restoration of nature to ensure sustainable economic development and safeguard essential ecosystems and their services. Investing in supporting healthier ecosystems provides numerous benefits, from climate change mitigation to disaster prevention and improved water quality.

According to the European Commission Impact Assessment Report prepared for the regulation, nature restoration efforts also yield a high return on investment, ranging from €8 to €38 for every euro spent, depending on the ecosystem type. The benefits of restoring various ecosystems, such as peatlands, marshlands, forests, heathland, scrub, grasslands, rivers, lakes, and coastal wetlands, are estimated to exceed €1,800 billion, with restoration costs around €150 billion. This showcases the immense potential of investing in nature restoration across various sectors, fostering economic resilience, health, and recreation.

Investing in nature is certainly recognised as an opportunity, with potential benefits of generating up to US$10.1 trillion in annual business value and creating 395 million jobs by 2030 at the global level. To achieve that, the impact assessment report considers private financing options as a principal way of achieving an overall balance of restoration costs to supplement public funding into nature restoration efforts (Annex XII). Therefore, private investment options are likely to feature in the implemented law and, as referenced in the impact assessment report, these options would include green equity, debt, and bonds.

The developments of the Task Force on Nature-related Financial Disclosures (TNFD), due to release a final publication in September 2023, can be seen to accelerate these efforts for providing a framework to identify and report on nature-related risks and dependencies for financial institutions and corporations. The European Union is also fostering initiatives like the Renewed Sustainable Finance Strategy, Green Bond Standard, EU Taxonomy, and Non-financial Reporting Directive to support a sustainable economic recovery.

There are also various schemes and partnerships, like the Nature+ Accelerator Fund, Rewilding Europe, and others, that aim to channel private investments towards biodiversity objectives. In addition, the EU plans to establish a dedicated ‘EUR 10 billion natural-capital and circular economy investment initiative’ building on InvestEU. The availability of viable investment proposals will be crucial, and support and tools are provided to encourage biodiversity mainstreaming among businesses and financial institutions. For example, a recent green advisory initiative funded by the LIFE program aims to offer technical assistance for green investments to private and public institutions.

The EU aims to mobilize public and private funds to support the objectives of the EU Biodiversity Strategy for 2030 and related initiatives, including the Nature Restoration Law. The report acknowledges that the cost estimates are not exact but highlights the EU’s consideration of market-based instruments as a means to finance restoration, maintenance (including compensation), and enabling measures.

The Nature Restoration Law will undergo further scrutiny and refinement before implementation. Therefore, the availability of funds will depend on the priorities and actions of Member States and the EU, and a legally binding instrument is expected to significantly contribute to achieving the restoration objectives.

To learn more about nature and biodiversity in finance, join us in Edinburgh on the 20th September for Ethical Finance Global 2023, where nature is a key theme.