Significant investment to improve the environment is required to reverse the current unsustainable trend and to enable future development to be sustainable. Governments continue to spend significant public funds to improve the environment. However, even with the recommended improvements to ensure the regulatory levers of government contribute to restoration, this will not be enough.
The predicted shortfall in restoration funding in Australia is $10 billion annually (Ward & Lassen 2018). It is unrealistic to expect government, and the taxpayer, to fund this level of investment. Philanthropic investment, while helpful, is not of the scale required for long-term restoration.
Some restoration activities will not provide a private return and may come at a financial loss to the landholder, particularly in the short term. It is therefore also unreasonable to expect private landholders to fund such activities for public benefits. There is opportunity though for the Commonwealth to facilitate mechanisms that both incentivise environmental restoration and generate greater private return.
8.4.1 - Private-sector interest
There is appetite to invest private capital in the environment in Australia. Globally there has been a shift towards investment in environmental, social and corporate governance (ESG), which refers to the 3 central factors in measuring the sustainability and societal impact of an investment. The pool of available capital interested in ESG investment has grown rapidly over the past decade. In 2018 the responsible investment market in Australia reached $980 billion and sustainability-themed investments accounted for $70 billion (RIAA 2019). The capital available to invest in environmental outcomes is likely to continue to grow.
Environmental services are provided by a healthy environment – often called ‘natural capital’ (HMT 2020). Despite growing interest in ESG, little private capital flows towards environmentally sustainable land management that can improve natural capital and deliver restoration of matters of national environmental significance (MNES). Given the scale of available private capital, only a moderate change in the way the private sector invests could drive a material improvement to the environment.
Combined, private landholders such as farmers and Indigenous Australians manage 77 % of Australia’s land mass and are key to sustainably managing natural capital and improving outcomes for MNES (Ward & Lassen 2018). Over the long-term, the maintenance and improvement of natural capital is linked to the success of landholders’ businesses and the resilience of regional economies. However, many landholders use their natural capital in ways that unintentionally degrade the environment. This unvalued loss of natural capital is a form of market failure.
The Commonwealth has the opportunity to help resolve this market failure and deliver the scale of restoration required to sustainably manage MNES. In response to the opportunity highlighted in the Interim Report of this Review, the Australian Government has allocated $2.5 million in the 2020–21 budget (Treasury 2020) for further policy work related to environmental markets – including how to best address this market failure. It is the Review’s view that this will be best achieved by government working with private capital investors and landholders to better value their natural capital and invest in the management of privately owned land.
Improved land management can deliver long-term returns at the farm gate, while also minimising impacts on MNES, and in some instances deliver restoration. Willingness exists to consider investment that better supports natural capital and restoration, but the information, tools and systems are not available to deliver the shift. Key issues include:
- the lack of farm-level information and metrics on the dollar value of natural capital or likely returns from investment
- the timeframes for returns on investments in environmental capital can exceed the time horizons of traditional private capital markets
- relatively immature markets for environmental capital, result in high-risk premiums and less investment.
8.4.2 - Commonwealth leadership to better align private investment with national priorities
The Review has identified opportunities for national leadership outside the EPBC Act that should be considered. This includes opportunities for greater collaboration between government and the private sector, to invest in the environment directly and to invest in innovation to bring down the costs of environmental restoration activities.
Attracting greater private investment in natural capital and restoration of private land requires Commonwealth leadership. The Commonwealth is best placed to deliver the mechanisms including the legal, governance and institutional foundations required to support private-sector investment and leverage public investment in restoration. Government is also best placed to improve data and key metrics of environmental health, to provide the market with certainty to encourage investment in activities that contribute to sustainability.
Mechanisms are needed that leverage public and private capital to deliver the scale of investment in restoration that is required.
Some stakeholders have highlighted concerns about the availability of farm-level information on natural capital stock. Information at this granular level will need to be available to enable the formation of environmental markets and determine the return on investment associated with an investment in natural capital.
The Commonwealth should formally work with the private sector and research organisations to investigate the feasibility of mechanisms that leverage private capital to deliver greater investment, including:
- funding innovation to reduce the cost of large-scale environmental restoration
- co-investing with private capital to improve the sustainability of private land management
- establishing a central trust or coordination point for private and public investment (including offsets)
- using opportunities to leverage existing markets, including the carbon market.
The links between these mechanisms and other government environmental management initiatives such as the Agriculture Stewardship Program (DAWE 2020d) should also be examined.
Past Australian Government restoration activities have focused on grants as the primary mechanism to fund innovation in restoration. Grants and other funding programs are biased towards past proven activities, which take precedence over innovative solutions – especially when funding is scarce. They also promote short-term planning and ongoing reliance on government resources. Grants may or may not require co-investment by the private sector. Where private return is possible, the grants model can lead to rent-seeking behaviour by private interests.
New grants are not the right mechanism to invest in the innovation and long-term structural change required to deliver large-scale restoration and should no longer be the central focus of government investment. The exception to this is grant funding where there is a pure public good outcome or for high-risk innovation that is unlikely to deliver a financial return on the upfront cost. In these circumstances, co-investment is not feasible or attractive to the private sector and a grant may be the only mechanism to deliver the innovation.
Encouraging innovation to lower costs
Submissions to the Review have stated the cost of achieving environmental restoration is high (PCA 2020). Substantial opportunities exist for cost reduction through fostering technological improvement in restoration and new business models – and there is a role for government to facilitate this. Previously, similar government programs have aimed to reduce costs of activities that will deliver public benefits. Box 29 provides examples of the role of government in growing the renewable energy sector and biomedical research in Australia.