Monetising natural capital

What is natural capital? How does it relate to ecosystem services or carbon markets? And what are the opportunities for land managers to monetise natural capital?

What is natural capital?

Natural capital refers to the world’s stock of natural resources such as forest, soil, air, water, and living things.

The benefits for humans – or ecosystem services – that derive from the world’s natural capital most obviously include the food we eat, the water we drink, the air we breathe, and the plant and animal materials we use for fuel or in construction work.

Less obviously, this also includes climate regulation through carbon sequestration by forests and peatlands, pollination of crops by insects, natural flood defences provided by healthy soils, or even the importance of nature for our wellbeing and mental health.

The aim of valuing these resources – referring to them as ‘capital’ – is to put a cost against letting them degrade. Since the UK’s national accounts don’t include the depreciation of natural assets, this means the natural world is often over-exploited for short-term gain instead of being maintained for the long-term benefits. For example, removal of woodland to build an office block might bring immediate financial benefit, but would also have hidden costs in terms of reduced carbon sequestration and water filtration.

By assigning natural resources a financial value, their importance can be better understood by policymakers, and – hopefully – lead to better management of our natural assets.

What financial opportunities does natural capital present for land managers?

As part of our Landscape Leadership programme, which equips land owners and managers to make environmental change at scale, Dr. Jason Beedell, Director of Rural Research at Strutt and Parker, joined us for an online session on monetising natural capital. This was based on the way policy and opportunities have developed in England, on the assumption that it is likely that things will go similarly in Scotland.

Here we run through a Q&A with Jason on the financial opportunities natural capital might present for landowners in future.

What kinds of opportunities to monetise natural capital do you see developing?

We see three ways in which opportunities to monetise natural capital may develop:

• On a farm scale: Agri-environment schemes
• On a development scale: Environmental net gain (offsetting impacts from development). This is already beginning in England, and it’s probable we will see something similar in Scotland.
• On a landscape scale: Environmental investments (including carbon credits). These are investments other organisations might make on your land.

Can you tell us more about what markets for natural capital might look like on a development scale?

There’s now a formal chapter in the UK environment bill for a Biodiversity Net Gain policy. This means that for any kind of development in England, developers will be required to deliver a minimum of 10% Biodiversity Net Gain as a result of their development.

In other words, they will be required to offset any impact on the environment plus an additional 10% as a result of their development.

The developer is liable to deliver the net gain for 30 years, although a challenge that will come with this is that if you plant woodland, for example, that’s a permanent land use change.

It’s still under discussion whether this offsetting will happen on development sites or offsite – but it would be cheaper, with greater environmental benefits, for doing this offsite, and this creates a potentially new market for land managers.

How will these sites be managed and measured?

In England, the proposal is that these sites will be managed between developer, local authorities, and the land manager providing the biodiversity net gain site.

The way this will be measured is using the biodiversity metric which was developed by DEFRA. They’ve just published the second version of it, and while it won’t apply in Scotland, it might be interesting to look through to see how the scheme is developing and the calculations being done – the base principles are likely to be similar.

And what kind of financial benefit is this likely to bring?

What we don’t know yet is the value per hectare, and that’s likely to be variable depending on where you are in the country, and the value of the development you’re offsetting.

We would expect land managers to be paid reasonably high amounts per hectare for this because of the amount of management involved – certainly comparable to growing crops – and because of the cost savings that off-site offsetting delivers for developers.

We’d like to see this linked to a percentage of development value, in which case the payments could be quite high.

What about markets for natural capital on a landscape scale? Can you tell us more about what opportunities that might bring?

On a landscape scale, markets for natural capital are likely to focus on environmental investments – in other words, where organisations buy benefits from your land.

Some of the changes that might be needed to deliver a net zero environment by 2050 means a shift away from cattle and sheep, low-carbon farming practices, an increase in tree cover, and restoration of peatland.

If you can make those kinds of changes, and you can measure the outcomes from those changes, then potentially you can sell the credits (such as carbon credits) that you generate to different markets.

And how do you measure natural capital?

One of the things we get asked about most is how to measure the changes you’re making to your landscape, and how to know what kinds of credits could be generated.

Last year, we carried out a large-scale natural capital assessment on an estate we manage in Yorkshire. It’s not really upland, but very mixed, and has arable farming, sheep, beef, dairy, a river running through it, plenty of woodland, a moorland, and some peat.

We worked with a firm of environment economists called eftec to try and quantify what natural capital was on the estate, to quantify it, and to see how many credits a change in land management would generate.

Some of the farming changes our farming consultant suggested included:

• Improve livestock productivity
  • Feed conversion rate
  • Better breeds
  • Quality of feed
  • Reduce livestock numbers
• Improve arable productivity
  • Precision application of inputs
  • Attention to SOM, cover crops and residues
• Reduction in greenhouse gas footprint
  • Attention to livestock emissions
  • Fertiliser use
  • Improve soil carbon
  • Tree planting
• Restore moorland to favourable condition

Over 60 years, we estimated that the estate could change from a net emitter to a net storer. 

When would you recommend landowners start to look at what natural capital they have in their landscape?

Because these kinds of assessments can take time, the advice we give to a lot of clients is to allow 6 months to do it, then to allow at least another 6 months to think through the implications. For a complex estate, this means accounting for what it means for tenants and future land use too.

We are therefore recommending people start doing this now. The one challenge is that there’s no recognised standard for this kind of accounting yet, so we’re taking a slight gamble because there’s no guarantee this standard will be what Scottish Government recognise.

Finally, what advice would you give to a landowner or land manager considering new opportunities for their landscape?

To guide thinking on what opportunities there might be in the future, we suggest following the big demographic and social changes.

For us, we see these as concern for the environment, and increasing demand for healthy, local, low-impact food.

Learn more about Landscape Leadership

You can find out more about the programme on our Landscape Leadership webpage.

If you want to be kept up to date on the Landscape Leadership programme, you can also get in touch for news of future rounds of the programme.