Natural Capital – The increasing value in the rocks and soil beneath our feet, our streams, rivers and oceans, and the air

The value of natural capital assets in Scotland alone is estimated at £230 billion and government policy is becoming increasingly underpinned by natural capital thinking.

Without doubt Scotland, with its rich biodiversity and stunning landscapes, has a crucial role to play in the development of natural capital and meeting governmental targets.

But is farming and food production at odds with this thinking? According to the father of the concept of “natural capital” Dieter Helm, farming has no option - it has to produce food, achieve net zero and protect biodiversity and rivers.

A herculean task, but one which will most likely need to be overcome if the landowners and managers are to make the most of this rapidly growing emergent market.

In Scotland, the woodland and peatland restoration carbon credit schemes are up and running but the markets are developing less rapidly that in England where more detailed work is being done and The Green Finance Strategy and Nature Markets Framework has been delivered.

Currently the opportunities available (some south of the border only) are:

• Carbon (offset credits) Payments - can be made for carbon sequestration (eg, woodland creation) or emission avoidance (e.g. peatland restoration) through carbon offset credits.
• Carbon (insetting) Payments from within the supply chain for verified emission reduction, often called carbon certificates, i.e. payments for reducing fertiliser use, avoiding intensive cultivations and planting cover crops etc.
• Biodiversity (offsets) Building developers pay farmers to create habitats to offset damage created by new builds (eg, Biodiversity Net Gain). In Scotland we have similar provisions in the NPF4 but they are not as structured in their requirements and have not been implemented as yet.
• Insetting biodiversity (value-added marketing) Selling farm produce with a premium in recognition of benefits to the environment, with examples such as Arla recently adopting this policy and paying a premium for produce fitting the bill, a clear example of food production being linked to the enhancement of the environment.
• Water quality and nutrient neutrality - in England water companies pay farmers for reducing phosphate and nitrate in the water courses.
• And interestingly, also thus far only in England, diversification, leisure and recreation - offering nature-based diversification for tourist and local community e.g, rural stays, field sports, wildlife watching.

It is, however, likely that these or similar measures are fully adopted in Scotland in the near future.

So what is the driver of these markets, and how might this opportunity for additional income plug the gap in the reduction in direct support to farmers and growers owing to the impending withdrawal of the Basic Payment Scheme?

In recent years, there has been a growing recognition of the importance of Environmental, Social, and Governance (ESG) criteria in the financial markets. Investors and corporations are increasingly considering the impact of their activities on the environment and society, alongside traditional financial indicators.

Net zero is the real driver, but so too is ESG. Businesses with better ESG credentials are more likely to qualify for ESG-focused funds, raise their liquidity, and increase their value and a strong driver for private investment.

The natural capital markets clearly have a huge role to play in fulfilling these requirements, but the natural capital markets are being held back by lack of clarity on regulatory structure, auditing, assurance and benchmarking.

Private investors are there now, and we can assist landowners and managers in creating a product for that market, interpreting the regulations around that market and thereby ensure that landowners and managers maximise the potential income streams for their businesses.

Nature Markets will be a vital future element of UK farming systems and if properly harnessed can provide a very valuable source of income for landowners and managers.

Our aim is to guide clients in this complex and developing space, to be one step ahead and to draw expertise from across the firm to find the appropriate business models and practises to best take advantage of these markets and help to maximise our client’s own environmental and financial outcomes.

We have a multi-disciplinary team with a breadth of knowledge and experience advising clients, funders and key stakeholders on sustainable projects across the developing landscape. If you would like to discuss natural capital and the opportunities this emerging market may present for you, please get in touch – we would be delighted to help.