Farmers may feel the last thing they need is another piece of jargon.
However, the phrase “natural capital” has very much arrived in Westminster and, with Defra secretary Michael Gove’s 25-year environment plan due to be published in January 2018, agriculture can expect to be hearing a whole lot more about it.
What does it mean? Natural capital describes all the pieces of the natural environment that provide goods and services to people.
In farming terms that includes soil, trees, watercourses and biodiversity, as well as wind and solar energy, natural habitats, minerals and aggregates.
Each “natural asset” is given a value in a set of accounts, allowing it to be measured and tracked in terms of growth or depreciation.
Prominent academics known to have the ear of the Defra secretary are convinced a natural capital approach has a major role to play in a post-Brexit subsidy shake-up.
Future subsidy payments
They want to see future subsidy payments targeted towards those who can demonstrate maintenance and improvement of these assets.
Some in farming are less keen, applauding the ambition but questioning its complexity and whether it will sufficiently incentise farmers to participate.
The mood music emanating from Mr Gove’s Westminster office is a soundtrack of change.
The days of area-based payments look numbered with, in effect, a reinforced Pillar 2 expected to be paying farmers to deliver public goods.
If a natural capital approach influences future environmental policy, it is likely to reward those who can demonstrate they are improving the natural environment.
That will include measures that farmers are already familiar with – enhancing natural habitats, reducing run-off, cleaning up watercourses and improving soils, for example.
Who will be the big winners?
But the big winners could be those who can go over and above on delivering public goods, such as reducing flood risks or maintaining woodland that captures carbon or pollutants from large infrastructure.
Dieter Helm, chairman of the Natural Capital Committee (NCC), says the opportunities are huge.
He is one of the biggest advocates of natural capital and is on record as saying Michael Gove takes “a very deep and proactive interest” in his work.
The committee he chairs was formed in 2012 after the coalition introduced a white paper stating an ambition to be the first government to leave the natural environment in a better state than it found it in.
“It’s hugely ambitious to stop the rot, let alone enhance the environment,” he said.
Reformed after the Conservatives won the 2015 election, the committee delivered its findings in September on how it believes the government can achieve that goal.
Feeding off that, Mr Gove is expected to release a long-awaited 25-year environment plan in January 2018.
“Farming is the use and application of natural capital to produce outputs. It’s blindingly obvious that farmers are at the sharp end of natural capital,” said Mr Helm.
He is in no doubt that environmental payments based on natural capital outcomes are deliverable, despite the potential cost of gathering data and building the required infrastructure.
“I’ve never met a farmer who doesn’t know the nature of the natural capital on their land. Imagine a farmer who doesn’t know what their soil is like.
“I can’t see how you can say it’s too expensive to justify why you should get public money – surely nobody thinks that?
“It’s a win-win – for farmers to understand their natural capital is to improve the productivity of their farm.”
Can it work on a practical level?
Farmers generally want policies that balance food production and the environment.
But many are concerned about the practical delivery of yet another scheme, especially given the many bureaucratic issues experienced with the RPA’s new system for the Basic Payment Scheme.
Jonathan Baker, senior land use policy adviser at the Country Land and Business Association (CLA), says at a strategic level the concept of natural capital stands up, but it borders on unworkable at farm level.
It is not a magic wand you can wave over agriculture to establish future environmental policy, he says.
While institutional landlords such as the Crown Estate and the Duchy of Cornwall, as well as a handful of private estates, have already made strides, smaller estates have not found it to be hugely useful, Mr Baker says.
“The things that are holding it up are data availability, quality of information and familiarity with the concept.”
Mr Baker says the CLA would prefer to see a different approach and has put forward the idea of a land management contract.
This takes the form of a legal agreement between a farmer and the government for provision of goods and services that the market doesn’t pay for, but which provides valuable benefits to society.
“It’s a way of incentivising land managers, but more of a contractual relationship.”
The NFU argues for a more balanced approach to a future environmental policy.
The NFU’s chief environment adviser, Diane Mitchell, says environmental policy should consist of a mix of measures and could include those based on natural capital.
“A more business-to-business transaction may be attractive to many farmers, but the challenge will be to develop this approach so it can go hand in hand with food production, ensure farmers can remain responsive to commodity market demands, deliver a fair financial payment for the services provided and minimise administrative costs.”
How can farmers prepare?
Jason Beedell, a partner at Strutt & Parker, says his firm has been advising a handful of clients on how they can maximise their natural capital.
“Farms that can provide services that are valued are likely to be the winners,” he says.
“For example, farms that have land that can reduce flood risk in a river basin or that have trees that absorb pollutants from large roads could get payments, and so be winners.”
However, he admits that embedding natural capital as part of a policy framework for future payments would be fraught with problems.
“I don’t think the NCC has thought about the human element. Even the biggest and best farmers don’t have capital data on farms – I can think of only a few and they are the early adopters. Perhaps a few of the really progressive agri-businesses do, but most won’t have any idea.
“I think [the government] has completely underestimated it – farmers will push back on having something like this imposed on them with no consultation.”
Case study: An opportunity to earn from the private sector?
The bigger story may be what gains farming can make by offering natural capital services to private investors.
Archie Ruggles-Brise is one of the few estate owners who has already made strides in integrating the concept.
He runs the 809ha Spains Hall Estate in north Essex, which lets out its arable land on a series of tenancies, while retaining 73ha of woodland in hand.
“It’s still a very new concept in land management, but I’m keen to see natural capital as part of my business,” he says.
His approach is to work in partnership with private investors to use the natural resources on his estate to create a diversified income stream.
Working with the Rivers Trust, he has been able to map areas of the estate that are suitable for natural flood management to reduce downstream flooding.
He has installed leaky dams, built retention ponds and established sediment traps with the goal of slowing the flow downstream and cleaning the water.
“We are doing it through a private scheme with the World Wildlife Fund and Coca-Cola, which want to put the water they take out back into the landscape,” he says.
“It’s for their corporate social responsibility, but it is private money coming in from our point of view.”
Seeing it work in practice has convinced Mr Ruggles-Brise that a natural capital approach is bigger than just subsidy payments.
“Water retention and biodiversity can go beyond the government subsidy model and deliver income streams,” he says.
“The innovative thing is paid-for results. I’m trying to encourage others to look over and above agri-environment schemes.
“If you get biodiversity improvements that you can measure, there will be a pool of those benefits that farmers can sell to others.
“I think the real win for the environment and land managers will be packaging it up and selling it to private industry.”
The watchword is simplicity, though.
“Farmers are pretty canny – they will see the way in to this if they’re motivated to do it, but not if it’s too complex. They’ll work it out.
“I think this is where I’m going to try to take our business. It’s something I can see that people are proud to hand it over to the next generation.”
Natural capital and the value of land
Are we about to see yet another market influence come in to play – one that takes farmland’s natural capital potential into account?
Jason Beedell says a policy shift could mean farmland adds more income-generating potential.
“Also, many buyers are interested in wildlife, the look of the land, diversifying their income, forestry and shooting, and so farms rich in natural capital are likely to appeal to them, which can increase values, as we are seeing in the land market at the moment.”
But James Collins, a partner at Howkins and Harrison, says that much like the current tiered approach to environmental schemes, not everyone will want to be involved.
“What everyone will bear in mind is that with attractiveness and capital value comes control,” he says.
“You may be able to get grants, but that means people aren’t going to let you do what you want to do with it.
“It restricts your freedom to manage it in a way you see fit, and that’s the issue that land owners will have. The more you get in providing value to the wider public in terms of environmental goods, the more they want control over it.”