How complex natural capital market may provide local opportunities
© Mypurgatoryyears/Istockphoto The term natural capital covers a wide range of benefits provided by the natural environment, such as clean air and water, carbon-capturing plants and practices, alongside healthy soils.
There are also social benefits, such as fresh air and views, which can aid mental health and wellbeing. The benefits derived from natural resources are often described as “ecosystem services”.
See also: Lottery grant to help northern farmers realise natural capital
Alongside the statutory requirements of biodiversity net gain (BNG) and nutrient neutrality, requiring developers to mitigate or offset and improve the environmental impacts of their sites, different types of businesses are starting to engage privately with landowners to produce environmental and social outcomes, sometimes at a very local level.
Harvey Davies, head of natural capital at law firm Thrings, is seeing this on the ground.
“These businesses are corporates that have environmental, social and governance [ESG] programmes,” he says.
“They have identified their climate or nature impacts and started to look at how to address these.”
Highlighting uncertainties as farming waits for the next iteration of the Sustainable Farming Incentive (SFI) from a cash-strapped government, Harvey sees opportunities here for farms to secure an alternative income.
“There will be a bit of a hungry gap – SFI is closed to new applicants, any future SFI scheme may be limited, and so it may be left to new emerging markets to make up the deficit.”
Farming resource limitations
“A lot of farms are not going to be able to intensify their production, because of access to capital, their land base, or other limitations. Planning and environmental constraints make life difficult and expensive for some, so emerging voluntary carbon and nature markets could provide a way of pivoting the farm in a different direction, to continue to produce food, less intensively but realising fresh income streams from emerging markets.
“We are starting to see how corporates, having assessed their environmental impact as part of their ESG programme (often through an accreditation scheme such as B Corp for example), are considering the benefits of direct engagement with landowners who can deliver the uplift in environmental performance which they will in effect purchase to meet those ESG requirements.”
This could involve a whole range of changes on farm, for example, habitat restoration which also provides a setting for school trips and company staff away days or training – and activities for disadvantaged children or the adoption of more sustainable farming practices to increase soil carbon and offset that corporate’s greenhouse gas emissions.
“It might look a bit like SFI but can be more lucrative than a government SFI-type offering and is getting that direct engagement between the company and the farm,” says Harvey.
Kate Russell is managing director of Tellus Natural Capital, an independent consultancy advising farmers and landowners, and says investment in natural capital is slow to emerge and can be complex.
Examples of high-level investment includes climate resilience work by Network Rail and National Highways on the Evenlode Farmer Cluster Landscape Recovery project.
“It’s about finding the right people and the right funding pot, at the right time, and it’s not easy for farmers to navigate, nor for the investors,” she says.
Local potential
Kate advises farms and estates considering linking with local businesses for nature restoration projects and sees great potential here, not only for farms and businesses but also for community and social benefits.
She says there are many options for businesses to fund work, including direct investment in or being a “friend” of a project, or perhaps funding visits to a farm, but it’s a question of how to parcel this up and present it.
Natural capital markets
Biodiversity net gain and nutrient neutrality are important elements of the natural capital market but are long-term commitments, as is the Woodland Carbon Code, the UK’s government-backed quality assurance standard for woodland creation projects attracting carbon funding.
All four UK nations also have peatland restoration schemes.
Among the most common alternatives are private market initiatives such as water company schemes paying land managers for undertaking water quality measures.
Merchants, food processors and manufacturers are paying farmers for changing practices, to reduce greenhouse gas emissions, sequester carbon or adopt enhanced welfare measures.
“This aspect is moving so quickly,” says Savills’ Jon Dearsley. “We have counted 42 ‘regen’ farming contracts where either a supermarket or a processor is rewarding farmers financially for some environmental measure.”
However, he warns farmers to ensure what is being offered works for the farm, rather than making the farm fit a scheme.
Other corporate interests are represented in schemes such as Landscape Enterprise Networks, connecting farmers and supply-chain funders to identify shared land management challenges.
This includes mitigating flood risk, improving crop resilience, meeting greenhouse gas emissions reduction targets, protecting nature, increasing biodiversity, improving water quality, and protecting rivers and other water bodies.
For example, flooding in Cumbria in 2018 led to investment in on-farm mitigation measures from Nestlé’, concerned about milk supply resilience, and water company United Utilities, worried about phosphorous
Regional and local funding
There is also regional and local funding. For example, Maidstone Borough Council in Kent recently announced £500,000 through its Nature Recovery Fund and Climate Action Fund to support environmental initiatives to combat climate and nature crises.
Most English councils have these funds, and local wildlife trusts offer grants for nature recovery.
Government and natural capital
Natural capital payments have been accessible to farmers and landowners in England through government schemes such as SFI and Landscape Recovery, although the private funding for this is yet to develop.
Support is also available through the government’s Farming in Protected Landscapes initiative.
Nutrient mitigation and biodiversity net gain – potential changes
The Planning and Infrastructure Bill is set to change delivery of nutrient mitigation, creating a Nature Restoration Fund into which developers will pay to have their obligations met.
Natural England (NE) will administer this, formulating environmental delivery plans at scale (replacing individual measures currently arranged by developers) and sourcing the mitigation measures.
NE will also have compulsory purchase powers over land which it deems necessary for nutrient neutrality and other Habitats and Species Regulations measures.
Harvey suggests that NE is unlikely to want to interfere with some of the larger established nutrient neutrality schemes.
“Are they going to duplicate something already working well in an area? They may look to deploy their schemes in areas where there is not a profuse supply of mitigation, but it’s going to take some time to see how NE takes action and what that means for land managers.
“The Planning and Infrastructure Bill does not end the market for nutrient mitigation – we will still need supply.”
Nutrient mitigation agreements usually tie up land for between 80 and 130 years.
However, there are some local differences. Savills’ head of natural capital, Jon Dearsley, points to shorter-term contracts offered to some land managers in Kent’s River Stour catchment.
These change the land use for 10-20 years as an interim measure until water treatment works are complete.
On BNG, two consultations closed in late July, the first looking at exempting smaller developments of up to nine houses and “streamlining” the rules for medium sites of up to 49 houses.
The second focused on how BNG would work for nationally significant infrastructure projects.
“The consultation on small and medium sites is weighing on on-farm thinking at the moment, some are understandably cautious and a bit nervous about what that might bring,” says Harvey.
“BNG is a market but it’s not necessarily a quick cash fix and therefore you have to proceed cautiously and be patient – developers are your customers but they are suffering with huge cost increases, and the economy is struggling and house prices are weakening.”
Nutrient mitigation and BNG are possible on the same land, says Harvey, but careful consideration of scheme structure is needed to maximise income from each measure.
Carbon
In the developing carbon market a fair amount of caution and a decent amount of advice is needed, says Harvey.
“If you’re selling carbon credits where you’re undertaking an action on land which is also in receipt of SFI, for example, you just need to be clear that that is permissible under both schemes. I would want to know that there is no double counting and the Rural Payments Agency and Defra are aligned and approve this” he says.
“Also, think about what other obligations you might have if you’re considering an SFI scheme and selling carbon credits – how will you satisfy any supply chain obligations?”
Jon says investors in carbon want good-quality, assured credits so that they get a “reputational kick” out of the investment.
Natural capital – key advice
- Look for opportunities to link with local businesses that may be willing to fund environmental measures on farm
- Seek out regional or local funding – there may be more out there than you realise
- There are many supply chain and utility company schemes, but make sure what is chosen fits the farm, rather than trying to make the farm fit the scheme
- If more than one scheme is contemplated, check for conflicts and double counting of benefits
- Consider applying to the National Lottery Heritage Fund – since 1994 it has awarded more than £2.2bn to 5,100 UK land, nature and biodiversity projects