Business management

Natural capital: the potential for land managers

At a recent virtual seminar hosted by NatWest and Savills, speakers discussed why the emerging concept of natural capital is an important development and outlined the opportunities it could offer to land managers as they adjust to life without subsidies.

But a growing understanding of the opportunities farmland can offer in terms of combating climate change, reducing pollution and supporting public well-being have made natural capital a critical part of a farm’s operations.

Speaking at a seminar hosted by Ian Burrow, NatWest’s head of agriculture and renewable energy, and Roddy McLean, the bank’s director of agriculture, Biddell said public concern about climate change and the environment was leading to a significant shift in environmental policy – ranging from tough net-zero targets to a focus on sustainable food production.

And with policy moving away from providing direct agricultural support to using “public money for public goods”, financial incentives for supporting natural capital are making it more relevant to land managers every day.

“For land managers who are concerned about the loss of subsidies, natural capital offers a brave new world in terms of income streams,” Biddell said. “There’s a realisation that what we previously saw as externalities need to be seen as key parts of [a farm business’s] balance sheet.”

Nature-based off setting

One significant area of financial opportunity lies in carbon offsetting, with land managers able to sell nature-based carbon credits to businesses interested in offsetting their emissions. There are currently three main options for increasing carbon sequestration: forestry creation, peatland restoration and increasing soil carbon.

“Forestry creation and peatland restoration both have accreditation schemes under the UK Woodland Carbon Code and the Peatland Code,” said Biddell. “At the moment there isn’t an agreed method for measuring soil carbon increases, but it’s an area that’s growing quickly and people are working on how to measure it.”

In 2019, there was a 30% increase in the price of nature-based carbon offsets, with prices sitting between £15 and £25 per tonne of carbon — and this is predicted to rise significantly, Biddell added.

“The Taskforce on Scaling Voluntary Carbon Markets found that voluntary carbon markets need to grow as much as 160 times if we’re to reach net-zero targets,” she said.

“It’s a question of when this market will really get going — there are definitely opportunities there for land managers,” said Biddell.

Green developments

A planning concept known as “biodiversity net gain” is another area that could offer financial incentives to landowners.

The concept, which is being driven through the Environment Bill and is set to be mandatory by 2023, involves all new developments needing to increase biodiversity by 10% as a condition of planning permission.

“If land managers can provide that increase, which developers can buy to offset their requirements, it provides an interesting income opportunity to land managers,” said Biddell. “We are already seeing clients providing habitat banks that developers can buy. They sit at £11,000 to £25,000, depending on the type and quality of habitat.”

For land managers who are concerned about the loss of subsidies, natural capital offers a brave new world in terms of income streams

Molly Biddell
Policy analyst at Savills

While there is undoubtedly financial potential in natural capital, Biddell said it’s important that landowners do their research or seek advice before they leap into the market. There are things to watch out for, she warned – these are emerging markets, so there is uncertainty around policy, regulation and tax implications for changing land use away from agriculture.

However, Savills is seeing more and more clients who are interested in tapping into this opportunity and demand is growing substantially, Biddell revealed.

Could farmers sell their carbon credits too quickly?

It is possible that, in selling carbon credits too readily, farmers could leave their own business short as they strive to achieve net zero, Biddell acknowledged. It is therefore important that land managers look at their own situation before they sell offset credits to others. “Many clients are already net sequesters because they have woodland that already accounts against their own process emissions,” she said.

“We are advising some clients that if they are creating new woodland now that they get it accredited so they can prove they have been creating carbon sequestration, even if they don’t sell credits until we see the market.”

The effect on land prices

Savills’ view is that it’s too soon to tell exactly how land prices will be affected by natural capital, but there are indications buyers are becoming increasingly interested in its potential.

“Agricultural investors are looking at their land portfolios in very different ways,” said Charlie Paton, director of national farms and estates at Savills. “Even four years ago, a lot of them were looking at offloading what they believed to be ‘vanilla’, boring agricultural investments. They’re now seeing more value to them.”

Natural capital value has the potential to increase land prices in regions that might not have ordinarily secured high prices, he added.

“The growth in forestry prices has been unprecedented, and this has fed through the market to hill land, too, particularly in Scotland. Values for hill land grew by 17.5% in 2020, wholly driven by entities looking at it for planting.”

Part of a long-term solution

In rounding off her presentation, Biddell asked whether “the Red Book will have to turn green” – a reference to the guidelines published by the Royal Institution of Chartered Surveyors on valuations and best practice. Her conclusion was “not quite yet”, but she stressed that natural capital represents a mindset shift that needs to be taken seriously.

“Given the direction of policy, natural capital investment is a solution to land managers who are losing the security of traditional income streams,” she said. “It will be more of a long-term trajectory, as natural-capital investment is a key part of the solution to global environmental risk, but natural capital will definitely be part of the shake-up we see over the next 25 years in rural land.”

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