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What is natural capital and how can it be monetised?

To many in farming, the phase natural capital is a vague one. It is generally used to refer to physical natural resources such as air, soils, water and living organisms, and the benefits they provide, such as fisheries, healthy soils and outdoor recreation.

What is natural capital and how can it be monetised?

To reach its potential in the UK what is needed, says Emily Norton, head of rural research at Savills, is practical examples of the earning opportunities and value of natural capital.

 

She says: “It is a debate dominated at times by highly academic answers. But we need to think beyond theory and onto things that mean something to farmers. What we need are real farm examples and opportunities.

 

We need to know how to take the value of soils or water in business decisions.”

 

Much of the recent interest in the topic of natural capital has sprung from the UK Government’s publicly stated plans to start rewarding farmers and landowners for improving natural capital.

 

Speaking earlier this year, the then Defra Secretary Michael Gove listed enhancing natural capital alongside food production as the two core tasks the Government wanted farmers to concentrate on.

 

The plan post-Brexit, Mr Gove outlined, is for farmers to be rewarded for providing public goods, which is likely to include services such as soil and water quality and public access and paths for the benefit of public leisure and recreation.

 

Brexit had, to quote a Linking Environment and Farming conference this year, ‘opened the door’ for natural capital to replace the Common Agricultural Policy.

 

Mr Gove told delegates at the Oxford Farming Conference last January: “Farmers could be rewarded for enhancing the natural capital of which they are stewards – protecting ancient woodland, bringing woodland under active management or restoring peat bogs.

 

“These all generate public goods by adding to our carbon storage, boosting air quality, tackling global warming, and also improving water quality.”


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Undecided

 

However, with most of the decisions about a future post-Brexit subsidy system undecided, many farmers have stepped back from considering the natural capital and earning opportunities already available to them.

 

That is a mistake, says Ms Norton.

 

She says: “The natural inclination of farmers is to wait for Government policy on this, but we need to look for private opportunities that exist today.

 

“It is a great way of diversifying income and mitigating exposure to Government subsidies that are on the way out.

 

“[Landowners] should be thinking about the assets they have available on-farm and who might be potential partners who could be interested in a different use of that asset.”

 

In Wessex, that market for natural capital from farmers and landowners already exists. Back in 2015, farmers were paid by Wessex Water to grow cover crops to stop nitrate run-off into the water environment.

 

This enabled the water company to save the costs of building additional treatment works.

 

After the success of this auction and the widespread willingness of farmers to get involved, Wessex Water set up EnTrade as a trading platform for bringing more buyers and sellers (in this case farmers) of natural capital together.

 

Since 2015, EnTrade has run a further four auctions inviting farmers to bid for funding to grow cover crops over winter to reduce the nitrogen leaching into the water course.

Value

 

They now plan to go one step further this autumn and allow farmers to put their own bids in for what they would be willing to grow in the form of cover crops, and then have what they are willing to do verified and given a natural capital value.

 

EnTrade can then seek out developers who are looking to offset and ask them how much they are willing to pay for it.

 

Tim Stephens, a Catchment Adviser for Wessex Water says: “We are at an interesting juncture now with the launch of EnTrade. Up until now it was a demand-led operation where water companies say they wanted a certain amount of nitrogen concentration in the water and farmers were found to supply that. Now it is changing to a proactive market.”

 

Mr Stephens says a market is emerging with water companies, local authorities, Natural England, the Environment Agency and wildlife groups all looking to work with the agricultural sector.

 

Mr Stephens says: “There are potentially significant budgets available on local levels, with water companies increasingly looking to help farmers implement habitat improvements and carbon offsets alongside measures to improve water quality.

 

“The direction of travel is towards rewarding farmers properly for the services they provide.”

 

In the absence of nationwide policies or bigger schemes on say, carbon storage, the most likely opportunities available to the agricultural community are going to be ad hoc and highly localised, said Roddy McLean, Natwest director of agriculture.

 

He says: “What is available to you will depend very much on where and what you farm.”

 

Mr McLean urges all farmers and landowners to look out and assess opportunities in their area.

 

“It may be that farmers coming together on their own initiative can also offer a scale that could appeal to the marketplace.

For more on succession planning, visit natwestbusinesshub.com, or email Roddy McLean at roddy.mclean@natwest.com

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