Peter Harker on natural capital
What is natural capital and why is it important for rural businesses to consider?
The concept of natural capital is gaining traction across various sectors, with large corporations and financial institutions increasingly recognising its value. While the term is becoming familiar, it's crucial to understand that landowners hold the key to unlocking this potential. By implementing different land management practices, there are potential opportunities to deliver environmental benefits which are also financially rewarding.
This shift in perspective is creating new opportunities for rural businesses. Landowners can now explore previously untapped income streams by focusing on activities that enhance natural capital, such as carbon sequestration and soil health improvement.
The market for natural capital is still in its early stages, but it's rapidly expanding. Driven by corporate net zero targets, there's a growing demand for carbon credits, which landowners can generate by practices such as tree planting and peatland restoration.
How can businesses assess and value their natural capital assets?
Accurately assessing and valuing natural capital assets remains a complex challenge. While there is growing recognition of its importance, established valuation frameworks such as the RICS Red Book have yet to fully incorporate natural capital as an asset class.
The lack of standardised valuation methods and limited market data for natural capital-based transactions pose significant hurdles for businesses seeking to quantify the value of their natural assets. As the market matures and more data becomes available, valuation methodologies will hopefully evolve for this area, providing a clearer picture of the financial implications of natural capital management.
What are the key factors influencing the financial viability of natural capital investments for rural businesses?
It’s about investing in the right scheme in the right place. Not all schemes are appropriate for all land types and different owners will also have varying views on exactly what they would like to see their land used for.
For rural businesses, the financial attractiveness of natural capital investments hinges on several key considerations. The size of the landholding is a crucial factor, as smaller farms dedicating a larger portion of their land will see a more material impact on their cash flow and tax position. Additionally, the type of natural capital project undertaken (eg a biodiversity net gain (BNG) scheme or carbon sequestration) influences the potential financial returns. Finally, the specific goals of the business and family owning the land are important. The potential benefits should align with the landowner's objectives, such as improving cash flow, reducing debt, or achieving other family aims.
So, it’s a context of scale but also what matters to each landowner. Every business and family is different. It’s also important to think about how this comes into play when thinking about succession planning and passing on a farm or estate to the next generation.
Finally, the specific goals of the business and family owning the land are important. The potential benefits should align with the landowner's objectives, such as improving cash flow, reducing debt, or achieving other family aims.
Are there any specific financial incentives or grants available for businesses focused on natural capital projects?
A range of financial incentives and grants are available to support businesses undertaking natural capital projects. For example, there are grants for woodland creation, which can significantly offset planting costs. Additionally, government subsidy schemes like the Sustainable Farming Incentive (SFI) encourage regenerative farming practices, narrowing the gap between traditional and sustainable methods.
HMRC is increasingly recognising the tax implications of natural capital income streams. As a firm, we’ve been instrumental in advocating for landowners, particularly concerning the impact of tax on BNG and rewilding projects. Following a consultation from HMRC last year, which we replied to, in the Chancellor’s Spring Budget 2024 it was announced that agricultural property relief (APR) would be extended to certain environmental schemes with effect from April 2025, which would have been a big win for the work we’ve been doing on behalf of our clients.[KH2] However, this change was not legislated for in the last Finance Act before the 2024 General Election, and so we will need to wait and see whether the new Labour government will take these proposals forward.
Some of the more convincing returns that we see are where landowners manage to strategically combine different schemes. While certain activities might not qualify for multiple payments due to the ‘additionality rule’, which essentially means you can’t get paid twice for doing the same thing, it's possible to stack incentives for different aspects of a project. For example, if you have a BNG project that also combines tree planting, if you’re not counting the biodiversity uplift from the trees, you can then theoretically also claim the carbon credit. Careful consideration of scheme rules is essential to optimise financial benefits.
Financial incentives or grants
What are some practical steps businesses can take to integrate natural capital into their operations?
The first step towards integrating natural capital into business operations is conducting a comprehensive baseline assessment. This involves accurately measuring and documenting the current state of natural capital assets on the landholding. By establishing a clear baseline, businesses can identify opportunities to enhance natural capital and subsequently monetise the resulting improvements.
There are a large number of businesses that provide these services. In my view it is important to choose one that adheres to the highest scientific standards.
What role do professional advisers (like ourselves) play in helping businesses on their natural capital journey?
When talking to our clients about natural capital, I like to say that ‘for a landowner to go green, they’ve got to stay in the black’, which means that if they’re thinking about starting an environmental project, it’s got to stack up financially. We help them understand what the scheme will look like, both in terms of cashflows and tax profiles, and what it will do for their long-term inheritance tax position. Our main role is to make sure that any venture is going to be financially beneficial and sustainable, because fundamentally if they do something and it fails as a business, there’s a risk that the scheme might not achieve its stated aims, which then creates even more problems and liabilities down the line. We’re here to support them at every step.
How has the landscape of natural capital projects evolved in recent years, and what are the key drivers of this change?
We act for many clients in this space who have launched a wide range of interesting projects, ranging from people that are entirely commercially driven through to those who are more philanthropic towards nature in their decision-making. I think all are great examples of how people can implement environmental projects and not be worse off because of it. It’s really driving a lot of change.
There are also a lot more institutional investors coming into the marketplace, with various natural capital funds being set up within the past few months. For large businesses investing in this area it’s a real opportunity to derisk their businesses from a nature impact and carbon point of view and aligns well with the current drive towards implementing responsible business initiatives. I think the understanding of nature impact by wider industries is just as important, or will become more important, as carbon.
Additionally, a new set of disclosure guidelines called the Taskforce on Nature-related Financial Disclosures (TNFD), that builds on the work of the Taskforce for Climate-related Financial Disclosures (TCFD), encourages businesses to examine what their nature impact is through their business activities and supply chains, as well as understand the business risks they face through nature and biodiversity loss.
Furthermore, the financial value of natural capital is influencing land purchases. There has been a real peak in the selling prices for land with natural capital opportunities; this appears to have cooled slightly in recent months, but nevertheless there is still a real premium being paid for natural capital over and above what the land might have been valued at just a few years ago. Large-scale acquisitions are increasingly motivated both by the potential to generate income from environmental benefits as well as land being seen as an asset with relatively stable values.
If there was one thing you could wish for in this space moving forward, what would it be?
In terms of positive environmental action in the UK and beyond, it would be to implement more regenerative farming.
Natural capital and food security go hand-in-hand. There are those concerned about food security that say we need to be putting farming above nature. However, I think there’s plenty of room for both, food security is vital but by addressing other issues such as food waste and supply chain inefficiencies there are huge opportunities to allow more room for nature across the country.
Changing your methodologies to regenerative farming could have a materially better outcome for the environment – soil health is at the core of everything.
Can you comment on the other natural capital articles within this publication?
I am thrilled that I had the opportunity to speak to two leading voices in the natural capital sector as part of this publication. Both Ben Goldsmith and Dr Rich Stockdale are true thought leaders, both of whom fully appreciate the challenges and opportunities that there are for landowners moving forward as the natural capital economy continues to develop.
I do think that one the best ways for a landowner to start to understand what their natural capital opportunities are is to look to people and businesses that are already heavily invested in the sector and to learn from their journeys. Natural capital schemes are not the right thing for all landowners but the economics of landownership are shifting and it is now a sector that should not be discounted without some serious consideration.
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