Recently much has been made of the importance of natural capital. Both the opportunities it may present to landowners in terms of ‘public money for public goods’, and the penalties that may be incurred for its abuse under the ‘polluter pays’ principle. In essence, this new approach means landowners should receive more direct income for a positive contribution and pay more for any negative outputs.

Generally speaking, less intensively managed land is more diverse in its natural capital, or has more potential to improve its natural capital without disrupting production.

It follows therefore that such land is likely to benefit more highly from income streams via public money for public goods or from private inward investment from for example water companies.

Similarly the uplands tend to be subject to fewer inputs and therefore should be less exposed to penalties based around the polluter pays principle.

Also, scale may not necessarily be vital in this new approach; it should be possible for an important meadow, or native woodland, to receive support disproportionate to its size. However, there will likely be cases where scale can provide flexibility to design a more diverse portfolio of proposals to improve a property’s natural capital.

This economic framework will have downside risks as well as opportunities

When considering the polluter pays principle remember that many productive, land-based businesses have both negative and positive effects on the wider environment. In an upland stock farm environment this could be as simple as reduced biodiversity or watercourse run-off.

Many effects are currently approached through regulation, but even so, the full costs on us all are not priced into a business’s accounts. While some environmental impact is to be expected as a corollary of producing food and fuel on any kind of scale, these negative consequences are largely unpriced.

The introduction of a Natural Capital Risk Register is one way of highlighting where a business risks additional cost via a polluter pays system. This register could also facilitate a gradual adaption in farming practices when deciding where to make longer term investments.

Landowners already practise a policy of stewardship over depletion

Landowners, especially those in long-term, multi-generational businesses, are used to stewarding their land for the next generation and no one knows the potential of their land better.

However, take soil – a keystone example of natural capital. It is vital to any farming or forestry business but unlike a building, the condition of the soil’s natural capital does not feature on the business’s balance sheet and therefore it may not receive the full investment it warrants for its maintenance.

This market will be built for the proactive

In the long term, we could expect public subsidy income streams to be based on maintaining the natural capital baseline that already exists on a property – the preservation principle. However, short-term funding is far more likely to come from the private sector.

These projects tend to focus on improvements on the ground, encouraging natural capital uplift.An example would be the funding of a new farm woodland, over and above levels that government grants could provide.

Landowners and land managers who are proactive in their approach towards identifying their natural capital resources and the opportunities they present will undoubtedly benefit.

Having a clear understanding of the current baseline, and a range of options to offer to willing buyers, will be essential in order to profit from this emerging market.

Further information

Contact Savills Rural