One of the key questions troubling policymakers is how to reward farmers who have always looked after their land well, when on a ‘public money for public goods’ basis, the most degraded land is in need of the greatest level of investment. Could natural capital thinking help these ‘good farmers’ to be recognised and rewarded for their efforts?

A natural capital asset register creates a list of the natural features of the farm, together with an assessment of the social value of the business and the cost and income associated with all types of capital (natural, social and financial). Through this schedule, the owners and managers of the land can begin to assess the quality of all of the assets within that geography.

Whereas accountants and valuers are very used to doing this for built and movable assets such as buildings and machinery, we do not typically account for the value or condition of soil, water or biodiversity in the farm’s balance sheet.

However, from each asset class, society derives benefits through the services that they provide, such as homes, habitat for biodiversity, pollination, water filtration and carbon storage. Maintaining the viability of the service creates a need to invest in the asset from which it is derived, to ensure that the benefit remains long term. Only by creating a full schedule of all assets can their condition be assessed and repairing investment decisions made.

Farmers like to think, quite naturally, that they know what ‘good farming’ looks like. But often good farming is not rewarded in the market place. Pushed by the other economic forces surrounding farm businesses, poor soil quality, depleted habitats and polluted water have become all too common. The challenge is, of course, how to rectify this. Does it need the carrot of investment or the stick of compliance?

Arguably both, but with limited funds decisions will need to be made. Given the higher need and impact that investment will have, land that has currently low levels of natural capital may benefit unfairly from future agricultural subsidies designed to rectify environmental damage.

The process of repairing poor land can be likened to the recapitalisation of the banks that occurred after the global financial crisis in 2008-2009. Banks were forced to do this in order to prove that they had adequate capital reserves to resource their lending commitments – some received bail outs from the Government in order to be able to do so.

Farmers who have always ‘done the right thing’ justifiably feel that it is not fair that badly managed land might receive more public money, but undoubtedly the money required to ‘fix’ the degradation is not available internally on those farms. External investment, matched with a rising baseline of conditions attached to land usage, may be necessary for the next generation of landowners.

So what can be done for those who have always got it right? First of all, they need to be able to prove that they are better than others. Savills Whole Estate Reporting system allows farms and estates to understand their natural capital and benchmark their performance against other businesses.

Secondly, the imperative has to be on supply chains to use this information. Increasingly, both banks and purchasers of agricultural produce will be looking to mitigate climate and reputational risk, meaning they both should be increasingly interested in working with farms with high levels of natural capital. These businesses tend to be better managed and should be synonymous with ‘good farming’ – deserving better lending terms and preferential contract deals.

Australian banks are working this way, judging farms with high natural capital to be worth more than low natural capital. Subject to the assessment of natural capital being robust, this approach feels inevitable here in the UK too.

Assessing and benchmarking natural capital is the first step in evidencing ‘good farming’, so that market rewards can be gained, and government can get on with regulating ‘bad farming’ out of existence. 

Further information

Contact Savills Rural Research