What farmers can do to unlock the value of natural capital

In a nutshell, ‘natural capital’ is thinking about nature as an asset and identifying ways in which economic and social activity depends on the natural environment.

In 2021, the Department for Environment Food & Rural Affairs published guidance on Enabling a Natural Capital Approach, recognising that natural assets offer social and economic benefits. The report identifies biodiversity as a core component when it comes to the value of natural capital as it “directly benefits people through species existence, through nature-based solutions and by enriching other benefits (like nature-based recreation)” and “underpins the resilience of ecosystems to shocks and can provide insurance value”.

When it comes to the calculation of natural capital, valuation is difficult to put into monetary terms. Growth goes hand-in-hand with health and welfare as well as environmental benefits, such as improved water quality. As the report authors say: “Many environmental services, effects or qualities are not typically traded in markets, because of their public good or externality characteristics.” The economic value of making positive changes in the natural environment is therefore measured by what people are willing to pay in order to secure those benefits.

Negative environmental effects, such as flooding, soil degradation and air pollution, have economic implications in terms of damage, output losses and rising health costs. “The risk of not valuing non-market environmental goods and services is that positive and negative environmental outcomes get ignored in analysis and decision making, resulting in losses to welfare and wellbeing.”

Natural capital and farming

In the UK, agricultural policy is increasingly recognising natural capital, with each of the four regional governments introducing schemes that reward farmers who deliver environmental outcomes. Farmers and land managers have a role to play in improving soil health, improving water quality, reversing biodiversity loss, and mitigating climate change.

Farmers are now being encouraged to think about their land’s ecology in terms of financial value and are being rewarded for looking after the existing environment and adding new measures. Public funds are being made available in the form of sustainable agriculture grants which are designed to encourage farmers to plant woodland areas, create hedgerows, reduce flood risks, and improve soil and water quality. Businesses are also recognising the value of natural capital and are also investing in farming. For example, some water wholesalers are paying farmers not to spread fertilisers near water courses. Developers are also paying farmers to create habitats that offset the biodiversity lost as a result of their building projects.

Projects that encourage natural capital investment on farms

NatureScot is piloting innovative approaches to helping farmers manage their natural capital. Currently in Phase 3 of a four-year project, farmers and crofters have been helping NatureScot identify and develop incentives for environmental outcomes that lead to sustainable and resilient farming practices.

The Prince’s Countryside Fund has just launched a new study to identify opportunities for natural capital markets for farmers across the UK. Researchers aim to assess private financial markets, as well as find ways of broadening natural capital markets to small, tenanted, and new farmers who wouldn’t normally have access to such funding.

Back in 2018, Nestlé introduced a natural capital approach to encourage its UK dairy farmers to become more sustainable. Farmers are paid a premium for their work to improve the quality of air, soil, water, and biodiversity. These include “switching from chemical to organic fertilisers, planting cover crops to provide soil cover and increase soil fertility, limiting soil disturbance, moving cattle between lands to fertilise the soil and planting trees and hedgerows to promote biodiversity and water management”.

Using natural capital is vitally important for the future of the planet, but that doesn’t mean that farmers must end up paying for it.