CREATING FINANCIAL RETURN ON NATURAL CAPITAL
6th July 2020
The recent explosion in UK media interest in carbon emissions, biodiversity collapse and the human impact on the planet is welcome. Fires in Brazil, Siberia and California, or melting polar ice caps are shocking and elicit global concern. We can all exhort other countries to preserve their natural resources, but perhaps we should look closer to home in the fight to bring sustainability into the mainstream of financial decision-making. Britain ranks bottom of the G7 biodiversity league table. Underpinning biodiversity collapse is land degradation – a decline of the economic and biological productivity of land due to human treatment, costing around 6.3 trillion US dollars each year (circa 7.3 per cent of global GDP).
Degraded land is less productive and less resilient – less able to provide services like fresh water, clean air or carbon sequestration. It often occurs because, speak it softly, nature isn’t priceless. Priceless can equate to zero price, undervaluing services provided leading to exploitation (‘tragedy of the commons’). However, the benefits available from preventing degradation and restoring land have never been as clear.
For those interested in making the economic case for increasing wild spaces the challenge is quite simple: make it financially attractive to create and maintain natural land. Going further, how can we transform re-natured land into a financial asset:
- Not reliant on subsidies or charity,
- Not part of a campaign to save nature.
The bad news is that carbon credits for replanting forests is not enough. A calculated business case for investment. Luckily there has been a lot of work in this complex area, summarised in the UK Government’s 2013 ‘Payments for Ecosystem Services: A Best Practice Guide of PES’.
In the forward Sir John Lawton puts the case succinctly,
“Arguing that the natural world is priceless is deeply mistaken. How much is a skylark worth? Well it clearly isn’t zero, but nor is it infinite …. Increasingly, paying for ecosystem services will be another powerful reason for society to look after the natural world, and to stop taking for granted the benefits we derive from it.”
There are many types and different types of PES schemes. In practice, PES often involves regular payments to land managers in return for a guaranteed flow of ecosystem services over-and-above what would otherwise be provided as part of business as usual. Payments are made by the beneficiaries of the services in question, for example, individuals, communities, businesses or government. For the purpose of this blog consider marginal farmland, say 100 hectares of upland. Can payments for ecosystem services, priced effectively, outweigh business-as-usual management of the land?
When considering creating financial return on natural capital, in broad terms there are five types of PES:
- Climate regulation
- Flood risk regulation
- Water quality
- Habitat for wildlife
- Tourism and recreation
Unleashing the benefits of upgraded land is the fundamental purpose of Klere Earth. Would simply removing livestock and arable from the land and turning it over to mother nature, generate enough carbon credits to justify the investment? If it were the case, our hilltops and floodplains would be covered in trees and peatbogs. The economics are against us. Simplifying greatly, assume 100 hectares of farmland is valued at £1,000,000. To earn a respectable 3% return on investment the 100 acres need to deliver £30,000 p.a. the woodland carbon code tells us that 1 tCO2e (tonnes of carbon dioxide equivalent) is worth £10 p.a. According to the Woodland Carbon Code, one Hectare of natural woodland delivers roughly 12 tCO2e p.a. This generates approx. £12,000 p.a. revenue. Other ecosystem services need to provide a further £18,000 p.a. (not including maintenance).
Interest turns to the other services our newly-forested wood provides. Strategically placed on a hill or floodplain, it would offer considerable flood-mitigation, slowing the flow of water during storms and retaining moisture in the soil. Such services are likely to be of value to government and/or insurance companies. From a water-purification perspective, they would interest water utilities. NGOs such as the RSPB would have a firm interest in creation of natural habitats for wildlife. Eco-tourism opportunities and education multiply as the forest matures.
One difficulty is that these services attract disparate potential buyers. And if one or two pay for the services, others can ‘free-ride’ the benefits. Another is finding buyers willing to pay market-sustaining rates that offsets the loss of farm income from the land. Here at Klere Earth we are exploring the ways recent evolution in digital marketplaces can offer some solutions to these challenges. The likes of Uber, Amazon provide a technology platform that matches buyers and sellers in a many-to-many relationship. Our approach is to apply the same principles to natural land. Effectively, we can use technology to unbundle these inter-related services and offer the right services to the right buyers.
So far we have scratched the surface on some of the complexities to be addressed. In the next blog I will consider the subject of flood risk regulation and how much of the missing £18,000 p.a. from our example it can deliver.
