What are the opportunities in Natural Capital Investment?

Associates Matthew Hay (MH) and Lisa Bulmer (LB) answer some key questions surrounding Natural Capital Investment which are key for landowners and developers to consider before investing in environmental net gain.

Q1: What is Natural Capital and environmental net gain?

MH: Natural Capital is a framework for thinking about the value derived from the living world. It is often divided into stocks and flows, the former being natural ‘assets’ like forests, bogs and rivers and the latter referring to the ecosystem services those assets deliver.

Ecosystem services can be thought of as the contributions nature provides for humanity. Some, like timber production or carbon sequestration are monetisable while others, like pollination, flood mitigation or soil formation are not (yet!). However, all ecosystem services create value within our economies and wider society even if we can’t measure that value at present.

LB: The elements of nature that produce a value or benefit to people are considered natural capital. These can be direct benefits like provision of fresh water from a stream, or indirect benefits like air quality regulation that contributes to human health.

Methods of valuing natural capital are being developed, which enables environmental impacts to be quantified. For example, the DEFRA Biodiversity Metric uses habitats as a proxy to determine the biodiversity a site could support and assigning ‘biodiversity units’ to quantify this. The Environment Act 2021 requires new developments in England to deliver at least 10% Biodiversity Net Gain (BNG) with the aim to increase areas for nature to support more biodiversity across England.

The next step is to consider gains in all environmental outcomes, where natural capital will be maximised to deliver a combination of environmental enhancements, such as improved air, soil and water quality, water attenuation, erosion regulation, pollination and recreation.

Q2: How can BNG benefit developers rather than just being a requirement to be met?

LB: There is a growing public expectation for organisations to make active steps to contribute to improving the environment. Many organisations have their own Environmental, Social and Governance (ESG) policy, so incorporating habitat enhancements into developments can support them in achieving their environmental targets and also demonstrate their contribution to tackling the climate and biodiversity crisis.

From a development perspective, incorporation of habitats to increase biodiversity will often increase the aesthetic appeal of a site, potentially providing community access to greenspace, and may increase the development value. Additionally, environmental enhancement can be a necessity to the viability of a development scheme. For example, where development is proposed in a nutrient neutrality catchment area, the ability to create wetlands within the development’s landscape design can ensure that nutrient neutrality is achieved, removing this barrier to development and creating community greenspace and biodiversity benefits.

There will be trade-off between the amount of environmental enhancement delivered within a development site and what is offset elsewhere. One driver of this trade-off will be the viability of a development scheme – for example a certain number of houses will need to be developed for the scheme to be profitable – thus the ability to secure remaining environmental gain off-site will help enable development to go ahead. Habitat banks in ecologically strategic locations can provide a solution to developers where habitat created generates ‘credits’ (e.g. biodiversity units, carbon credits, or nutrient credits) to be traded.

As of December 2022, landowners in strategic locations in relation to nutrient neutrality catchments will be invited by Natural England to utilise their land for nutrient mitigation, helping both developers and landowners to improve water quality and allow development to progress.

Q3: What are the differences between natural capital in England and in Scotland?

MH: The main difference between England and Scotland when it comes to natural capital is that the Scottish Government has been slow to legislate for biodiversity net gain. As a result, this compliance market does not yet exist north of the border, meaning developers are not required to secure positive effects for biodiversity. There are signs that BNG will be introduced when the latest National Planning Framework (NPF4) is implemented in 2023, which will help to secure large amounts of investment for nature recovery.

The other significant difference is that Scotland has far more land that isn’t suitable for agriculture. Currently some of this land is used for sheep farming, though this activity is generally loss-making without subsidies and has led to habitat degradation over large areas of the uplands. As a result, many more Scottish landowners are interested in woodland creation and peatland restoration than in England, leading to Scotland being the main source of carbon credit generation in the UK.

LB: In comparison to Scotland, England’s natural capital markets include biodiversity units and nutrient credits, which are both compliance markets and are restricted by location. This provides a potential for landowners in England to create and enhance habitats to support more biodiversity or establish nutrient neutrality in affected river catchments, and then trade the units/credits generated to local developers. There is a need for such offsetting to be delivered in proximity to the development site and for nutrient neutrality in a location that will influence the affected river catchment.

Carbon offsetting is currently a voluntary market and is not restricted by location. The most significant and tangible nature-based solutions for carbon offsetting are tree planting and peatland restoration which are well-established in Scotland due to the lower land values and availability of suitable land, in comparison to England. Organisations are beginning to consider how their carbon offsetting can also deliver other ecosystem services to meet their ESG targets which is moving organisations to look more locally, for example a new woodland created locally would not only sequester carbon but also provide community green space and improved biodiversity, which may drive more woodland creation in England. Furthermore, the Peatland Code is being expanded to incorporate lowland peat which will enable carbon sequestration in these habitats to be accounted for and potentially open a new market for carbon offsetting in the lowlands.

Q4: Why is it important to invest into nature recovery and environmental net gain?

MH: At a basic level, nature recovery is essential because biodiversity, like a stable climate, underpins our economies. Our society is embedded in the biosphere and if it becomes degraded that will impact on humanity’s prosperity in profound ways. This point was made emphatically in the Dasgupta review (2021), an extensive piece of research commissioned by the UK government, which drew an explicit link between biodiversity and our social and economic well-being.

However, globally and in the UK biodiversity is not faring well. We’ve witnessed huge declines in the abundance and diversity of thousands of species, across multiple taxa, with human activities increasing the rate of extinction by orders of magnitude.

The UK has the lowest biodiversity intactness in the G7, lower than almost every other country in Europe and 12^th worst in the world. Yet our trend is still down, with 41% of UK species in decline. It’s clear therefore that our current approach to conservation is not working and huge investment is now required to try and bend the curve on biodiversity loss in all four UK nations.

This matters because activities that are moderately or highly dependent on nature account for more than half of the world’s GDP, or $44 trillion, according to the World Economic Forum. The continued depletion of natural capital represents a real risk to businesses, their earnings and investors. Unless we can unlock regenerative business models that drive investment into nature recovery at scale, this issue will start to affect the bottom line of businesses right across the planet.