Ask The Legal Expert

Q: What is Natural Capital?

A: Natural Capital describes the earth’s stock of both renewable and non-renewable resources, such as minerals, soil, water, air, animals and plants, that have value or benefit to people from a social, environmental or financial perspective.

The benefits that such natural assets provide to society can be divided into four main ecosystem services:

(a) use of the resource to create material outputs, for example, timber, food, fresh water and energy;

(b) use of the resource for non-material benefits, for example, outdoor recreation and the aesthetic benefit of natural habitats;

(c) indirect benefits generated through regulation of the ecosystem, for example, the creation of habitats to encourage pollinators for crop pollination, the creation of reed beds for water filtration, and the regeneration of peatland for carbon sequestration; and

(d) the value of those ecological processes which support the delivery of the other ecosystem services mentioned here, for example, nutrient cycling and soil formation.

Some of these benefits have been valued by society and generated an income via established markets for a long time, in particular the generation of material outputs and use of resources for recreation. What is changing is that, with increased awareness of the climate crisis and the unsustainable rate at which we are using our natural resources, there is focus on the importance of, and the generation of value from, some of the other benefits that flow from nature to society, such as water filtration, carbon sequestration and biodiversity.

Q: Why have we been hearing more about Natural Capital recently?

A: The concept of Natural Capital has been around since the 1970s, but a number of recent developments have brought it into renewed focus. 

One such topic is Biodiversity Net Gain (BNG). This is a planning concept to allow land development whilst also securing a contribution to the recovery of nature. It aims to ensure the natural environment is in a better state post-development than it was beforehand, by imposing legal obligations on developers. The Environment Act 2021 sets out the key components of mandatory BNG. Developers will have to try to avoid loss of habitat to the piece of land being developed. Failing this, the development site will be required to provide an increase of at least 10% in biodiversity, as measured against a baseline, post-development compared to pre-development by creating habitat either on-site or off-site (or through a combination of the two). BNG will apply to most large development sites by law from November this year and it will also apply to small sites from April 2024.

Other topics which have increased the focus on Natural Capital are Nutrient Neutrality and carbon sequestration. Nutrient Neutrality is another planning requirement aimed at reducing the impact of nutrient pollution caused by development in certain protected areas. Natural Capital solutions, such as converting farmland into constructed wetlands, can be used by developers to offset nutrient pollution. The Government are proposing to scrap the Nutrient Neutrality rules but we anticipate there will remain a marketplace in the shorter term for developers who do not wish to wait for the change in legislation to be implemented.

Carbon sequestration, or carbon capture, describes the use of peatland, vegetative growth or soil management to capture carbon dioxide and store it away from earth’s atmosphere. Increased awareness of climate change and interest from businesses in offsetting carbon dioxide emissions has created a market for carbon credits, generated though Natural Capital solutions such as woodland creation and of assurance schemes to independently verify such carbon units.

Q: What new options are available to landowners looking to generate an income from their Natural Capital assets?

A: Following the introduction of BNG, landowners with land on which habitats can either be created or enhanced may be able to generate an income from that land by contracting with developers for the off-site delivery of BNG projects. Our Natural Capital team is currently seeing three different ways in which these projects are structured; developers may buy or lease the land to manage and generate their own BNG, with no input from the landowner; alternatively, the landowner can manage the land themself and sell units to the developer (or via a broker to a developer). Also, the landowner can lease the land to a habitat bank company, such as the Environment Bank, which will typically pay the landowner to manage the land and sell the units to developers. Any land used for a BNG project will need to be allocated to that project for at least 30 years. 

The private finance marketplace for generating income from Natural Capital is evolving rapidly. Other options include Nutrient Neutrality schemes and carbon sequestration or peatland improvement, with income being generated either via third parties paying to use land for such purposes or the landowner creating units themselves to sell. Some further emerging investors include sustainable buyers and biodiversity unit purchasers (aside from BNG) who are doing so either for their own ESG reasons, or for the socio/environment benefit of becoming involved.

In addition to the options presented by the private marketplace, there are three key government-funded schemes, the Sustainable Farming Incentive, Countryside Stewardship, and Landscape Recovery to which landowners may be able to apply. /

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