The Next Big Thing: Corporate Natural Capital Accounting

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It goes without saying that one of the key components needed to address the emergencies we face from climate change and biodiversity loss is how we use land in the years ahead.

The transformations we need involve changes to cropping regimes through a switch to agroecological approaches to growing our food, protection and enhancement of existing and creation of new habitats, better water resource management and much greater consideration given to the appropriateness and location of development and infrastructure.

I’ve spent the last 14 years addressing the latter and with the imminent introduction of mandatory biodiversity net gain I believe we now have a mechanism that will generate significant investment into the natural environment by enabling development to pay the true cost of the use of land.

But of course development represents only part of the story of impacts. Practically every business and corporation impacts on natural capital in some way. Work is afoot to enable those impacts to be measured. When they can be measured they can be reduced. Where reductions in impacts cannot be viably achieved then corporates need to offset their impacts and I am promoting the idea that they could buy conservation credits to build resilience into ecological systems. In so doing, we will have a natural environment that improves the opportunities for future generations, improves the sustainability of our economy and improves productivity.

Initiatives and ambitions

Over the past three years there has been a ‘revolution’ in ambition and policy development to tackle these existential threats, notably the Government’s 25-year Environment Plan and Agriculture and Environment Bills currently progressing through parliament. Embedded within these are initiatives such as Biodiversity Net Gain (BNG) already mentioned, and the creation of a 500,000ha Nature Recovery Network. These initiatives require both access to land and access to finance.

In parallel, a number of major philanthropic initiatives to restore nature at scale have been established and these are creating some spectacular examples of nature recovery.

But if we are to see the much needed transformational change in how we value and use land we need private investment into private landholdings at an unrivalled scale and that could be provided by the mechanism of corporate natural capital accounting. Essentially this about a company’s future value being directly linked to how they interact with and use the resources that nature provides. Carbon disclosure has been deployed to varying success to identify and then remedy a company’s emissions profile. As investors press for transparent disclosure of impacts on natural capital, however, a company will only achieve its investment potential if it can demonstrate net zero or a gain in natural capital as part of its normal operations.

There is already growing demand to reduce natural capital impacts to enable businesses to become better investment prospects. This is beginning to drive a demand for natural capital or environmental credits generated on land. It is pretty much a certainty, given the current economic climate, that the public purse will not be able to fund the scale of interventions required to tackle the problems and make the transformational changes necessary. Which means that only by leveraging private investment into private land will we be able to achieve our ambitions to restore nature, making our lives, our economy, our food and our ecosystems more resilient in the future.

If we fail to deliver on the initiatives in the Environment Bill as enacted and on the 25-year Environment Plan, it will be because Government has failed to set the framework within which the private sector can invest. Government must not intervene in the markets that are needed to deliver on these initiatives – just to set the framework and the standards and then let the markets go to work.

Developing a market in environmental credits

So how would a mechanism work? The good thing about biodiversity net gain is that is has developed a metric for measuring the attribute (biodiversity) in units in a standard way. Standards are good – they set baselines and enable markets to develop because everyone is (or should be!) using the same standard. So we need metrics to enable corporates to measure their impacts and risks. We also need a metric to measure the gains that can be delivered on land as a result of the range of possible management interventions – eg. converting damaged arable farmland into woodland, wetland, wildflower meadow, wood meadow or even areas for rewilding/managed wilding. To a large extent the biodiversity impact accounting metric already enables that.

At the Environment Bank we have seen a major increase in interest in this whole area, from both corporates wishing to improve their investment potential and their attractiveness to fund managers, and landowners and farmers wishing to bring forward sites for investment. We are now building a large registry of sites and we are working with a number of the large estates to demonstrate how the mechanism would lead to a diversification in income streams whilst recovering nature. These large estates are particularly interested in how they can generate biodiversity credits from changes in the way they manage land. Just this week I had a conversation with the brilliant Sustainable Food Trust and we think that significant changes to food production also generate biodiversity values that could be captured through a credit-based mechanism as a co-product of that change to the farming regime. Everyone benefits.

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