Putting a price on Natural Capital

Land has long proven itself to be a good investment over time, almost regardless of the economic climate. Its average value has changed very little over the last decade. Farmers buy land to grow their businesses, provide for future generations or retirement. Developers buy land for construction and lifestyle purchasers buy land to have space for their hobbies. But now, in our eco-conscious society, there is a new type of investor – the investor in natural capital.

This is a relatively new concept in the Irish property market. Forestry companies would be considered natural capital investors, but it is not limited to forestry only.

Natural capital is gaining traction, especially where large companies see it as an opportunity to offset carbon emissions and help them meet climate change obligations.

The sustainability driver

“A lot of corporate bodies now have sustainability on their agenda,” says Evelyn Channing, director of rural sales with Savills in Edinburgh, Scotland. “We have seen increasing interest from a different type of buyer than we are used to.”

The new type of buyer is someone that puts a value on the environmental benefits of owning land, such as peatland restoration or capturing water. Evelyn puts ‘natural capital investors’ into three categories:

The Irish Forum on Natural Capital (IFNC) defines ‘natural capital’ as an economic metaphor for nature; a concept that frames the world’s renewable and non-renewable resources like plants, animals, air, water, minerals and soils as assets or stocks that combine to yield a flow of benefits to people. It involves measuring and valuing natural capital assets.

Difficult to value

Values can be expressed in qualitative, biophysical or monetary terms. These values can be used to show how natural capital assets deliver a flow of benefits to society and the economy. These natural capital assessments or natural capital accounts can be used to support sustainable decision-making.

However, panelists on a recent Introduction to Natural Capital webinar hosted by the IFNC agreed that it is difficult to express a return on investment in natural capital in monetary terms.

“This is not fully understood just yet. We need new markets to develop,” said Reiss McLeod, associate with the Institute for Development of Environmental-Economic Accounting (IDEEA) group in Melbourne, Australia.

“Until these markets mature, what we need is for everybody to come to the party, including consumers and government, to support environmental performance.”

Different reasons

So far the concept is very wishy-washy. But when you see large investments made by wealthy individuals, it becomes a serious space to watch. For example, 15 years ago, Anders Holch Povlsen did not own a single acre in Scotland. The Danish billionaire now owns about 220,000ac of Scottish Highland, more than the Duke of Buccleuch, who would be a more traditional landowner who inherited vast estates. The Duke would have been one of the most prominent landowners in Scotland until recently.

Anders made his money in the online clothing retail business. He and his wife Anne have bought all this land in order to conserve it for future generations.

“We wish to restore our parts of the Highlands to their former magnificent natural state and repair the harm that man has inflicted on them. Not just the land itself, but also those other parts of Scotland’s rich heritage of which we are now custodians.

“There are many vulnerable properties across all of the holdings that we have the wonderful and privileged opportunity to rehabilitate and restore to life; there are also archaeologically important structures that we have the responsibility to protect,” the Povlsens state on the Wildland website. This is the company that manages their estates in Scotland. Interestingly, the couple say this is a 200-year project. Wildland also has a nature-filled tourism offering for visitors to the estate, this includes overnight stays at one of the houses. However, prices for this are not listed on the website.

The trend is there

You could say this is a sideline for wealthy individuals with more money than sense. However, it may be that today’s investors in natural capital are ahead of their time. Take a look at the policy direction in Brussels, with the formation of the Green Deal, the GLAS scheme in Ireland and the Locally Led projects being run throughout the country. Part of the Green Deal literature from the European Commission states that “all EU policies should contribute to preserving and restoring Europe’s natural capital.

“Payments for eco-system services may or may not be worthwhile for investors,” says Evelyn Channing, adding that you could see insurance companies paying landowners to manage water issues further upstream, thus reducing the number of flooding-related claims. “We had discussions with a shipping company that wanted to offset their emissions. There are a few collective forestry funds – who’s to say there will not become carbon funds.

“It is relevant to farmers in that they will be incentivised to go down this route, perhaps on a smaller scale, by measuring things like butterfly populations and hedgerows. The estates is just the same thing on a larger scale.”

Once it becomes possible to put a value on the return potential, it is expected that large funds will get involved in this area. However, some are already doing it. In September 2017 Paris-based company, Mirova, created an investment platform called Mirova Natural Capital. The asset management company has created a range of funds for investors that want to finance sustainable land and ocean management projects. Mirova has staff in Paris, London and Lima.

Tech giant Microsoft made a pledge in January this year to be carbon negative by 2030 and remove its historical carbon emissions by 2050. It made $1bn available for its climate innovation fund. Meanwhile, Amazon said it intends to be carbon neutral by 2040.

An Irish example

An example of a natural capital investment in Ireland would be the 800ac site which was formerly Lisheen Mines. It is on the market with Knight Frank for €11m. This is a slightly different concept to investing in a Scottish estate – it is designated as Ireland’s national bioeconomy campus and can harness funding from the EU for projects on things like renewables. Anecdotal evidence would suggest that multinational companies are looking to buy it with a view to reaching their carbon-neural targets.

However, the IFNC is keen that we don’t let a situation evolve in Ireland that would see a small number of wealthy people or companies owning large amounts of land.

“We need Government to work together with businesses on this to protect these areas and ensure their future. These areas provide benefits for wildlife and people, as well as businesses and investors, so we don’t want a situation where only a few of those stakeholders get a say. Natural capital is a powerful tool to make these land planning decisions,” says Orlaith Delargy from IFNC.

Estate agents agree that the arrival of forestry companies in Ireland has put a floor in the land market which was not there before.

The question is whether or not natural capital investors will do the same. “I agreed terms on an estate recently for this style of buyer and they are paying a price which is no worse than what would have been paid for sporting estates before. Traditional buyers are being pushed higher than their normal level, these guys are paying a value equivalent to sporting estates. They do not know yet themselves what the return is,” Evelyn Channing says.

Keogh’s crisps is investing in a project in Ethiopia that co-benefits natural capital. The company has invested in climate-mitigating programmes to offset carbon emissions in the farm to crisp production process.

He says that in the middle of the huts where the villagers live there is a fire to cook and heat with. The Vita project helps to install wood burning stoves made out of cast concrete with a heavy steel plate on top and a chimney.

“It improves health, as well as reducing wood consumption. This was a very simple thing to do and it makes a huge difference. We invested in that and because it was registered for carbon certification,” Tom said. “A company called CO2 balance came in and mapped our carbon output from field to crisp. This also factored in my team going to America for sales meetings. It took six weeks to compile the data. We offset that against the carbon savings in Ethiopia.”

When Keoghs crisps received carbon neutral certification it was initially a good marketing tool in America, but Tom says it has only become relevant in Ireland in the last 18 months.

“I like the fact that, as a business owner, I can make my business more sustainable regardless of whether we tell our customers. My big concern is greenwashing with so many people getting in to this. I think the first step is to map your carbon footprint. It’s actually quite a good thing for any business to do. In our business the biggest carbon emission is the gas we use in our fryers. We can’t cut that back, but we can turn the fryers off when people go to lunch. From a traditional farm point of view, diesel would be a massive input.”

The Irish Natural Capital Accounting for Sustainable Environments (INCASE) project is testing natural capital accounting in Ireland. It is working on four river catchments – Bride, Caragh, Dargle and Figile. Accounts based on the UN System of Environmental-Economic Accounts (SEEA) Central Framework will be developed for the four catchments. This will map the biotic and abiotic stocks and flows of these ecosystem services in biophysical terms and in some cases monetary terms. It is funded by the Environmental Protection Agency (EPA) and is running from March 2019 to 2023.

For the Bride, catchment the project is working with the Biodiversity Regeneration in a Dairying Environment (BRIDE) programme. This is a locally led project with farmers paid to manage wildlife habitats. One of the key payments is for establishing 2m wide field margins.

The Bride valley in Cork is an area of productive agriculture, with many dairy and tillage farmers. The total funding for the five-year project is €1.1m. There are 44 farmers involved in the project. They have been allocated €2,000 each this year for capital improvements such as planting hedgerows and woodlands, creating ponds and increasing field margins.

“That is a one-off payment and they will also receive a results-based payment for the ecological quality of all the habitats on their farm. This is an annual payment for the duration of the project and we won’t know what this will amount to until the habitats are scored this year,” said project manager Donal Sheehan. “We hope to give an average of €3,000 per farmer and as the quality of the habitats improves over the years this payment would also increase.”

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