Natural Capital and ESG in the Rural Market

In this article, Mairead MacDonald and Hamish Lean provide an overview of the rising investment in natural capital in the rural market and the opportunities this provides for rural landowners and investors. 

12 February 2024

Natural capital can be understood as the world’s supply of natural resources, and the product of natural processes that have economic value to society. 

Natural capital has recently emerged onto the scene, most prominently due to climate change and the introduction of the Environmental, Social and Governance (ESG) frameworks for businesses, together with government planning for Brexit rural policy. This is particularly relevant for rural landowners who are the custodians of the UK’s natural resources. Please see our previous articles, Rural Land Market Insights Report” and “The Next Steps in Land Reform: Agriculture and Climate Change.” 

The current value of ecosystem services in the UK is estimated to be around £1.5 trillion. The opportunities generated by these services are growing rapidly and becoming very attractive to many private investors, businesses and landowners.

How can landowners use their assets?

Opportunities are rising for rural landowners to join ESG/ natural capital projects and investment opportunities in offset carbon markets. Voluntary Offset carbon markets are organisations that operate to remove carbon from the atmosphere and issue carbon offsets or environmental credits. Corporate buyers choose to invest in these environmental credits to support their net zero and ESG strategies. These carbon offsets are purchased voluntarily rather than due to legal obligation.

The offset carbon markets in the UK are dominated by two voluntary codes: the Woodland Carbon Code and the Peatland Carbon Code. The Woodland Carbon Code involves sequestering carbon in woodland. Planting trees to generate and sell carbon units is growing into a very profitable way of generating income from woodland for agricultural landowners.

The Peatland Carbon Code is a voluntary standard for UK peatland projects that wish to promote restoration. The Code also supports private finance for peatland restoration and managing damaged peatland. It involves reducing emissions from damaged peatland by restoring them. Similarly, to woodland, peatland will capture carbon, and enable the selling of carbon units.

Both codes are aimed at the offset market for buyers who are unable to reduce their emissions in their practices. However, as they are voluntary and do not have any statutory or regulatory basis, they lack price transparency and can lack standardisation. 

Controversy with Natural Capital Investments

Uncertainty in the market is perhaps, its biggest challenge. The lack of transparency and standardisation with these codes, has caused controversy. Natural capital schemes are developing quickly, jumping ahead of policy and regulation, leaving them lacking certainty. This lack of regulation can leave people at risk to misleading schemes that, for example, do not represent authentic carbon reductions. This practice, although by a minority, can endanger the natural capital market.

Lack of regulation also means there is uncertainty in tax implications, primarily for landowners and farmers. Depending on how land is held and used, there will be an impact on the tax treatment. For example, when switched to another use agricultural land may no longer qualify for tax reliefs such as agricultural property relief. 

A final concern is greenwashing or unintentional greenwashing. Where a company makes an unsubstantiated claim about their environmentally friendly practices, is becoming a major concern among businesses with the implementation of their ESG strategies.

Opportunities for the Rural World

While these markets have been deemed controversial, it is an interesting time for land and estate owners and farmers. These new markets are opportunities for landowners to create new methods of generating income and diversify businesses. A lot of these opportunities will be underpinned by the Woodland Carbon Code and Peatland Carbon Code, as voluntary markets.

Given the long-term nature of carbon investments, people have developed a more cautious approach. Landowners should note that these projects tie the land for a long period of time, the commitment to a carbon investment varying from 50 up to 100 years.

Nonetheless, natural capital markets are growing in traction and are set to feature strongly in both the rural sector and in businesses. 

If you would like to learn more, please contact Hamish Lean or get in touch with the Rural Property team.

This article was co-authored by Mairead MacDonald, Trainee in the rural property and infrastructure team.