How nature can help farmers' business

The continuing decline of biodiversity in the UK features in the State of Nature Report 2023. Similarly, the State of Natural Capital Report for England 2024: Risks to nature and why it matters outlines that all ecosystem assets and almost all the benefits they provide are at a high or medium-to-high risk.

However, promoting nature recovery and reducing the risk of natural capital degradation can be achieved by ensuring natural capital is central to decision-making about our environment, economy and society.

Existing policies related to environmental protection, agriculture, climate change and planning are moving towards this, and a number of targets and schemes aim to move land management towards practices that enhance biodiversity and benefits from nature.

For example, the Department for Environment, Food and Rural Affairs (DEFRA) 25 Year Environment Plan outlined policies that the subsequent Environment Act 2021 made statutory, which in turn has created opportunities for gaining revenue through the requirement that developments larger than 0.2ha deliver a biodiversity net gain (BNG) of at least 10%.

The following case studies from Natural Capital Solutions (NCS) show how changes in farming and land management – funded by public, private or blended finance – can enable farmers and landowners to manage their land for nature recovery and environmental enhancement.

The aim was to find out whether these interventions could be funded by a combination of environmental land management (ELM) schemes, water company finance and the biodiversity unit market, ensuring that the farms remained viable businesses.

First, we mapped the natural capital assets of each farm and created a habitat basemap using geographic information system (GIS) and data on habitat type and extent from ground surveys of the farms.

This allowed us to run models that estimated the provision of ecosystem service benefits across all six farms, such as carbon sequestration, air quality, water quality and flow regulation – of particular interest to Yorkshire Water – pollination and access to nature. We then calculated the baseline biodiversity units using DEFRA's statutory metric.

The next stage, scenario 1, modelled the impacts of hypothetical interventions we were testing using the mapping approach. After the interventions were added to the habitat basemap to create an intervention layer, we re-ran the benefits models and biodiversity metric calculation.

The results showed no BNG, while ecosystem benefits had increased only slightly.

Following this mapping exercise we devised two additional hypothetical future farming scenarios to explore agricultural production at one of the farms: scenario 2 modelled regenerative farming and scenario 3 modelled farming for environmental benefits.

We aimed to examine the levels and types of intervention that would enhance biodiversity and ecosystem benefits sufficiently to encourage private financing and potential income from BNG uplift.

Scenario 2 increased woodland plantations and hedgerows, restored marshy grassland and introduced agroforestry, as well as reduced the stocking density of the sheep; a variant of this, scenario 2b, lowered stocking densities further.

Scenario 3 focused on farming for environmental benefits, prioritising ecosystem service benefits and habitat restoration.

Our research showed that scenario 2b, the regenerative farming approach with low stocking densities, provided the greatest environmental benefits across the majority of ecosystem services, as well as more biodiversity units; in fact, it was the only scenario to achieve net gain.

The economic assessment showed that scenario 2b could provide the best net benefits, with a return of £3.60 for every £1 invested, accounting for the capital and maintenance costs of implementing the on-farm interventions.

Despite the economic benefits of investing in the regenerative farming scenario, uncertainties associated with quantifying and valuing the water benefits related to specific on-farm interventions were too substantial to make a convincing business case for water company financing at that time.

However, we found that between 57% and 75% of the capital funding could potentially be met through the Woodland Creation Planning Grant, English Woodland Creation Offer (EWCO) and an ELM scheme, if farmers and landowners were to sign up to them. Additional sources of revenue could include annual payments related to BNG credits and funds from selling carbon credits and timber products.

While revenue for air quality and public access could align with future ELM schemes or local authority strategies, this requires clarity on how to stack payments for different benefits on the same site, as well as a process to align national and local priorities and bring together buyers, sellers and potential investors to support quality-assured high-integrity nature markets.

The long-term goal for the forest is to increase tree canopy cover across North East England to 30% – almost double the current national average. This will improve the natural environment, help tackle climate and biodiversity crises, and create greener and healthier places for people.

The North East Community Forest received funding from DEFRA's Trees for Climate programme to provide grants for woodland creation across the region.

To ensure the best possible returns, NCS was commissioned to design a payment scheme that would encourage landowners to plant in areas that offer maximum benefits.

The project had three aims:

• to map the relative ability of different locations for new woodlands to enhance a range of benefits, from air pollution reduction to biodiversity
• to calculate the monetary benefits of new woodlands at different locations
• to design a financial offer for landowners to plant new woodland, based on the value of the benefits delivered.

Habitat opportunity maps identified where new woodland would provide the most benefits for biodiversity, with a focus on improving connectivity, water flow regulation, water quality, air quality, noise reduction, local climate temperature regulation and access to natural green space.

Using the latest valuation techniques, we calculated the monetary value of eight different ecosystem services for each year for the next 50 years, taking into account the time it takes for benefits to accrue as new woodland develops.

The rate differs depending on the ecosystem service: some provide benefits almost immediately, such as health benefits, whereas others provide full benefits only on maturity, such as air quality regulation.

Three priority zones were established for each ecosystem service – sites returning high, medium and low benefits – as well as an additional riparian zone for areas adjacent to rivers and streams that was relevant only for water quality and water flow regulation.

To create the financial offer for landowners, the values of the eight ecosystem services were grouped into four categories:

• air, noise and heat mitigation
• water flow and quality
• biodiversity
• public access for recreation and health.

The values in each category were summed for each zone and divided by four, giving an ultimate cost-benefit ratio of 1:4. These values are the amount offered to landowners.

The offer excluded the monetary values of recreation and health benefits, as their addition would have exceeded the funding available under the scheme. Instead, if landowners provide new permissive access, they will be eligible for a public access payment of up to double the amount of the offer, with the rate determined on a case-by-case basis.

Applicants could also apply for additional funding for carbon sequestration through the Woodland Carbon Code. The landowner offer was calculated for each individual field across the study area.

Figure 1 shows the map that we produced showing the payment that landowners would receive. This map could be used to quickly calculate the offer for any area of land, or to target woodland creation in areas providing the greatest combined benefits.

As demonstrated by the DEFRA test and trials case study, regenerative farming could balance BNG with providing a wide range of environmental benefits, but uncertainties remain around funding for farmers and landowners.

Natural capital benefits have high economic value, but most are public benefits, and the challenge is to monetise them and provide a financial return. To this end, nature markets are developing rapidly, although BNG, carbon and to some extent nutrient neutrality are the only viable markets at present.

Broader natural capital payments schemes, or payments for ecosystem services schemes, are being set up in some places, such as the North East Community Forest, where the payments that landowners can receive are directly based on the benefits that would be provided at that specific location.

Here, payments for a range of different benefits are stacked together to provide a more viable landowner offer. The Forestry Commission's England Woodland Creation Offer (EWCO) works in a broadly similar way.

Other markets, such as those to improve water quality and water flow regulation, are more difficult to develop and usually occur only where bespoke schemes are set up with an interested buyer, such as a water company.

Landowners often need to stack or bundle benefits to achieve adequate financial return, or must consider using a mix of public and private finance; but due to the infancy of these markets, best practice is still to be developed.