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Perspective

Four steps for optimised natural capital investment

We explain how natural capital mapping can strategically optimise the benefits of green investment, including biodiversity off-setting funds.

Four steps for optimised natural capital investment

By Francesca Moore, Principal Environmental Economist, Black & Veatch Europe

We are witnessing unprecedented levels of investment in nature; a shift from public and charitable funding to private green investment. This has been driven by government and corporate commitments to Biodiversity Net Gain and Net Zero, and a growing awareness of corporate dependencies upon nature and its health.

In the UK, for example, this is manifest in the fact that demand for off-setting sites that deliver multiple benefits - as well as carbon and biodiversity - far out strips supply. There are not enough ‘investment ready’ habitat creation and restoration opportunities out there.

Natural capital mapping and assessment provides a means to strategically optimise the benefits of green investment, including biodiversity off-setting funds. Natural capital mapping and assessment links nature’s assets – natural stocks (land, water, air etc) usually categorised by habitat type - to flows of benefit or service. These flows generate goods - often with the input of intellectual and manufactured capital, clean water for example - to which we attach a higher value than market price, i.e. the benefit of not going without safe drinking water. By recognising and defining this value chain natural capital mapping and assessment provides a means to source investment in natural processes that will generate economic benefits - economic in its broadest sense as per the Total Economic Value Framework.

Our approach to linking restoration of nature, to economic benefits, to green investment
 

Ascribing economic value to natural processes

Natural capital is about helping us better understand, and ascribe economic value to, the natural processes upon which we depend: the benefits, services and goods we derive from nature which underpin assets, commerce and amenity. This is something that financial markets have historically struggled to achieve, typically resulting in the chronic under evaluation of these natural processes.

As a result we are in the position of failing to recognise the indirect effects of natural capital depletion, and biodiversity loss, upon our well-being and economy. One key aim of natural capital accounting is to assign an economic value to natural capital in order to quantify the ‘hidden’ economic value of those natural assets and services, not accounted for fully in market prices.

Nature’s health is a critical component of economic resilience. In nature’s complexity, the pathways of benefits interlink through networks to compound each other, either in synergy or trade-offs, resulting in effects which are much greater than the sum of their parts.

 

Understanding biodiversity net gain

Biodiversity net gain is one mechanism for the optimisation of natural capital through the planning of resilient nature networks. This approach recognises that through ‘systems thinking’ far more combined benefits, which exceed the sum of individual parts, will emerge from networks; rather than from separate, fragmented nature restoration projects. 

Although mapping and economic methods are still developing to fully capture these complex systems, some clear principles delineate the approaches to natural capital mapping and assessments that are likely to offer investors the greatest value.

Fully optimised investments require linking a ‘grounded’ examination of natural capital stocks and flows, and where there is potential to restore them, to a robust understanding of when and where we can more readily attach economic benefit to the restoration projects; and finally identifying which restoration projects are best able to attract additional investment incentives. By recognising and acting upon this Black & Veatch has achieved some notable successes.

 

Natural capital mapping in action

The River Thames Scheme (RTS) is the largest ever inland flood alleviation project in the UK. The £500-million programme will protect communities and critical infrastructure in southwest London. Black & Veatch’s natural capital valuation for RTS valued an additional £48 million in economic benefit (to conventional flood risk economics) in public goods and other ecosystem services. This secured an additional £3 million in funding from water companies, the Local Enterprise Partnership and Local Authorities, culminating in significant enhancement of natural capital at a landscape scale.

The Burton Washlands Landscape Vision project served to unlock the potential environmental and community value for 630 hectares of functional floodplain in Staffordshire. Black & Veatch’s role

included the valuation of natural capital and ecosystem services gains attributable to the masterplan proposals. This valued an additional £2.7 million in economic benefit and attracted an extra £2.5 million in funding to the scheme.

Based upon these and other successful natural capital projects we have identified four steps for optimising natural capital investment:

 

Tailor the mapping and modelling of natural capital ‘flows’ (or ecosystem services), to ensure proposals reflect viable investment opportunities. This involves critical appraisal of existing methods which tend to be more ‘bottom up’, and less tuned in to why opportunities are being sought in the first place. You need to focus on the opportunities which are more attractive to both public and private investment. Such opportunities include: carbon sequestration, biodiversity enhancement, flood risk mitigation and water quality improvement. Multiple, wider benefits can then be ‘piggy backed’ on top, such as air quality and health benefits.

In tandem with this, investigate the full extent of investment incentives (such as grants, payments, finance, subsidies and tax breaks), investment mechanisms (such as inverse auctions, share capital, brokers) and investment expectations (risk levels, timescales, expected return, performance measures) to gain a full understanding of the types of opportunities that will more readily facilitate investment.

Identify the measures that will improve/restore natural capital stocks and flows in priority investment areas identified in the mapping and modelling stage, highlighting those likely to be more attractive to investors, depending on the levels of risk and certainty in delivering the outcome sought. In addition, agreeing the scoring parameters and assumptions with potential investors early on is essential to securing investment as this will vary by sector, investment type, expectations and mechanism. Remaining opportunity areas can be tiered into follow-on project phases.

This step requires a partner with an integrated multidisciplinary team of experts encompassing environmental economics, geographic information system (GIS) mapping, flood risk and water modelling, finance and investment, landscape design and environmental and ecology services. The ability to deploy ‘digital ecology’ techniques is vital. Integration is essential in order to fully understand all of the interdependencies and interactions between the different disciplines.

For each priority investment area, identify a suite of measures and appropriate key performance indicators, and estimate the outputs and outcomes over an agreed timescale. This will inform the impact assumptions underpinning the valuation of their costs and benefits. Impact assumptions should be based on the anticipated project outputs and outcomes. The natural capital valuation addresses the need to understand the scale and value of natural capital in a proposed investment area, and how this links to the area socio-economic profile. The result should set out clearly an opportunity’s benefits and value.

For landowners to attract investors, for investors to understand the nature of the opportunity, and for both parties to optimise the opportunity’s value, requires the creation of a dynamic, near real-time, interactive digital representation of an area’s natural capital stocks, flows and their value: a natural capital investment platform.

So, in addition to the integrated team described previously, creating an effective natural capital investment platform requires a partner able to provide GIS visualisation expertise and high quality, near-time and historic satellite land use data. As well as being able to gather, analyse and model data, your partner needs the ability to present the analysis and results in a clear, up-to-date, easy-to up-date, interactive format; for ease of future monitoring of impact. Here too, the importance of digital ecology capabilities is key.

Conventional natural capital valuation studies are provided in Word documents, underpinned by Excel spreadsheets, and targeted at a technical audience. In our experience, these studies are little used and become rapidly out of date. In contrast, creating a web-based natural capital investment platform represents a significant step along an opportunity’s path to fruition. A web-based natural capital investment platform is able to optimise and communicate a project’s value across a range of benefits. Thus the tool can help attract investment, planning consent, and land owner and stakeholder support. These are all vital if a project is to be viable.

Satellite image © Rezatec Ltd, 2020

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