Natural capital: How farmers can make money from ag’s new focus

Natural capital is the new catchphrase in agricultural circles — discover why investors see huge potential in it.

If you had to single out one word or catchcry that had embedded itself into Australia’s multi-billion agriculture industry over the past decade, sustainability would surely be it.

The topic has seemingly found its way to the top of every conference or Zoom call agenda, not to mention to the opening page of just about every major corporate marketing plan, as all links in the supply chain respond to, or attempt to get ahead of, a more environmentally in-tune consumer base.

Now, as farmers look to harness the rewards of their significant efforts in minimising their carbon footprint and managing their land for future generations, it has given rise to a new phrase in the industry vernacular: natural capital. According to experts, it’s about farmers being able to put a price on everything from the soils, water and biodiversity they manage to the air they breathe.

“When we talk about natural capital, we are really starting to consider nature as a new asset class,” KPMG food and agribusiness lead Georgie Aley said.

“Every one of us breathes clean air or wants to breathe clean air, we want clean drinking water but when we think about factoring that in (to an economic equation), we’ve treated it as free and we actually haven’t placed a price or a value on what those natural assets actually do.”

Ms Aley said the industry and the broader economy were now increasingly weighing up how to consider these environmental stocks and “how do we actually treat them as a new capital class, like we do financial capital, like we do human capital”.

“And how do we actually start to put a price and a value on the quality of those assets and ensure that we are enhancing that asset quality and not degrading it,” she said.

“We are really good at valuing the cow in the paddock, we are really good at valuing the grain in the silo but how do we think about all of the landscapes across the farm and consider the enhancements to those landscapes, the quality of those landscapes and also how we might undertake practices that enhance that water and whole complete aspect of that farm.”

Large-scale investors in agriculture globally are increasingly turning their attention to the potential in natural capital.

Nuveen – a subsidiary of the North American teacher superannuation fund TIAA-CREF, one of the biggest investors in agriculture globally with about $2 billion worth of land and water assets in Australia – is just one of them. In February this year it went as far as launching its Nuveen Natural Capital business unit to create “a more streamlined proposition” for investors, combining Westchester Group and GreenWood Resources businesses which had more than US$7.7 billion of farmland assets and US$1.5 billion of timberland assets across the globe.

Nuveen Natural Capital head of sustainability Cristina Hastings Newsome said natural capital could be summed up poignantly as “everything that we derive from the natural environment” including soils, forests, air, rivers and oceans as well as the biodiversity of plants and animals.

“These resources are essential for our survival, and they provide the foundation for our economic system,” Ms Hastings Newsome said in a recent Nuveen report titled Natural Capital: The future of land investments.

“Natural capital makes human life possible. It provides our basic human needs: our fresh water, our fertile land to grow crops, the pollination to enable those crops to grow,” she said.

Ms Hastings Newsome said natural capital generally served the population in ways that were “invisible, silent and taken for granted”.

“It provides supporting services through the nutrient and water cycle and, of course, nature provides the conditions that allow us to grow food,” Ms Hastings Newsome said. “By some extremes, these services could be valued at US$140 trillion.

“Our global economic model free-rides off nature in some shape of form. We can easily measure the financial value of the crops we grow, but the ecosystem services, which have allowed those crops to be produced, have not historically been valued.

“In fact, all the other types of capital – financial capital, produced capital, human capital – have an intrinsic dependency on a rich and resilient base of natural capital.”

But just how do you measure natural capital? Nuveen head of portfolio management Skye Macpherson describes it as a “very new science” with the first natural capital accounting standard – the System of Environmental-Economic Accounting – only adopted by the United Nations last year.

Ms Macpherson said accounting standards could help organisations understand how their operations impacted and depended on natural capital assets, providing a way to standardise “how people measure the asset and the outputs, so there can be a transparent and repeatable practice”.

“Financial reporting has been around for centuries and refined over time, as we fully expect the same to happen with natural capital accounting,” she said. “The most important step is to recognise the importance of natural capital, so that we can start to measure it in a meaningful way.”

Ms Macpherson said enhancing natural capital also enhanced the resiliency of an asset over time. “A more holistic approach, which balances growing the crop and managing the natural capital assets, means that the farm is more resilient to shocks that might come from rainfall or weather fluctuations – and this will enable more consistency in returns,” she said.

“Just as we’ve seen with the development of carbon markets, at some point in the future there may also be markets for other ecosystem services. That’s another way that enhancing natural assets could potentially add to the financial value of the land over time.”

Ms Macpherson said there was more consumer awareness of the food supply chain and the impact it has on the environment.

“In the future, it might be possible to show consumers through blockchain or other technologies that their food came from a farm that has been managed in a regenerative, sustainable way,” she said.