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Natural Capital and Private Wealth

Date: 21/11/2023 Type: Articles Topic: Private Client | Investment and HNWI’s |

Natural Capital is a catch-all phrase for a range of different actions and approaches, all of which have at their heart the idea of improving the natural environment. 

In the UK, the most well-known example of this is the rewilding that has taken place at the Knepp Estate in West Sussex.  While rewilding has captured many of the headlines, tree planting, seeding flower meadows, de-intensification, organic conversion and the re-wetting of land are all elements of a Natural Capital approach.

In the space of five years Natural Capital has gone from being something spoken of by ecologists and economists to something that is happening in reality, with projects on the ground and a newly formed army of consultants advising on it.  The appeal of it to wealthy families who have long-term interests is undeniable, and it fits in perfectly with the broader development of awareness about sustainability and ESG.  And while the term Natural Capital has only recently gained a high profile, there have always been conservationists and nature enthusiasts who have used their wealth to advance their ideas.  That might be through deploying projects on their own land, or influencing others. 

The enthusiasm for Natural Capital is now widespread, even if is not universal (there are some noted sceptics), and this enthusiasm is not just reflected in clients’ actions, but in also in those around them – look at how private banks now publicly advertise themselves and their connection with nature and sustainability. 

The UK is in a very interesting test-bed for all this.  We have a diverse and well-managed stock of land, and a sophisticated land market which deals with both the ownership and use of land.  We also have a long history of families investing at least part of their wealth in land, and gaining a significant level of enjoyment from their stewardship of that land. 

We are now seeing that involvement with the land developing through Natural Capital projects, which presents issues both for families and their advisers.

The family dynamic

At a broad level, there is greater enthusiasm for sustainability and Natural Capital projects amongst the younger generations.  But this can be a source of tension where investment opportunities are being driven by sustainability objectives, or the level of change required to deal with the family’s land in new ways creates resistance, particularly if that resistance is from the senior generation who have charge of the assets.

That can be a difficult dynamic to manage, and the reality is that one generation telling another that they have despoiled the family’s land is unlikely to go down well – most landowners genuinely think that they are doing the right thing for the land, and the concept of stewardship is an old-fashioned principle that has been given new life by the enthusiasm for Natural Capital, but was not invented by the younger generation.

The tension this can create between generations is not necessarily unhelpful.  In many situations it leads to the younger generation being given the opportunity to lead the involvement with these projects, so can be a practical development opportunity within the family. 

The trustees’ position

But at some level it gets more difficult. 

Assume that the family’s wealth is held by trustees.  Natural Capital thinking and projects are still an emerging area and it is easy to get carried away by them.  They can offer some extremely good returns in theory, but the underlying system whereby they result in land being used in a more environmentally beneficial way, and less intensively, suggests that in the long-term there may be a trade-off.  Will there be free money in exchange for capturing carbon in trees, or at its heart does the application of this thinking mean you fundamentally get less out of the land? 

For trustees, a family’s wish to engage in these projects (or more dangerously, the wish of one limb of the family) can create a dilemma.  How do the trustees assess projects that may have a long-term adverse impact on the income received from their asset?  And flipping that, how does the trustee who rejects enhancing the Natural Capital and sustainability of an estate look in 10 or 20 years’ time, when the unimproved or impaired Natural Capital of that estate may itself be a detriment to its value?  And to what extent is it safe for the trustees to rely upon an enthusiastic section of the family who are keen to push ahead, when other family members are either silent or reluctant?

These questions illustrate why this is not a clear road for trustees.  Having to balance a wish to work alongside the beneficiaries with a suitably cautious eye to the long-term creates a challenge which may see them being regarded as being the brake on innovation. 

For the more involved trustees, the way through is to get engaged so that the balance of risk can be ascertained, and a sensible and justifiable approach taken.  There is also likely to be a desire to have as much specific beneficiary approval as possible.  These changes are long-term, so trustees need to give consideration to is the position in respect of minor or unborn beneficiaries, and what it is conceivable that they might be saying in 20 or 30 years’ time assuming (taking a glass-half-empty view) that the land asset has underperformed economically for a couple of decades due to the implementation of a Natural Capital project on it, and there is no discernible upside.

Regrettably there is no silver bullet to answer this, and in a developing market we are seeing a lot of trustees are taking a cautious approach.  Natural capital is very unlikely to go away as an issue and as an enthusiasm.  At the moment, many of the pathfinder projects are being led by families where they have sufficient control of their assets so that they can take the risk, and are happy to do so, given the environmental benefits that they consider will accrue.



Kevin Kennedy - Burges Salmon
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