GWCT supporters are receiving complimentary entry to The Scottish Game Fair this year, thanks to the generosity of sponsors Waverton, an investment management company.
But why is Waverton interested in biodiversity and natural capital? Why the support for The Scottish Game Fair?
Last year Ross Macleod, Head of Policy in Scotland at the GWCT and Paris Jordan, Senior Multi-Asset Analyst at Waverton, met to talk about responsible stewardship and sustainability. Ross explained GWCT operations, conservation and the promotion of biodiversity and Waverton discussed how to value, measure and manage natural capital.
Here’s how the conversation went.
The worlds of biodiversity and natural capital
Ross, let’s start with you and your background. What first drew you the worlds of biodiversity?
Ross: Well, I’ve always been brought up in the countryside when I was a youngster, so it’s always been sort of in my in my lodge, if you like. I’m interested in what’s going on in the landscape and what’s happening.
I did take a diversion into financial services for a while and I started my working career, but my family has run a small farm for quite a long time now, so I’ve always had that to come back to and have always been fascinated by the way in which production and farming can fit alongside biodiversity. So ultimately that’s really why I ended up with the Game and Wildlife Conservation Trust.
Let’s introduce the Game and Wildlife Conservation Trust. What’s the purpose and what’s the sort of value proposition?
Ross: The Trust is a research and education charity. It’s been in existence for 80 years. We employ 25 post-doctoral researchers and 50 other scientists, and I guess most people know us in connection with the conservation of game and wildlife species.
But we’ve had a very long involvement in wider land management research. For instance, we’ve run the longest monitored project in the world, measuring the impacts of changes in farming and flora and faunt on arable land. It’s called the Sussex Study and that’s been running 50 years now and featured in the National Geographic on that celebration year 2018.
We run two demonstration farms, one in Scotland and one in England, where both are researching the relationships between agricultural production, greenhouse gas emissions, soil health, water management and biodiversity. And I guess it’s in this arena where there’s some really exciting prospects around the concept of natural capital, which has spawned a lot of interest in placing value on our natural assets around us.
And I think that’s that’s really where things begin to open up for the Trust now.
We’ll come back to natural capital. Paris, how do we think about biodiversity when we’re thinking about investments, at Waverton?
Paris: So these days there is an inter-connectivity between nature, biodiversity and any investment and corporate. So what we tend to find is that each business will be impacted by a different criteria, whether that’s environmental criteria, governance criteria but on the environment side, different businesses may be affected by different factors so that some of those factors will be things like drought. Some of those factors will be things like agricultural yields depending on the business type. Therefore, when we’re doing our assessment and analysis of a corporate, it’s incredibly important for us to make sure we understand the risks related to those businesses. I just mentioned agricultural businesses and when we’re looking at that type of sector, we need to ensure that the practices they’re doing are not overly negative towards food yields and therefore the fertilization products that they produce are effective in increasing yield, but at the same time, they’re not destructive so that in future obviously they’ll make less profit. So it’s ensuring that each corporate is aware of the impacts of biodiversity, related to their own products and services.
Ross just go back to that thought on natural capital, how do you define natural capital and has the definition changed over the years?
Ross: It’s evolving. That’s for sure. And that’s with increasing understanding about how we measure natural capital.
But it can be defined us as the world’s stocks of natural assets, which include geology, air, soil, water and all living things. And it’s those assets that provide us services which we call ecosystem services. And these comprise things like provisioning for food, fibre, timber and energy, the regulation of climate, flood risk and water quality, or even supporting services such as soil formation and cultural benefits to ensure that these services, the benefits that nature provides to mankind.
So it’s that growing recognition of the need to look after our natural assets, our natural capital, that has energised interest in land, water and nature as an investment asset class. Some might say it’s been re-energised in an interest in the sector. It’s just that I think we’re beginning to value land in a totally different way from say 5, 10, 20 years ago.
To value land, presumably you need some sort of measurement and management. Are there some sort of metrics that you can put out? You go first Ross, and then Paris you can comment on the measurement management and monitoring of some of these attributes.
Ross: It’s interesting in the UK with devolved administrations, but there’s a lot of energy behind finding the right benchmarks and measures. So in England, for instance, there’s a lot of energy behind biodiversity metric 3.2, which is underpinning the valuation of land in a sensible way, principally for offsetting purposes. In Scotland that debate is still evolving. There’s a lot of energy behind trying to come up with the right measures. But Scottish Government has commissioned Scottish rural agricultural colleges to look into this and make a set of proposals to the Scottish Government and they propose to come up with that towards the end of 2023. And that’s really important because there is a danger otherwise you get a plethora of different measures.
So we do need some governance and some guidance around this, so that there’s a degree of of commonality about the way in which we approach measurement, I think.
And Paris, same question to you. I mean, how do we think about measurement and management where we’re looking at or sort of assessing value in our investments? And, you know, is there a sort of standardized set of metrics that we can look at or or is it still pretty murky?
Paris: I think that was a leading question there. I think we know that there is not a standardised measure when we’re looking at investments specifically related to natural capital, biodiversity. And following on from Ross’s point there, you know, there’s lots of work going on for people to identify the best metrics. But ultimately at the moment, different investment managers are looking at different criteria and not just because it’s identifying what’s the best one, but as with anything in the assessment and analysis space, we also need the best quality data.
So how do you get the best quality data from corporates who are using different standards? But you know, what do we use? Do we look at deforestation numbers? Do we look at air and water pollution data? Do we look at the amount of water usage and carbon exposure? Do we look at a particular area of land and identify how many species are in that?
Some organisations are using geospatial data and at the moment it’s a bit of a rogue area in some ways, because there are just lots of different metrics. And I wouldn’t say that any specific one is a solution on its own. At the moment it’s a combination of many and even then it’s really trying to clean up the data that we use.
That’s where in some ways what we do at Waverton, we look at fundamental analysis and we really try to get to know the company. At this stage, you cannot use a quant measure to do a kind of a top down assessment. You really need to know the businesses to understand what’s impacting them and then identifying the right metric, trying to get as much data as possible.
Now, we are excited about a number of frameworks and organisations that are working together to identify the best data points but these are these are evolving. They’re evolving rapidly, but it’s probably going to be a number of years before we really get standardisation across the kind of natural capital, specifically biodiversity space.
And Ross, I wonder where you think the sort of responsibility lies on this because, you know, there are a sort of multitude of stakeholders.There are governments, there are landowners, there are consumers, there are corporates, and you know, there are investment managers. Who needs to be sort of active in driving the change and perhaps who has been active in driving the change thus far?
Ross: It’s a really interesting question. I think we need to look at this from two directions. I think our administrations need to provide us with some confidence through governance frameworks. So looking at it top down, but in the experience of GWCT, we do believe that bringing groups of farmers together to look after land at scale is a really good way to approach this bottom up, because by and large the people on the ground know how to manage the biodiversity, know how to look after it, know what’s there.
So engaging both top down and bottom up, we think is a very sensible approach. And this is something that the Trust has been working on for about ten years now through the principle of farmer clusters. And certainly in England there are about 100 of those covering 400,000 hectares of of land, and that’s supported by a stewardship of facilitation funding.
What happens at these farmer cluster meetings? How well how do the sort of conversations go, because I suppose the danger is you don’t want to get into a sort of finger wagging conversation way; you mustn’t do this because of this, you must do that because of that.
I wonder how constructive are the conversations and maybe some examples of the kind of conversations that these farmers will be having with each other?
Ross: It is very important that there is a lead farmer within these groups and usually the person who is appointed to lead the cluster is someone who’s well-respected within that community and is prepared to work with everyone to convene the groups, get them together, think about what it is that they want to look after in terms of whether it’s a habitat or species.
They tend to cluster around that individual characteristic of charismatic leadership, if you like. And that’s where they’ve been the most successful. I think.
Paris, I wonder if you can give some examples of companies that we’ve looked at who have been driving the change and have been on the front foot with this.
I’d be tempted to try and get you to give some examples of where it’s going wrong as well. So positives and negatives.
Paris: I think on the positive side, when it comes directly to things like renewables actually looking for positive change and ensuring that less climate damage is done via our real assets fund, we have a number of fantastic businesses, specifically wind farms. So we’re really looking at investing in businesses that are on the solution site.
Your second question relates to where things have gone wrong. I wouldn’t explicitly say things have gone wrong. I would say that businesses have perhaps not taken strides in ways that we had either expected of them or we wanted from them. What that means is that potentially the strategies that they’ve written – they put a five year plan or a ten year plan and that hasn’t come to fruition or there’s been a situation and we’ve seen at the moment where because of the macro environment, something like interest rates and inflation and margins has really put a pause on some of their transition plans. That’s where I would say things have kind of gone a little bit, not right rather than wrong itself. And at that stage it’s up to our analysts and investment team to engage with those companies and assess whether they think they either can get back on track, whether they are willing to change some of that strategy or just understand what that management team are trying to do to make sure that their businesses are fit for purpose, for future.
I want to turn to the future and see if you can dust off your crystal balls and ask what the future holds for the industry. What does the future hold for natural capital? And maybe you can talk to the metrics that may be put in place or indeed the progress we may be able to make.
Ross: I think that there are enormous prospects. First of all, there’s that pent up energy to look at the sector, to understand, to recognise that our our natural assets are threatened through climate change and biodiversity loss. And that is definitely concentrating minds. It needs to go a lot further and a lot quicker. And that’s why the government’s aspects become very important around the baseline measurements.
In Scotland at least, there’s a huge amount of energy being invested in this through the Scottish Nature Finance Pioneers group, which is looking at all kinds of options all the time to come up with baseline measurements of biodiversity. But I think what we’ll see is a couple of key things. First of all, land managers will be expected to understand the balance between carbon sequestration on the ground and the greenhouse gas emissions that are happening as a result of their activity.
So that’s that’s one sort of building block. The second will be around measurements of biodiversity. And here I think we’ll see a basket of measures. So there may be, depending upon the type of habitat, there might be measures around the number of invertebrates, the number of bird species and the condition of habitats. And when you put that all together, you get a composite understanding of what is what is happening.
I think the key beyond that is to make sure that we’re doing this at scale. If investors from your sector are looking for advantage, we need to be doing this at big landscape scale. So that’s again where the idea of clusters comes back in so that we can reduce the transaction costs for everyone in doing that at the same time as deriving a really significant biodiversity dividend.
Turning to you, Paris, the ESG genie is out of the box and there seems to be a fairly large area of industrialised complex around the topic. I wonder from an investment perspective, what does the future hold in this space?
Paris: That is a huge question but one that actually is an incredibly exciting one. For those of us who have been working in the ESG investment space, touching on all things from natural capital biodiversity through to other social impacts, the space of natural capital is just huge and rapidly growing.
We are expecting a huge carbon compliance market to grow and we’ve barely touched on that. But the global compliance market for carbon and that’s for companies at the moment around 172 billion and we’re expecting that to be a trillion by 2030. So you know, six times within a short amount space, the voluntary carbon market is set to grow.
So companies are absolutely paying attention to that. The amount of carbon they’re emitting and how they’re offsetting that and how they’re reducing it as well. We’ve got businesses, governments, industry groups, all working incredibly rapidly to set up frameworks because they know how important nature is to the planet and also investment. And what’s going to be particularly interesting will be how much climate risk starts to actually be calculated within investment processes.
There are estimates that even sovereigns will see credit rating downgrades because of climate change risks. So I think they’ve estimated about 63 sovereigns will be downgraded just because of that. And people recognize now that, you know, we’ve got a huge amount of biodiversity loss, we’ve got a lot of pollution and we’ve got an exceptional amount of deforestation. Nature has provided economic, opportunities over the years and as nature is starting to suffer, we need to adapt those. And there are a huge amount of funds, investment projects, new types of vehicles that are being released and announced as well. So this space has huge opportunity and the potential is really wide. Hence why we are at Waverton looking at these types of issues at a corporate level, but also considering them at a wider macro level, ensuring that we capture some of these opportunities for our investors.
A final question to both of you. And I ask everyone this question, but what advice would you give to other younger listeners who are looking to pursue a career in this space? And perhaps, Ross, you can talk more about biodiversity. Perhaps Paris, you can talk more about the sort of investment behind it.
Ross, what skills do these our younger listeners need to equip themselves with to be successful?
Ross: Gosh, that’s a really good question. I’m an old lag within GWCT, you know. So I look at the younger ecologists coming through the group and I think that the prospects for them are fantastic. I think that basic skill sets really require understanding of biodiversity, a real passion for monitoring, getting to grips with species interpretation, understanding what’s there, identification.
These are really important things because they’ll form the bedrock of the baseline measurements that we need to look at in future. I think good understanding too. I think this is going to be really critical too, being able to balance advice to people on the ground, land managers, companies about that mix between productive activity and biodiversity stewardship.
And that’s a really challenging skill mix to bring together. But I think that’s where things really need to go, is that you balance business with a sense of of understanding about how we look after biodiversity.
Paris, same question.
Paris: It’s a fantastic question and a very exciting space. So anybody that’s looking to go into it will be very fulfilled.
There are so many different avenues that you can pursue, you know, from an investment side of things. You can look at the more sustainable strategist way and look at it on that kind of a top down level. Looking at regulatory policy and what governments are doing. But then on from a really bottom up perspective, you can focus on a specific sector and understand how it’s interlinked with the planet, how its profits affect the inputs that are coming from nature and vice versa as well.
There’s just a huge amount of work to do in this space and anyone with a bit of passion and can help solve many of the issues that we’ve got, will find it to be a very rewarding space to working. I know I certainly do, and we’ve only really touched upon a few things today. It’s an incredibly interesting space.
Paris Jordan,Ross MacLeod, thank you for joining me.
Meet Waverton
Waverton will have a stand at The Scottish Game Fair and will welcome anybody who wishes to find out more about the company.
