To the early economists, land was the primary factor of production. François Quesnay, the founding father of modern economics, believed that the value of land was inherent, not the result of human labour or capital. Quesnay’s physiocrats considered other input factors “sterile” without healthy land.
This view was largely discarded by (neo-)classical economics. The starting point for the classicals is not the objective value land provides, but the price we pay. This price reflects the marginal utility of a good, which in turn is governed by the scarcity. Land was seen as homogeneous, amply available and only useful if worked by humans. This view dominates our relationship with land to this day.
But not for much longer. Against a backdrop of climate change, population growth and an increasing demand for land, thriving land is turning into the ultimate scarcity of the 21st century. Land is of value if soils are fertile, water is retained and purified, biodiversity thrives and carbon is stored. Economies need soil, not dust, and dust we have: land degradation affects almost 2bn hectares of land worldwide, home to 1.5bn people. The breakdown of natural systems is now, according to the World Economic Forum Risk Monitor, the greatest threat to our economy.
Nature is our most vital asset. It is declining because we don’t reinvest. Today, investment into nature restoration and preservation is largely done by governments (approximately $150bn per annum). The private sector, while using nature at a rate of $5tn per year, is only a marginal investor into natural capital with less than $20bn. This is largely carried out through some ecosystem service payments, land-use taxes or mandatory or voluntary compensation efforts. All of these are cumbersome to execute and limited in scope and scale.
The breakdown of natural systems is now, according to the World Economic Forum Risk Monitor, the greatest threat to our economy
The call is getting louder to make natural capital investible: to put nature on the balance sheet. The necessary informational and financial infrastructure for such a system change are currently being laid between the new land bankers: nature fintechs, accountants and bankers. In a first step, every plot of land is assessed with regard to its natural capital stocks. In recent years, new technologies have become available that allow ecosystem quality (i.e. biodiversity, carbon, soil, water) to be measured reliably on a global scale: Earth observation, metagenomics, bioacoustics, machine learning.
These measurements are recorded in a biophysical natural capital account. That would make it possible for farmers to prove to customers, banks or the state that they are maintaining or accruing natural capital. Consider improved silviculture, which reduces the risk of forest fires in California, or ensures old-growth forests serve as air conditioning for nearby housing during the new summer heat.
The second step is to establish nature performance agreements between providers and buyers of natural capital. Every verified preservation or uplift equivalent triggers a payment to a land steward. These feed into a new role, that of a provider of ecosystem outcomes.
The last step is to turn the nature performance agreements into an investible asset, to be called “nature equity”. The proof of improved or maintained natural capital is recognisable as a balance sheet asset. Accounting standards are clear: to qualify as an asset, payments must be identifiable (through a "natural capital account"), controllable (through a performance contract) and beneficial for the future economic performance.
With these criteria in place, payments to nature qualify as an asset, like any other infrastructure investment. This has impact on balance sheet ratios, credit conditions, credit ratings and company valuation of land stewards and businesses. Nature equity contracts are proof of accrued natural capital and a valuable token in a modern economy. These may soon constitute an asset in its own right: a currency recognised by tax authorities, regulators and even central banks. Think of a Bretton Woods 2.0 moment, where documented and attributed natural capital would turn into the basis for nature-based currencies.
In the past, land banking was the business of buying land cheap and selling it high for conversion. Today, any human activity looks sterile in the absence of nature’s intrinsic value. Land banking is now the business of making land ecologically productive. A new species of companies is getting ready to measure, issue, capitalise and transact natural capital. François Quesnay would smile.
Martin R. Stuchtey is the founder of The Landbanking Group
