Is managing risk the key to making a natural capital approach work?
By Steve Wilkinson, JNCC and Clive Mitchell, NatureScot
Making a natural capital approach work will need investment from industry as well as government. Today’s blog suggests how government approaches risk, could be the key to driving the agenda forward.
A few weeks ago, I met up with Clive Mitchell from NatureScot who highlighted an idea that they are pursuing (see board paper) which feels like a really significant step forward in how government and industry interact around environmental management. The concept is to drive more formalised and collective management of risk to build resilience for a warming and more chaotic climate. This is the first of a series of blogs where I want to explore this idea a bit more.
Flooding at Fen Drayton Lakes: The shorter term fluctuations in climate are creating significant challenges
within the land use sector © Hugh Venables
Generally, governments act as the ultimate insurers, especially for anything that is ‘too big to fail’. If we think back to the financial crisis, a fundamental piece of our economies (the banks) began to fail. Governments judged that the overall risk of this failure was too high and stepped in to financially underpin them. This wasn’t a decision taken lightly and had costs for all of us, but especially for poorer people who tend to rely more on public services. Following the intervention, steps were taken to increase regulation to reduce the risk of it happening again.
This is not atypical. Each time there is a significant societal cost there is expectation and pressure on governments to intervene. When they do it is you and I, through taxes, who underwrite the cost. In principle this is fine and an important role of governments, if the tax system is designed to fairly reflect the distribution of benefits and burdens across society. If not, then underwriting can act as a subsidy for private interests. However, as with the financial crisis, governments also have a duty to manage and ideally pre-empt the risk, primarily through regulation, so that potential crises are avoided and benefits and burdens shared more equitably.
Which brings us onto climate change. Whilst the profile of this appears to have dropped slightly the need and urgency certainly hasn’t. The initial expectation was that, within the UK, winters would be a bit wetter and summers a bit warmer and, in terms of averages, that is exactly what we are seeing. But the problem is not the averages but the degree and range of shorter-term fluctuations especially around the frequency and intensity of flooding and drought events. If ‘average weather’ was the problem it would be easy to solve; but a more chaotic climate, within and across years, with extreme events and ‘unusual’ patterns of weather, is much harder to ‘manage’. It’s this that is going to be one of the major risks that the UK faces.
This will be felt more acutely in some areas and sectors than others but perhaps nowhere more so than the land use sector which is very susceptible to climatic variations and events. This exposure is largely a result of land use policies and practices designed on the assumption of a largely stable and predictable climate. But that is no longer the world we live in. Policies and practices should be reviewed to better reflect the emerging distribution of benefits and burdens associated with land management. We are already seeing an expectation that government will underwrite this risk of a more chaotic climate. This years longer wetter winter meant that several agricultural systems were adversely affected and there were calls from the sector for governments to step in. The question is, should we begin to move to encourage the sector to own and manage the risk and ensure that the cost is equitably passed on to consumers.
A key mechanism to do this could be encouraging greater use of insurance premiums across the sector to underwrite the risks. If we don’t know where, how much or when something might happen, then managing risk is difficult and building resilience becomes more important. Importantly, decisions that land managers make influence the risk exposure and analysis will help us understand that better. This is what the insurance sector does. For example, increasing adoption of more regenerative farming techniques also increases resilience to the sorts of extremes we are now seeing – by diversifying the product within and across years to hedge bets and improving soil quality which will help to buffer the extremes. So, you can see that insuring a farm which is applying more regenerative techniques against failure should be cheaper than larger intensive monocultures. This should also help rebalance the market to drive greater adoption of more regenerative techniques. This sort of relationship could also help to encourage more data sharing from the agricultural sector because this is what is needed to build improved understanding around the risks, especially for shared landscape-scale risks., especially for shared landscape-scale risks.
There is an opportunity now for governments to start to acknowledge and embrace the emerging risks and start to signal where they will invest and where they expect industry to manage these. Developing this approach could help to drive a more evidence-based approach and greater general uptake of an ecosystem service-based approach, as well as a fairer distribution of benefits and burdens. Is it time for more open discussion about the pros and cons of this sort of approach?