Death of the Red Book: Growing a Greener Valuation Standard

Spring 2024

Introduction: We’re tearing down the red book! Don’t be scared! We’re here to help you realise this is the most incredible opportunity to be a part of building the future nature-connected economy, where we all value what really matters most!

 Over the past three years, we have built the UK’s first hundred-million-pound natural capital portfolio and in the process, we have changed how land is bought and sold – and we hope for the better. We have challenged the status quo and often found new and innovative ways to accelerate the land-buying process, making it more transparent, more inclusive, and more enjoyable for those involved.

However, one of the most challenging, problematic, and archaic legacies that remain is the concept of the Red Book valuation. As we face the realities of climate and biodiversity collapse, Red Book valuations are increasingly dangerous and limited due to their failure to adapt to the emerging environmental and market actualities. Rooted in traditional metrics, adhering to a global ‘standard’ the methodology often overlooks critical factors such as climate change risks, ecological sustainability, and the potential for properties to become stranded assets in a rapidly evolving economic landscape. This myopia can lead to significant financial misjudgements, as it undervalues properties with environmental benefits and overvalues those at risk from changing regulations and shifting societal values towards sustainability. Consequently, stakeholders relying on these valuations face heightened risks of making investment decisions that are not only financially precarious but also environmentally detrimental, undermining the urgent global shift towards sustainability and climate resilience.

In this piece we offer a critical examination focusing on the urgent need to reformulate property valuation standards in the UK – we need less red and more green!


The Shortcomings of Red Book:

1. Climate Change Risks – A Glaring Omission:

  • Current Shortcomings: The Red Book’s traditional methodologies are alarmingly silent on climate change risks, basing current valuations on past and present data points, rather than looking forward to future trends. This renders these valuations dangerously short-sighted and potentially misleading. For example, insufficient consideration is given to the increasing frequency of severe weather events such as droughts and floods and their effects on property and land. In the long term, all assets will be worthless if we are unable to manage the climate and biodiversity crisis.
  • Strategic Failures: This lack of future proofing exposes stakeholders to significant financial risks and undermines the long-term sustainability of investments in an era where environmental factors are crucial. For example, climate change is significantly increasing wildfire risk, especially to monocultures such as commercial forestry or grouse moors which are largely absent of natural moisture.

2. Overlooking Natural Capital in Valuation:

  • Methodological Blind Spots: The Red Book methodology is markedly deficient in recognising the value and implications of natural capital, leading to an outdated and incomplete approach to asset valuation that is not keeping pace with changes in the market. By definition, it is a valuation framework built on historical market “comparables”. In a world where we’re breaking (restoring) new ground, how can this approach possibly account for the future value of an emerging asset class? This can also lead to the overvaluation of environmentally damaging assets, as well as the undervaluation of more sustainably managed land and properties. Take for example an intensively managed commercial farm with a business model underpinned by the widespread use of fertiliser, insecticides, and intensive stocking. The very act of farming conventionally (non-regenerative way) significantly reduces the land’s future potential through soil and water degradation. It is more at risk to climatic events and contributes significant greenhouse gas emissions which will need substantial investment to reduce, meaning it is unlikely to be a sustainable model in the future. By contrast, a regeneratively managed farm combining conservation grazing, agroforestry, and organic arable production with the sale of carbon and biodiversity credits is actively improving the condition of the asset, opening up significant new revenue streams in the process, and building long-term sustainable value. Sadly, under a Red Book methodology, we have been told by valuers that this approach makes the land ‘untidy’ and therefore lowers value for potential future investors.
  • Business Consequences: This oversight fails to equip investors with the complete picture, potentially skewing investment decisions and risk assessments in sectors heavily reliant on land and property. For example, the widespread loss of soils from our fields is a clear demonstration of how we treat the natural world and presents an incredible risk to food production and therefore the underlying value of agricultural land. The current approach is based on subjective, historical land classifications, and assumptions on quality with no consideration of fertility, biodiversity, or bioabundance. I’m left wondering how comfortable the owners of Grade 1 arable land should be when they’ve lost huge volumes of soil, and seen its fertility be literally washed away, often with downstream impacts for nearby communities

3. Stranded Assets and Market Myopia:

  • Inadequate Foresight: The current valuation framework is ill-prepared to identify and appraise stranded assets, such as lands adversely affected by evolving environmental regulations and shifting societal norms. Take for example grouse moors and sporting estates which are decreasing in numbers every year as social acceptance and demand for blood sports collapses.
  • Wilful Ignorance: This lack of foresight in the Red Book approach could lead to significant misallocations of capital and missed opportunities for positive impact and profit, especially for those not actively involved in the rural economy. If you are seeking investment diversification, the traditional focus would be targeted at farmland, which is clearly now an industry experiencing significant challenges: hardly offering the safe secure long-term diversification one might seek. The dogged determination of a dying industry to cling to the Red Book will almost certainly be remembered in the same way as the videotapes we borrowed from Blockbuster and the hours spent playing Snake on our Nokias. Instead, natural capital presents the very hedge we need against society’s climate inaction that sadly every significant portfolio requires, or will soon realise they do.


Envisioning a Future-Forward Valuation Model:

One of the rules we have at Oxygen Conservation is that you can only criticise something if you offer an alternative or try and help find a solution. We have therefore begun the process of considering how we might inform, develop, and begin to build the rural property valuation model of the future. To help in this process, we are working with some of the country’s leading land agents, law firms, and professional services consultancies.

We have drawn inspiration from across the developing Natural Capital Economy, the many incredible minds we have the great pleasure of calling friends and colleagues, and we have integrated elements of the Treasury’s Green Book, the Dasgupta Review, and the Natural Capital Committee’s guidance.

1. Advanced Environmental Risk Analysis:

  • Cutting-Edge Climate Risk Tools: Employing innovative tools to assess land and built properties’ vulnerabilities, with respect to climate change scenarios is essential for forward-looking investment decisions. For example, developing digital twins will allow a wider range of climate scenarios to be explored to consider impacts and their necessary mitigations to better inform value potential
  • Ecosystem Valuation: Recognising natural capital as a key valuation approach provides a more rounded and future-proofed assessment of land and property values. Take for example the potential offered by an Estate with unique or rare habitat that must be protected. Currently, the Red Book system would consider this a liability and seek to reduce the value of the underlying asset as a result. Let that settle in for a second: the more precious the nature asset, the lower the Red Book valuation. The system is broken and is at least partly to blame for the ongoing degradation of the natural world. A natural capital-based approach would fully recognise the value of natural assets, and the restoration of degraded assets to a functioning state based on the value generated through the sale of biodiversity units.

2. Natural Capital Valuation Framework:

  • Integrating Green Book Insights: By embedding Green Book principles into valuation practices, a more environmentally accountable and financially sound framework can be established building on environmental, social, and economic foundations, with nature at its heart. For example, estimating the true value of natural capital assets such as through recognising and measuring the carbon stored within natural habitats as well as the unique value that access to nature offers to people and wildlife, can transform how we look at and value different properties. Green book insights also allow investors, lenders, accountants, legal, regulators, and all of us to see and account for the financial value created from positive environmental and social impact. When we have built the nature-connected economy we will realise what we value most has, as yet, not been fully valued.
  • Risk Assessment Reimagined: Incorporating comprehensive environmental risk assessments is crucial to reflect the true value and future viability of land and properties in today’s market. For example, recognising the value for money offered by providing improved environmental performance of built properties making them sustainable in future climate change scenarios.

3. The Greatest Hedge Against Human Inaction

  • Nature-Based Carbon Sequestration: Nature-based solutions leverage the natural ability of ecosystems to absorb and store carbon. By valuing estates based on their carbon sequestration potential, we incentivise the conservation and restoration of vital ecosystems like forests, wetlands, and grasslands. For instance, a property with extensive woodland potential (and in future mature woodlands) should be appraised more highly due to its significant carbon capture / storage capabilities, which play a critical role in mitigating climate change. This method not only reflects a property’s environmental contribution but also aligns real estate valuation with global carbon reduction goals.
  • Natural Capital Credits as a Hedge to Human Inaction: Incorporating the concept of carbon credits into land and built property valuation addresses the urgency of climate action. Properties that generate carbon credits through sustainable practices should be valued more highly, recognising their contribution to reducing the global carbon footprint. This model transforms individual estates into active players in the fight against climate change, offering a tangible financial incentive for reducing greenhouse gas emissions – the greatest challenge of our time. By doing so, it provides a direct economic response to human inaction in environmental preservation, turning rural real estates into proactive agents for ecological sustainability. As markets continue to develop, the inclusion of biodiversity-based credits into valuation estimates also provides an economic response to biodiversity loss, generating a financial incentive to protect and restore natural habitats for their biodiversity as well as their carbon value.


Leveraging Technology for Dynamic Valuation:

Embracing technological innovation is key to driving a more accurate and holistic approach to land and property valuation, and we’re delighted to share some of the ways we’re integrating these approaches.

1. Remote Sensing and Big Data in Valuation:

  • Data-Driven Decision Making: The increasingly rich pool of data that is now available can illuminate a property’s true environmental potential when analysed effectively, moving away from subjective judgements towards quantitative assessments of environmental value.
  • Revolutionising Data Collection: From the experience of our in-house drone survey team, which has scanned 10 individual estates in mm level detail, we have found that utilising remote sensing for environmental data collection offers a transformative insight into the speed, detail, and accuracy of property valuation.

2. Automated Valuation Models (AVMs) Enhanced:

  • Evolving Beyond Traditional Models: By incorporating environmental metrics into AVMs, valuation processes can become more aligned with current and emerging market realities, and the rapid changes taking place across them,
  • Efficiency and Accuracy: These sophisticated models can significantly streamline the valuation process, delivering timely and comprehensive assessments that react to real-world change.

3. AI and Predictive Analytics:

  • Harnessing AI for Market Insights: Employing AI and machine learning for predictive modelling offers unparalleled foresight into market trends and environmental impacts.
  • Early Identification of Stranded Assets: AI can be instrumental in the early identification of potential stranded assets, as well as being crucial for strategic risk management and valuation accuracy.

Conclusion: Charting a Sustainable Course in Property Valuation:

The transformation of land and property valuation methodologies is not only a strategic necessity but also a significant opportunity for innovation. By integrating sustainability-focused principles and embracing cutting-edge technologies, the real estate sector can align itself with the environmental imperatives of the 21st century. This pivot is essential for maintaining asset relevance, ensuring long-term profitability, and contributing meaningfully to global sustainability efforts. The future of property valuation lies in its adaptability and commitment to encompassing both financial robustness and environmental stewardship.


Rich Stockdale
Founder & Managing Director