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Speaker
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Transcript
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Michael Barlow, Partner, Burges Salmon
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[Music] Hello and welcome to Environment Matters, a monthly podcast by the Environment team at Burges Salmon. I'm Mike Barlow and I head up the team here at Burges Salmon. Each month I'll be joined by experts from across the firm to discuss the most pressing environmental developments and hot topics in UK law.
In today's podcast we'll be discussing natural capital and nature-based solutions and the opportunities these present. I'm joined by Sarah Sackville Hamilton, who's a senior associate in the Environment team specializing in environmental regulation and sustainability projects, and Ross Simpson, who's a partner in our Real Estate department specializing in strategic land and rural property. Hi Sarah, Hi Ross, thank you both for joining us today.
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Sarah Sackville Hamilton, Senior Associate, Burges Salmon
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My pleasure Mike.
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Ross Simpson, Partner, Burges Salmon
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Yeah, great to be here.
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Michael
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So, Sarah, let's start at the beginning shall we, could you start by telling us what you mean by nature-based solutions.
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Sarah
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Of course, nature-based solutions are all about nature restoration projects to create, or to enhance, or to protect various forms of natural capital and by natural capital we mean things like woodlands or peatlands or other natural habitats and systems.
Nature-based solutions can generate a whole range of different ecosystem services that can then be monetized in markets for natural capital products, so for example if you've got a nature-based solution to sequester carbon that can generate carbon credits, if you're generating or or safeguarding biodiversity that can create biodiversity units, or similarly if you are mitigating nutrient pollution that can generate nutrient credits.
Natural capital markets in the UK are still quite nascent but they're growing very rapidly, this is true both of voluntary markets and compliance markets, so voluntary markets are ones where buyers don't have any legal obligations to buy credits but they're choosing to do so to support their net zero or their wider ESG strategies, good example of that is carbon credits that are being delivered through projects under the woodland code or the peatland code. Compliance markets on the other hand are ones where buyers have got legal obligations to secure credits, like biodiversity net gain.
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Michael
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Thanks Sarah, that's really clear, and are you seeing much activity in the market at the moment with your work?
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Sarah
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Yeah I think it's fair to say I've seen a real upswing in activity in natural capital markets in the last few years, as an Environment team we've been advising on nature-based solutions projects for years, we were involved in producing the first wave of tree planting agreements over 15 years ago, that was a bit before my time at Burges Salmon but I expect you remember that Mike.
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Michael
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Sadly I do.
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Sarah
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With the reinvigoration of the natural capital space in recent years, largely through the drive to net zero, to sustainability and stewardship we've been helping clients more and more with contracts that underpin a real range of nature-based solutions and associated environmental credit trading schemes. Some of this activity is in a similar vein to those early tree planting arrangements.
So, for example, we've been working with a major player in UK forestry on developing its carbon offsetting brokerage scheme which introduces landowners to corporates to help offset carbon through tree planting. The work that we've been doing is involved designing contracts which align with the woodland carbon code, for example, on topics like validation and monitoring of the planting scheme and verification of the carbon sequestration achieved and the credits that are generated and traded.
To give another example of activity that we're seeing, we've been working with a peatland partnership to develop a peatland code restoration agreement between it and a consortium of landowners, that agreement deals with the development of restoration projects which are accredited under the peatland code and then the allocation of the peatland carbon units that are generated as a result.
Both of those examples that I just chattered through are from voluntary natural capital markets, so the ones where corporate buyers are choosing to invest in nature-based solutions through purchasing environmental credits for the purpose of supporting their net zero and ESG strategies. What we're also seeing particularly in the last 6 to 12 months is a real surge in activity in natural capital compliance markets, particularly biodiversity net gain, a requirement to deliver 10% biodiversity net gain, or BNG is less of a mouthful, through most new developments was due to become a planning requirement from November this year, that's been pushed back to January but it's still pretty imminent and as a result we're working on a lot of projects where developers are securing their BNG through off-site arrangements, and that's both through direct arrangements that we're working on between developers and land owners, but also, and perhaps more so at the moment actually through brokerage or habitat bank arrangements.
Hopefully that's a good flavour of the sort of stuff that I've been involved with recently.
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Michael
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Thanks Sarah, that's really interesting to look at it from the corporate side of things and Ross sort of turning to you and looking at it from the landowner side of things, what are you seeing in your world at the moment?
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Ross
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Yeah, well, it really varies, we deal with a range of land and estate owners and farmers and they're all coming at it from very different angles, you know, it's an interesting time as a real property professional, it's a really exciting time to be part of this kind of new market and seeing land as an opportunity to, you know, provide a lot of answers and solutions to some of the biggest problems that, you know, facing us around nature and biodiversity crisis and climate change, so in terms of what we're doing and what we're seeing it's everything from acting for the likes of oxygen conservation, it's a company set up and we've been advising since its inception in 2021, it's got really ambitious plans to scale conservation and in less than 24 months we've helped them acquire 10 estates across Scotland, England and Wales spanning nearly 30,000 acres, and they are an example of a land owner buying large scale rural land holdings intent on protection and restoration of nature and natural processes, in each site they are looking to restore and manage natural capital to deliver positive environmental and social impact and at the same time generating economic return, not necessarily a return as a purpose of what they do, but more that is a natural consequence of what they are doing in that space.
We've also got other land owners and farming clients who are looking at these new markets as a potential opportunity to create new income streams and to diversify their businesses and there's a lot of range, there's a range of options and opportunities out there for land owners who might want to participate in these markets whether that's directly themselves or in partnership with other bodies and agencies or through brokerage type arrangements and all sorts of trading platforms, a lot of which will be underpinned by that woodland carbon code and peatland carbon code in the context of kind of voluntary markets ,which Sarah mentioned earlier.
We also as a firm have had a long established strategic land practice, so acting for land and estate owners who are being approached by developers and house builders in the connection with options and promotion agreements for house building projects, and so in that context the subject of BNG, biodiversity net gain is particularly relevant, either existing agreements needing to be revisited to take account of potential BNG requirements or new agreements needing to be put in place having proper regard to what's coming down the line in terms of BNG and whether that's capable of being delivered onsite or offsite, and then in a similar vein where we've got a very busy energy practice as well, so we find ourselves acting for land owners in the context of wind or solar projects and increasingly BNG is something that is being looked at in the context of those deals and whether there's an opportunity for that, those BNG requirements to be satisfied on site and how is that delivered and if there's surplus environmental credits generated who benefits from that, so lots of different angles, lots of different opportunities and yeah very active in this space at the moment.
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Michael
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That's great and if I put you on the spot now, what would be the key things that you would tell your clients to consider when they're thinking about moving in this space.
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Ross
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Key things for landowners to think about, I think there's a lot to think about, I think a great starting point, a really important starting point is data and good data, you know, this is really important what we want to be creating here is, you know, high integrity natural capital market and understanding what you've got and undertaking robust, comprehensive baseline assessments to establish that I think is really important, yes there will be an an initial outlay for that original baseline testing, you might be able to get some funding for that, you might be able to get some assistance depending who you're working with on these types of project, I think data is everything and really really important, I think regardless of the type of scheme or project and, you know, who might be responsible for its management, I think it's important for land owners to remember that these types of project are largely multi-generational, so you're going to be binding the land for significant periods of time, you know, in the context of BNG you're looking at a 30-year term minimum how, does that sit with your long-term plan and aspirations for the state, and for the generation coming after it's a really important thing, you know, very honest open conversations need to take place with think kind of land and estates owning families and farming families. Be careful who you're selling to and in that constant I'm talking about experience and the profile of an investor or partner that you might be transacting with or buddying up with in terms of delivering some of these projects, I do I fully suspect that the integrity of a lot of these markets are going to come under scrutiny at some point or other, you know, there has been a bit of that already to date and for a lot of our landowning clients that, you know, there will be reputational matters to think about in terms of participating in these markets.
Be careful about what you're selling off as well, you might need to retain some benefit of some, you know, credits and environmental credits, I'm thinking maybe in context of carbon for your own offsetting purposes, and then finally, I think it is important to reflect on tenanted land, or land that might in the future be let out I think letting and tenancies adds a whole other dimension to these types of projects as well and thought will need to be given as to who's ultimately responsible for the delivery of these projects, where does the benefit of any revenue generated from them say, does it go to one or other of the parties, is it shared landlord's reservations to carry out surveys and assessments for natural capital purposes, tenancies and paid other occupational interests like tenancies and how they sit alongside some of these projects is another important consideration.
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Michael
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Thanks Ross, that's a really good list of things to look out for on the landowner side, and Sarah just flipping it around then from your perspective and more on the corporate side, what would you say the key things are to look out for?
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Sarah
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I think starting in the same way as Ross did, there's an awful lot that corporate buyers and investors should be thinking about when they're approaching a natural capital deal. A fundamental consideration has got to be how a particular natural Capital opportunity will align with that corporate or organization or investors' ESG strategy and priorities.
Beyond that, there are just three key ones that I'll pick out now, the first one is integrity, and again that is going back to a point that Ross made and integrity is a consideration on both sides of the fence on these, corporates should be looking to buy environmental credits from or otherwise to get involved in financing for nature-based solutions projects which are going to deliver genuine lasting and additional environmental improvements that are robustly verified and transparently documented with no double counting or room for misleading claims or greenwashing, so just a small list of nice notes, the key question is how the landowner or the broker that the corporate is dealing with going to satisfy the corporate of the integrity of their scheme.
The second key consideration I'd pick out on the corporate side of things is payment structures, so questions like how will the financial aspect of the arrangement work, what will the corporate be paying the landowner or the other project delivery body for, is it for provision of ecosystem services, is it for purchase of credits, is it for a combination of the two, crucially how frequently and at what point a payment's going to be made, will there be a one-off upfront payment or drip fed instalments over time, the key one again on sort of payment and money flows is who's going to bear the financial risk if the project fails or needs reinstatement after a catastrophic event, like a fire or a flood, obviously no one is hoping or expecting that that will happen, but it's really important to work through the risk allocation for those worst case scenarios at the outset and make sure they're documented.
The final consideration that I would flag as key for any corporates approaching these types of deals to think about is change provisions. Natural capital markets, as I said earlier, are still nascent and the scope for an awful lot to change in the coming years, whether that's through increased regulation of the markets or government policy or otherwise there are undoubtedly advantages to being early promoters of voluntary natural capital markets, but this has got to be balanced against the uncertainties of a developing market. For mandatory markets, like BNG, developers may have little practical choice but to participate, so in both types of markets it's really important for corporates to think about how they want change to be dealt with under their agreements both legal change but also practical change on the ground, given that many nature based solutions contracts will be very long-term arrangements, so I think those would be my top things to think about.
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Michael
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Thank you, so, again a few things to think about there, and I think you've both talked about the fact that this is very much a developing market and I think it's probably worth just trying to turn our minds to where do we think this is going to go next, what are the challenges with the market? Sarah, perhaps you could start?
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Sarah
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Yeah, yeah happy to, I think I'd start with uncertainty in the market as being a key challenge as I said a minute ago the whole market is relatively nascent, some areas are definitely more advanced than others and, but even in those more advanced areas I'd say that regulation guidance is often lagging behind market activity and market appetite.
A particularly challenging area from an uncertainty perspective at the moment's nutrient neutrality, the way nutrient neutrality works is that for areas where nutrient pollution is a particular issue, planning policy currently requires development only to go ahead if it won't cause additional pollution to sites so what developers have to achieve is to demonstrate that the nutrient load from their development from the additional waste water from their housing, for example they have to show that that's mitigated and this requirement for developers to mitigate, that could be satisfied through purchasing nutrient credits from a nature-based solutions project.
That whole requirement is a very political hot topic at the moment, there's been toing and froing in the last weeks and months over whether or not the nutrient neutrality requirements are going to be scrapped, I think there's appetite in parts of government to do this, to unlock certain housing developments, so seeing exactly where that seesaw lands is going to be a key theme to keep an eye on, and a key theme that we're keeping an eye on. Another one that we're tracking closely is biodiversity net gain, as I said earlier mandatory BNG had been due to kick in from November this year for most developments but the government pushed that back to January, end of September that was announced, further regulations and guidance on precisely how the BNG requirements are going to operate are still outstanding and were outstanding when the decision came, so the decision wasn't a huge surprise, it was going to be quite a lot to get nailed down in the month between when the announcement came and when BNG was due to come in.
From speaking to various clients and contacts in the natural capital space, while the delay was frustrating for some, it came as a relief for many who've been grappling to get to grips with BNG and precisely what needed to be done to meet the requirements, I think that provided that the additional months between November and January actually used to plug the gaps in the current regulation and guidance for BNG and the date isn't kicked further down the road when January's looming, the move should actually promote rather than undermine certainty in the market, I don't know if you've got any sort of equivalent things that you've been seeing and tracking Ross on the certainty or uncertainty side of things?
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Ross
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Yeah definitely, I think the main one that I would want to draw out would be uncertainty around tax treatment, I think it's a really important one from the landowner perspective, with all these things it's so important for land owners and farmers to be mindful of tax, you know, depending on how land is held, undeformed, often it will be held undeformed in a certain way and will be taxed accordingly.
If you start using land in different ways, that could impact in some unexpected way on tax treatment, it could upset some very long considered or established kind of succession in tax planning. You know, one example would be in the context of inheritance tax, you know, if you suddenly remove land from agricultural production it may no longer qualify for agricultural property relief and, you know, I'm very much not a tax lawyer, this is one for landers and farmers to be speaking to their tax lawyers, their accountants or tax advisors on, it's something that Treasury and HMRC has been looking at, there was a full government consultation which closed back in July, but yet at this point in time we're still waiting for some clear HMRC Treasury guidance to come out, not entirely sure when we're due to see that, but yeah at this point in time you probably, there's more that we don't know than we do know when it comes to the tax treatments.
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Michael
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And we never want to finish talking about tax so I don't know if anyone's got any final comments?
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Sarah
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I can raise one, I can bring us back to a point that Ross and I have both mentioned before but I think is a really important one to finish on which is integrity and the challenges associated with the integrity of these nature-based solutions. I think where you've got nascent and rapidly growing markets, where activities moving ahead of policy and regulation, they can be vulnerable to participants who lack Integrity.
There have been various stories in the press recently about particularly some carbon credit schemes that haven't represented genuine carbon reductions and that whole piece around, sort of, statements and green practices not measuring up to the reality I think links quite nicely back to the greenwashing issues you were discussing on the last podcast Mike, and the concern here is really that poor practice by a minority can undermine confidence in the wider market.
So, addressing that integrity challenge, something that we've been seeing more and more of is collaborations between charities or other conservation bodies and corporates or investors with strong ESG agendas, so arrangements that are bringing together the natural capital expertise of the charities with private funding to deliver genuine and robust and scalable nature-based solutions models. I think that's going to be something that we see an awful lot more of in the months and years to come.
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Michael
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Thank you for that Sarah, that's really interesting and a great place to finish our podcast today.
I think what I've taken away from the discussion that we've had is that this is a new and dynamic market that is developing, there's a lot to think about but the key things are these are very long-term contracts and they do need to be robust and there's a lot of things to be thought through on both sides, both on the landowner and on the corporate side to make sure that everybody gets what they want out of them and that they're de-risked as much as possible, but that there is quite a lot of risk and uncertainty in the arrangements at the moment, and we all want this market to have integrity and to develop and there's all possibility that that will happen but there's quite a lot to think about to make sure we get there. So that's been, it's been really interesting, thank you both so much for joining me to talk about that.
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Sarah
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Thank you, Mike.
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Ross
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Yeah, thanks for having us as well.
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Michael
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Thank you for listening to environment matters, if you'd like to know more about our environment team, and how our experts can work with you, you can contact me and the rest of our team via our website. If you enjoyed this podcast, you may also enjoy listening to last month's podcast, how to avoid risks and protect your business from greenwashing, which is available on Apple, Spotify or wherever you listen to your podcasts.
Our next episode is on a significant change in the enforcement of environmental offenses as the environment agency introduced variable monetary penalties on the 1st of December. So don't forget to subscribe and thanks for listening.
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