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Speaker
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Transcript
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Tim Williams, Partner, Burges Salmon
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[Music] Hello and welcome back to death and taxes, a private wealth podcast from Burges Salmon. I'm Tim Williams and on today's podcast we're going to talk about natural capital and what that means in the world of private wealth. I'm delighted to be joined today by my colleagues Kevin Kennedy.
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Kevin Kennedy, Partner, Burges Salmon
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Hello.
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Tim
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And Ross Simpson.
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Ross Simpson, Partner, Burges Salmon
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Hi great to be here.
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Tim
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And we are going to talk you through what you need to know about natural capital and the green agenda.
To start with we thought it'd be really helpful to talk through some of the sort of high-level bits, clear up some of the jargon, before we dive into the meat of what we're seeing in the market. I think Kevin if we can start with you, please, it would be really helpful if you could just set out for us what we mean by natural capital.
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Kevin
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Okay thanks Tim, well like with everything there's multiple definitions around this. Looking at the one we're about to use is probably the best one. It comes from the UK Natural Capital Committee, who are very highly regarded nationally and internationally and they essentially, the elements of nature that directly and indirectly produced value or benefits to people.
So it's this idea of kind of putting an economic value of some type on natural benefits so benefits produced by ecosystems, water, land, minerals. You've got some really obvious ones, like clean water is better than dirty water, you've got other far more subjective ones: well-being from nature that's often quite controversial and then you've got some issues where you've got trade-offs, so for example planting trees, locking up carbon rather than growing food, they all fall within this kind of natural capital umbrella.
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Tim
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Thanks Kevin, that's really helpful to set the scene for this discussion, but as we go through the podcast, you're going to hear lots of acronyms and bits of jargon that I think it would be helpful if we could have a little bit of a glossary of to start with.
So Ross, I'm going to go to you first. BNG is something we hear a lot about, what exactly do we mean by BNG?
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Ross
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Thanks Tim, yeah biodiversity net gain is essentially something that's born out of the Environment Act. This idea that when it comes to development we need to be looking at a baseline of biodiversity and creating a 10% uplift in biodiversity improvement.
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Tim
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And that's in the context of development land often isn't it, so if I'm covering some countryside with a housing development I'm covering in concrete, I take the Baseline of what that landscape had in terms of biodiversity and I try and improve it by 10% somewhere else.
Effectively it's sort of taking what you've taken out by building something on an area of land you need to put back somewhere else and then have that uplift. That's your net gain.
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Ross
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Exactly right and there's a whole regime around it: how do you achieve it and where do you achieve it and you know when there is development taking place, this idea that it you know should be as proximate to the site of development as possible and there's kind of mitigation and hierarchy if you like in terms of getting it as on site as possible and only if that's not possible that you would look for other fields maybe some offsite locations.
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Tim
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Okay, so that's BNG, so another three letter acronym is ELMS, E L M S, a four letter acronym even sorry. Kevin could you just say what we mean by ELMS?
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Kevin
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Yeah, this is one of the government policies - here's another acronym for you - coming out from DEFRA, Department for the Environment, Food and Rural Affairs. ELMS stands for Environmental Land Management Scheme, also sometimes called Environmental Land Management Systems, and it kind of is what it says on the tin. It's a form of subsidy which is aimed at achieving environmental benefits from the land and in context it is the replacement for a previous blizzard of acronyms which were the government's way of subsidizing farmers to produce food.
So, the switch, the kind of philosophical switch, has been moving away from that into paying public money for public goods for things that should enhance our environment.
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Tim
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And that was a sort of policy shift under Michael Gove that began a little while ago but is now biting as the previous subsidy regime is withdrawn and we landowners need to enter these schemes to replace the funding that they've effectively lost from DEFRA through the basic payment scheme. Okay so those are two nasty acronyms but what about the words that we might think we know what they mean but in a context of Natural Capital they might mean slightly different things.
So carbon is a big thing that we talk about in the context of Natural Capital. I'm going to throw that out to the floor, who wants to talk about carbon?
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Ross
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Carbon, yeah happy to take that one Tim. There's lots of ways that we are looking to engage with carbon in Natural Capital Markets. Essentially we are, a lot of what we're seeing and the kind of schemes that we see is about sequestration carbon, trying to lock it in, maybe you will find a corporate for example who has gone through the mitigation hierarchy of avoiding as much carbon as it can, reducing that which you can't avoid, but will be left with a certain amount of carbon left over that it needs to offset, and then we're seeing these projects where carbon corporates are looking to land owners and other kind of land management arrangements with a view to locking in carbon and offsetting type arrangements and that can be achieved through various different types of project.
We've been seeing a range of tree planting, people in restoration and even blue carbon projects as well involving the marine environment. So yeah that's what we're seeing in carbon.
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Tim
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Fantastic thank you Ross. And the last one I think we probably really need to talk about is nutrient neutrality, which is something that's sort of been here and there and now is back again I think Kevin, so what's nutrient neutrality when we talk about it?
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Kevin
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So that's the principle, much like biodiversity net gain, but you're dealing with particular issues that are affecting river catchment areas, so it applies in particular areas where there's a water catchment and it's there is development granted it's to prevent the incursion of additional nutrients into water courses and so you got a particular small scale regime but one that's quite dramatic because it generally involves handing over control of land for 120 years, so it's something which has been in operation for a couple of years and it had an effect of stymieing a lot of developments.
Now that's been dealt with to a degree but it's one of the things that people have some experience of if they're within that catchment.
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Tim
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Okay that's really helpful to have a bit of a glossary before we start diving into the detail but I suppose taking it at a very basic level, all of these things we're talking about are changes to land management in one way or another looking at you know doing things to improve environmental health I guess and one common theme from a lot of those is around monetization effectively isn't this is kind of being paid for doing things and doing different things and and some of those things that we mentioned are government funded so ELMS as you said Kevin is a government scheme, BNG biodiversity net gain is not, that's a planning requirement but the money for it effectively comes from private industry developers have to fund those projects themselves, and carbon can be government backed but is essentially a private market thing I suppose.
But I suppose the commonality there is this is all things landowners can do to generate at a return. Now I suppose it's worth saying that actually there's lots of people out there who are doing this for different reasons I mean conservation has always been a big part of landowners in the UK's mindset it's very important to lot of them so there are lots of people who are doing all this stuff anyway because they want to but I suppose the distinction now is that they can do it, some land owners are doing it to get paid effectively and which is of benefit to them but also of wider benefit to the environment as a whole.
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Ross
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Yeah that's exactly right Tim and certainly some of our landowners and farming clients are seeing this as a potential opportunity to create new income streams and diversify their businesses and there is a range of option out there for them to do that and participate in these markets whether directly themselves or in partnership with specialist bodies or through brokerage type arrangements and their trading platforms out there too and you know they will be under pinned by things like the Woodland Carbon Code, the Peatland Carbon Code, other types of arrangements which are in place for these voluntary type markets.
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Kevin
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And it's probably also worth adding to what you said Tim, that a lot of this at the moment is government driven but there's a very real sense that that is intended to be pump priming and that a lot of the money that is going into green investments globally will be put into these sorts of investments in land and obviously for those of us in this area who've been talking about it, conversation's been absolutely dominated for the last 18 months, two years by BNG biodiversity net gain but probably the big one is carbon and carbon sequestration and how that can be dealt with in a long-term approach so we'll probably be hearing far more about carbon and private money going into carbon schemes on UK land.
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Tim
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So we've heard a little bit about the high level theory of all of this and it all sounds very interesting and lots of opportunities for landowners but what are we actually seeing people doing?
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Kevin
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Well it's been remarkable Tim in that we were talking about this stuff five years ago in a real theoretical sense and it's actually started happening in real life so what we're seeing with the implementation of compulsory BNG that's driven a lot of people to start taking actions and to have to contemplate actions now in what is still in reality quite an immature market.
So what we've been seeing in practice is that from the supply side the people who are putting their land into these schemes at the moment in the private sector there's a lot of caution about this because the regulations have been a long time coming and it's been quite stop start so there is quite a bit of scepticism still as to whether there is a valid market there.
But on the other side we're seeing the landowning institutions, who are a major part of this land sector in the UK, they have been taking a lead and that's driven by a number of factors including the fact that most of them will have clear stakeholder engagement or ESG pressure upon them or simply will have enough land and enough marginal land that maybe isn't that good previously for food production that they're thinking can we put this to some other use, so in practice what we're seeing is a lot of those bodies getting to grips with what they have and what they can do with it and how they can actually make this work and taking it out of the kind of discussion cloud and putting it down into something concrete if you will excuse the pun.
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Tim
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And is that sort of adoption by these bigger institutional land owners is having a wider impact, do you think it's being felt elsewhere in the market Ross?
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Ross
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Absolutely and it's almost created generated this kind of new class of buyer that just didn't exist you know 5 10 years ago as well you know we've been acting for a number of entities who are investing and buying large scale rural land holdings all with the intent on protection, restoration of nature, natural processes, the delivery of ecosystem services and you know depending on where they are in the market and what the drivers are and who is behind these organisations, a range of motivation behind them as well too you know some where economic return isn't necessarily driving it all it is something that you know they're looking to generate but it's not the purpose of what they do but a natural consequence of what they're doing.
Others will be more driven to monetize but yeah, it's interesting the impact of just seeing that new class of buyer out there and acting for those types of buyer too and what that has done to the market as well it is a much more crowded market terms of who is interested in land and buying land.
And it comes back to a point that you made Kevin around sort of marginal land maybe having its day now, there's a sort of shift isn't there where you know rural land goes from just being how much food can you grow on it or how nice does it look perhaps in the market terms to something else and do you think that's shifting the way that land owners across the board are viewing their portfolios?
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Tim
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And it comes back to a point that you made Kevin around sort of marginal land maybe having its day now, there's a sort of shift isn't there where you know rural land goes from just being how much food can you grow on it or how nice does it look perhaps in the market terms to something else and do you think that's shifting the way that land owners across the board are viewing their portfolios?
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Kevin
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I think that's right and one of the great surprises is that land which might typically be thought of as being not very good turns out to be massively valuable from a biodiversity point of view so it really does change your approach here, for example if you've got boggy water logged land fantastic it's really valuable and special from that point of view or an old bit of hard standing covered in gravel that no one's done anything with for 30 or 40 years we're seeing some of those when they're actually measured by ecologists having massive biodiversity values really is quite interesting as to what you think will have a high value and what in reality has a high value so yeah it is making people reassess what they own and what it can and should be used for.
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Tim
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So if I'm a land owner wanting to get involved in some of these projects what are the issues I need to consider so let's say I've got some land that might be suitable for a BNG project, Kevin what do I need to have in mind as I look at that project as a possible use of my land?
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Kevin
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Well let's assume you are a land owner and you're approached by someone who wants to use your land for BNG so they're offsetting from a development that they have, presumably nearby maybe not, what you have to consider is that you will be entering into some form of binding agreement which is going to mean that you will need to deliver these outputs from your land and what you may find is that you're made quite an attractive offer to do that but that's going to have a lifetime of a minimum of 30 years and that so that is actually quite a big deal and what we've heard some anecdotal reports of and it's been picked up a bit, it's had a bit of traction this, that there's a lot of trees that are not surviving past year one or year two because they're being planted and they're just not being looked after enough they're not being watered enough so there are some consequences to that it's not necessarily easy, it kind of has to fit in it's either got to be your main play because that's what you want to do or fit in with your plans so you know you're on this.
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Ross
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You're binding the land for a significant periods of time here this is largely multigenerational decisions that are being made you know trying to putting land into this kind of project or scheme.
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Kevin
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I think the other thing that is you know going right back to the start, making any sort of decision about participating in a project data is everything when it comes to understanding what you got and what types of project you you might want to participate and get involved in I think that's really important that from the outside that if you're looking at an opportunity you you do undertake a fairly robust comprehensive baseline assessment to establish what are the opportunities, what can you achieve.
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Tim
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And at what risk as well I think that's the other side isn't it because we talk to lots of different sorts of land owners don't we so you know there are different concerns for people who are farming in hands say versus people who've got tenants and maybe we can talk a little bit about landlord and tenant relations a bit later on, particular issues for trustees and we've talked a lot about the way trustees need to approach these decisions and your point Ross about it being a very long-term arrangement on the land, how does this impact on the next generation, how does it impact on future value, future use and you know who is in favour, who might be against this because actually at the moment certainly as we've talked about the returns might not be as certain as they are from you know business as usual but then again farming's pretty risky as well always has been but with a changing climate. Farms that have previously been very good at doing one thing may find that more challenging so maybe these investments you know are no less risky than continuing what we might have previously thought of as business as usual.
So BNG is relatively novel but we've been talking about carbon credits for years now haven't we, is the carbon that we're talking about in this context the same thing or are we talking about a new market that's developing?
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Kevin
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That's a really good question Tim and I think we're going to see both actually because carbon credits, the idea of locking up carbon, has been with us for a long time through trees and the Woodland Carbon Code that's been really helpful and Ross you've seen quite a bit of that in practice.
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Ross
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For sure absolutely we've been really quite busy in terms of helping with these kind of tree planting agreement and the kind of carbon credit arrangements that sit alongside them.
They've definitely been around for a while something that we're involved in you know the early days of these kinds of project I think the Woodland Carbon Code has been around now for a while and it's given that underpinning it's just brought integrity to the market and confidence that there is a there's something tradable that is validated it's verified and it's something that can be pointed to and that's definitely really it's a growing rapidly area.
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Tim
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And so presumably whilst some of these things that we've talked about are government backed, the government is presumably looking to a sort of high integrity private market to really support this stuff and really make it take off across the UK.
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Ross
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At this point it is just a private voluntary market at the moment but it is doing it in a high integrity way that we should all have an interest in making sure that we're creating as high integrity natural capital market as possible and that's what the Woodland Carbon Code and the Peatland Carbon Code and other codes that will emerge will do and help to achieve.
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Kevin
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Yes and we hear that the Soil Carbon Code as such is on its way or there'll be a British standard which will help regulate soil carbon codes so that that locking up carbon will be spreading to more lowland areas as well and won't just be Woodland and Peatland but it'll apply more across the board.
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Tim
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So it's fair to say that at the moment there's a sort of, there's lots of opportunities out there but those are only going to grow as time comes on goes on and as you say Kevin you know it's horses for courses as ever isn't it there's going to be different land owners with different sites who are going to be able to take advantage of different things and enter into different schemes.
Some of those may be possible now but some of them might not be quite there yet because it as you say Ross it is all backed up by this idea of having a good quality market to sell into and probably for some land owners is a better understanding of how these schemes play out over the longer term.
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Ross
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Yes and that longer term point is certainly when we're speaking to land owners, that's the thing that concerns them, the level of clarity as to how long their land is going to be subject to particular obligations and there is some uncertainty it's fair to say about that.
You have coming out of the BNG exercise you know a 30-year minimum term for a scheme, but there are many people have been asking questions about what happens afterwards and does that mean I've changed the nature of my land permanently or what and you contrast that with a new nutrient neutrality scheme which is 120 years where you conceptually you kind of understand, right I've put that away and that is grandchildren or great grandchildren sort of time.
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Tim
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And one of the concerns for land owners that we speak to is around the tax treatment and I think there was a consultation last year about this very topic of you know how are these kind of schemes and arrangements going to be taxed for land owners because as I said earlier on this is all about changing land use. If you're farming we kind of know how that works for tax purposes, you probably get agricultural property relief provided you meet the criteria and you might get business property relief as well.
And for lots of land owners that's hugely valuable because it's a relief from inheritance tax and what they rely on for their estate planning, but there are also income tax issues and capital taxes issues that flow from these schemes as well because obviously they make money you get money in you have to pay some sort of tax on it but equally what kind of relief can you claim on that income and capital disposals as well so lots of uncertainty there some of which was resolved in the March budget, so confirmation that agricultural property relief from inheritance tax will be available for the ELM schemes so think back to Kevin's glossary about what ELMS were and but also for some carbon markets, now there's a bit of a tension here and this comes back to what we were saying about the sort of integrity of these markets, government supported carbon markets will be recognized for APR so Woodland Carbon Code, Peatland Carbon Code, tick, but actually at the moment it's not quite as widespread so if you're going into the private market schemes which as we said government is probably going to look to to be the real driver for all of this there's a bit of uncertainty there about your APR treatment.
So that was sort of partly good news from the budget. For business property relief expected but possibly less good news in that we have to go back to first principles, we have to look at what the activities on the land actually are and whether or not they constitute a trade or a non-investment activity for business property relief purposes so lots of this is again comes back to the uncertainty of what this looks like over the long term because with lots of these schemes there might be lots of activity up front probably good argument that that's all trading but at the end you might end up with deliberately not having to do very much on your land so query whether that is a trade so a little bit of uncertainty still about BPR but hopefully as time goes on that will become clearer.
There is a group of industry bodies who are going to come together to look at the income tax and more business tax side of that so hopefully there'll be some more clarity on that going forward. So we talked about the benefit for land owners but clearly lots of land is not just occupied by the person who owns it. Kevin how do tenants come into this whole field, excuse the pun?
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Kevin
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Indeed, well when we because we are talking about essentially rural land almost exclusively a lot of that is tenanted and this has been a big issue between landlords and tenants at different levels, who gets the benefit, who's carrying out the work, who can get onto the land, all that sort of thing.
To give some context to it very recently we've had Published for England the Agricultural Landlord and Tenant Code of Practice for England and that addressed this head-on and so this was this was produced by a government endorsed group which brought together tenants representatives and landlord representatives so it's quite sector-wide and its general approach was that blanket bans, for example on participation in environmental schemes, were discouraged and where landlord's consent was to be needed for many of these schemes which they are because they're long-term that should be providing good time and tenants should be respecting landlord's interests and vice versa.
It's very much from the perspective of trying to encourage cooperation between landlords and tenants which also envisages inherently sharing: sharing the obligations and sharing the benefits and that's quite I think quite an important thing that we'll see referenced over the next few years in terms of where the mindset should be.
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Tim
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So thank you both so much for such an interesting discussion I hope that's been useful for everybody. Before we go though before I let you off into the rest of your days I want you to give me a key takeaway each please, starting with you Ross.
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Ross
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My key takeaway is that this is a really exciting area. There are opportunities here for existing land and estate owners, for others to get involved, it's an important opportunity, certainly for the existing land and estate owners to diversify, and yeah the rate of market development that we are seeing is you know this is a space which is growing rapidly, don't be left behind, get involved and engage with it.
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Tim
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Great stuff thank you Ross, and Kevin what about you?
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Kevin
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Well, it all sounds a bit polyamorist from us really because actually I agree to a great extent with everything Ross says, this is a real thing and in a way most exciting for me is this gives any land owner the opportunity to think about their land in a really holistic and different way and think about what benefits there are from that land, how they could use it, what the long-term future is, which is really good.
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Tim
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Many thanks to Ross and Kevin and thank you again for listening to this episode of Death and Taxes: the private wealth podcast from Burges Salmon. You can listen to our previous episodes and get in touch with the team at burges-salmon.com or on our LinkedIn page. Don't forget to subscribe to stay up to date with our latest podcasts.
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