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Natural Capital – future opportunities

Author: Peter Harker, Partner, Saffery Champness

Published: 23 Jul 2021

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With the reduction of the Basic Payment Scheme over the next seven years and the expectation that the new ELM schemes will not, for most farmers, fully offset the lost BPS income, farmers are naturally concerned about future cashflows and income. However there are some potential future revenue streams that either are already or will shortly become available to farmers and landowners, which may go some way to help re-shape the finances of many farms. These new revenue streams are generated by ‘Natural Capital’.

Climate change issues are now reaching the top of the political agenda. Things such as the Environment Bill, Net Zero and various land use papers that have been published are all going to have a fundamental impact on our countryside and how it will be used in the coming years. Both land use and farming methodologies are going to be heavily incentivised to change. Some of this will come from government funding through routes such as ELM schemes and Forestry planting grants, however there is another sector which is rapidly developing which landowners are able to tap into. Some of these income streams include:

Carbon credits

There is now a well-established carbon credit market, where carbon emitting industries are prepared to pay landowners to carry out activities that sequester carbon (typically by planting forests). There are various requirements that need to be met and ongoing monitoring required to ‘create’ a carbon credit, but these tend not to be too onerous for those that were wanting to plant forestry anyway. From 2020, large companies have been required to disclose their carbon usage under the ‘Carbon and Energy Reporting Requirements’. There is wide expectation that this will encourage more businesses to focus on their carbon consumption and seek to offset this.

Biodiversity net gain

A requirement is being brought into planning law that developments over a certain size will need to be able to deliver a ‘biodiversity net gain’ of 10%. What this means in practice is that either developers need to find ways of enhancing the biodiversity of the land in and around the developments they are building (such as by the introduction of wetlands, ponds, woods or meadows), or where it is not possible to achieve this full ‘gain’ physically on the development site in question, they will need to find other ways of increasing the biodiversity net gain of the wider local area. This has given rise to a market for ‘biodiversity net gain units’ which can be created by landowners who are in the same area as development sites and which can be purchased by developers to allow them to meet the planning requirements. This provides a potentially very attractive new revenue stream to landowners that can be used to take unproductive land out of agricultural.

Ecosystem services

Businesses such as water companies are prepared to pay landowners to manage their land in certain ways to reduce the run-off of certain chemicals, such as nitrogen. These opportunities tend to be fairly localised but can provide a significant potential income stream for landowners.

Measuring Natural Capital

Before a landowner can start to monetise their ‘Natural Capital’ it is important for them to firstly understand the value of the Natural Capital of their land in its current form and use, this is called a ‘baseline assessment’. Most of the potential income streams referred to above arise from payments to improve the Natural Capital and hence a baseline assessment allows opportunities to be identified and improvements to be measured. This may well stimulate much discussion as there are many factors to be weighed up when considering committing to a long-term change of land use.

The term ‘natural capital accounting’ is becoming widely used which also then raises the question does that mean that as Chartered Accountants we ought to be taking some responsibility for the production of these ‘financial statements’? A set of Natural Capital accounts consist of a ‘balance sheet’ which is essentially the product of a baseline assessment. It will record the valuation of various different sorts of ‘Natural Capital’ such as carbon sequestration, biodiversity, amenity use value. A ‘P&l’ can then be drawn up to measure the improvement (or degrading) of these assets over time. Producing a baseline assessment requires the skills and input of ecologists and related professions. There are a number of businesses who are actively marketing various different forms of baseline assessment and ‘natural capital accounting’ to landowners. As accountants, there is an opportunity to discuss with landowners how this information might be best presented alongside the more traditional financial statement that we are responsible for. It will likely only be the larger farming operations and landowners who undertake more formal reporting that will be looking at these issues.

Accounting and tax issues

New income streams present the question as to how should these various cashflows be accounted for and taxed. This article does not set out to answer all these questions as there are too many different permutations, but as always we must return to ‘first principles’ and look at what the substance of the transaction is to determine both the most appropriate accounting and tax treatment.

There are also issues to be grappled with such as what will the impact of a change of land use be on the availability of APR and BPR for a landowner. Many ‘rewilding schemes’ take farmland out of agricultural production and as such, under the current legislation, would mean that the availability of APR is lost. It will be important that we identify and flag such issues to clients as they arise.

*The views expressed are the author’s and not ICAEW’s.