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Transcripts
Video 1 – An Introduction to Natural Capital
00:00.00
Adam Corbin
Hello, I’m Adam Corbin. I’m a partner in the Agriculture team at Michelmores.
00:04.91
Ben Sharples
Hi, I’m Ben Sharples. I’m also a partner in the Agricultural team at Michelmores and I head up the Natural Capital group here.
00:12.25
Adam Corbin
So we’re here to talk about Natural Capital. Let’s start off Ben, with ‘what is Natural Capital?’
00:18.56
Ben Sharples
Well, it’s the natural environment, effectively.. It’s the the soil, the trees, water — everything around us in that natural world, as it were, that is capable of being utilised in some way and is indeed being being done so now and is emerging as a new sort of asset class in terms of the capability to invest in it and for it to carry out a service for the wider benefit of the community.
00:52.17
Adam Corbin
And has is it now become a ‘thing’? Why is it now important?
00:58.29
Ben Sharples
I mean it always was important. It’s been important for agricultural purposes for time immemorial. You know, we’ve used it to produce food.
01:09.32
Ben Sharples
We’ve used it for water. We’ve used it for generating power in terms of hydroelectric power, wind power, and renewable energy generally, but it’s become more of a focus point because of the need to tackle climate change, the need to generate food more sustainably, and to really deal with the host of environmental problems that face us and governments around the world and ours in particular have focused on the ability of these assets to help solve those problems, so we’ve had the deaf for a 25 year plan and. A lot of other reports that have focused on this issue and so it has very much come to the fore in the last few years in particular.
01:58.40
Adam Corbin
And in a Natural Capital deal, who tend to be the buyers and and who tend to be the sellers? Who are the players on the pitch?
02:05.50
Ben Sharples
Well, at the moment a couple of markets have really taken, sort of, the front running, as it were. So, we’ve got biodiversity net gain (BNG) and nutrient neutrality and we’ll talk about those both in more detail later. But, in those 2 particular markets: The buyers are essentially developers, house builders who require — they have to show an increase in Biodiversity Net gain in order to secure planning permission. And, equally, if they’re in a relevant catchment area that is affected by phosphate and nitrate pollution, they need to demonstrate that their developments are nutrient neutral before they’ll get the go-ahead from the local planning authority. So they’re very much the market makers at the moment. The sellers are the landowners, who control the natural asset, the natural capital, the land which can generate biodiversity credits or nutrient neutrality ,respectively. So they’re essentially the two sides of the the commercial equation. But then there are other players involved as well like the local planning authority and potentially contractors, and so on, who might be carrying out work on landowners’ behalf. So there’s a reasonably complex web of arrangements potentially, in order to get one of these deals off the ground.
03:30.51
Adam Corbun
And thinking about the landowners briefly, why don’t they just sell the land and why don’t the developers just buy it? What’s to stop them from doing that?
03:31.88
Ben Sharples
First.
03:40.76
Ben Sharples
There’s nothing to stop them from doing that and some investors in natural capital markets are buying land they are acquiring freehold interest, but I think there’s a desire on the part of landowners often to keep the estate intact, to keep land in family ownership and so they will look for different models to perhaps take advantage of these markets. You know, they could lease land for a long period of time to, for example, a habitat broker who will then create biodiversity credits on that land and sell them on to developers, or equally they can do it themselves. They could create the habitat themselves or they could use a contractor to do that, to create those biodiversity units to then sell them as as credits in the wider market. I think some investors have started off thinking that purchases are the way forward and perhaps have realised that, you know, the the blocks of land that are required the size of operation that is required isn’t widely available on the market and so they’re looking at alternative structures like leasing or joint ventures in order to facilitate it. You know, Green Finance inward investment into these sorts of schemes.
04:54.43
Adam Corbin
And a credit? What does a credit represent on the land? Does it represent what’s there at the momenan? And does it represent all elements of natural capital that are on the land at the moment? Or does it just represent a part?
05:11.49
Ben Sharples
A credit.. I tend to think of it in terms of units and then credits and languages, you know, you can get hung up on it. But I think it is quite important in order to try and clearly explain what we’re talking about. If you’ve got an area of land which, for example, is an arable rotation at the moment you could take that out of the arable rotation and you could create habitat on it. And habitat creation is often thought to be very complex and, you know, involves loads of tree planting and so on. Often not the case you can create habitat and you can increase biodiversity relatively easily by, you know, discontinuing arable farming and creating some, you know, mosaic scrub or whatever it might be. If you do that, you will increase the biodiversity on that site. So you’ll have a baseline of the arable biodiversity which will be relatively modest and then if you create a habitat you’ll have a higher level of biodiversity. So you’ll have an uplift in the number of biodiversity units on that land — those units can be converted to credits by way of a credit purchase agreement and sold to a developer. So that’s a distinction between units and credits. And units represents the uplift in biodiversity. So you have your baseline in terms of what’s already there, your new higher level that you’ve created, and the difference is your
06:41.22
Ben Sharples
Your net gain and your units that can be sold as credits.
06:46.20
Adam Corbin
So some of the time there’s a promise to do something in the future that’s going to improve the natural capital and some of the time you’re maybe selling What’s already there.
07:00.62
Ben Sharples
Yeah, absolutely. So, you might have a situation where, for example, you know some of the the habitat brokers and there’s some big well-established players in the market. They will have acquired sites and they will have started to create habitat already. And they will be, well on the way to that journey of creating that habitat and therefore crystallising those units and selling them as credits in other circumstances. You might have a developer come along to a private landowner and say “look I need some credits, can we do a deal?” and the answer is yes. And at that point, the deal will be done. The habitat will then start to be created and will then be, you know, the work will carry on for the next thirty year period to complete that habitat creation and enhancement. And in those circumstances the developer will.
07:54.87
Adam Corbin
Um.
07:55.73
Ben
Still be able to secure their planning permission because the local authority will see that the process is in train and the work will be carried out because it’s subject to legal obligation. But that’s a sort of, just in time order of credits, as it were. Whereas with the habitat bank model, the credits are already there in the bank. You know, ready to go immediately.
08:16.90
Adam Corbin
So we focused quite a bit there on the BNG and nutrient neutrality side of these arrangements. What are the other horses in in the race?
08:29.53
Ben Sharples
So, the other market is nutrient neutrality and that has sort of come up on the rails somewhat. Biodiversity.
08:38.34
Ben Sharples
You know, has been in the offing for a while because we had the Environment Bill originally and now we have the Environment Act 2021 which deals with all of the biodiversity issues. Nutrient neutrality is a creature not a statute but of European Case Law. There was a case called the Dutch Nitrogen Case which basically established that if you have protected sites, so special areas of conservation, special protection areas ramsar sites, you know, these valuable wetland sites. You can’t make the the nitrate and phosphate pollution situation in those waterways any worse by way of development. So if you want to build development that consists of overnight accommodation effectively, then you need to make sure that that development is nutrient neutral. It isn’t going to be contributing anymore nitrate or phosphate to those waterways. So you have to either, you know, create a wetland area which will deal with the problem and the runoff from the development, or you have to purchase credits, which have been generated by often the discontinuation of agricultural use on other lands so that other land isn’t, you know, the nitrate and phosphate isn’t being applied to that land. So it isn’t running off into the rivers.
10:00.47
Ben Sharples
So that creates the credit and creates the uplift which can then be used to offset the effect of the development and your question which I only partly answered earlier about whether it’s all of the credit or, you know, whether you can sort of stack these these benefits on land. The answer to that is that you can, so you know a landowner might have an area of land where he’s exploited it for biodiversity net gain takes it out of agricultural production now. If he’s doing that, he may well also choose to create nutrient neutrality credits on it, if he’s in a relevant catchment area. And that’s called stacking. So you’re stacking nutrient neutrality onto biodiversity net gain and that represents a greater opportunity for value and for, you know, income for the landowner and is being accepted by the government and Defra as being a perfectly acceptable way of proceeding. So, you know, the 2 can sort of coexist as it were. They’re not mutually exclusive. The point about nutrient neutrality is that it’s only relevant in certain catchment areas. There are 74 local planning authorities that are currently affected by it and if you’re in one of those catchment areas, you will be subject to it. So.
11:07.13
Adam Corbin
Um.
11:14.82
Adam Corbin
Are.
11:17.80
Ben
It is quite wide-reaching, but it’s it’s quite geographically specific and the market is, you know, quite dynamic as a result.
11:28.14
Adam Corbin
So those schemes — I suppose they’re more or less private money because they’re a requirement. For development, is there any public money available for natural capital benefits at the moment?
11:39.90
Ben
There is and that’s another key issue which Defra and the Government have been have been engaging on. There’s the ability to blend public and private money in terms of environmental schemes. Generally, the public money is basically in the form of the environmental land management schemes which the government have launched as the successor to the basic payment scheme. That’s got 3 tiers. There’s the sustainable farming initiative which is the lower tier which is fairly basic works of environmental improvement. You’ve then got countryside stewardship plus which is a bit like the countryside stewardship scheme of old, is a bit more advanced, and then you’ve got the landscape scale recovery which is the sort of catchment scale large schemes at the top of the pyramid. And it’s those sorts of schemes I think that represent an opportunity for landowners or syndicates of landowners to derive the benefits of public money. But then to stack private money.
12:40.26
Adam Corbin
Um.
12:51.58
Ben Sharples
On top in the form of Biodiversity Net Gain credits nutrient neutrality credits, or carbon, or indeed the, you know, the wider market of corporate ESG, environmental and social governance. You know, companies looking to improve their green credentials by, you know, buying up forestry or planting trees. You know, to create carbon offsets to improve biodiversity, you know. And we’re seeing this a lot now and that’s the market which, yeah, the market for BNG is statutory and, you know, is there. The nutrient neutrality market is a bit more subject to change because of the political nature of it at the moment. It’s come under attack from the current government and they they don’t like it. And they want to they see it as a block on development and they want to get rid of it and we’ll talk about that in more detail later. But, you know, this private ESG market is potentially the one which offers great opportunity.
13:59.12
Adam Corbin
And you mentioned carbon.. Is there a real market for it? How does that work?
14:07.33
Ben Sharples
There is a real market and in many ways, it’s the most established market. Ah, yeah, there are auctions for carbon and, you know, there’s a formal trading platform and mechanism for it. So in that sense it’s the most mature and it’s the most certain and you see, you know, inward private investment in the form of sort of corporate investment. Corporate’s the wrong word actually, in in terms of institutional investment. You know, the large funds and so on. They’re quite attracted by that because it provides a return. You know, if you’re in a joint venture with a landowner, you can you can split the return between the investor and the landowner who’s doing all the work effectively and that’s a reasonably certain way of proceeding because there is a price for either. Pending issuance units or carbon credits, depending on what you’re talking about and, you know, you can plan accordingly. Biodiversity Net gain is a bit less certain. You know, it hasn’t come into legal effect yet. But it’s on the statute book. So I, you know, I think they see that as a reasonably safe horse to back. Nutrient neutrality is politically more sensitive as I’ve said so that remains to be seen. But carbon is at the moment, you know it is.
15:30.54
Ben Sharples
The prices aren’t that exciting in terms of what you have to do to earn those carbon credits but that you know, one would think that the direction is only one way on that as more and more companies have to become carbon neutral, it would seem highly likely that the price of carbon per ton will increase significantly.
15:54.18
Adam Corbin
So I think our final horse, perhaps for the moment anyway, is catchment management and I was wondering if you could just elaborate a little bit more on that.
16:05.11
Ben Sharples
Yeah, I mean these are the schemes that really would dovetail in very well with landscape scale recovery that I mentioned earlier. You know, they are big at scale schemes aimed at improving water quality in a particular catchment or river, for example, dealing with flooding. So if you’ve got a town that floods, you know, regularly, you are looking effectively to slow the rate of water flow from the high ground to the low ground down. And that can be achieved by tree planting. It can be achieved by rewiggling rivers, you know, some of these rivers have had, you know, works done to them and to put them in a straight line because everyone you know was obsessed with either getting from A to B as quickly as possible or getting the water from A to B as quickly as possible. Now we’re looking at getting it from A to B as slowly as possible because those at B don’t appreciate being under three feet of water every other year. So you know that requires a holistic approach and a catchment-wide approach and you see the likes of the water companies engaging in these so, you know, you would have various schemes have happened whereby for instance, farmers have been paid to not graze livestock right on a river edge to, you know, reduce that sort of treading in and polluting effect it increases, it improves water quality.
17:30.91
Ben Sharples
And cleanliness at the end of the pipe, so it saves them money which they can pay to the farmers to fence off livestock and so on. So that’s onw example. You know, they’ve been schemed in the North of England between groups of farmers in terms of rewetting pete. Again, slowing up water flow again, improving water quality, improving biodiversity, improving carbon sequestration. So, you know, it’s those sort of schemes that can provide a number of outputs from a single input. And rewetting pete is a great example of that it has a number of benefits but you can sort of achieve, kill a number of birds with one stone as it were, with these wider scale schemes that bring in all of the farmers in the area if possible. And you get, you know, two plus two equals seven really, you know, you get this greater than the sum of its parts effect. And it’s those schemes and those opportunities that really provide the greatest interest to investors. I think it’s the scale. It’s the multiple benefits. It’s the you know the unseen benefits in many, in some ways, that will materialise that make them attractive.
18:49.27
Adam Corbin
And finally, what legal and commercial arrangements are usually required in these deals generally?
18:55.33
Ben Sharples
Well, if you look at, sort of, biodiversity net gain and nutrient neutrality as a starting point, you would generally have firstly a commercial arrangement between the landowner and the developer simply selling the credits, so that would be a credit purchase agreement. That’s a commercial deal between the two would have to be negotiated. But the crucial thing about, you know, the credits as opposed to the units is that the credits need to be underwritten by a promise to manage the land in a certain way so that the units are produced which are effectively converted into the credit. And that is achieved by way of a section one zero six agreement between the landowner and the local planning authority. The landowner is effectively promising to, in the case of BNG, to create and maintain the habitat and in the case of nutrient neutrality, to not farm the land to create the phosphate or nitrate credit and the local planning authority can enforce that section one zero six agreement in the usual way if, you know, something goes wrong with the management of the land. Which threatens the viability of the units and then the credits. The point about the deal is that the developer has no interest in managing the land for a long period of time, you know, he or she just wants the credits.
20:08.37
Adam Corbin
Are.
20:22.45
Ben Sharples
And then to walk away and start the next project. So the enforcement, the habitat management angle, is between the landowner and the local planning authority. Landowner might do the work himself. He might engage a contractor so there might be a habitat management agreement alongside to ensure that that work is carried out and that the obligations of each party are clearly set out. So that’s those two markets, the landscape scale recovery. The catchment scale scheme side of things is a bit different in terms of blending public and private money. What Defra want for the public money angle is a single point of contact and contract with the landowner. So I think what you would do there is probably create a special purpose vehicle with the landowner, that would then allow the blending of public and private money. Because private investors will want to see a structure that they recognise, you know, a corporate joint venture (JV) type approach.
21:21.46
Adam Corbin
Um.
21:25.80
Ben Sharples
And then you would have emanating out from that SPV all the sub-agreements underneath, with the occupiers of the land. The tenants, the contractors, the commons, rights holders, the graziers, whoever it might be, who are actually going to deliver the environmental benefits which create.
21:39.15
Adam Corbin
Are.
21:41.60
Ben Sharples
The payments for environmental services, which would then be shared out between the various stakeholders in the way that they’ve agreed previously. And that’s how you would, sort of, tend to structure those. And we’ve seen that and we’ve advised clients on those sorts of deals. Because Defra are doing large pilot projects at the moment to try and launch this landscape scale recovery and Defra want to know, you know, how would these be structured. How would they be documented in order to get the benefits delivered on the ground.
22:14.80
Adam Corbin
Great, well look forward to exploring some of those points in more detail as we go through this series. So, let’s wrap it up there. If you have any questions, do feel free to get in touch with Ben or I. Goodbye.
22:31.27
Ben Sharples
Bye.
Video 2 – What is nutrient neutrality?
00:00.62
Adam Corbin
Hello, I’m Adam Corbin. I’m a Partner in the Agriculture team at Michelmores.
00:05.24
Ben Sharples
Hi, I’m Ben Sharples. I’m also Partnering the Agriculture team here and I head up the Natural Capital Group as well.
00:13.30
Adam Corbin
So, now we’re going to look at nutrient neutrality. What are these nutrients, Ben?
00:19.40
Ben Sharples
Right. The nutrients are nitrogen and phosphorus and nutrient neutrality is the requirement that development that consists of overnight accommodation doesn’t contribute to. The problems that exist in certain waterways in this country. Those waterways are protected areas, special protection areas, Ramsar sites and the like, protected by European legislation and there is a problem with nitrate and phosphate getting into the water and causing algal blooms and other pollution. So, that’s the issue of nutrient neutrality in a nutshell.
01:03.60
Adam Corbin
And why has this suddenly become a problem or suddenly become something that developers need to do something about?
01:11.86
Ben Sharples
Well, there was a European case called the Dutch Nitrogen Case. That established this principle that you cannot make the problem worse in terms of nitrate and phosphate pollution. So if you are developing in a catchment area that feeds one of these protected sites., then you have to make sure that you’re not making the position worse. So you effectively have to make your development nutrient neutral and you can do that by, you know, putting in water treatment works or reed beds, and so on. Or, you can buy nitrate and phosphate credits as an offset to take account of the nitrate and phosphate that you’re putting into the waterway as a result of the development.
01:57.30
Adam Corbin
And can you can you buy these credits anywhere?
02:02.81
Ben
Well, there’s two ways of doing it. You could do a deal with a private landowner, who typically would stop agricultural production. Agricultural production relies on nitrate and phosphate fertiliser.
02:17.71
Ben Sharples
So, if you stop farming, you stop the runoff or you reduce the runoff and that creates a credit which can then be used by the developer. Equally you could purchase statutory credits.
02:32.81
Ben Sharples
Because the Government have set up a statutory scheme which is being piloted in the tees catchment area whereby landowners will set land aside and then the government will do a deal with them and they will then make credits available for developers to purchase.
02:37.23
Adam Corbin
Um.
02:48.39
Adam Corbin
And you have to improve the catchment in the location where the development is, don’t you?
02:55.28
Ben Sharples
Yeah, so the if if the development is in the catchment area of a protected site then the mitigation site, you know… But the land where you’re discontinuing farming, for example, also has to be in that catchment area. So that the river benefits effectively.
03:15.56
Adam Corbin
And you’ve been at the front of this and, in particular, you did one of the first nutrient neutrality deals didn’t you.
03:25.52
Ben Sharples
Yeah, that was for the Forestry Commission in the Stour catchment area and we’ve been very fortunate. They’ve allowed us to, sort of, talk about that fairly widely and use it as a case study which is very kind of them. And that involved the discontinuation of agricultural use and the planting of trees. Which has meant that, you know, there was a phosphate and nitrate credit generated, which can then be made available to local developers. And that was sort of part and parcel of the Forestry Commission’s, you know, purchase of the land and their wider philosophy of planting trees.
04:04.95
Adam Corbin
And is the method of mitigation different for phosphate and nitrates, or do the same things produce the same benefits?
04:15.77
Ben Sharples
Well, the discontinuation will produce a nitrate or phosphate credit depending on the activity that you were doing before. So whether you were arable farming, or for instance, if you were pig farming then the…
04:26.50
Adam Corbin
Um.
04:31.87
Ben Sharples
The phosphate and nitrate levels, particularly the phosphate levels, are much higher with pig farming. So, if you know, sort of, the mother load as it were for nutrient neutrality is finding a pig farm stopping pig farming, and then you’ve got a big phosphate uplift and and a nitrate uplift as well, often to the sellers credits. So, you know, there are opportunities there for farmers if they’re changing or diversifying their businesses to look at this, if they’re in a relevant catchment area.
05:03.33
Adam Corbin
And these arrangements — how are they currently documented? How do you ensure that the obligations are carried on?
05:06.69
Ben Sharples
A.
05:13.51
Ben Sharples
Very similar to Biodiversity Net Gain. You’d have a credit purchase agreement between the landowner and the developer selling the phosphate and unnitrate credits. You’d have a section one zero six agreement between the landowner and the local planning authority. Covenanting to discontinue agricultural use. Whatever it might, be managing the land in a certain way to create the credits and that’s the way that you underpin and underwrite the units and the value of them to the developer.
05:41.10
Adam Corbin
And is there any alignment between the way in which nutrient neutrality is treated by LPA and the way in which BNG is treated? Are they organised and administered in the same way and are the new regulations going to have any impact on huge neutrality?
06:01.41
Ben Sharples
They’re not organised in the same way but LPAs that are in relevant catchment areas should be familiar with both, because they’re having to deal with both. You can stack nutrient neutrality and BNG on the same land so that, you know, we know that from the Defra consultation. And that should now be confirmed in the secondary legislation that’s due in November. But they would be probably dealt with by different teams as the LPA, possibly. I mean logically they wouldn’t be, but they might be. But, you know, the two can co-exist and would form part of the same planning application if you’re in a relevant catchment area.
06:40.27
Adam Corbin
I Guess what I was also wondering, was whether or not the changes that we’re expecting in BNG are going to start to regulate neutrient neutrality? Or whether it’s just going to sit on its own as a separate requirement.
06:52.12
Ben Sharples
I think it’ll sit on its own as a separate requirement. But, what we do have with nutrient neutrality, that we don’t have with BNG is much greater political uncertainty. The Government tried to amend the Levelling Up Bill recently, to do away with nutrient neutrality. They they don’t like the fact that European legislation is having a significant effect on the house building process in this country and they tried to institute significant changes to the Levelling Up Bill. Those were rejected by the House of Lords because they were extreme changes very late in the day. Now Michael Gove and Rishi Sunak both said since, that they want to see this through. That they might sacrifice a Bill in the current parliamentary timetable, bring in a new bill which would be a standalone bill getting rid of nutrient neutrality. If they did that, they would be able to use the Parliament Act to force it through, which they weren’t able to do with the Lord’s recent voting down. So there remains an uncertainty there.
07:53.46
Adam Corbin
Um.
07:57.54
Ben Sharples
Yeah, some people think that will happen. Some people think that the government will simply run out of time and they’ve got bigger things to worry about, you know, you pay us your money, take your choice. But there is that greater uncertainty.
08:10.76
Adam Corbin
Great. I think we’ll wrap it up there on that happy final note. So, if you have any any questions that you want to ask about what we’ve spoken about this time, please do get in touch with Ben or I. Goodbye.
Video 3 – What is Biodiversity Net Gain (BNG?)
00:01.56
Adam Corbin
I’m Adam Corbin, a Partner in the Agriculture team at Michelmores.
00:06.15
Ben Sharples
I’m Ben Sharples. I’m also a Partner in the Agriculture team and I head up the Natural Capital Group here.
00:10.71
Adam Corbin
So, now we’re talking about BNG. What is that, Ben?
00:16.85
Ben Sharples
It’s biodiversity net gain and the obligation on developers to improve on the pre-development biodiversity levels by 10%. So if you’ve got a site and you’re putting houses on it, you need to establish the baseline of what biodiversity you’ve got there and then improve that by 10 % and that’s the number of biodiversity units you need to acquire in some way.
00:44.54
Adam Corbin
And how’s that Baseline established?
00:47.62
Ben Sharples
So, there’s a very complicated spreadsheet which uses habitat as a proxy for biodiversity in terms of species and you effectively punch in the relevant details of what you’ve got. And that will give you a figure in biodiversity units of your of your baseline effectively and then in order to reach the desired uplift of 10 you can either create biodiversity as part of your development or you could create it off-site or you could buy credits. Um, from a habitat broker in the marketplace.
01:28.19
Adam Corbin
And bearing in mind there are different types of habitat does it does it matter if you don’t get what you’re expecting to get if you if you aim for improving 1 thing and you get something else as long as it’s an improvement in biodiversity does does that matter.
01:43.86
Ben Sharples
It does matter because you can’t trade down in terms of complexity and value of habitat. So, you have to either increase the number of units at the same level or you have to go up the scale and there are.
01:57.71
Adam Corbin
Um, we all.
02:00.49
Ben Sharples
There are different types of habitat. Some are much more complex than others so sort of river and estuarine habitats, for example, and those credits could be quite difficult to obtain or that habitat could be quite difficult to, you know, reproduce or recreate.
02:17.58
Adam Corbin
And it seems like this BNG business has had a bit of a rocky start. Could you give us a potted history of BNG and we’ll have a little explorer as to where we’re going with it.
02:30.30
Ben Sharples
Yeah. I mean BNG has been around for quite a while because we’ve had the Environment Bill originally. We’ve now got the Environment Act 2021 which came in on the 9 November 2021 which really, you know, said BNG will be a legal requirement. But there was quite a bit of activity before then, because BNG was a crime and in things like general development orders some local planning authorities were already insisting on it. There was a pilot scheme involving some local planning authorities. So it was, you know, it was known about. But it hasn’t become part of the mainstream market yet. The Environment Act set out the skeleton of detail and conservation covenants, what biodiversity net gain is, and so on. But we’ve been waiting for secondary legislation to flesh out those details. For the last two years, really. Defra recently announced that there will be a delay to the imposition of biodiversity net gain. They’re saying that we will still have the secondary legislation by the end of November 2023 but that it won’t actually then be a legal requirement until the end of January 2024, so it will give some time for that secondary legislation to bed in and for the guidance and so on surrounding it to be published. And I think their thinking is that they will, sort of, yeah, build us up to it gradually. But it has had, as you say, quite a um…
04:03.24
Ben Sharples
Long and interrupted introduction.
04:09.79
Adam Corbin
So, are developers piling in now to get their BNG requirement development in, or is that really not a practical thing?
04:18.44
Ben Sharples
Well, I think it depends on the planning authority they’re dealing with. Some, as I say, are already insisting on it. You know, in a sort of ‘behaving as if it’s already part and parcel of the of the planning regime’. And local planning authorities have considerable autonomy, as you know, so there is some of that going on. I’m not aware of that happening. But I suspect it probably is because clearly the requirements will be different depending on when you are trying to get planning permission. You know, what I would say, is that we’ve seen deals going through. Ah you know with developers just sort of accepting that this is now part of the everyday operation. And we haven’t seen a dramatic upturn in those but maybe some developments are being pushed through without the requirement to get BNG credits at all, so it may well be happening.
05:19.45
Adam Corbin
And these new rules, or these new regulations that are going to come in, bearing in mind it’s all going on now. Anyway, what are they going to do? How are they going to improve our developers’ approach and the LPS’s approach to BNG?
05:35.94
Ben Sharples
Well I think it will give some certainty and that is now absolutely part of the town and country planning system. So there will be that to start with. Secondly I think we’re going to get more detail that we need on things like responsible bodies. So, the environment act introduced the legal concept of a conservation covenant which is an agreement between a landowner and a responsible body to ensure the management of the land in a certain way, to deliver an environmental outcome. So they are tailor-made vehicles for these sorts of schemes — biodiversity net gain, nutrient neutrality, whatever it might be — but, what we haven’t had is the detail of what it means to be a responsible body on the face of it. You know, it looks reasonably attractive. You know, you’d think some sort of wildlife charities might say well it will be a responsible body. We will deal with, you know, the administration of conservation covenants. But actually, you know, it will require them to be the enforcing authority in terms of conservation covenants. And yeah, that could be quite an onerous responsibility. So it will give us some detail on that. And we’re also awaiting lots of detail on things like the, you know, the biodiversity gainsite register. You know, how that will be administered, who will administer it. You know, we’re hearing it might be Natural England but there’s a lot of detail around the.
07:04.65
Ben Sharples
The detail procedure of you know, getting the site registered, getting it set up, who’s going to be administering it, who’s the responsible body, where do the obligations rest.
07:21.62
Adam Corbin
And is there an idea that there’ll be a site register with ready to go BNG areas and offerings? And so that’s a proactive market and then there’ll also be a more reactive market, I think you touched on that earlier.
07:43.67
Ben Sharples
Yeah, and the site register is a requirement for all biodiversity gain sites to be on a central register. So there is some transparency, so that people can see what the obligations are, which sites have been set aside, you know, what habitat is meant to breate created, and so on. So it’s sort of a control and a transparency measure. It seems to me, and you know, therefore it seems appropriate that someone like Natural England, you know, probably should be administering it. So, it’s not a sort of marketing tool. But it is absolutely vital in terms of the credibility of the scheme and the underwriting of the credits, because people can go and see that, you know, this site is on a register and this is what should be happening in terms of the site. So, people could be held to account if the biodiversity isn’t delivered. And, you know, there will be monitoring. The LPAs will have monitoring and enforcement powers and they will be checking up. You know, initially probably on an annual basis and then perhaps on a five yearly basis as to whether or not the promised habitat is being delivered. You know it’s one thing to say, you know, ‘we will deliver this increase in biodiversity’ and it’s another to actually achieve it. And I think as long as the parties are doing what they are contractually obliged to do, you know, carrying out all the works to create this habitat, then they will have fulfilled their legal obligations.
09:13.74
Ben Sharples
The example I always use is, you know, you can do all the works in all the world, but it doesn’t mean that the, you know, the 50 pairs of breeding lapwings that you would like to see in that habitat are going to come and inhabit that field in that area. There is always an element of uncertainty when Mother Nature is involved, as we all know. And so, really, the emphasis has to be on inputs. You know, the promise to do the work properly at the right time and in the right way. And then, if you create that habitat, hopefully the species will follow.
09:46.78
Adam Corbin
Great! Thanks Ben. I think let’s wrap it up there. If you have any questions about this, or any other aspect of natural capital, then do get in touch with us. Goodbye.
Video 4 – What is Landscape Sale Recovery?
00:00.00
Adam Corbin
Hello, I’m Adam Corbin, I’m a Partner in the Agriculture team at Michelmores.
00:04.29
Ben Sharples
Hello, I’m Ben Sharples. I’m also a Partner in the Agriculture team and I head up the Natural Capital Group here as well.
00:11.43
Adam Corbin
So, now we’re doing landscape scale recovery. Ben, what’s that?
00:18.78
Ben Sharples
It’s the top tier of the Environmental Land Management Scheme system that the government have introduced to succeed the Basic Payment Scheme. So the European funding under cap has gone and this is a more bespoke.
00:37.60
Ben Sharples
Scheme for this country moving forward. And it is a large scale catchment-wide project which they’re aiming to deliver. You know, significant benefits over landscape scale, hence the name of the of the scheme.
00:57.74
Adam Corbin
So, it sounds like it’s quite a grand ideal and when we talk about Landscape Scale Recovery, what what sort of things do you think it’s expected are going to be improved? Are we going to more rolling hills with more trees on them with? Less arable on them? What’s that going to look like, do you think?
01:19.66
Ben Sharples
Yeah, I mean I think that is the aspiration it. It is to affect that level of change on the landscape, but it also will be delivering things like increased water quality, reduced flooding risk because of slowing down water coming off the high ground onto the low ground. Yeah, it will be to preserve the, sort of, the fabric of the rural landscape. You know, the upland, the hill farms, and so on. So I, you know, I think we are going to see some fairly significant change. You know, it’s likely to involve some fairly serious tree planting you know, given all the other requirements of climate change, and so on. But, it is designed to change the landscape I think and that’s the aim.
02:11.65
Adam Corbin
It’s a worry isn’t it, that it’s maybe a bit too big of an ambition for one scheme. And you wonder whether it might mean different things to different people. You know, does it mean it is a way of putting money into public, private enterprises to do those things? Is it a way of affecting change in a bigger way? Or is it something else? Do you think it’s confused, or do you think it’s ‘we know where we’re going’?
02:38.68
Ben Sharples
Well, I think you’re right that it could mean different things to different people. I mean, if you took the example of a large landed estate then they might have a very sort of cohesive clear strategy and management plan. But if you’ve got a
02:46.91
Adam Corbin
Un.
02:56.76
Ben Sharples
Disparate group of syndicate landowners making up the required area for a Landscape Scale Scheme, then you might have very different ambitions and there would be potential for conflict there. So I think the management of it is going to be, you know, quite tricky. The devil will be in the detail, but the one thing that it does represent is scale — and that’s attractive to, you know, green finance investors. Yeah, definite will be putting public money in through the ELM scheme but there is ample opportunity to blend public and private finance. With these projects, yeah, that will give further revenue streams to them and and should create greater environmental benefits as a result.
03:41.12
Adam Corbin
Yeah, I suppose I’ve been thinking about how’s that money going to flow through and, you know, I was thinking earlier: Is it that the public money goes into the stuff that’s more difficult to buy, or is it being paid as income lost, or how do you think that’s going to work?
04:01.82
Ben Sharples
I think you’ll certainly see quite a bit of the debt refund going into, sort of, the initial capital works. I would expect that, I mean each scheme will be structured in a different way, and there may well be payments for, you know, income foreone and there might there may be an element of that. But I think the emphasis is on you know, creating change, you know, infrastructure change to deal with issues like flooding climate change and all the rest of it. You may then see that the private money coming in and that might be aimed more at you know, sort of like, a water company. You know a catchment scale fencing off rivers to stop cattle treading in, you know, the river banks, and so on. Yeah, that sort of approach. But yeah, you know, we’ve done a number of these now and advised on a number of them and all the proposals are very different depending on the landscape, depending on the the farming systems that are in place. So there’s no one size fits all. But if it creates the required benefits then you know the schemes are in with a chance of getting the Defra funding and making it through to the implementation phase. Which is the second of the two stages, the first being the development phase.
05:18.79
Adam Corbin
So I suppose we’re still on the model, aren’t we, where there is a seller of some environmental benefit and then there is a buyer. I suppose it just might be the case that the buyer for instance, award company is is part of the venture. Rather than it being purely transactional.
05:40.12
Ben Sharples
Yeah, you what you might see I think is essentially a special purpose vehicle established by the the landowner that would be a single point of contact and contract with derefore for the purposes of drawing down public funding. But that would also then be, you know, a potential joint venture vehicle with other stakeholders, like a water company, like a green investor. You know, who would have representation on the board in the usual way, would be a shareholder, would have officers of the company. You know, it’s a recognisable corporate structure that they would be comfortable with. You know, we’ve seen it with renewable energy that sort of structure in place. So it’s tried and tested and you would then have the JV then contract with all the occupiers of the land. You know, the tenants, the graziers, the Commons rights holders. To actually deliver the management on the ground, which delivers the environmental benefits, which delivers the income, which is then split according to the deal that’s being agreed and according to the level of investment contributed by the various parties, and the amount of work that they’re doing. So, it’s possible I think to structure these things in a fairly familiar way, but albeit one that’s dealing with, sort of, a new scheme and a new set of problems.
06:57.34
Adam Corbin
There’s a lot of stakeholders though here, isn’t there? I mean, you know when you think of it just landlord and tenant that’s already quite complicated because maybe there’ll be one landlord, but there’s probably going to be multiple tenants. And there might be owner occupiers in the mix in the landscape as well. And then you’ve got the other stakeholders who might have an interest, and then you’ve got the need to kind of wrap that all up in a structure and in a management structure that works. In order to deliver the the benefit. So, it’s going to make some fun interesting novel legal work isn’t it?
07:39.37
Ben Sharples
It is certainly. And I think it is quite complex potentially and people are going to be doing different things to create different outcomes and outputs. And I mean for example, yeah I think there’s a huge role for tenants here. In delivering landscape change and environmental benefits. Generally, you know, they are on the ground, they know the land. They’re very experienced. You know, they’re the perfect sort of custodians of these sorts of schemes. So, I think what will make these schemes work is having the right people doing the right jobs. So, you know, if the tenants are involved in delivering, you know the the environmental outcome that’s likely to be successful. You know, they’re going to be, you know, managing the soil to so sequester carbon. You know, whatever it might be. And the same would apply to the other occupiers and holders of interests on the land equally at the other end of the chain. Yeah, the landowners need to be doing their bit. You know, in a logical way to deliver the outcomes that are required.
08:44.96
Adam Corbin
Yeah, I suppose what I’ve been struck by is, it appears to me, that there’s a real need for some pioneers. And it’s area by area. Not just, you know, one or two pioneers across the country and some pioneers who will just say, ‘well, we’ve got together and we’re going to make this work and these are the pieces of the landscape that we control and that we can make this work on’, and then they can say to others, ‘well are you with us or not, because we’re cracking on with it. We’ve got critical mass and we’re ready to go, I think. I think those arrangements are much easier to see being successful and to see getting up and running than the much more challenging assembly land — assembly of smaller owners and of very diverse interests.
09:41.88
Ben Sharples
Yeah I think undoubtedly, that’s right. I mean, if you’ve got one estate, for example where they’re taking the lead and then saying ‘look, you’re either with us or you’re not’, then that’s going to be more likely to be successful. You know, the way we’ve seen deaf structure it so far is to try and, you know, have a development phase where you formulate what you’re going to do and then the implementation phase, if that’s acceptable, is, you know, how are you going to structure it. How is this going to work. Practically, how are you going to document it. How are you going to deliver. And it’s the first bit that’s often the taxing bit, deciding what you’re going to do and who’s going to do it.
10:21.80
Adam Corbin
Exciting times.
10:23.68
Ben
Yeah, no, it’s going to be interesting and as you say a lot of novel work, I suspect, is going to come out of it.
10:31.12
Adam Corbin
Great, I think that’s wrap. Wrap it up there. If you’ve got any questions that come to mind after watching this, then please do get in touch with Ben or I. Goodbye.