June 2022 saw the publication of a thought-provoking new nature recovery report setting out a potential roadmap for the funding of environmental land management across the UK.
Financing Nature Recovery UK report
The contributors to the Financing Nature Recovery UK report include many of the major industry bodies (including the CBI, CLA and NFU) as well as environmental charities and green finance groups, and so its recommendations are likely to carry significant weight as the government wrestles with the question of how to unlock the large-scale private financing which will be needed to reach ambitious environmental targets.
Perhaps the most interesting part is a recommendation which runs like a thread throughout the whole of the report – the authors propose that farmers and other land managers should be paid directly for the environmental outputs they produce, rather than for carrying out specific activities which are expected to have environmental benefits.
In other words, rather than the current system where landowners are paid on a per-metre basis for establishing and maintaining a hedge, the report instead suggests that the environmental benefits of that hedge (improved biodiversity, carbon sequestration, flood mitigation and so on) should be assessed, quantified and then sold on the open market as “credits”.
That would be a profound departure from the current model, and (if adopted) would represent a significant change in thinking for a government which has only recently recommitted to the current model when designing the Sustainable Farm Incentive.
Advantages and opportunities for landowners
However, that proposed change and the others set out in the new report would present some real advantages and opportunities for landowners:
- By assessing and quantifying the different environmental benefits produced by a project or land management system, land managers would be able to demonstrate and sell each benefit separately and transparently. Most projects will produce a range of different environmental benefits, and the ability to sell them separately would enable landowners to get the best price for each while avoiding the current uncertainties about whether it is acceptable to receive funding from different sources for the same project.
- The open market sale of environmental benefit credits would mean that the market determines their price. The laws of supply and demand should then ensure that the market price keeps pace with the actual costs involved in generating those environmental benefits, since few people (and certainly none of the institutional investors which the report’s authors wish to encourage into the sector) would invest in a nature recovery project unless it made financial sense. That would be a significant improvement over the rock-bottom rates proposed under the Sustainable Farming Incentive.
- A well-organised, well-regulated and transparent market in environmental benefits would prevent “greenwashing”, and would also cut the risks posed by poor practice by both land managers and purchasers of environmental benefits. At present, there are serious concerns about landowners signing up to long-term agreements which are poorly structured or one-sided – perhaps not properly protecting the landowner against the risk of the other party going bust, or not giving the landowner flexibility to take advantage of other opportunities to sell environmental benefits. The report recommends that standard agreements should be produced, which would be an opportunity to ensure that both parties’ interests are taken into account and protected.
The report persuasively argues that this is both a better approach than the present system, and also that it stands a better chance of attracting the billions of pounds of private finance which are needed. However, it is less convincing when it comes to whether this vision is realistic and achievable.
Is this vision realistic and achievable?
Firstly, there would be an enormous amount of work involved in designing and implementing this new system. A whole swathe of new standards, tools and models would be needed to measure the various types of environmental benefit, and systems would have to be designed to monitor and audit their application on the ground. The market for trading the environmental benefit credits would then need to be created, together with the governance structures required to police it.
Realistically, this work would probably have to be driven by the government, as it seems too large, too new and too risky for the private sector to handle alone. Does DEFRA truly have the ability, the appetite and the “bandwidth” to manage a project of this size at this time, especially on the very short timescales proposed in the report? The agonisingly slow progress on ELMS and the wider agricultural transition suggests not.
Secondly (and perhaps most importantly), the report is rather coy about who would actually be buying these environmental benefit credits and thus paying for the work needed to create them. The authors acknowledge that few people (whether landowners or the sort of institutional investors they are keen to bring into the sector) will invest in a nature recovery project unless they will then receive a reasonable return on that investment.
However, other than the “usual suspects” (developers, the water industry and the government itself), the only potential purchasers of environmental credits identified in the report are businesses (particularly in the food industry) who sign up to a voluntary pledge to become “nature positive”. Without wishing to descend into cynicism, it seems fair to be sceptical about how many businesses would agree to unilaterally increase their costs in that way without being forced to do so by government action or societal pressure.
There are other concerns as well. The report does not address how to make the proposed new system work on land which is farmed and managed by tenants – balancing the interests of landlords and tenants in that scenario is one of the largest unresolved questions for any proposed system of environmental land management, and it is disappointing that the report does not grapple with it. The authors are also unclear on how existing environmental good practice would be rewarded under their proposed system. It seems grossly unfair if land managers who are already focusing on environmental benefits would not be able to sell them in the same way as those who only start after the new system is introduced.
That would also leave those existing environmental benefits at risk – if they could not be sold (and were no longer being supported by government subsidies under the existing system) that would produce an entirely perverse incentive for those land managers to instead maximise the revenue from their land by converting it back to intensive commercial agriculture.
The future for funding environmental land management and nature recovery in the UK
In sum, this report offers a fascinating glimpse of one possible future for funding environmental land management and nature recovery in the UK – given the identity of those involved and the general persuasiveness of its conclusions, it seems likely that its proposed roadmap will prove influential. However, it also underlines just how much work still needs to be done to create a functioning, financially-viable system which works both for potential investors and for various types of land managers. We are still a long way off knowing what the eventual post-BPS, post-transition landscape will look like.