An eye on the Natural Capital marketplace

Due to the huge focus on ESG in the market recently, here we interview Sophia Key, Partner at Birketts and expert on Natural Capital, about current trends in the marketplace.

There has been a lot of talk regarding the E of ESG this year – are you seeing this flow through to the Natural Capital marketplace? 

We have definitely seen an increase in business money entering the Natural Capital marketplace, a lot of which has been generated through the environmental pillar of ESG. In return for the investment, businesses are generally requesting quantifiable data over an extended period of time. This would, presumably, be data that they can report back to their shareholders and boards to evidence the return on the investment.  

The recent announcement within the Spring Budget regarding the taxation of ecosystem uses may impact this ESG area. Emily O’Donnell, Partner in Birketts’ Private Client Advisory Team, recently produced an article with further details. In summary, the article confirms that there may not be agricultural property relief (APR) available to landowners who change the use of the land for environmental purposes if they are not also securing this land via a planning agreement or conservation covenant (or it being part of a government scheme). 

What is the next big thing on the agenda?

The hot topics at the moment are: 

• Water neutrality: another planning consideration for developers in some catchment areas. Natural England is trying to protect certain water-stressed habitats by looking at whether the water demand for new developments can be offset within the existing community. This could be through people recycling or using less water. Within those catchment areas, there are going to be impacts on the deliverability and costs for developers, which lenders will need to keep in mind.  
• Environmental land management:  there is now more clarity on the Environmental Land Management Schemes (ELMS) introduced by the Government. Under ELMS there is the Sustainable Farming Incentive (SFI), and some of the options available to landowners under this scheme are incredibly favourable and are beginning to compete with the private marketplace in terms of opportunity. This is certainly a hot topic for those involved in the natural landscape and may well have a positive impact on land valuation, providing a very welcome uplift for landowners and security providers.

Nature depletion and general biodiversity losses seems to still be an issue – how do you think we can see this addressed? 

We believe that the Government’s introduction of the ELMS and, in particular, the options under the Countryside Stewardship and Sustainable Farming Incentive are offering landowners very good incentive to focus on environmental uses. Through this and a genuinely competitive private marketplace for the sale of ecosystem services, we believe that nature recovery is looking positive.

What do you think will be the main issues for lenders going forward?

There will be certain metrics which lenders use in order to ensure affordability and sustainability of loans to their developer clients. When offering development finance, lenders will need to ensure that their metrics include the additional requirements and costs of developers complying with biodiversity net gain, nutrient neutrality and water neutrality requirements, where relevant.  

In addition, lenders must consider the impact on value when being asked for consent to landowners entering new schemes or when offered security against land which is subject to these schemes. 

How do you think lenders can avoid accusations of greenwashing?

Good practice in governance, suitable disclosure and an extensive understanding of the sustainability profile of the project and the customers may deter accusations of greenwashing.   

New regulations call for greater transparency and disclosure of ESG data. The UK Sustainability Disclosure Requirements (UK SDR) aims to introduce a package of measures referring to investment labels by July 2024. Naming and marketing requirements, with accompanying disclosures, will come into force by 2 December 2024 and further disclosure requirements will be phased in over the next two years. The UK SDR is directed at supporting the efficient allocation of capital and the smooth running of the UK’s capital markets.   

In addition, from 31 May 2024, the anti-greenwashing rule will require FCA-authorised firms to ensure that any reference made to sustainability characteristics of their financial products and services are fair, clear and not misleading.   

Meeting the disclosure requirements as well as reporting on the risks and opportunities concerning sustainability and climate change matters could dissuade allegations of greenwashing. Nevertheless, lenders may need to review and/or update their risk frameworks to identify and manage the risk of greenwashing appropriately.