Biodiversity net gain as a diversification option for farmers

At a conference hosted by Scrutton Bland earlier this year, Kerriann McLackland from the Environment Bank talked about the various ways farmers can capitalise on creating and selling biodiversity net gain (BNG) units to developers, while still receiving income from BPS and environmental schemes.

Opening the conference, Nick Banks, finance partner at accountancy firm Scrutton Bland, highlighted the various challenges presented to farmers over the last 12 months.

These include parliament turmoil, soaring inflation, extreme weather events, avian flu, the Ukraine conflict and skyrocketing prices, all of which have caused input costs to outweigh outputs in many businesses.

As subsidies diminish, Mr Banks stressed tax planning is more important than ever, as well as reviewing the farm financial model on a regular basis.

Other than re-evaluating the cost of production, navigating the next 12 months will mean farmers might have to consider investment in diversification and exploring the opportunities around emerging carbon markets, Mr Banks said. He then handed over to Kerriann McLackland, head of land (South East) at the Environment Bank, who provided further insight.

Biodiversity Net Gain: An on-farm revolution

BNG is set to become a statutory requirement for all developments from November 2023, as outlined in the Environment Act 2021. From this date onwards, developers will be required to demonstrate, as part of their planning obligations, how they’re going to replace any habitat that’s lost during the development and provide an additional 10% gain, with some local authorities seeking to increase this to 20-25%.

While developers should look to minimise habitat loss on-site where possible, many will need to look at off-site opportunities for habitat creation, which is where farmers and landowners can get involved.

According to Ms McLackland, BNG has the potential to provide farmers with a stable income stream amid ongoing uncertainties surrounding environmental schemes and government policy.

“Farmers have the land, skills and knowledge to create and manage habitat, and you can provide that service to developers and receive income in turn under various arrangements,” she explained.

Exploring the concept further, she said developers will need to follow a set mitigation hierarchy, that is:

  • Minimise damage within the development
  • On-site habitat creation
  • Off-site habitat creation
  • Statutory credits

The latter will be issued by the government as a last resort to developers with sufficient evidence for using this option. The money paid for the credits will then be used to invest in habitat creation elsewhere in England.

However, this option will come at a significant cost to developers, Ms McLackland said. “The Government wants to deter developers from using statutory credits with pricing them at a level to put them off, as they want to see the market providing the new and additional habitat.”

Meanwhile, Natural England has developed a tool for measuring habitat loss (Biodiversity Metric 4.0), which will also be used by any off-site BNG provider when trading units of biodiversity.

As for what off-site mitigation looks like, Ms McLackland said the land can still remain a farm landscape as long as habitat creation is being managed by the farmer or third party under agreement with the developer.

“It’s very much about farming where your major output shifts to nature conservation with food production being an ancillary output,” she explained, saying the concept is a “flip on its head” from what many farmers are currently doing, where main output is food and secondary outputs are nature and habitat.

BNG models – risks & rewards

According to the speaker, there are three models of how landowners can get involved in providing off-site mitigation, each with different levels of risk and reward. The model most suited to farm businesses will vary with each individual farm, as well as appetites for risk and reward, and how it sits with other business ventures.

The model offering the highest income (and also the highest risk) is the direct sales model, in which farmers are responsible for creating the habitat on their farm. They are also in a direct relationship with the developer, to whom they sell the units of improved ecological value of the land, Ms McLackland said.

As there is no other party involved, this model provides farmers with the highest income from BNG. “On the flip side, it is also the highest risk model, as you would be carrying all the risks of making sure you can create the habitat and bearing all the costs of initial creation and recreation should the habitat fail,” she explained.

In addition, farmers would be directly responsible to the local planning authority for monitoring the site and demonstrating the habitat is meeting the requirements of the Biodiversity Metric. It would also be the farmer’s responsibility to find the developer willing to buy the units they offer, Ms McLackland added.

Another model for trading BNG units is via a brokerage service, where a so-called ‘middle man’ matches up units that farmers have to sell with what developers need and takes a slice of the profit for doing so.

While there are an increasing number of these models, Ms McLackland said they vary with the level of ancillary support they provide and involve a medium-level risk to farmers.

The third and lowest risk model is the Environment Bank approach, where farmers enter into a third-party agreement to share the risk of selling BNG units and receive a secure income in return.

This approach involves signing a 33-year Farm Business Tenancy Agreement with the company that sets out how the land is going to be managed over that time period.

Sharing more detail, Ms McLackland said: “We create the new habitats, meet all the capital costs of creation, then we lease it back to you for 33 years minus a day and you carry out the management.

“The income comes to farmers in two forms: the rent that we pay for the head lease, and the management payments we pay to you to keep the habitat in the agreed condition.”

She added the management plan for the land can be adapted and changed according to the needs of the farm to allow the business to continue to grow. However, entering into the agreement is a long-term commitment, and in many cases, it may involve an intergenerational change to consider, she pointed out.

Integration with other payment schemes

Answering the most common questions around BNG, Ms McLackland said income from habitat creation is stackable with some but not all elements of environmental schemes like Countryside Stewardship. At the same time, farmers will still be able to claim BPS on the managed land for as long as the payment scheme exists.

Regarding the effect of habitat creation on farm productivity, the Environment Bank works with farmers and landowners to ensure the agreement is not only compatible with wider farming activities but enhances those. The scheme is also open to tenant farmers subject to the landowner’s approval.

Once the 33-year agreement expires, farmers are under no obligation to take any further actions, Ms McLackland said. However, the scheme does need to be looked at as a long-term land use change, as legislation such as environmental impact assessments are likely to make it difficult to simply revert the land back to conventional farming, she stressed.

Other risks to consider when it comes to BNG income include:

  • Timing – when is the land needed
  • Liability – who is responsible if BNG doesn’t occur
  • Financial – how secure is the income stream
  • Taxation – how will BNG affect CGT and IHT

According to Ms McLackland, the Environment Bank is currently in the process of creating habitat banks in every local planning authority throughout England and has plenty of scope for more sites.

Land that is most likely to be accepted into the scheme are sites with a low ecological value – such as arable sites or grassland with low species diversity – and those that offer some strategic potential in terms of how the land aligns with other existing habitats.

Moreover, the Environment Bank scheme requires a minimum land size of 20ha and no existing schemes that could cause conflict in the agreement. Most importantly, the company is looking for landowners who have the right mindset and are interested in operating this as a diversification on their farm, Ms McLackland concluded.

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