HABITAT BANKS
Farm resilience & revenue sharing: How BNG works for landowners
With an increasing number of diversification enterprises available to farmers, Environment Bank’s newly appointed Estates Director, Tom Mason, discusses the importance of revenue sharing principles in schemes like BNG, and explores how habitat creation can actively support rural businesses.
With the basic payment scheme being phased out, what options are available for landowners looking to diversify their income streams?
There are lots of diversification enterprises that farmers and landowners have been considering for several years, from environmental schemes to tourism enterprises. More landowners are looking at land uses that engage a wider public audience; things like dog walking fields and other things that involve a complete change in land use away from agriculture.
There are other natural capital options available, such as nutrient neutrality, and these typically have a greater agricultural impact. We are still lacking in clear legislative framework around nutrient neutrality, but this ultimately requires stopping agricultural practices because you must take that land out of agricultural production to mitigate nitrates and phosphates.
There are several alternative land use options within the realm of agriculture – providing other income streams but keeping farming at its core. That’s things like the sustainable farming incentive (SFI) and biodiversity net gain (BNG). These might impact farming intensity, or the type of farming operation, but agricultural land use is still associated with it.
How are schemes like BNG an opportunity for rural landowners with holdings of all different sizes?
Regardless of the size of their holding, most landowners will have areas of land that aren't as productive or are difficult to farm. I think that's really been highlighted this year with the prolonged periods of inclement weather and the impact of that for farmers all over the country, especially those farming on heavy soils who've really struggled to get going with operations.
What’s appealing about BNG, especially the model that we operate, is that there is still some carrying capacity of that land. It might involve low-intensity grazing, so there could be a change in the farming system, but it won’t reduce the agricultural productivity of the land to zero.
I think that helps because diversification enterprises can be quite daunting for landowners because it's often something that's outside of their wheelhouse. It's not something that they necessarily feel like they are an expert in, and it might require skills they've not yet learned.
Also, unlike a lot of rewilding-related projects, working with Environment Bank doesn’t require huge swathes of land being put aside. Depending on demand, we typically look at sites around 20ha where habitat creation can play a part in the wider farming business, rather than a wholesale change in direction across the whole holding.
Many farmers are anxious about flooding, food security, and the impact of environmental schemes – how can BNG Habitat Banks actively support agriculture and make landscapes more resilient?
We've had land put forward to us that had potentially high agricultural value, but we've been the ones to say that we don't think it is right to be taking this land out of food production because that’s of national importance.
We know that environmental projects of all shapes and sizes have helped to build farming system resilience. We know that things like tree planting and shrub planting can help with flood mitigation. We know that taking some land out of arable production and putting it into meadows or grass habitats is going to help with soil erosion and runoff, reducing sedimentary loads in rivers.
From the actual land use perspective, it can help to make the most of land that is not best suited to farming practices, allowing farmers to focus on areas that are better for more intensive livestock management or arable rotations.
Also, having a diversified income stream can really help fill in the funding gap with the changing legislation and provide, especially through our model, some secure income that they can use to strengthen other areas of their farm business. They could use it to invest in new machinery, livestock enterprises, or other projects like converting old barns into residential property or commercial enterprises.
Often, people outside the farming world think farmers are only driven by high yields or the greatest output. But when you speak to farmers, they mostly see themselves as stewards of the countryside who love seeing flora and fauna in the landscape around them. They want to leave the land in a better state for the next generation, not only from a financial or commercial perspective, but also from an environmental perspective, helping nature return to the farm.
Why are landowners choosing to partner with Environment Bank on BNG?
With so many different driving factors, we really try and get to know our landowners early on and understand their ‘why,’ as we put it.
The key thing for landowners with a lower appetite for risk is having a clear visible income stream for up to 33 years. You might derive higher income from BNG if you were to do it yourself but the real attraction for our landowners is the fact that, once they sign the lease, they know exactly what their annual payments will be for the next three decades. That's incredibly valuable from a business planning perspective, especially when you’re trying to navigate generational changes and a volatile political climate.
Another attraction for landowners is the fact that we really prioritise agricultural management. It's incredibly rare that we take on a site where hay cuts and grazing aren’t a part of the grassland habitat management.
One of our landowners is an ex-dairy farmer who really missed looking out the window and seeing cows in the fields. They sold their dairy herd off many years ago because it seemed like the most viable choice for the business, and they'd been farming the holding in an arable rotation ever since. So, not only were there the economic and environmental benefits, one of the landowner’s key drivers was that it meant livestock could return to the farm.
We've built a fantastic team here at Environment Bank with many experts in this field and we really hope landowners feel like they can trust us to take care of all the ecology, land, and legal aspects of the agreements.
Securing the planning obligations is handled by Environment Bank, all the capital works are paid for and delivered by Environment Bank – either with the landowner, if they have the desire and skills to do so, or a third party.
The landowner can be as involved as they choose. If they'd prefer to sit back and see their payments come in every year and not have anything to do with the Habitat Bank, they can. But most take a very active interest in the ecological benefits and want to get involved.
Why do you think revenue sharing is such an important part of schemes like BNG?
With most natural capital markets, including BNG, it’s still early days. We are taking a lot of the risk, but so are these landowners, and we view it as a partnership.
While we obviously try and mitigate as much risk as possible for the landowners through our agreements, there is still an element of risk that they are taking, and we felt that this needed to be recognised. These are multi-generational assets that they are tying up for a long period of time. So, if the sites perform better than we expect, then both parties should share in the upside, not just us.
In our business model, we guarantee payments to the landowner over that 33-year period, and we've based those payments on our anticipated revenue targets. But we felt it was important that anything exceeding those targets is shared 50/50 with our landowners. Once that revenue target has been hit, anything above is split straight down the middle to reflect that it is partnership.
We’re aware that we essentially represent private finance coming into the rural space, and a lot of investment in this space has historically come from the public sector, so people can be slightly distrusting of that. It's why our priority has always been securing land under a leasehold model and working with landowners so we can get that money back into the rural economy.
This also applies to our habitat creation works. While there might not be someone local with the equipment or skill to do all the work, we try and use local contractors or the landowner themselves, to deliver those works. If we were to go to a big national contractor to undertake all the work, that wouldn’t benefit the local communities.
What upcoming changes do you think will most impact the farming sector and environmental schemes like BNG?
A general election will be called before the end of the year, and none of us know for certain which way things will go. What is reassuring is that we have already seen recognition from the opposition indicating how BNG might look under a future government going forwards. They've even proposed some changes which could bring other types of land into the scope of BNG.
In terms of the farming sector more widely, there's been talk about regenerative agriculture for some time and we are seeing rapidly growing interest in regenerative practices. That will really change the UK’s farming landscape, and this should only create greater synergy with environmental schemes and natural capital products.
I think we will really see a shift towards more traditional ways of farming in a mixed, holistic sense as opposed to just commercially driven units that are chasing higher productivity.
If you’d like to learn more about working with us and setting up a BNG Habitat Bank, register your land via our quick form and we’ll be in touch to discuss your options.