Greg Beeton, Agricultural Business Consultant & Natural Capital Specialist discusses how future initiatives such as the 25-year environment plan will require a significant change in the industry and how this may present financial opportunities in the future;
Aside from Brexit, the news pages are increasingly taken with the challenges around climate change we all face. The Government recently committed to the UK being carbon neutral by 2050. To deliver this change will require significant shifts in the way we produce our food, energy and generally live our lives. Central to making this happen will be the land base that we all work with, the future is encapsulated in the top level vision of the 25-year environment plan, the agriculture bill and ELMS. At Brown&Co we are at the forefront of engaging with the opportunity that these changes present and are working with a number of industry players in the early stages of creation and design of mechanisms that will deliver financial opportunities for our farming clients in the future.
Achieving sustainable change will require the structures and processes that underpin our economy to engage, the heavyweights of the capital and financial markets and the business processes that underpin. Last week Sir David Attenborough told bankers and financiers the planet was in mortal danger and they “simply must act”. Mark Carney the Governor of the Bank of England, who shared the same platform, is driving a shift in capital flows from “where it is needed to day to where it will be needed tomorrow”. This drive, under climate legislation, will massively re-orientate capital flows resulting in capital projects that pension funds, insurers and asset managers can invest in. Agriculture is one of the key sectors for this investment target.
This comes at a time when there is a lot of talk but not much visible action around Natural Capital and how it will actually crystallise at farm level. Which raises the question; how soon might this happen?
One initiative with the potential to turn this talk into action is through the developing Green Bond market.
Bond markets rely on a return for those purchasing the bonds, this return on investment has not been part of the design of the limited number of natural capital project to date. These have generally been designed to deliver to physical or social returns. This will now change with the new UK Gov thematic policy framework for sustainable infrastructure investment. Farming, food production and natural capital projects can now be designed to be investable; attracting private capital market finance into sustainable land use.
The exciting potential here is for significant new sources of income flowing into the agricultural sector.
This is a much needed step change and will initially be focused upon the challenge thrown out by Mark Carney of “what can we do to manage these climate risks?”
Traditionally insurance policies have been part of this risk mitigation, so working with this established technique it should be possible to understand the insurance valuation of assets at risk of climate change (mainly flooding) that can be transposed into a set of projects which act together to mitigate those losses (ie measures that retain water on/in land).
One application of this mechanism might be in areas of planned development where local authorities have the opportunities to issue Green Bonds (that encapsulate mitigation measures). Insurers purchase this bond and then sell on to the corporate developers. Corporate developers need to demonstrate Bond purchase as part of the planning permission process. The money raised by the Green Bonds is channelled back to Farmers, landowners and Natural Capital projects thus completing the circle.
This mechanism is receiving growing attention in the UK and could produce stand alone funding or contribute to funding streams into the ELMS mechanisms.
Brown&Co see this as a huge opportunity for the farming base, at a time of considerable uncertainly in the sector. The Cambridge Oxford arc and associated river catchments could be an initial focus area for its piloting if we are able to pull together enough stakeholders with common interests. This aligns with our key strengths and skills in Brown&Co that focus on producing innovative solutions that will integrate the value of natural capital assets into the economic mix in the rural economy.
For any further information please contact Greg Beeton | firstname.lastname@example.org | 07919 015676