The EFG is a group comprising a cluster of farmers from around the river Avon catchment in Hampshire. They are collectively trading natural capital which means trading environmental outcomes.
How can farmers in the UK sell natural capital?
The opportunity comes from the private sector as they look to off-set or improve their own environmental credentials through their own Environmental, Social and Governance (ESG) platform.
Why does this work?
Legislation is coming into place that is requiring off-sets for biodiversity net gain and farmers are well placed to deliver that. Selling natural capital sits alongside good farming practice as a complementary activity.
How does natural capital trading work?
Public money for public goods has brought environmentally focused farming to the fore. We now need to blend the demand for natural capital from private business with the environmental work that farmers are doing. Farmers have been doing these things for years but this (the move to ELMs) is accelerating the opportunity to turn natural capital into a diversified income stream.
Possible revenue streams
Nutrient neutrality: in certain parts of the country there is a requirement to prove nutrient neutrality. for any new development. So, as an example, a new house will typically produce 1.2 kilos of phosphate per annum so there is a requirement to off-set the phosphate generated. That can be either through fallow land management plans – leaving land uncultivated and used for fodder or conversion to woodland; or through wetlands/reedbeds which produce phosphate from a relatively small area.
More generally, coming into UK law is a requirement for developers to off-set any biodiversity loss they incur, plus 10 per cent, this is known as biodiversity net gain. If they can’t do that within their own operation then they can go off-site to a nearby farm to deliver that gain via increased field margins or turning arable into wildflower meadow. This creates a series of credits that the developer accumulates via a very transparent trading system.
Carbon is the other emerging part to the sector. There are already coded systems of carbon sequestration for peatland and woodland. The new addition is soil carbon. This is not yet coded but there is already a voluntary trading platform, looking at protocols to increase the amount of carbon sequestration in soil and exploring how it can be traded.
How can it work for NNCG members?
The NNCg shares many characteristics with the EFG: The EFG is a cooperative. EFG comprises 61 farmers, covering 60,000 hectares. It grew from farming clusters. It is now working as a cooperative when it comes to trading natural capital. This means the farmers are in a position where they can not be picked off one at a time and also creates scale for trading. A lot of these trades need scale to be workable as it gives buying and selling power as well as opens up more access to funding streams as they come online.
The three missions of EFG
- Clean water in the catchments,
- Reverse of biodiversity loss in the catchments
- Delivering net zero in line with national targets.
Practical examples of how EFG is trading natural capital
The group started on phosphate trades. These tend to be site specific. Two examples are: a fallow land management plan, which has created permanent fallow land, used only for grazing. This is a 80 year agreement.
The second is the creation of reed beds downstream of a sewage treatment works. This gives a measurable in-flow and out-flow, so it is easy to see metrics.
On behalf of local councils, we have also done annual phosphate reductions, through cover crops. These are around where developments have occurred. Money has been put aside in the Community Infrastructure Levy, which is held by local authorities and then distributed for this mitigating work.
Key to it all is that the value of the goods needs to be reflective of the opportunity of profit afforded, rather than reverse, which is profit foregone. That is how you arrive at a fair evaluation.
Key is the implementation of a framework that is a fair trading arrangement.
This is the share of the revenue among the farmer members of the group. Those that didn’t take part in trades immediately should be rewarded for the part they play in lending scale to the group. Within the group are Active members who are actually doing the trading and Supportive members who are not yet trading but whose membership gives the group greater power.
88 per cent of income goes to active farmers, 9 per cent is split between the supportive farmers and 3 per cent goes into the group’s operating funds.
We have set the equalisation into separate cells, so each catchment is its own cell. Within the membership we are spread across three catchment. So each trade is specific to one cell. As we grew we wanted farmers to share with their neighbours, rather than being diluted over too large an area. This also makes the process more scalable in the future.
What funding supports the EFG
Subscription is crucial, everyone has a buy-in. We also have grants and crucially we have had interest from sponsors. The 3 per cent also helps tremendously.
What benefits can farmers see?
This is valid source of new income. It is provision of goods that they have been doing for years so farmers are familiar with the process. Working together is popular because all farmers recognise that scale will give power when it comes to natural capital trading. Scale has made it possible to drive best terms for farmer members.
The trades will vary. For trades under £5,000 /annum we just give advice. Some trades go through to £3million and EFG leads the way with these but works with the farmers and their agents.
In the future we will look at conservation cross the entire catchment area with a view to bundling up services – biodiversity net gain, carbon sequestration etc. This will probably be more for ESG use than Biodiversity Net Gain as developers are becoming more sophisticated in the way they build developments.
The simplified version is that we would bundle a set of biodiversity measures – hedgerow, tree planting, wildflower meadows etc – and sell them as carbon off-set and biodiversity gain.
Missing link is what is the financial structure behind that? How do you spread it across farmers contributing to the bundle.
Challenges around natural capital assets
To do the natural capital services properly, you need to understand baseline.
Then there is the question of stacking: can you sell biodiversity net gain in addition to soil carbon?
What is the right action for the land under question? It is important to get the foundations correct.