Businesses are being challenged to transition to net zero greenhouse-gas emissions within three decades – and often land will play a big part in the process.
This is aside from other environment-related action taken by landowners, for example on biodiversity net gain (‘BNG’), and nutrient neutrality (‘NN’), influenced by phosphate or nitrate levels in watercourses. These all create opportunities for farmers and landowners to do the right thing, and also generate extra income.
In every case, it is important to look at any legal obligations associated with the property involved. For example, land that is subject to a 30-year covenant imposing conditions requiring the owner to undertake work will invariably hold a lower financial value than if it were unrestricted.
The changes in value that result from this process are presenting some businesses with difficulties in maintaining their balance sheets, particularly those companies with external shareholders to satisfy.
At Galbraith, we are being asked to address this issue. Banks are concerned that their customers might devalue land offered as mortgage security when it is managed for new purposes and subject to covenants. Here we need to distinguish the covenants from the payments.
On the one hand, an income stream derived from carbon credits is tied to the land, reducing the value of the property; if the carbon credits are sold, their value is lost from the balance sheet and the security is reduced in value.
On the other hand, BNG and NN credits are usually bigger one-off payments made at the outset, and can be included as assets on the balance sheet. Overall, their effect is to increase the net asset value of a property, even if the obligation to manage the land for BNG or NN offsets results in the value of the land being reduced.
In conclusion, the latest credits represent a new opportunity for businesses, but they need to be thought through carefully to avoid unwanted financial consequences.
- Natural Capital: The expert advisers at Galbraith guide our clients in realising value in all land uses – by assessing and measuring natural assets, furthering opportunities in biodiversity net gain, and ensuring stakeholders are rewarded fully for their investment in and contribution to delivering ecosystem services and net-zero outcomes.