Jeremy's Blog 18th February: A Green Bubble and Risks
This article by Jeremy Moody first appeared in the CAAV e-Briefing of 17th February 2022
The chatter, energy and money intrigued by the talk of new environmental markets, as in carbon, can have the flavour of a gold rush in uncharted lands. Money and enthusiasm are pouring in but with considerable uncertainty about what can be bought and sold, what will have value and who will find that they carry risks when the mist lifts. Some may prove akin to the 1,350 tons of fool’s gold that Martin Frobisher, the Elizabethan explorer, brought back from the northwest passage.
The comment by Mark Versey, Chief Executive of Aviva Investors, that “You can buy green assets today which are frankly overpriced” (Financial Times, 16th February) concerns environmentally-oriented companies with values in established markets that may reveal an investment bubble. However, much in rural land management is imperfectly seen, barely defined and has contractual risks. As its markets crystallise, so sustainable deals may be done for real value but these are, as yet, barely fledgling markets. Actions now may often be at speculative risk.
England’s biodiversity net gain market will not formally open until later 2023 with a consultation now underway on how it might work. Moves that some people are be taking to protect or promote interests may prove to have unintended outcomes. What might it mean if a landlord reserves “carbon” in a tenancy agreement? Does it have any meaning at all? Or, with the role of carbon in farming, is the tenant then effectively unable to farm and pay the rent?
The loose concepts of environmental discussion such as “natural capital” or even carbon serve to tell a story but might have little meaning in themselves when put in an agreement. Strictly, “natural capital” includes livestock and timber trees with produce that sells as well as assets like soils and hedgerows with benefits not recognised in the marketplace. What does it mean when a contract binds a farmer to transfer the environmental outcomes of actions being paid for? What are the restrictions then on farming use or development? What are the penalties? How good is a force majeure clause? Might it come to deter a lender?
While a landlord might be troubled that a tenant could sell carbon from the holding, a tenant who did that could find that he has a decades-long personal commitment guaranteeing that carbon to the buyer, after he has left the land that might not be fettered. The CAAV is working on these issues, knowing the difficulty of drafting for rules still to come.