Opinion piece: where next for private nature markets and supply chain requirements?

Government policy direction in England is becoming increasingly clear, delivering environmental goods on-farm through the Environmental Land Management (ELM) schemes including the Sustainable Farming Incentive (SFI). This is not expected to change dramatically in the short term following the change of government.

Looking at private nature markets and wider space, this has been developing quickly too. More and more schemes have been becoming available, though the mechanisms, regulations and delivery of schemes varying, from BNG and nutrient neutrality to soil carbon schemes. Despite this, farmers' knowledge of many schemes remains limited, with some difficult to access, or restricted by the varying implications for farming businesses (for example through permanence periods). Earlier this year, my colleague Tom highlighted options currently available to farmers to explore, and key watchpoints when considering schemes. 

Some sectors across agriculture are already seeing increasing requirements for farming businesses from supply chain actors, including carbon footprinting and incentives to cut emissions. Perhaps an insight into the future for others?

Looking forward, there are a few key factors influencing the direction of private nature markets and supply chain requirements, which we will explore today. 

1. Increased standardisation and regulation are coming 

After the arrival of the first nature market standard on the overarching principles of the markets, the signals are for more standards to come, including biodiversity and natural capital. Plus, with the Soil Carbon Code and Hedgerow Carbon Code development ongoing. These codes bring more regulation into how credits are created, verified, validated and time in permanence, ensuring no double counting. Additionally, we are seeing harmonisation of carbon footprint measuring methodologies, with the welcome commitment from industry of three major calculators in recent weeks. This is something Defra signaled within their Nature Markets Framework as a priority. 

Increased regulation brings more transparency into markets that are often referred to as the ‘wild west’, and with higher integrity in markets this could link in to value of credits. Though equally, this could bring added requirements and costs for businesses entering credit markets, which depending on the business, could act as a barrier to entry for some. 

The question remains, where next for regulation in these markets? And who will be regulating this space? 

In the UK, the only compulsory regulated market in this space is the UK Emissions Trading Scheme, which is applicable to energy intensive and aviation industries, with some expansion in the coming years to maritime and energy from waste and waste incineration. The Environment Agency currently administers a charging scheme for the UK Emissions Trading Scheme. In New Zealand, agriculture was added into their ETS, though is now to be removed before implemented. For the UK, it will be important to watch the EU (considering their voluntary carbon removals and carbon farming regulations framework) and other countries closely for direction in this space, especially considering the number of elections this year globally. 

Another thing to consider is the introduction of the Carbon Border Adjustment Mechanism (CBAM) which is intended to reduce carbon leakage risks. Although this won’t cover agriculture directly, it will apply to imported fertiliser products. CBAM will be introduced by 2027.

2. Companies will be asking for more from farmers 

Another piece of this puzzle is increasing requirements for company sustainability reporting, and companies asking more from their suppliers. 

The introduction of the EU’s Corporate Sustainability Reporting Directive extends the scope and tightens the requirement of ESG reporting for many companies inside and outside the EU – including some UK companies which operate in the EU, meeting a criterion. One fundamental new rule for this directive is double materiality – meaning companies need to identify both external impact on society and environment as well as impact on enterprise value – shifting responsibility. But generally, we have been seeing Europe row back on some of their net zero commitments, so where next is not clear. 

What does this mean for UK reporting? And what could a change of government mean? This new directive is a different approach taken by the IFRS Sustainability Standards, who announced an official partnership with the Greenhouse Gas Protocol in recent weeks for future work and collaboration. Net zero is prominent in UK politics, though arguably fiscal policy commitments are expected to be relatively conservative with a small ‘c’ for this new Labour government due to domestic inflation and low growth – so, how high on the list will net zero be short term and what other departments will be competing for budget? 

For companies inside the UK which have set voluntary targets, for example through the Science Based Targets Initiative, as targets become closer, momentum brings into focus what supply chains might be asking from farmers to meet these goals. 

So, what does this mean for me? 

Well, we can expect more regulation into non-regulated nature market space - how carbon credits are created and verified, ensuring no double counting and permanence of benefits. What is the cost and implications versus return for your business is something to consider when looking into income opportunities, whether this private nature markets or government schemes. Consider wider benefits too, are you may already be doing some actions to reduce emissions or build carbon stocks, and you may see wider soil health and cost reduction benefits. For schemes that have long permanence requirements, be sure to assess the details here to understand what this means in the long term for your business. 

Even though direct government policy on sustainability reporting, regulation and net zero targets, are not yet clear for this incoming Labour government, voluntary targets keep pressure on farmers to reduce emissions to hit net zero goals. Ultimately, it is likely your supply chain will be likely asking increasing questions about your carbon footprint on-farm as part of their own responsibilities – something to continually monitor within your sector to make sure you can meet these requirements, especially if you are considering selling credits for an offset market. 

For more information on nature markets, visit the AHDB webpage on carbon markets. The Green Finance Institute have also developed a detailed nature market toolkit as commissioned by Defra, to help farmers navigate this space. The key thing when considering these schemes is to read the small print. As ever, the devil is in the detail and where necessary, seek legal advice.

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