Stewardship: word of the moment, guiding principle for past generations and shining light for the next
The Society of Trusts and Estates Practitioners (STEP) recently hosted a webinar introducing its guide entitled “Family Dialogues on the Responsible Stewardship of Wealth”. Shortly before that, Knight Frank had launched its annual Rural Report, this year devoted to the theme of Environment, Social and Governance (ESG), which also mentioned the concept of stewardship throughout. The STEP guide refers the reader to the Merriam-Webster definition of stewardship as “the careful and responsible management of something entrusted to one’s care”. This definition will ring true for many farming families who see themselves as custodians of the land they farm for future generations, rather than as absolute owners. “Stewardship” is certainly a hot topic. It is not, however, a new principle- rather one which has been adopted by successful landed estates and farming families for generations.
If stewardship is an old idea , why are we talking about it now? While landowners and their advisers of years gone by may have chosen to adopt a stewardship model for ethical reasons, taking the long view and perhaps eschewing short-term financial reward as a result; now, the same stewardship model positively influences a rural business’s bottom line. To a large extent this is a result of the growing focus of legislators, regulators, investors and insurers on ESG, itself arguably a new taxonomy for stewardship re-invented for an acronymic age. The 2020 Edelman Trust Barometer Special Report, which surveyed 600 institutional investors across six global markets, found that businesses which prioritise ESG initiatives are thought to represent better opportunities for long-term returns than those that do not. Conversely, failure to prioritise ESG factors can have negative financial ramifications for businesses (see the VW emissions scandal or more recently a farmer being fined £31,000 for ploughing up National Trust-owned land of historical importance). While the focus on corporate governance sharpened back in 2008, as a result of the lessons learned from the financial crisis, the E and S of ESG have gained momentum more recently, driven in part by an environmentally and socially conscious millennial generation as they take more prominent roles both in family businesses and in driving patterns of consumption.
For farming families and landed estates today, the increasing emphasis on environmental concerns and in particular in harnessing natural capital for public good is evident in the government’s move from the acreage based subsidies of the Basic Payment Scheme (BPS) to the Environmental Land Management Scheme (ELMs) which rewards farmers and landowners for initiatives which enhance the environment, such as tree or hedge planting, river management to mitigate flooding, or creating or restoring habitats for wildlife. It is not just the government that is prepared to pay for such initiatives. Fledgling markets are appearing in carbon and biodiversity credits as private companies and funds seek to offset their own carbon footprints and invest in rural businesses that can prove their capacity to sequester more carbon than they emit and to generate an increase in biodiversity. The key challenges include establishing a carbon and biodiversity baseline and agreeing the metrics for measurement. Considering the government’s pledge to reach net zero emissions by 2050, it seems likely that such environmental credit schemes are set rapidly to expand. The difficulty for landowners is how to obtain first mover advantage in these new markets while navigating trading platforms and agreements that are not yet robustly tried and tested.
While ELMs and carbon credits may be the Environmental carrots, there is plenty of stick wielding too. As wholesalers and retailers make their own net zero and environmental commitments, they are starting to require their suppliers to contribute to those pledges, whether that is by reducing carbon emissions or increasing transparency (regarding animal welfare, antibiotic use, and sources of animal feed to name a few). For those currently reliant on BPS payments (which are due to halve by 2024 and be removed entirely by 2028), signing up to ELMs will be one means of securing crucial farm income but that alone won’t be enough to plug the gap. An impact assessment carried out by Strutt & Parker suggests that net farm profits for an average arable farmer could fall by as much as 54% by 2028, even when factoring in ELMs payments. The direction of travel is clear – farming businesses need to ensure they have their environmental houses in order, both to be in a position to embrace new revenue streams and to avoid losing existing ones.
Quite apart from the carrot and stick influence of regulators and investors, many landowners are turning to more sustainable farming methods for the perhaps more old-fashioned reason that they see it as the right thing to do for the long-term future of their land (and the planet). Whether these landowners follow the rewilding approach, which Charlie Burrell and Isabella Tree have taken at Knepp Estate, or adopt more regenerative farming practices such as minimum or no tillage, introducing cover crops and rotational grazing, they will want reassurance from the government that such initiatives do not have adverse tax consequences. While the government has been vocal about its green agenda, there have been no specific assurances that land no longer used for conventional farming will still benefit from the valuable Agricultural Property Relief (APR) from inheritance tax. While trading farming businesses run for profit are still likely to qualify for Business Property Relief from inheritance tax, even if APR is no longer available, the devil is in the detail here, particularly in the case of farming businesses which are being wound down or passed on to the next generation (see this article for more on this point - https://blog.charlesrussellspeechlys.com/post/102gilc/not-planning-to-retire-farmers-should-still-be-planning). A clear statement from the government on the inheritance tax implications of using land for environmental purposes would be most welcome and would surely encourage greater numbers of landowners to commit to the environmental cause.
Although Social, the S of ESG, may seem less immediately relevant to farming businesses, farmers and landowners have long recognised the importance of looking after the communities who look after them. Blenheim Estate articulates this connection with the powerful statement: “We see our success as intimately linked with that of our local community; if Oxfordshire does not thrive, then neither can we.” Engaging with employees and external stakeholders to ensure they buy into the rural business’s vision is crucial to achieving that symbiotic success. Knight Frank’s Rural Report features an excellent interview with Wilfred Emmanuel-Jones MBE, famously known as The Black Farmer, in which Emmanuel-Jones makes the case for embracing the power of diversity within the rural economy. Having a diverse and inclusive workforce which reflects the wider community and customer base can only be a good thing and rural businesses should ensure they have the necessary policies and practices in place to achieve this.
Governance, the G of ESG, is perhaps most synonymous with stewardship. That said, governance encompasses not just robust decision-making processes and engaging with the wider stakeholders of a rural business, but also ensuring that these processes are transparent and clearly communicated. Landed estates and rural businesses may have taken a stewardship approach for generations, but as reporting requirements and demands for transparency increase (from the Trust Register, to gender pay gap reporting, to ELMs reporting), it is vital from both a reputation management and tax exposure perspective that the supporting compliance elements are all in order. Compliance can feel an ever heavier burden for businesses to carry, and can often be dismissed as a necessary evil, but with good governance, where the overarching purpose of particular compliance requirements is made clear, stakeholders are much more willing to engage with the process.
At Charles Russell Speechlys we are committed to running our business responsibly. That means recognising that our long-term success depends on the health and resilience of our clients, our people, our communities and our natural environment and working hard to ensure that we make a positive contribution for all our stakeholders. In other words we believe in stewardship. We have been acting for land owning and farming families since the first agricultural revolution, providing us with an understanding of genuine stewardship under all its headings (whatever the nomenclature of the moment), and we are happy to share those generations of experience with you.
For more information please contact Hannah Connors or your usual Charles Russell Speechlys contact.