Charities and natural capital: green finance for a greener future?

In recent years, many charities, particularly those with substantial land holdings, will have been monitoring developments in green finance and considering the opportunities this relatively new and expanding area may offer.

The range of green finance initiatives potentially available presents both opportunities and risks. Well-advised trustees will carefully consider whether and how to engage, taking into account the financial, legal and governance factors at play.

What is green finance?

The World Economic Forum describes green finance broadly, as “any structured financial activity – a product or service – that’s been created to ensure a better environmental outcome”.

In practice, green finance can take a wide range of forms: from relatively simple financial support for activity that achieves sustainable outcomes (for example, funding to enable a business to invest in solar or wind power), to more sophisticated biodiversity platforms which issue tokens or units in return for investment by businesses seeking to achieve net-zero objectives.

Why is it relevant for charities?

Charities with significant rural land holdings are potentially well-placed to participate in green finance schemes, provided they are able to do so in a way which works for them.

Broadly speaking, green finance is likely to be most relevant for:

• Landowning charities with substantial, existing natural capital, such as woodland, forest, wetland or other biodiverse ecosystems.
• Charities with environmental objects or purposes, whether working in the UK or overseas.

There will, of course, often be a fair degree of overlap between these two groups.

In its simplest manifestation, charities which own or manage land may accept funding to undertake activities aimed at achieving environmental outcomes such as habitat restoration, species reintroduction and tree planting. Funding can take a range of forms, from traditional grant funding to soft loans and other partnership models.

At the more sophisticated end of the spectrum, some charities might consider involvement in platforms which offer opportunities for companies which are committed to achieving net zero to invest in high-quality projects aimed at biodiversity restoration and carbon sequestration.

Whether and how a charity might choose to engage with some form of green finance will be for its trustees to determine. Some factors the trustees may wish to consider are set out below.

Factors for charities to think about

• The three Ps (purposes, powers, public benefit). Charities in England and Wales must further their charitable purposes for the public benefit. As part of this, they must consider whether a proposed activity: (a) is within the powers contained in their governing document, but also (b) whether it may give rise to a level of private benefit which could, for example, make the use of a trading subsidiary appropriate. While the position may be relatively straightforward where funding amounts to little more than a grant, the situation is likely to become more complex the more a non-charitable third party wishes to receive in return for any funding.
• Time. In some cases, participation in a scheme may require a charity to enter into long-term commitments in relation to its assets, which will need to be given careful consideration.
• Trading and tax. If a proposed activity may amount to trading, care should be taken to consider its tax treatment and, if necessary, put in place appropriate structuring to maximise tax efficiency and reduce risk to charity assets. Legal and tax advice should generally be sought before embarking on significant new activities.
• Charity Commission guidance. Where a scheme involves investment by a charity, trustees should consider the Charity Commission’s updated guidance on investing (CC14) and other relevant guidance published by the Commission.
• Regulation and reputation. It is important to keep in mind that while many schemes are subject to voluntary standards, this remains an area which is largely outside the scope of formal regulation. Trustees should be satisfied that any scheme with which a charity becomes associated is suitably robust, transparent and legally compliant (with specific regard, in the case of some green finance initiatives, to the Financial Services and Markets Act 2000), such that it will achieve the charity’s objectives and avoid the risk of reputational damage.

Green finance can offer attractive and lucrative opportunities for charities who wish to engage with it. It is, however, vital that trustees do their homework and carefully consider what they are permitted to do, with whom are they dealing and how any activity aligns with their strategic objectives.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, October 2024