Woodland Finance Working Group: recommendations for woodland creation

The Trees and Timber deep dive identified an urgent need to consider models to secure investment in woodland creation without negatively disrupting existing communities and having unintended adverse impacts on land ownership patterns.

Over the past four months, the Woodland Finance Working Group have considered options, with a focus on ensuring equality for farmers by creating mechanisms that enable them to create woodland and manage risk on an equal basis to other organisations. This paper sets out the recommendations.

The working group recognise that since their meetings began changes to the geopolitical situation have increased pressure on the price and supply of timber. This may have an impact on the appetite for investment in forestry. 

The UK imports approximately 80% of the timber it uses and timber prices have been rising recently. The conflict in Ukraine has exacerbated these price increases. Many commodities have already seen prices affected by factors such as the pandemic and ongoing labour, transport, energy and supply chain issues. Timber imports from Ukraine were already restricted due to an EU joint enforcement position highlighting issues with illegal logging operations. According to the Timber Trade Federation, the impact of sanctions on Russia has potential to have an ongoing impact. Russia is a significant supplier of timber worldwide and this will mean competition for timber from other countries if buyers are to avoid trade with Russian. Russia accounts for a sizeable section of UK softwood, hardwood and plywood imports, with a total of 456,810m³ imported last year (although this represents only 1.25% of building material from Russian, Ukraine and Belarus).

The result of rising timber prices has an effect on construction and the ability of house builders to use more timber in place of other materials, although these have also risen in price. Rising timber prices also has an effect on issues such as carbon credits. Changes have been made to Woodland Carbon Code additionality rules and these are due to take effect in October 2022. These changes may mean that large commercial projects are increasingly unable to demonstrate additionality as the rising price of timber makes afforestation financially viable without income from carbon credits.

These developments may increase demand for investment in woodland, and mean that the main motivation for investment in productive woodlands remains the return from timber rather than carbon credits.

• There should be a clear political statement outlining how Wales should meet the target of 180,000 hectares of new woodland, setting a clear expectation of the level of planting each year, the types of woodland and who will be involved. There should be a clear commitment to target future support towards farmers and Welsh communities.
• There should be a clear policy position on carbon credits and farmers must have information and guidance about using them.
• The responsibility for woodland creation support for the next 3 years must lie with Welsh Government whilst confidence develops and private financing is engaged. A key element of building confidence will be process improvement within the new woodland creation scheme.
• Local facilitators should be funded to help landowners create woodland, help ensure the right trees in the right places, identify sites for the National Forest and build our understanding of the demand for woodland creation at a local level.
• A proportion of the woodland creation budget over the next 3 years should be used to pilot approaches to securing private finance. The working group should scope what these pilots will involve by the end of April 2022, considering options including a carbon guarantee, community led projects (based on the Stump Up for Trees model) and partnership arrangements to deliver blended finance options.

• When the Sustainable Farming Scheme is introduced clear funding must be made available both for farmers and other landowners. There were different views in the group about how best to integrate this with other farming support.
• Welsh Government should commission a feasibility study for a Public Interest Company focussed on delivering woodland creation through funding projects delivered by Welsh Government, financed by issuing green bonds. This company could also have responsibility for creating the National Forest in Wales. The study should be completed within 12 months.

All members of the working group would be glad to continue working with Welsh Government to help deliver these recommendations.

The woodland creation working group had the objective of providing recommendations to Ministers about models to secure investment in woodland creation without disrupting existing communities and land ownership patterns.

The group was made up of Sarah Jennings (NRW), Gareth Davies (Coed Cymru), Anthony Geddes (Confor), Pat Snowdon (Scottish Forestry), Prof. Karel Williams (University of Manchester), Prof. Colin Haslam (Queen Mary Management School), Prof. Gerry Holtham (Cardiff Metropolitan University and Cadwyn Capital LLP), Dr Keith Powell (Stump Up for Trees) and Andrew Jeffreys, Ann Owen, Neil Paull and Alice Teague (Welsh Government).

To form the recommendations there were five working group meetings, plus a half-day workshop. There was also a roundtable with representatives of the farming sector and discussions with experts in investment in forestry.

The group’s overarching objective was that any proposed option should be able to effectively secure additional woodland creation and management, which could not be delivered through existing Welsh Government funding alone, in a way which works for existing landowners and local communities. The approach must also be consistent with plans for the National Forest.

In recent years, there has been low levels of planting and there has not been planting rates above 2,000 hectares since the early 1970s. Welsh Government has committed to creating 43,000 hectares of new woodland by 2030 and a total of 180,000 hectares by 2050. This is a key element of tackling the climate emergency. It will also contribute to a National Forest for Wales, create ‘green’ jobs, help address the nature emergency and increase well-being. Planting 43,000 hectares by 2030 would require a trajectory of woodland creation similar to the below:

Most woodland creation has been funded through the Glastir Woodland Creation (GWC) scheme, which will be replaced by a new funding scheme next year. Based on current GWC rates, the estimated cost of funding Welsh Government’s targets is set out below (costs are not discounted). This demonstrates the scale of funding that needs to be met either by government funding or secured through private investment.

Requirements of landowners

An essential requirement of any model is ensuring that it works for existing landowners. Farmers as the primary landowners in Wales will need to play a central role in creating more woodland in Wales. However, they face a different set of incentives to those buying land.

It must provide a return to the landowner which makes it financially attractive. There is potential for farmers to plant both broadleaf woodlands, funded through grant funding and potential income from carbon credits, and productive mixed woodlands, which can also provide a return from timber in addition to grant funding and carbon.

However returns from carbon and timber can take a long time to be realised, and farmers may choose not to sell carbon units (see below). Many farmers do not have the same access to capital as outside investors in woodland creation, so require a more regular income stream from their woodland. They are also typically less well placed to deal with risk, such as the woodland creation failing. There are also differences in the attitude to land value – many farmers are concerned that the value of land will fall following the conversion to woodland, whereas the tax benefits of purchasing land to plant can be attractive to outside investors.

While financial considerations are very important, the process also matters. A complex process to claim grants and get approval for planting will put off farmers from applying. Any model to attract private sector investment must avoid adding to this complexity.

‘Behind the meter’ tree planting will also become an increasingly significant driver for woodland creation on farms, in offsetting the farm’s own carbon as part of Scope 3 supply chain emission reductions, (‘insetting’). Better understanding of these drivers is required.

Requirements of investors

There are a wide range of people interested in funding woodland creation, with different motivations and different requirements in terms of returns. Positively, this offers the opportunity to reduce the cost to government of creating woodland, enabling more public goods to be funded. Negatively, it risks models of afforestation that alienate rural communities.

Groups such as local communities, environmental charities and companies looking to fund CSR projects can be interested in putting funding towards woodland creation with no requirement of a return.

Some groups are interested in generating carbon offset credits for their own use to offset emissions. This could include housing associations, small and large businesses (both based in Wales and elsewhere in the UK) and farmers themselves.

Others are looking for a financial return in a way consistent with environmental, social and governance principles. This could be institutional investors or pension funds. The Local Government Pension Schemes (LGPS) in Wales have funding on balance sheet of roughly £17bn, with investments making an annual return of 5-6%. The DCLG’s Investment Strategy Statement (ISS) sets out the need to act in a prudent way with regards to financial risk taking, but states it is possible to forgo some of the financial return in order to generate social impact with permissions from members, fund managers and trustees acting with due diligence.

Concerns have been raised about the impact of large companies based outside of Wales purchasing land for woodland creation. These concerns are driven by a variety of factors. These include:

• Loss of agricultural land and impacts on food production
• Loss of economic returns to communities from land ownership change
• Concerns about non-native conifers being planted
• A concern about carbon offsetting and carbon being ‘lost’ from Wales
• Lack of ability of local communities to influence projects
• The impacts on local culture and Welsh language of the loss of farming communities

It is important to differentiate between concerns. Increasing woodland cover will not be possible without land use change, and meeting the target of 180,000 hectares of new woodland by 2050 will require significant land use change. As part of this there is an important role for productive woodland to grow some of the timber needed to de-carbonise sectors such as construction, and creating green jobs in rural areas. The carbon accounting system in place in Wales means carbon is not double counted.

However it is important not to minimise concerns about the impact of woodland creation on local communities, particularly given the history of woodland creation in Wales. There is a risk that large projects which are not sensitive to the needs of local people have a negative impact on local communities.

It is important to establish how common large afforestation projects driven by outside investors are. There are anecdotal examples of this type of project, but as yet little evidence to suggest it is widespread. The majority of woodland creation in Wales is funded through the Glastir Woodland Creation scheme, we are aware of very few projects which have gone ahead without Welsh Government funding.

To gauge how many projects are linked to investment made from organisations outside Wales we have carried out an analysis of the address details. Of the 10 windows of the Glastir Woodland Creation, 35 of the 1,121 applicants have correspondence addresses outside of Wales, 17 of which are for projects less than 6 hectares. Larger applications have been made by charities including the Woodland Trust and SMEs looking to offset emissions. In total these projects were seeking to plant 817 hectares of woodland, equivalent to less than 0.05% of farmland in Wales.

There appears to have been a small increase in this type of application in later windows (8-11) but it too early to confirm that this is an ongoing trend, and may be the result of more larger projects getting through the selection process due to increased budgets. All projects applying to Glastir Woodland Creation are required to have their plans verified as being consistent with the UK Forestry Standard. This includes a requirement to consult local communities, and it is possible that some plans for new woodland will be altered or reduced following this consultation.

Some of the options which could address the frequency of projects by outside investors are outside of the scope of the working group. However in the view of the group, the primary focus should be on ensuring that there is an economic incentive for on-farm tree planting at a range of scales, and so ensure equality of opportunity for woodland creation by farmers.

Making tree planting attractive to farmers should result in farmers taking opportunities to create woodland themselves instead of selling land. There will, of course, be some instances where farmers wish to sell for personal reasons, such as retirement. Overall, the group felt that improving opportunities for farmers, rather than restricting who is able to plant trees, is a better way to address land ownership issues.

Policy should (i) incentivise more woodland and forestry to be created as part of good farming practice on holdings that continue to provide agricultural output, contributing to ‘Net Zero’ and supporting nature recovery and (ii) facilitating more community owned woodland and forest structures, especially where Welsh businesses and individuals can act to offset their own carbon and improve local biodiversity.

Recommendation: There should be a clear political statement outlining how Wales should meet the target of 180,000 hectares of new woodland, setting a clear expectation of the level of planting each year, the types of woodland and who will be involved. There should be a clear commitment to target future support towards farmers and Welsh communities.

Carbon credits should not be seen as an alternative to reducing emissions. However not all sectors are currently able to reduce emissions to zero and some may voluntarily choose to use them to offset remaining emissions. Models proposed to incentivise woodland creation for carbon should be robust, take account of wider public goods and be based on an assessment of the requirement for Welsh businesses to offset their own emissions.

In Wales the Woodland Carbon Code is the quality assurance standard used to verify carbon sequestered through woodland creation. The Woodland Carbon Code is backed by the Welsh Government and other UK and devolved administrations. It is administered by Scottish Forestry and governed by a cross-border MOU between the administrations. It is based on robust carbon prediction tools and monitoring protocols developed by Forest Research, projects are independently verified, and carbon units held in a credible registry.

Creating woodland with the Woodland Carbon Code allows landowners to make robust and verifiable claims about the carbon sequestered by their woodland. They may choose to use these credits to offset emissions created by their own activities, or sell them to receive income in return for sequestering carbon on their land. Greenhouse gas reporting is mandatory for all large UK companies (around 12,000) and they have the option to buy verified Woodland Carbon Units (WCU) to compensate for unavoidable emissions such as from their fleet vehicles.

Under the Woodland Carbon Code, ‘Pending Issuance Units’ are generated once a woodland is planted. This unit is effectively a 'promise to deliver' a Woodland Carbon Unit in future, based on predicted sequestration. It is not 'guaranteed', and cannot be used to report against UK-based emissions until verified. Landowners have the option to sell PIUs to get an early income from woodland creation. ‘Woodland Carbon Units’ are issued later, once the woodland has actually sequestered the CO2. Around 60% of carbon credits are currently sold upfront as PIUs.

An important element of the Woodland Carbon Code is the ‘additionality rules’. These seek to ensure projects can only register for the Code when the woodland could not have happened under existing legal, financial and business circumstances. The additionality rules are currently being reviewed, which has the potential to change the ability of large investors to access carbon units for afforestation projects.

Carbon credits verified by the Woodland Carbon Code operate at the level of individuals and businesses, and are separate to the national greenhouse gas reporting undertaken by Wales and other countries.

The Welsh Government uses the net Welsh emissions account (NWEA) to measure progress against Wales’s statutory emissions reduction targets and carbon budgets. Any tree planting undertaken in Wales will show up in the Welsh greenhouse gas inventory. Because climate change legislation is based on territorial emissions in Wales and Nationally Determined Contributions are based on territorial emissions in each of the Paris Agreement signatories, this does not lead to double counting between countries.

For many farmers there will be an increased interest in using woodland carbon credits for offsetting to reach Net Zero targets or to realise a financial return on the woodland. The voluntary carbon market, which includes woodland credits, is still developing. Some of the decisions required can be complex, such as whether to sell carbon units or hold them to offset a farmers’ own emissions, and whether to sell the units as PIUs or wait until WCUs are generated. The Welsh Government should therefore set a clear policy position on carbon credits and ensure farmers have guidance in choices about using them.

Recommendation: There should be a clear policy position on carbon credits and farmers must have information and guidance about using them.

While there is currently an unprecedented opportunity for private finance to be used to create new woodland, there remains a vital role for public funding. It is important that the Welsh Government provides long-term certainty over the budget for woodland creation and the draft budget on December 20^th offers an opportunity to begin that.

It will take time to build confidence in Welsh woodland creation and Welsh Government funding through the new woodland creation scheme and National Forest programme will need to provide most of the woodland creation over the next three years. Improving the process for accessing funding and getting plans approved is vital to increasing confidence. The trees deep dive identified actions to do this.

Recommendation: The responsibility for woodland creation support for the next 3 years must lie with Welsh Government whilst confidence develops and private financing is engaged. A key element of building confidence will be process improvement within the new woodland creation scheme.

Finance is only part of what is required. Project management capability, people to implement funding and better intelligence at a local level is also essential for delivering the scale of change required. In the long-term this is likely to require organisational change. In the short-term, better engagement at a local level is a important first step.

Recommendation: Local facilitators should be funded to help landowners create woodland, help ensure the right trees in the right places, identify sites for the National Forest and build our understanding of the demand for woodland creation at a local level.

Beyond 2025, the proposed Sustainable Farming Scheme (SFS) can play a key role in financing woodland creation and management on farms in Wales. The scheme design is still being developed, however it is likely that woodland creation will form part of an integrated scheme, with other requirements on farmers and payment rates based on sustainable land management outcomes. This will require separate support for landowners who are not eligible to join the SFS.

It will be important that the scheme learns lessons from previous support for woodland, and that improvements are retained. The scheme should support both broadleaf woodland and productive woodland for timber.

It will be important that the scheme is simple for farmers to interact with, and allows private finance to be blended with SFS support. Some of the working group believe separate schemes for woodland and agricultural land would be a more effective way to achieve this.

Getting the permissions process right and provision of trusted advice will be a key element in this process working.  It would be impossible to scale up on-farm planting without this step.

Recommendation: When the Sustainable Farming Scheme is introduced clear funding must be made available both for farmers and other landowners. There were different views in the group about how best to integrate this with other farming support.

The working group has considered a number of options for securing funding for woodland creation in a way which secures local ownership or control of projects. Some of these options would take longer to implement than others, and none has yet undergone a detailed assessment. Some would need further work to develop business cases before being delivered. Some may also require new powers which Welsh Government does not currently have. The options considered can be grouped into the categories below. Each option was assessed based on its strategic fit, value for money, deliverability and affordability. 

Blended finance within existing grant schemes

Current Welsh Government woodland creation funding for tree planting is ‘all or nothing’. Claimants are funded for the full costs of planting the trees and are not allowed to receive payment from any other source for the same activity. One way to encourage private sector investment in woodland creation would be to change this. There are various ways this could be achieved:

• A reduction in grant funding rates, requiring all applicants to raise some finance privately.
• The option to apply for a lower rate of grant, with applications favoured if private finance is secured.

For example the new English Woodland Creation offer provides the option of opting out of Additional Contributions and instead using private finance. Applications will be scored higher where this is the case.

This option could also be carried forward to the new Sustainable Farming Scheme, where payments will be based on outcomes rather than costs. This could be designed so that Welsh Government in effect pays the difference between funding provided by the private sector and the amount required to make the woodland creation financially viable. 

It is likely that this model would allow a marginal increase in woodland creation given a fixed budget. Allowing blended finance may make it easier for existing landowners to secure private funding at a realistic level, without relying on it to make the project financially viable on its own.

However it would need to be designed in a way that avoids tilting the balance in favour of larger investors for whom projects are more likely to be financially viable at lower grant levels.

Current Welsh Government funding for woodland creation is relatively generous and it may be difficult to persuade people to opt for some of the alternative models listed below without also changing the current grant system.

Community Models such as Awel Aman Tawe and Stump Up For Trees

Awel Aman Tawe is a co-operative which runs two wind turbines in south Wales. Members receive a return on their investment which depends upon the cost of electricity. The scheme provides a 4% rate of return to members, who have some limited rights in terms of how the co-op is run. It has also donated shares to local schools and community organisations.

It could be possible to adapt the Awel Aman Tawe model for woodland creation. This might involve a co-op being set up which leases land from farmers/other land owners to plant woodland, with a  return being provided from the timber and/or carbon income. However there would need to be further exploration of whether the model would work given the lack of return for the first 15 years (unless sale of PIUs provide an initial return).

Stump Up For Trees is a woodland creation project in the Brecon Beacons. Their Bryn Arw project has created 61ha of woodland on bracken covered common land. It seeks to demonstrate that woodland creation can be done without affecting food production or biodiversity. There is a high level of community engagement with the project. The PIUs were sold upfront before trees planted to gain income. The group are also seeking to provide payments for local farmers to plant woodland, mirroring the arrangements of the Glastir Woodland Creation Scheme. This involves accepting CSR funding from organisations to fund planting of trees on farms, with the carbon providing a long-term income for the farmers.

It would be possible to replicate schemes like this across Wales. These schemes are dependent on local experts who can engage with landowners and communities. Key to replication would be identifying such individuals and providing them with support. It would also be important to have a feedback mechanism so that local experts can contribute to a national picture about the level of potential woodland creation.

Woodland Carbon Guarantees

In England the Woodland Carbon Guarantee (WCaG) is run by the Forestry Commission. The guarantee offers land managers the option to sell woodland carbon units to the UK Government at an index linked price once credits are generated. Land managers do not need to take advantage of the option if the private price of carbon is greater at the point they wish to sell.

The price at which the guarantee is set is determined by reverse auctions, in which landowners submit bids for the price they want to receive, with the lowest bid winning. Four auctions have been held so far, with the below results.

In England, bidders are able to access woodland creation grants alongside the auction scheme i.e. it is an additional cost (liability) to the UK Government in addition to grant funding. However it would be possible to offer it as an alternative to woodland creation funding, or alongside reduced grant support.

A guarantee has the potential to reduce some of the risk of investment into woodland creation for both large and small investors, and depending on the future price of carbon could come at only a small cost to Government. However, it risks being more attractive to large investors than existing landowners. It could be a good enabler of some of the options discussed below. Welsh Government would need to commit to purchasing carbon credits, which may attract criticism from organisations opposed to the use of offsets.

Key issues would include the legal framework governing the guarantee, and how to establish the price level of the guarantee and whether the market in Wales would be large enough to make a reverse auction process viable. There is potential to explore using the online platform utilised in England.  

Partnership Model

A regional or catchment scale Forest Partnership (FP) approach, possibly seed funded by Welsh Government to co-ordinate, utilise multiple land holdings, funding streams, and develop relationships between farmers and investors could be created.

Traditional existing relationships spanning decades or potentially centuries do not align with standardised land sharing arrangements:

• Income tax, IHT relief and Agricultural Property relief are not conducive to long term tenancies or the use of Limited Companies.
• Management control of Land is currently key to all Welsh Government Grant Schemes
• Reversionary requirements of 1954 Act business tenancies are not compatible with current forestry legislation.

To enable a farmer and an investor to work together a partnership agreement would be required. This may create complications as investors may want to scale their investment and an individual farmer may not have the capacity or desire to do this.

A partnership model could facilitate multiple farmer engagement and multiple investor relationships that could be scaled up. Creating geographical local hubs could promote better local stakeholder engagement and allow the additionality benefits of afforestation to be considered on a landscape scale. By acting as a portal for those seeking to invest in afforestation, the model could seek to create packages profiled to the type of investment required and the desired income stream for the farmer.

As an example, a farmer could be:

• Hands off – Just wants an income stream from the land, fixed term deal.
• Hands on – Wants an income stream but also wants to tender for the potential contract works for establishment and management.
• Equity – Could be either of the two types above but also has some equity to invest but cannot cover all initial costs of establishment.

Whilst an investor could have the following characteristics.

• Small – potentially local person or business seeking to create pension/carbon off set opportunity.
• Medium – SME looking to offset carbon and deliver CSR goals or outcomes, may have some timber materials interest e.g. ENGO body, Housing association, Local authority
• Large – Institutional/Corporate, large public sector body with either/and strong CSR/Environmental drivers, carbon, Timber/Product income in blended investment portfolio.

The model would aim to create a relationship between partnerships that can spread the risk for the investor whilst maintaining an income stream for the group of farmers.

In principle this model is a good strategic fit as it encourages private investment whilst allowing farmers to retain control of their land and choose to what extent they diversity existing farm activities. This is dependent on being able to establish a model that would provide a sufficient return for potential investors and a suitable level of incentive for farmers. As with other models, it would be challenging to make a model work for tenant farmers.

Recommendation: A proportion of the woodland creation budget over the next 3 years should be used to pilot approaches to securing private finance. The working group should scope what these pilots will involve by the end of April 2022, considering options including a carbon guarantee and partnership arrangements to deliver blended finance options.

While the options above could help attract private finance, some in the working group felt that more fundamental organisational change is required in response to the scale of the challenge, both in terms of attracting finance but also in project management resource to manage the level of change needed.

This could be achieved by creating a national public interest company which would combine financial acumen with social values and mobilise private funding to meet ambitious national planting targets. Planting and delivery on targets would be delegated to lower level regional or catchment organisations.

The public interest company would negotiate uncertainty by drawing on finance from different sources and then apply that funding to different objects as circumstances changed. Initially, the company would be debt financed by bond issue, but the preferred fund-raising model could change over the life of the programme. The company would be able to seize current opportunities (notably, very low interest rates) but leave open unresolved issues and not foreclose options.  The proposal is for two-tier institution building with (a) a Welsh national agency in the form of a public interest company at the upper level raising funding to distribute to (b) regional or catchment-area forest partnerships, which plan, plant and deliver

Such a company would require an endowment to create balance sheet reserves necessary to allow the company to borrow at low interest rates. There are 2 possible sources:

• A cash endowment by Welsh Government where there would be a multiplier effect because a £50 million endowment could be enough to cover a bond issued for £250 million.
• Second, there could be a resource endowment from some or all of the Welsh Government Estate. However if debt is secured against Welsh forest assets, the bonds should therefore be sold to Welsh local authority pension funds, or other Welsh public interest investors because in a worst case, the assets pass to the bond holder when covenants are breached.

There would be potential for ethical questions about the willingness of Welsh Government to accept funding from different types of investor and/or sell carbon credits to different sectors (e.g. criticism of Scottish Government allowing ‘greenwash’ by accepting money from Shell for tree planting).

The Welsh Government must also consider how best to integrate the desire to secure finance for woodland creation with other areas where private investment is needed, such as renewable energy and other ecosystem services.

Recommendation: Welsh Government should commission a feasibility study for a Public Interest Company focussed on delivering woodland creation through funding projects delivered by Welsh Government, financed by issuing green bonds. This company could also have responsibility for creating the National Forest in Wales. The study should be completed within 12 months.