How to finance biodiversity
South Africa was the first country in the world to grant the tax concession in Section 37D of the Income Tax Act to protect biodiversity, which provides a sustainable financing solution.
Co-authored by Garyn Rapson from Webber Wentzel & Candice Stevens of the Wilderness Foundation Africa
Biodiversity is a key element of tackling climate change, and it is an area in which South Africa has demonstrated flexibility and innovation.
The United Nations’ 15th Sustainable Development Goal is “to protect, restore and promote sustainable use of terrestrial ecosystems …. And halt and reverse land degradation and halt biodiversity loss”.
There are two key elements to protecting biodiversity. The first is to ensure that protected areas remain safe and well-managed and the second is to require developers of projects on greenfields sites that impact biodiversity to offset their impact.
Establishing a biodiversity offset area
If a mine was to develop a virgin site in the Northern Cape, for example, a typical condition of the environmental permits would be to require the mining company to mitigate the impact on biodiversity as much as possible.
For biodiversity impacts that can be avoided, the company would be required to employ an external consultant to investigate the need for a biodiversity offset area and make a recommendation. If the consultant finds that an offset area is required, the mine developer would have to find another piece of land of equal or better biodiversity value, buy it, manage it, and finance it as an offset area. The company is ‘replacing’ what it has impacted. In practical terms, this requires putting formal protective measures in place, notably through the biodiversity stewardship approach, to ensure the new land area cannot be impacted in future.
In the lifecycle of a biodiversity offset project, there are five steps:
- Investigation to determine if an offset is needed.
- The purchase of land, including a due diligence to ensure it has the right vegetation and no land claims over it – in other words, that it is an unhindered piece of land offering the best biodiversity value.
- Declare the land as a protected area based on national legislation.
- Put management plans in place to manage it as an offset area as prescribed by the National Environmental Management Protected Areas Act (NEMPAA). This can be complex and is likely to entail the recruitment of a reserve manager and some staff to clear alien vegetation, put in firebreaks, and the like. Then present the management plan to government for approval.
- Develop innovative sustainable finance models to ensure that the area adds value to South Africa’s protected area estate and is able to pay for its own management and effectiveness.
Webber Wentzel works with clients to ensure these projects are sustainable. Many companies will incorporate them into their economic development activities, for example, they could run these sites with an emphasis on ecotourism or agri-processing, or help grow SMMEs and involve local communities.
Examples of offset projects in South Africa
South Africa has examples of offset projects already, such as nature reserves established by Sishen Iron Ore Mine in the Northern Cape, and Venetia diamond mine and Amandelbult platinum mine, both in Limpopo. While a few companies have created offset areas voluntarily, many others do so only because it is a licence condition. We hope that this attitude will change, and that biodiversity offset areas will become a voluntary effort as part of a company’s suite of sustainability solutions.
Tax allowances for biodiversity offset areas
Candice Stevens, together with national government, worked to effectively implement South Africa’s first dedicated biodiversity tax incentive, section 37D of the Income Tax Act.
This unique tax deduction can be utilised by companies buying land for biodiversity offset purposes to claim back the full purchase price of that land over 25 years if they meet certain requirements. These requirements are:
- The land must be designated as a nature reserve or national park.
- There has to be a management agreement in place.
- The land has to be set aside for biodiversity for a minimum of 99 years with a title deed endorsement.
South Africa was the first country in the world to grant this income tax concession and many other countries will probably soon follow. This provides a sustainable landscape financing solution that has helped to drive a number of international biodiversity projects.
In allowing these amendments, the South African government is to be commended for adopting a forward-looking approach towards finding financing solutions for biodiversity areas and utilising fiscal policy to support international and national steps towards a more sustainable future.
Webber Wentzel has a longstanding collaborative relationship with Wilderness Foundation Africa to execute these projects to the highest standard. Their focus is on private offset projects, not public sector offsets, typically for large-scale capital projects such as mines, solar parks, and other major infrastructure.
Webber Wentzel is represented on the Sustainable Landscape Finance Coalition, on which a number of public and private sectors are represented, including the JSE, Nedbank and other financiers, and nongovernmental organisations. The Coalition takes a multi-pronged approach towards finding financing solutions for land conservation activities, which could include water treatment or agri-processing, both in South Africa and elsewhere in Africa.
The work of the Coalition could result in further changes to legislation as well as the launch of ring-fenced funds by some of the banks.
The Coalition has developed a four-stage approach to developing and implementing new finance solutions for particular landscape contexts: incubation, strategic development, piloting, and scalability. The Finance Solution Approach© is based on experience in developing successful landscape finance solutions, such as section 37D of the Income Tax Act, and ensuring a strategic approach is taken.
This four-stage approach ensures solutions are viable before they move to the pilot stage. Then they are piloted to test their practical implementation, often based on strategic finding from incubators, and ultimately taken mainstream, to other landscapes that can benefit from this solution.
Apart from the income tax and biodiversity solutions already developed, the Coalition is also working on carbon payments, making green projects bankable, using municipal property rates for landscape conservation and sustainable cities, and investigating debt finance.
Special thanks to Candice Stevens of the Wilderness Foundation Africa for her input on this insight.
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