This framework provides guidance about when the discount rate used to calculate the Total Fund Deposit will be reviewed.
Under the Biodiversity Conservation Act 2016 (BC Act), when the holder of a Biodiversity Stewardship Agreement (BSA) sells or retires credits, they must pay an amount, known as the Total fund deposit (TFD), into the Biodiversity Stewardship Payments Fund (BSPF).
The TFD is used to fund the management actions required under a BSA. The Biodiversity Conservation Trust (BCT), which manages the BSPF, makes annual payments to BSA holders who have paid their TFD to undertake these management actions.
The BC Act defines the TFD as the present value of future payments for land management actions under a BSA. It is determined by the NSW Environment Agency Head; that is, the head of the department responsible for administering the BC Act.
The TFD is determined by calculating the ‘present value’ of all scheduled land management payments set out in a BSA. This is the amount of money that needs to be invested now to fund all the management actions required under a BSA into the future.
A discount rate, determined by the Environment Agency Head under the BC Act, is used to calculate the present value of these payments. The Environment Agency Head can change this discount rate.
Reviewing and determining the TFD discount rate
The department developed this framework to provide guidance about when and how it will review and, if needed, change the TFD discount rate. This is based on ensuring:
- TFDs for new BSAs are not materially higher or lower than needed
- the review process does not destabilise the biodiversity credits market
- there is transparency about the review process and outcomes.
This framework comprises of 5 elements set out in this table.
| Element | Description |
|---|---|
| 1. A risk-based formula for setting the discount rate | The department will continue to use this formula to calculate the discount rate: Discount rate equals expected BSPF investment returns minus the BCT’s costs of managing the BSPF minus the Minister’s risk tolerance margin. |
| 2. Regular monitoring of the value of inputs into the discount rate formula | In March each year, the BCT will update the DCCEEW on changes in the value of these inputs into the discount rate formula:
If changes in these inputs would result in a change in the discount rate of 50 basis points or more, based on the existing risk tolerance margin, the EAH may ask the Minister to confirm their risk tolerance margin. |
| 3. Scheduled reviews of the discount rate, with out of cycle reviews in special circumstances | The EAH will review the discount rate:
Each time a scheduled or out of cycle review is undertaken, DCCEEW will, unless the EAH is satisfied that special circumstances exist:
|
| 4. A materiality test for changing the discount rate | After reviewing the discount rate, the EAH may leave the discount rate unchanged if:
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| 5. Transparent communications about the review process and outcomes | The department will publish a summary of this framework, including information about the timing of reviews on its website.
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Table notes: BCT = Biodiversity Conservation Trust; BSPF = Biodiversity Stewardship Payments Fund; EAH = Environment Agency Head; DCCEEW = Department of Climate Change, Energy, the Environment and Water; TFD = Total Fund Deposit.