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Commentary

Is Biodiversity Net Gain Everyone’s Gain?

Dr Anthony Kirby, Head of Regulation and Risk for Asset Management and Capital Markets in Europe at EY, considers the key concepts and implications behind a key policy innovation in the UK.

Most readers are already aware of alarming rates of biodiversity and ecosystem loss, with the WWF estimating a devastating 69% decline in wildlife populations on average since 1970. Banks, insurers and asset managers are vulnerable to climate change mitigation and adaptation risks – inter alia, physical, transition and litigation risks – in the medium to long term. But vulnerabilities arising from biodiversity are just as important, with risks extending from the macro-impacts on broad ecosystems to cases of pandemics stemming from anti-microbial resistance (AMR).

Biodiversity covers an expansive range of life forms that inhabit a particular habitat or biome – in other words, the variability among all living organisms from all sources. These include terrestrial, marine/freshwater and the ecological complexes of which they are a part, together with a wide variation in genetic, phenotypic, phylogenetic, and functional attributes.

The time dimension is relevant here, so classification and monitoring criteria must also track changes in ‘mean species abundance and the corresponding distribution over time and space across biological ecosystem communities. More ‘in-the-weeds’ themes in biodiversity ecosystems include strategic objectives and delivery models that seek to minimise threats to biodiversity by safeguarding, conserving, maintaining, restoring and/or improving the diversity of plants, animals, and ecosystems and their natural habitats and sharing the benefits arising equitably.

Inflexion point

Covid-19 illustrates only too well that nature doesn’t care about geopolitical outcomes, so we need to manage an effective transition at pace of our economic and financial systems to one that values and invests in our natural environment. The UK is at an exciting inflexion point. In a groundbreaking report, the Green Finance Institute, the UN Environment Programme World Conservation Monitoring Centre and University of Reading demonstrated that biodiversity loss and environmental degradation could create material risks for the UK economy and financial sector, in addition to their wider social and biodiversity impacts.

Their report found that the deterioration of the UK’s natural environment could result in UK GDP being 6% lower than otherwise by the 2030s under two scenarios (domestic and international) and 12% lower under an AMR-pandemic scenario. The former is greater than the impact experienced in the Global Financial Crisis, while the latter is greater than that wreaked by the Covid- 19 pandemic.

It also presented a new inventory which charted various nature-related risks to the economy, many not currently captured in national risk assessments. This captured financial risks arising from the deterioration of nature and biodiversity, including the decline in soil health; the potential for water shortages; global food security repercussions; zoonotic diseases transmitted from animals to humans (e.g. bird flu, swine flu, and Covid-19); and AMR, where bacteria and viruses no longer respond to medicines.

The report identified how sectors faced selectively important levels of nature-related financial risk, including agriculture, manufacturing, and utilities. For example, the agricultural sector faced risks associated with water, climate regulation, soil quality, and pollution which could impact food production. The utilities sector is dependent on surface water for cooling power stations, meaning any constraint in water supplies could impede production and raise energy prices.

A key challenge is transparency – the inherent difficulty of sourcing consistent data capable of calibrating nature-related impacts across the various value chains. Metrics recommended by the Taskforce on Nature-related Financial Disclosures (TNFD) for quantifying nature-related metrics and targets, are in their infancy, and natural ecosystems are neither bounded nor constrained by territorial considerations.

Groundbreaking concepts

The UK is one of 12 jurisdictions around the world that include or plan to include nature-related aspects in their taxonomies by focusing on nature-relevant environmental objectives and priority sectors. To that end, the UK has developed groundbreaking concepts and indicators to help agricultural and property developers to provide projects which fulfil national demands and meet high standards of environmental protection.

The UK Environment Act 2021 introduced the concept of biodiversity net gain (BNG) to the UK, setting a target of 10% for BNG as a condition of planning applications or permissions to ensure that biodiversity in an area under development is measurably increased.

BNG is mandatory across England for major developments from 12 February, 2024 (and for small sites from 2 April, 2024) under Schedule 7A of the Town and Country Planning Act (TCPA) 1990 (as inserted by Schedule 14 of the Environment Act 2021). The requirements for a minimum 10% BNG are to be largely mirrored for nationally significant infrastructure projects (NSIPs) which are covered by development consent orders under the Planning Act 2008, though the requirements are not expected to come into force for NSIPs until November 2025.

The 10% target threshold can be realised by improving and maintaining existing habitats or creating new ones. The biodiversity metric is a habitat-based approach, featuring biodiversity units (BDUs) defined as representing “the protection of one square metre of high strategic value conservation land”. BDUs will be used to calculate and assess an area’s biodiversity value to wildlife and by extension, the measure for BNG. The metric uses natural features such as size, quality, location and type of habitat to calculate a biodiversity value. Biodiversity units may be gained through evidencable efforts to maintain or create habitats (or lost as a consequence of failing to take BNG metrics into sufficient account during development). As with all new regulations, there will be exceptions and transitional provisions, as summarised by a recent Addleshaw Goddard paper.

BNG can be achieved either onsite (at the development site itself), offsite or by the purchase of statutory biodiversity credits (BDCs). Significant on-site gains and all off-site gains will require developers to maintain the habitats for a minimum of 30 years, and a review timeframe of five years will be in place to ensure that all efforts are assessed over a continuous cycle. Failing to meet BNG requirements is likely to result in breaches of planning conditions, developer obligations or legal agreements and the local planning authority could take enforcement action. Enter the need for developers and investors to distinguish between BDUs and BDCs.

BDUs will be created, agreed and marketed by landowners or public authorities outside the direct control of the government. The value of a BDU could adjust on the open market, according to the distance the biodiversity gain site is from the application site, the value of a unit is diluted, the greater the distance of the gain site from the application site. There are several commercial sites including circa 26,000 landowners, land managers and estates interested in conservation, rewilding, regenerative farming, offering to sell ‘BNG units’, such as Belmont Estate, Biofarm, the Duchy of Cornwall, the Environment Bank, and gaia with unit prices starting at around £12,000. Developers will be incentivised to deliver biodiversity gain within the same local authority as the development, so supply and demand for biodiversity units could vary significantly across the various regions.

In contrast, Natural England will sell statutory BDCs, with the Department for Environment, Food & Rural Affairs providing information for developers and local planning authorities explaining statutory biodiversity credits, and the process of buying them. Prices will be based on the cost to create, maintain and monitor different habitat types, with a mark-up to prevent statutory credit prices undercutting the off-site market, with prices set at six-monthly intervals. Current expectations are that BDCs will be priced from £42,000 per credit, and BDUs within a commercial policy context will likely not be calculated in the same way due to the updated metric tool that the latter uses.

The BNG concept accompanies an enhanced duty which requires councils to demonstrate their compliance with the UK government’s biodiversity duty formally. Each local council authority, local planning authority or statutory undertaker is required by the act to have completed their first consideration of actions to further the biodiversity objective by 1st January 2024 (see here for a detailed example). This direction of travel mirrors the aim by the Financial Conduct Authority to press for the industry to focus on good outcomes for consumers by raising the bar on providers of financial services, thus forestalling reputational risks of miss-selling.

A given biodiversity duty could reference an overall BNG Plan that sets out how biodiversity gain will be achieved across a given site on a phase-by-phase basis. This would need to be submitted for approval by the relevant planning authority before any development can be begun for outline planning permissions and phased development. A planning authority might, for example, signal that to be suitable for a BNG project, a given site needs to have recognised potential for habitat enhancement or creation.

As the objective is to deliver a significant gain in biodiversity, the site doesn’t necessarily need to be of high biodiversity value at present. Sites with significant opportunities for gain in a remote location could also be attractive to a developer looking for a single site to deliver on a large net gain requirement. Suitable projects may include arable reversion to grassland, rewilding restoration of species rich grassland, improving the condition of existing woodlands or creation of new habitats such as scrub or wetlands.

Material financial impact

These impacts across the real economy will also have a material financial impact on insurers, banks and other financial institutions. When underwriting new developments, leading insurers have gone public on the need to consider any risks associated with biodiversity loss, including considerations as to the long-term maintenance of the biodiversity and how these might impact the development project and the associated risks. Some leading insurers have already developed innovative risk transfer solutions to help them manage nature-related risks and accelerate their firm’s transition to nature-positive operating models. Developments such as these could have important implications for restoration clauses, as many policies build on a like-for-like basis, some of which do not currently take into account any future environmental obligations needed.

When it comes to lending and loan provision, some analysts have suggested that certain banks could see reductions in the value of their domestic portfolios of up to around 4-5% in some cases – which suggests that nature-related risk will not just impact the economy, but potentially financial resilience in the sector. EY has tested how alternative asset manager investors in commercial and retail real estate and infrastructure projects can prepare to avoid being caught. Some existing policies include additional covers for elements such as applying green factors or complying with local authority requirements. However, it will be important to check that clauses are clear on whether they wish to cover for BNG and consider whether traditional investment metrics are sufficient to achieve it, or whether updates to cover are required to meet the new environmental requirements.

Addleshaw Goddard suggests that there is “…scope for the Government to tweak things that are not working as it goes along and we can certainly expect the system to evolve over time regardless.  At the same time, since this is a completely new regime, the Government does need to allow sufficient time for it to properly bed in before pulling any such levers”. Their paper examines some broader questions in the context of the determination of planning applications subject to mandatory BNG. It also queries the longer-term role of Natural England in the current political climate, asking “… who has a key role to play in the new regime, both administering the system of registration and selling statutory credits?”. Proper calibration, and coordination, will be key.

Clearly, there’s more work to be done as the BNG and biodiversity duty regimes settle down in the UK, and it will be interesting to see if there are further changes to be factored in considering future political directions of travel as well.

Dr Anthony Kirby is writing in a personal capacity and his views on this subject do not reflect those of EY.

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