Environment Bank and Gresham House Plc                            CAP0004

Written evidence submitted by Environment Bank and Gresham House Plc

The Role of Natural Capital in the Green Economy

evidence presented to the uk government’s environmental audit committee

Presented to: Environmental Audit Committee

Issued:

Environment Bank and Gresham House Plc                            CAP0004

Environment Bank and Gresham House Plc                            CAP0004

September 2023

Environment Bank and Gresham House Plc                            CAP0004

Summary of Evidence

Environment Bank and Gresham House welcome the opportunity to provide evidence to this inquiry. Our evidence specifically relates to our shared experience in respectively securing and making a private sector investment into the development of:

• the natural capital asset classes of mandated Biodiversity Net Gain (BNG) in respect of the development sector; and
• Biodiversity Credits in respect of a voluntary market for investing in nature-based solutions to help corporates become nature positive.

There is a significant gap between estimates of funding required to restore nature at scale in the UK (£4.4bn - £9.7bn per year), and levels of funding currently provided (c.£380mn via the eNGO sector, c.£400mn from agri-environment grants to farmers). The amount of the c.£2.4bn in ELMs (Environmental Land Management) payments that is intended to pay farmers for direct environmental performance and delivery, remains unclear, especially in relation to nature recovery. It is imperative that the right environment is created to fill this gap with investment from the private sector.

We believe that if the mandatory BNG market is allowed to prosper as outlined in this paper, and corporates are required to become nature positive, it could catalyse over £16bn of new investment into nature in the UK. Hence why it is so critical for the Government to implement the nature investment market as suggested.

The Government must also recognise that large scale, off-site BNG has bigger benefits for nature, as set out in the Lawton Principles.

The following key criteria are essential to enable the size of the potential private investment into the natural environment to be maximised:

• A level playing field for all operators accessing natural capital markets with no government subsidy or grants to be used for capital works establishment (for both BNG or Biodiversity Credit sites) and no bias from planning authorities;
• A move to internationally adopted mandatory standards to require the corporate market to become nature positive which is applied consistently at an international level; 
• Implementation of a common standard for the implementation and monitoring of nature capital investment (or range of standards for different asset classes) as being developed by the British Standards Institute (BSI).

Current barriers to private investment in nature markets that require addressing include:

• Delays in national government guidance and secondary legislation;
• A lack of clarity on whether multiple payment streams for multiple natural capital assets can be stacked from the same project, thereby creating uncertainty when assessing potential revenue to support investment decisions;
• Tension between on-site delivery and off-site delivery in terms of social impact and outcomes for nature;
• Accounting standards not yet developed to properly deal with these new asset classes; and
• A lack of clarity on whether Agricultural Property Relief will continue to be a barrier for agricultural landowners to access nature markets.

Introduction

1. The work of Environment Bank, funded and supported by Gresham House, focuses on two key aspects of privately financed ‘nature-based solutions’ which form the basis of our evidence here:

1.1.  our role in enabling developers to comply with the new legal mandate of Biodiversity Net Gain (“BNG”) enshrined in the Environment Act 2021 by establishing ourselves as a ‘National Gain Site Operator’ serving the national development market for BNG (the “Mandatory Market”);

1.2.  our role in enabling corporates to become Nature Positive and access ecosystem restoration projects at scale through our ‘Biodiversity Credits’ product (the “Voluntary Market”).

About Environment Bank

2. Environment Bank was established by David Hill in 2006 to promote a new approach to addressing biodiversity within the planning and development control system. Since 2006 David has written extensively - outlining the need for development to deliver gains for nature rather than, as has been the case until now, poorly accounting for biodiversity, and thereby contributing to a continuing loss to the natural environment. He lobbied Government for the concept of biodiversity offsetting and gains for nature to be introduced into UK legislation, the concept of BNG that was eventually mandated into law through inclusion within the Environment Act 2021.

3. Gresham House Plc is an alternative asset manager with £8.3bn of assets under management providing tailored investment solutions across five areas of alternative investment. Both Gresham House Plc and funds managed by its Sustainable Infrastructure Division, led by Peter Bachmann, have provided the investment necessary to both develop the basis upon which the Mandatory Market and Voluntary Market could become investable. This culminated in Gresham House managed British Sustainable Infrastructure Funds, committing an initial sum of £240mn in December 2021 to create and maintain a network of at least 8000 hectares of Habitat Banks across England. These Habitat Banks will service the anticipated demand for BNG, providing a high integrity and frictionless solution for the development sector, allowing development to continue at pace and creating an income diversification solution for farmers and landowners who wish to farm for nature.  

Responses to inquiry questions

1. What potential contribution can private capital investment make to measures to secure nature recovery?

4. With the investment and support provided by Gresham House, Environment Bank has been able to establish a scalable business model that can achieve 2,000 hectares of nature restoration annually in England for BNG alone, a model which is serving as a blueprint to expand into new geographies and access new markets. The model delivers high integrity, high value, investment grade natural capital products that are designed with both technical ecological robustness and commercial rigour, ensuring that financial viability and science-based decision-making is at the forefront of nature recovery, a notable shift in a sector that has historically lacked commercial focus to date.

5. This scale of private investment has enabled funding to be channelled into on-the-ground nature recovery activities quickly and effectively with more than 2,000 hectares of projects secured and live by December 2023, just one month after the mandatory requirement for BNG becomes law.  This early investment in advance of the market becoming ‘live’ will allow us to immediately serve the national demand for BNG, preventing this new legal requirement from impeding the progress of development.  It has taken a great deal of work, vision, risk management and advancing of ecological methodologies from both Environment Bank and Gresham House to deliver a solution ahead of the market demand.

6. Private investment has been successfully deployed into service and technology sectors associated with nature recovery but very little has been catalysed into on the ground nature recovery schemes because the risks and routes to market are very different. Annex 1 sets out the evidence of the scale of the funding gap, market size for the Mandatory Market and the Voluntary Market and likely developer appetite for an off-site BNG solution. This context reinforces the fact that private investment at scale is needed to create the impacts desired and was a key factor in the Gresham House early investment decisions. 

7. The Gresham House Sustainable Infrastructure Division had nature regeneration as an investment thematic and had been actively seeking opportunities in the market to invest in this area from 2019.  As part of this search, the Environment Bank team came to our attention in late 2020 and Gresham House learnt more about their work and the forthcoming Environment Act.  The introduction of a legally mandated regime for BNG was the key factor in the progress of turning the concept of BNG into an investable proposition and without it, no investment would have been secured for nature recovery.

8. During early 2021, Gresham House undertook a detailed diligence phase to understand the potential market for BNG. At this time, without the Environment Act having been passed, the concept was not developed to a stage to qualify for institutional investment from Gresham House funds as the levels of uncertainty posed too much risk. However Gresham House Plc, with its stated objective of catalysing new markets and investing in sustainable solutions, was able to provide balance sheet funding to enable its Sustainable Infrastructure Division to work with the Environment Bank team to advance market diligence, track the progress of legislation, start to develop the necessary legal and financial structures and invest in a team of ecologists and land professionals to create an investable product that could deliver good returns for investors whilst meeting the environmental impact required.  This included deep analysis of how the product needed to work for key stakeholders, being farmers/landowners, Local Planning Authorities and developers.

9. The early investment from Gresham House Plc and the mix of skills from the Gresham House team and Environment Bank team which included knowledge of the political process and relationships within government departments, legal structuring, financial modelling, habitat design, land surveying, understanding of the agricultural property sector being key skills, culminated in a commitment from Gresham House’s British Sustainable Infrastructure Funds of £240mn in December 2021 which was ultimately unlocked by the legal certainty created by the enacting of the Environment Act 2021.

10. Scalability of the investment was key to Gresham House’s decision to invest. Not only did this mean significant diligence on market scale but also a strategy to securing land that would facilitate the same.  The ability to have a secure legal interest in land is fundamental to securing private sector investment into land-based investment opportunities. Delivering our model in a way that involves, rather than displaces, landowners and farmers is central to our strategy meaning a lease-based approach rather than freehold acquisition is our preference.  Transacting land in this way has raised many issues around landowner tax positions and agricultural mortgage provider sector understanding which need to be resolved if land is to be confidently brought forward by landowners for nature recovery at pace.    

11. Of particular importance has been the ability of our teams to participate in working groups and market-based workshops with Defra and Natural England. This has been the case throughout the period up to December 2021 and subsequently, as secondary legislation and guidance is critical to the design of our product for both the Mandatory and Voluntary markets.  Low standards and inconsistent implementation in a nascent market is a key risk for investors and the access to policy makers has been fundamental in allowing us to deliver the private market solution desired by policy makers and openly share our thoughts and experience on how the legislation and policy can support the shared objective of ensuring a high quality product that will serve nature , attract private capital and allow the development market to operate seamlessly. 

12. In summary, through our shared experience, we can demonstrate how private capital investment can bring skills, resource and scalability which leads to a commercial model for nature recovery that will make nature economically visible and investable, both key ingredients for a robust Green Economy. 

2. How can investment best be aligned with environmental benefits, so as to achieve or surpass the Government’s targets for nature recovery?

13. The evidence in this paper (see also Annex 1) demonstrates that private sector finance will be critical in delivering the Government’s area and scale ambitions for nature recovery within a sensible timeframe of 10-25 years. It is critical that the secondary legislation for the Environment Act is released well ahead of November 2023 and follows the guidance provided in the consultation process. Once in place, it is critical that the Environment Act is not then modified and survives any changes in Government in order for this private market for natural capital to grow within a very stable regulatory environment.

14. Looking forward, the most important task now, moving beyond the value that the BNG mandate will deliver, is to support the national and international work to set standards for corporate business (ie the non-development sector) and to back an international mandate via the Taskforce for Nature-Related Financial Disclosures (TNFD). The Government should require corporates to measure, disclose, account for, reduce and then compensate for residual impacts of their economic activities in order to achieve the status of ‘Nature Positive’. A mandated regime will not only enable consistent, high-quality standards of delivery on the supply side but will bring certainty and confidence on the demand side that will encourage and catapult private investment in nature. The most frictionless, cost-effective and natural capital-successful approach to a TNFD mandate would be to require corporates across all sectors and of all sizes to buy-in to land-based ecosystem restoration projects at scale through the purchase of biodiversity credits. Through their financial reporting mechanism, such credits could sit on their balance sheets either as assets or reported on via their annual reports and statements of accounts to shareholders and potential investors.  It is likely that only a combination of investor pressure and mandated financial reporting will generate the revenues needed to justify private sector investment into the restoration of nature at the scale envisaged by Government.

15. There is much talk of blended finance whereby a diversity of funding streams is used to develop projects on the ground.  In order to support and enable private investment in these markets it is essential that there is clarity on how multiple payments (e.g. for nutrient neutrality or flood defence) can be legitimately stacked and additionality rules adhered to in order to ensure that a level playing field is established for all operators across the market. We are of the view that in some cases this has merit, but that it is essential that public money is not used to subsidise a private good. For example, a perverse outcome would be generated if public grant funding (e.g. through agri-environment payments/ELMs) is used to create habitat banks for subsidising the cost of BNG or corporate sector investment in Nature Positive schemes, thereby undercutting a fully privately funded solution.

16. Similarly, local authorities must not be able to set up BNG sites to service a demand for BNG units from those developers whose planning applications they regulate, unless done through an arm’s length special purpose vehicle set up to operate as a commercial entity entirely separate from the authorities’ planning functions. This is the same standard required for all other commercial activities of local authorities (under the so called ‘Tekal exemption’) so as to avoid state aid and conflicts of interest.

17. Private sector market solutions will only develop where rates of return are sufficient and predictable enough to make a viable financial business case. Where grant funding or local authorities using their own funds subsidise the system, private markets will not develop and the scale of delivery will be significantly depressed as a result.

3. What measures are necessary to (a) establish and (b) maintain the high-integrity markets in ecosystem services which are expected to attract private investment? What confidence do investors currently have in the UK’s arrangements for these markets?

18. We consider that the following criteria are essential to both establishing and maintaining a high integrity, privately invested market:

18.1                      A mandatory, not voluntary regime. Without a Mandatory market through the Environment Act 2021, Gresham House would not have invested in the Environment Bank because the voluntary market was too uncertain and the risks for investors deemed too high. By way of illustration, the absence of similar legislation, clarity and a well thought through delivery framework for nutrient neutrality has led to a lack of confidence from investors looking to invest at scale in assets that can serve that market;

18.2                      A level playing field for all operators (i.e., private, eNGOs and public sectors) accessing natural capital markets with no government subsidy or grants to be used for capital works establishment or long-term site management (for both BNG or Biodiversity Credit sites);

18.3                      Demonstration of secured funding for the delivery and management of the project for its full lifetime (at least 30 years) including costs for Monitoring, Reporting and Verification (“MRV”) and management interventions;

18.4                      A level playing field for on-site and off-site BNG so that they are required to meet the same standards e.g. registration of BNG, same funding requirements, same management plan requirements;

18.5                      Insurance, covenant strength tests and bonding requirements on site providers to address habitat establishment failure and the risk of financial failure of the provider;

18.6                      A legally binding restriction on the land with an effective enforcement mechanism (for example, conservation covenant, a Section 106 agreement (BNG) or other legal instrument that binds the land for nature conservation purposes for a minimum 30- year period);

18.7                      Implementation of a common standard (or range of standards for different asset classes) as being developed by the British Standards Institute (BSI);

18.8                      Use of a standard metric – in the case of BNG this is provided by the Defra metric 4.0. Metric, however, no standardisation currently exists for the development of voluntary Biodiversity Credits and without a market standard, the market could be quickly undermined by low quality, greenwashing products.

18.9                      A national Market Authority to oversee and hold to account local planning authorities and Responsible Bodies to ensure national consistency and adherence to standards.

19      As demonstrated by our response to question a. above, the mandating of BNG through the Environment Act 2021 has given confidence on the demand side to Gresham House although we are not aware of any similarly funded or scaled solutions for this market. However, certainty and clarification is still required in a number of areas to allow deployment of capital to continue at pace, in particular the delays to the publication of further guidance and secondary legislation continue to be a major risk register item. The Government’s stated preference for on-site delivery of BNG brings uncertainty to the scale and opportunity in the market when there is significant and mounting evidence that on-site BNG delivery achieves very limited biodiversity value compared to off-site delivery at scale. Confidence is further eroded by inconsistency in how BNG will be treated on-site and off-site (for example, only off-site will be registered on the national gain site register); inconsistency in how local planning authorities (LPAs) are resourcing and implementing the regime locally (including how they are managing internal conflicts when acting as both BNG delivery body and competent consenting authority); and inconsistency in how operators will demonstrate that sufficient funding is in place and secured to deliver the BNG for 30 years, providing the essential longevity to the project. Furthermore, robust protective mechanisms such as insurances for habitat failure or bonding for organisational failure are not currently required and there is no formal accreditation mechanism for either off-site or on-site delivery to ensure that high standards are being aimed for across the market.

4. What contribution will data from the Natural Capital and Ecosystem Assessment (NCEA) programme make to the objective measurement of changes in environmental outcomes?

20      The NCEA provides a unique opportunity to collect and integrate data in a cross-sectoral way in order to help plan and develop policy that, for example in respect of biodiversity and natural capital, can maximise ecosystem restoration objectives. It could be used to monitor trends in land management in relation to a range of initiatives including local nature recovery strategies, changes in farming practices (eg towards regenerative agriculture and substantially reduced chemical inputs), and the proposed Land Use Framework, and would be helpful in showing the landscape-scale improvements to biodiversity that should happen through BNG and corporate biodiversity credit investments. It would also help in predicting and monitoring success of the water industry in cleaning up the major problems associated with storm water discharges, give better granularity to inform the insurance industry around flood risk, and ensure for example, that tree planting supported by the carbon market doesn’t destroy important habitat for upland breeding waders.

21      We are therefore very much in favour of the establishment of the NCEA but it will need proper resourcing if it is to generate real time information that will help, for example, investors decide on how to make investments into the natural environment via the range of natural capital asset classes that require that investment.

5. How can the proposed UK Green Taxonomy support high-quality investments which deliver genuine benefits to nature? What financial disclosures should the taxonomy require?

22      At present, there is only limited knowledge and understanding of what the UK Green Taxonomy will address, as most of the available information is concerned with how the advisory body will develop the taxonomy to help stakeholders and investors, and the majority appears to focus on delivering net zero. However, it is critical that the remit is expanded to incorporate natural capital, including biodiversity, to contribute to raising the bar to enable investors to make the right investment decisions based on full-scale on- the-ground projects. Since it is being chaired by the Green Finance Institute, we are hopeful that these points will be included in the Taxonomy and that integration with the ISSB (the International Sustainability Standards Board) work, TNFD and the BSI (British Standards Institute) developing standards, will be achieved.

6. How can the operation of natural capital markets ensure genuine net gains for nature? How do such markets address the risk of ‘greenwashing’ of investments and the offsetting of natural recovery in the UK against environmental degradation elsewhere?

23      The key to ensuring natural capital markets operate with integrity and hence generate genuine net gains for nature, avoiding greenwashing, involves the following:

23.1                      Having globally (or at least nationally) relevant standards such as being developed by the International Financial Reporting Standards (IFRS) Foundation that has created the International Sustainability Standards Board (ISSB) whereby ISSB is developing the IFRS Sustainability Disclosure Standards to include water, biodiversity and ecosystems, drawing on the work of the TNFD. These standards will provide the basis for future obligations within company law and FCA requirements for listed companies ensuring a single set of standards is applied across the UK regulatory framework.

23.2                      The British Standards Institute (BSI) is currently undertaking a Nature Investment Standards (NIS) programme[1] and is in the exploration phase. In relation to ensuring equity and fairness to enable an efficient and effective market to operate we would advise that a standard/s needs to include the following in relation to UK biodiversity schemes (both BNG and Biodiversity Credits):

23.2.1    In respect of both on-site (insetting) and off-site, it is critical that the criteria listed in (c) above are included in the regulatory framework. This involves requiring funding to have been secured for the life of the BNG intervention, insurance against financial failure (if the project developer or investor no longer exist) and delivery failure (to restore sites);

23.2.2    A Habitat Management Agreement validated to ensure its objectives should realistically be achieved given the timescale of creation and management interventions;

23.2.3    Demand the presence of robust legal contracts between the landowner and credit generator, the developer and regulatory (local planning) authority in respect of BNG and landowner/credit generator for Biodiversity Credits in order to give security to the long-term nature of the delivery projects;

23.2.4    Avoidance of any situations where conflicts of interest could arise between the provider of credits and any regulatory function they hold within the market (e.g. local planning authorities who regulate the planning system and permit development); and

23.2.5    An effective validation and verification regime for both on-site and off-site projects leading to an accreditation/certification mechanism that a) precludes the sale of credits by credit providers to buyers in the absence of accreditation, b) precludes developers gaining planning permission in the absence of using accredited gains ie. BNG credits for off-site areas and BNG units where they are located on-site (inset), c) precludes corporates from claiming gains on balance sheets, annual reports to shareholders, or other outputs unless credits purchased are from an accredited source.

7. What role can the UK’s financial markets play in developing the flow of international capital into the development of natural capital in the UK and globally?

24      The market for Biodiversity Credits through a voluntary approach as corporates move to a Nature Positive future in order to secure their own investment, is likely to be greater than that being created for mandatory BNG. If a mandated regime were to be introduced to corporates via corporate natural capital accounting, as part of their fiduciary duties under financial reporting, demand for Biodiversity Credits will escalate significantly as organisations with a widely reaching value chain will need to take action in UK geographies. A mandated regime through TNFD would provide the clarity and confidence to investors and project developers (those creating large-scale ecosystem services projects on the ground) to provide the necessary investment to bring forward sites at scale.

25      A mandated regime would also attract international capital to the UK because there is currently a lack of large nature related projects in which to invest since, outwith compliance markets, in, for example, the United States, Colombia, Australia, etc., corporates are using investment worthiness via ESG to determine how they invest their own resources. An international mandate to measure, disclose, reduce and compensate for residual impacts as well as to demonstrate nature positive activities, working in association with investor pressure, will drive a major expansion in the need for nature recovery projects.  The UK could speed-up demand for nature recovery investment by mandating corporate disclosure now in order to achieve the £5-10bn market for biodiversity credits in advance of international market development. In the absence of a mandated regime in the corporate sector, the revenue values generated by BNG and voluntary Biodiversity Credits will remain underwhelming in relation to the ambition to deliver 500,000ha of nature recovery.

8. What role does the UK have in establishing international standards for natural capital investments, alongside other jurisdictions and financial centres?

26      The emerging legislative arrangements and market infrastructure established for the BNG market in England, whilst still evolving, have created an environment that has given Gresham House, provider of private sector finance, the confidence to invest. With further safeguards and refinement implemented over the coming months and years, the BNG market in England can become a globally leading example of how to ensure high integrity outcomes and robust governance that give it sufficient credibility to influence emerging international standards. Early signs that this can be achieved include the British Standard for Designing and Implementing Biodiversity Net Gain (BS8683:2021) being developed into an international standard by the International Organisation for Standardisation (ISO).  

27      There are currently a number of emerging frameworks, standards and methodologies in the nature-related risk reporting and voluntary biodiversity credits space. The UK government, working with industry and the environmental NGO sector, needs to ensure that it plays a part in the development of standards and most crucially that it ensures that project developers and projects are accredited, delivering high integrity outcomes with robust governance and credible MRV requirements.  The UK government must also ensure the integrity of the trading (and potentially secondary trading) environment through clear and well-engineered infrastructure that transparently tracks the purchase and ‘retirement’ of credits as it has done for the BNG market. This will provide clarity and certainty for the investment sector to provide the nature finance needed to rebuild ecosystem functionality and natural capital stocks. This landscape is evolving and developing at pace but needs to have a deployable system in place within the next 2-3 years, to unlock the financial investment opportunities that currently exist.

28      The UK has already played a critical role in developing markets for nature finance through work such as The Economics of Ecosystems and Biodiversity (TEEB), Natural Capital Committee, the Ecosystem Markets Taskforce, the Dasgupta Review, the establishment of the Green Finance Institute and Defra’s Nature Finance team. Using the developed standards to mandate nature disclosure in the same way as climate disclosure is critical in scaling natural capital restoration and protection.

29      However, the ability to trade across national boundaries needs an international body (such as the International Sustainability Standards Board) to set a common standard in order the give certainty to this expanding market. The financial sector would make a game-changing contribution to market expansion and scale if, for example, financial institutions were mandated to require their corporate customers to demonstrate Nature Positivity. Work is being undertaken at pace in this area – for example, in May 2023 the UN Environment Programme Finance Initiative, published its report ‘Banking on Nature’ stating for example that ‘….private financial institutions, including banks, have a role in reducing harmful financial flows they are responsible for, scaling up financing for solutions to biodiversity loss and contributing to closing the finance gap’[2]. We will fail to address the climate and biodiversity crises if we only work at a national scale, in isolation of the global community.

Annex 1. Scale of the Funding Gap

The GFI Finance Gap report from 2021 estimates that £56 billion in investment above current public sector commitments is needed to meet nature-related outcomes in the next ten years alone within the UK.

A range of financial values have been attributed to the potential market for Biodiversity Net Gain, from around £200m per year to £1.2m per year. A review of the market was undertaken initially by the Ecosystem Markets Taskforce (2013)[3], followed by a more recent assessment by Eftec (2021)[4]. Environment Bank has calculated the potential size of the BNG market based on historical quanta of c.10,000ha of built development in the UK that includes housing/residential, and commercial/warehousing/retail, excluding linear infrastructure. Application of land cover statistics to an ‘average’ parcel of land in the UK, deploying the Defra BNG metric 4.0, derives approximately 2.5-3.6 biodiversity units per hectare. Taking a median value of 3 units/ha, the extent of BNG units therefore likely to be required to compensate for biodiversity impacts per year is around 30,000. At a price of £28,000 per unit, this equates to a market of say £840mn per year.

Our estimation is that 30,000 BNG units per year would require between 4,200ha and 5,000ha of poor agricultural land per year to satisfy the demand from all built development (excluding linear infrastructure). The extent delivered on-site would reduce this area requirement though material nature recovery is highly unlikely to be delivered within development sites (see issues in the value of on-site BNG in Annex 2) as they are too small, fragmented, highly disturbed and developers will not commit to funding sites for 30 years.

A conservative figure, subject to various caveats, would suggest therefore that some 4,000ha or thereabouts per year would be required to satisfy this predicted demand for BNG units. Environment Bank is currently aiming to provide approximately 2,000ha of land per year to supply the demand for all types of BNG compliant development. It is highly unlikely, therefore, that the supply of BNG units will be a constraint on development, especially given the rules to location which enable Habitat Banks to provide BNG units to multiple developments across multiple regions, based on Natural Character Areas.

Nor is cost to development likely to be a barrier. Annex 3 presents evidence on the likely cost to development of delivering BNG based on 146 enquiries for BNG units to Environment Bank over the period June 2020 to February 2023. The analysis demonstrates that the cost to development of complying with the BNG mandate would on average equate to only 0.6% of gross development value. This figure will vary depending on how much is placed on-site versus off-site.  In any event, as developers become accustomed to the BNG mandate, the cost of its provision will be deducted from the residual land value so that, ultimately, the landowner who makes a windfall from the sale of land for development, will pay.

According to Innovate UK, the total UK construction market (largely development of real estate and infrastructure) is worth approximately £100 bn per year[5] based on 2014 figures. Therefore, a contribution to the natural environment of around £600 – £700m (ie applying the 0.6% figure) per year is a realistic evaluation of the size of the BNG market and accords with our figure above based on the c.4,000ha of BNG habitat required.

What, therefore, might be the corresponding demand figure for biodiversity credits? Using total GDP output of the UK of c.£2.6 tn per year and on the basis of a similar 0.6% ‘cost’ of nature restoration applying to corporates (and GDP economic activity) were the corporate sector to be mandated to account for, disclose, reduce and compensate for residual impacts on natural capital through the purchase of biodiversity credits, this would equate to a gross value of £15.6bn per year. Even under a voluntary biodiversity credit system which might tentatively be a third the size of a mandated scenario, whereby corporates buy into land-based management interventions to restore ecosystems such as those created by Environment Bank in order to become Nature Positive, over £5bn of investment into the natural environment could be leveraged every year.

Therefore, as long as off-site BNG is the route of choice for the planning and development control sector, and a significant proportion of corporate business activity across all sectors voluntarily become Nature Positive, a market of £6bn per year invested into the natural environment would not be an unreasonable figure. Under a full mandate on corporate disclosure and a requirement for businesses to become Nature Positive, it could be possible to leverage up to £16bn per year into the natural environment.

Clearly there are likely to be a number of significant barriers to implementing a mandated regime on all corporates and all economic activity, and also equity issues under even a voluntary approach – many corporate businesses do not or will not adequately understand the substantial risks to their businesses posed by the current rates of biodiversity decline and loss of natural capital, despite the World Economic Forum’s calculations that 55% of global GDP relies on what nature provides.

Putting those undoubtedly significant barriers aside, in terms of scaling, based on Environment Bank’s knowledge and experience of establishing nature restored sites in the UK and the cost of establishment and 30 years of management to provide longevity, an annual market of £6bn would generate between 31,000ha and 36,000ha of nature recovery per year (based on either 6 or 7 biodiversity units per hectare). An annual market of £16bn would generate between 82,000ha and 95,000ha per year.

The 500,000ha nature recovery ambition under a nature restoration market of £6bn per year would take between 11 and 13 years to deliver depending on biodiversity unit yield as measured by the Defra metric. By contrast, under the Government’s ambition for £500m to £1bn private sector investment being leverage per year, this would generate between 2,550ha to 5,102ha of nature restoration per year (at maximum yield of 7 BNG units/ha) and would take between 98 and 196 years to deliver. Clearly, far more finance than £1bn per year is needed to do the job. However, other revenue streams such as from carbon, specific nutrient compliance within the housing and agricultural sectors and, for example, the water industry for improving water quality, would also contribute to financing natural capital and hence nature recovery, somewhat reducing these timelines.

Annex 2. On-site vs off-site BNG delivery

The effectiveness of the regulatory mandate would be improved if Government supported off-site delivery of BNG (eg. through large-scale habitat banks or small bespoke sites) rather than on-site (within the development site boundary). A problem we raised with Government, that still features in the consultation response on BNG issued by Defra in February 2023, is their ‘preference’ for BNG to be placed on-site. Whilst we recognise the principle that ecological impacts should be compensated for as close to the impact as possible, the reality is that mitigation and compensation delivery within a development boundary is largely incapable of securing net positive outcomes for nature. There is now a growing wealth of scientific evidence (eg zu Ermgassen 2021)[6] and economic evidence (Professor Ian Bateman, University of Exeter) that on-site BNG provision will fail to deliver any biodiversity of worth and wouldn’t provide the type of greenspace that policy advocates believe people want. The zu Ermgassen study concluded that it is unreasonable to expect BNG to deliver anything of value to nature recovery in the wider countryside – the small fragments created within a development site boundary add up to very little even if their successful creation and management could be enforced. Greenspace provision and biodiversity provision are very separate entities. On-site BNG would generally be too disturbed by people to have any true value. Environment Bank was established largely because on-site delivery doesn’t work, is too expensive if it uses developable land, is never enforced by the LPA, and is usually removed by resident’s associations (residential developments) in the pursuit of ‘tidiness’ once the developer leaves the site. A summary of the comparison of onsite to offsite BNG is provided in Table A2.1.

On-site BNG must be delivered under the same governance rules as off-site BNG. In the case of the latter, all sites brought forward to sell BNG Credits to developers have to be registered with Natural England, with proof of secured funding for 30 years to include that for monitoring and reporting. Government expects a similar requirement for on-site BNG delivery though any register would be the responsibility of the LPA rather than central government. For this to work a two-tiered system must not be allowed to operate. LPAs are upskilling to enable effective controls over on-site BNG delivery. To ensure an effective system therefore operates, Environment Bank have suggested to the Office for Environmental Protection that they could introduce a simple ‘Ofsted’ type of arrangement to hold LPAs to account in terms of their management of on-site BNG.

Much development involves project types other than residential though residential has been overly focussed upon in terms of delivery. Infrastructure projects and commercial developments such as distribution sheds, ports, airports, retail, warehousing etc, are largely substantial slabs of concrete and tarmac and have very limited capacity for on-site BNG delivery. Having a large series of Habitat Banks, therefore, will facilitate easy discharge of the BNG mandate by these types of developments.

Table A2.1. A summary of the comparative advantages/disadvantages of off-site BNG delivery compared to on-site.

Annex 3.  Relative costs of BNG in relation to gross development value

We expect that developers will need to seek a balance between adhering to the mitigation hierarchy (that requires compensation to be delivered as close to where the impact has occurred as possible) and being cognisant of project viability and the need to maximise the developable area. Having the option of off-site provision provides a safety net or pressure valve to facilitate the development and also provides the best gains for nature. Ultimately it is the developer who will decide how to structure where to deliver BNG ie on-site vs off-site, at the same time as demonstrating adherence to the mitigation hierarchy and presenting that information to the LPA within the biodiversity gain plan that has to be submitted to discharge their BNG related pre-commencement conditions following planning.

We are able to evidence the extant costs of BNG to a range of residential developments using data from requests to Environment Bank for BNG units spanning the period June 2020 – February 2023 (Table A3.1). These analyses are based on 146 development site requests over the period ie. prior to the mandatory regime becoming effective in November 2023. We anticipate demand escalating significantly as the end of the transition period of November 2023 approaches.

The key point is that BNG costs, on average, are only 0.6% of gross development value (Table A3.1). This figure will vary depending on how much is placed on-site versus off-site.

Figure A3.1 presents the relationship between size of residential development (gross area in hectares) and the costs of BNG as a percentage of gross development value from the 146 enquiries received by Environment Bank up to the end February 2023. At present, the majority of development sites are relatively small. The larger more strategic sites will always be fewer, and they can also absorb some of the BNG requirement within the development site because they cover a larger area.

As a further example, Greater Manchester currently has a housing allocation of 55,000 homes to be built over a given five-year period. Table A3.2 illustrates relative costs of BNG based on predicted demand for BNG Credits.

Table A3.1. Relative costs of BNG delivery determined via actual enquiries to Environment Bank between June 2020 – February 2023.

Figure A3.1. Relationship between the size of residential development and BNG cost as a % of gross development value.

Table A3.2. Relative BNG costs for Greater Manchester 5-year housing allocation based on predicted demand.

BNG costs are therefore entirely affordable in relation to average gross development values, with ranges of 0.41 – 0.68% of GDV. As developers gain understanding of the means of delivery and the costs thereof, they will factor that into the residual land values ie. the amount paid for development land, so ultimately, it will be the windfall landowner selling land for development that is most likely to pay for the BNG. However, even if the developer ultimately pays, BNG costs are well within the margins of variation in overall development costs.

There have been some claims that uncertainty over BNG costs is preventing land being brought forward for development. Given the fact that BNG costs are less than 1% of GDV, it cannot be the case that BNG costs are impacting on development and for example creating a barrier to house building targets.

September 2023