Biodiversity net gain units herald a new nature market

The most highly anticipated part of the UK’s Environment Act 2021 came into effect on 12 February, reports affiliate title Agri Investor.

All major building developments must now demonstrate how they will deliver a 10 percent biodiversity net gain in comparison to the pre-existing baseline of the site that is to be developed, otherwise planning permission will not be given.

It’s a big step forward for nature, which now has a value attached to it, and that value also represents the advent of a new market.

Asset manager Gresham House has wasted little time making its entry with the launch of a $380 million vehicle that will work alongside portfolio company Environment Bank to develop ‘habitat banks’ across England, which will generate biodiversity net gain units issued by the Department for Environment, Food and Rural Affairs.

These units will then be sold to developers, which will allow them to meet their 10 percent BNG requirement.

Unlike a single carbon credit, for example, which is equivalent to one ton of carbon dioxide removed from the atmosphere, a single biodiversity unit can represent several ecological benefits delivered to a given area.

The UK’s system is broken down into seven habitat types made up of five tiers of “area” habitats, with “hedgerow” and “watercourse” habitats receiving their own distinction.

And the price of a BNG unit generated by these habitat types also varies, with the cheapest having a backstop price of £42,000 ($53,000; €49,000), and the most expensive being £650,000.

“But because there’s this thing called the spatial multiplier, which means that if your off-site habitat bank is in the same local planning area, you don’t need to buy any more units than if you’re doing it onsite – it’s like a one-for-one,” said Peter Bachmann, Gresham House managing director of sustainable infrastructure.

“But if your BNG site is in Cornwall in the south and you want to buy units from Maxfield in the north, you need to buy a lot more units. So that £42,000 is actually £84,000 and that’s for the most basic grass land, and then that £650,000 is actually effectively £1.3 million.”

While these sums may seem high at first glance, Bachmann says the price represents extremely good value for developers, who may typically expect to suffer a £45 million-£50 million shortfall in lost revenue if they attempted to incorporate a habitat bank into a 100-acre residential development site, for example.

Another point to bear in mind is that when a habitat bank is issued with a BNG unit, the site must be protected and maintained for 30 years, with buyers of the credits entering into a 30-year tripartite conservation covenant with the local planning authority and Environment Bank.

“With that, you’re obligated to operate and maintain this biodiversity habitat area in a certain way. The covenant is very specific as to what you’re supposed to do, how you maintain it and all of those things,” Bachmann told Agri Investor when the firm was developing the strategy.

“The Environment Bank pays for the maintenance. The way it works is that with the sales revenue, we then effectively create an escrow account where all of the costs to operate and maintain the habitat bank for the 30 years are provided for.”

Bachmann added that as well as viewing the strategy as an infrastructure play given it is underpinned by a real asset, will deliver predictable cashflows and is government regulated, it will also deliver returns that are “competitive on an infrastructure return-basis”, which is typically in the range of high single digits to mid-double digits.

Gresham House is yet to complete the first sale of a BNG unit owing to a delay in the secondary legislation needed to facilitate sales, but Bachmann says their first deal could be signed within a few months.

With every step forward in this process representing new ground for all parties involved, the terms of the first agreement and its practical workings should make for fascinating viewing.