Waking up to biodiversity loss

In taking action on sustainability, the natural starting point for infrastructure investors has been to focus on addressing their climate impacts. This is hardly surprising, given the scale of the climate crisis. Increasingly, however, investors are recognising that other impacts of infrastructure, not least those on biodiversity, also need to be considered.

In fact, the biodiversity crisis is every bit as severe as the climate crisis. The World Wide Fund for Nature says that the animal species it monitors have suffered an average population decline of 69 percent since 1970. The Earth is facing a sixth mass extinction event – the first since the dinosaurs were wiped out 65 million years ago.

“For a long time, climate and net zero has been the focus, but, increasingly, the complete correlation between climate and biodiversity is coming to light,” says Ruth Murray, investment director in the sustainable infrastructure team at Gresham House. “I think people are becoming much more aware of how infrastructure does have a really big impact on biodiversity.”

Even infrastructure assets that help to mitigate the climate crisis can have negative impacts on biodiversity. Solar parks, for example, potentially take up large areas of land that serve as a habitat for plants and animals. Wind farms can be a significant risk to migratory birds, sometimes forcing developers into elaborate mitigation measures. 

Almost all infrastructure projects are likely to have some kind of impact on biodiversity. The EU’s SFDR requires financial actors to report on biodiversity activities that negatively affect biodiversity-sensitive areas under its ‘principal adverse impact’ regime.

Being able to adequately assess impacts on nature is far from straightforward. “Understanding biodiversity is a lot more difficult than understanding carbon,” says Murray.

Peter Raftery, global head of technical, commercial asset management and ESG for climate infrastructure at BlackRock, notes that LPs are also eager to collect information on biodiversity impacts – but this kind of data cannot easily be standardised. Reporting on biodiversity, he says, is “likely to remain more specific than standard”.

Nature in the spotlight

Two major developments over the past year have significantly raised the stakes when it comes to how infrastructure managers consider their biodiversity impacts.

First, the COP15 biodiversity conference in Montreal in December 2022 produced an historic Global Biodiversity Framework. Governments committed to ambitious targes, including to extend protected areas to cover 30 percent of the Earth’s land and oceans by 2030. At least in theory, this may make infrastructure projects in biodiversity-sensitive areas less likely to be approved.

And the Taskforce on Nature-related Financial Disclosures (TNFD) – modelled on the influential Taskforce on Climate-related Financial Disclosures (TCFD) – launched its framework for firms to disclose their nature-related risks, impacts and dependencies in September. While this is a voluntary mechanism – though regulators in some jurisdictions have proposed making it mandatory – the TNFD will put greater pressure on infrastructure managers to be more transparent around their biodiversity impacts.

Beyond disclosure, the ultimate goal of the TNFD is to encourage investors to channel funds into activities that are ‘nature positive’. A 2021 report published by the UN Environment Programme estimated that $8.1 trillion is needed by 2050 to tackle the biodiversity crisis.

Murray says the TNFD is already changing attitudes on how investors approach biodiversity. “It is making people consider nature positivity with as much importance as they are potentially considering net zero. And it is starting that mind shift towards needing to have a nature positivity through all aspects of the life of your infrastructure asset.”

The TNFD will influence how infrastructure assets need to behave, and not just in terms of site selection, says Murray. “It will need to influence procurement strategy, financing strategy, construction methods, and then methods of operation, because all of those things can impact nature in the longer term.”

Net gain?

The idea that developments should produce a ‘net gain’ in biodiversity seems laudable – but is it practical? An experiment that is about to begin in England could help us find out.

Under legislation that will enter into force next January, developers of new sites in the country will be required to produce a net gain in biodiversity of at least 10 percent. Murray says that features such as green roofs and living walls could go some way towards helping developers achieve this target.

But she adds that Gresham House wants to pioneer the use of ‘habitat banking’. This would allow infrastructure developers to offset negative impacts in one location, with investment in restoring nature in a habitat bank – which would ideally be located as close to the development as possible.

She says this is a “better model than piecemeal on-site development,” since creating larger scale habitats has a “multiplier effect” for nature. Investors in a habitat bank can be assured that the habitat will be maintained for decades, whereas a developer could have an incentive to minimise maintenance of nature-friendly features within its development.

“We very much wanted to find a regeneration thematic where we could try and create some sort of investable proposition to invest in natural regeneration,” says Murray. 

She says it was difficult to ensure that habitat bank assets would benefit from reliable revenue streams in order to “tick the box of an infrastructure asset”, but that the passage of the Environment Act has been a game-changer.

“It is the biggest change to planning policy in a very, very long time,” Murray says. She estimates that around 2,000 hectares of land will be needed each year for habitat banks that deliver biodiversity net gain. Developers will be able to calculate the amount of land they need to restore using a government-provided tool for assessing the biodiversity value of their development site.

How successfully the legislation works in practice remains to be seen. But, if habitat banking takes off in England, investors globally will have a model to replicate in ensuring they can deliver nature-positive infrastructure.