The "How We Live... Sustainably" podcast series sets out to investigate how companies operating within the Living sectors are working towards achieving their net zero goals. In the final episode of our How We Live...Sustainably podcast series, David Hill, Chairman at Environment Bank, joins Nath Curtis, head of our UK infrastructure finance team.
Throughout the podcast, we discuss how the recent Environment Act changed things for developers both financially and from a regulatory perspective, the main challenges to the roll out of Biodiversity Net Gain and the benefits habitat banks give.
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Transcript
Nath Curtis: Welcome to this the latest edition of Gowling WLG's How We Live Sustainably Podcast. This series will explore various themes raising sustainability in the living and development sector. The evidence is clear that sustainability is no longer just an optional consideration for investors and developers and instead is firmly being embedded in the heart of developers' fundraising strategies and investors' investment criteria.
I am Nath Curtis. I am the Head of the UK Infrastructure Finance team at Gowling WLG. Having spent well over a decade helping clients to structure and execute renewable energy projects from geothermal energy in Cornwall to offshore wind off the coast of Scotland. I am very interested in the evolution of the conversation about how we achieve net zero. It is no longer just about how we generate heat and power and how we reduce our dependence on petrol driven transport with investors alive now more than ever on the need to embed sustainability into all facets of our society.
Over this series of podcasts, myself and my colleagues will be talking to our clients and contacts about their real world projects and showcasing the progress of innovation that happens in the sector each and every day. It is not possible to talk fully about net zero and sustainability any more without consideration the role of biodiversity net gain or 'BNG' as I will refer to it. This was something that was fully on the radar of two smaller groups of people until fairly recently but all that has changed now particularly with the enshrining of BNG into law by the Environment Act 2021. BNG is a concept that will impact on all developers and investors which is why I am absolutely delighted to be joined today by Professor David Hill, Founder and Chairman of the Environment Bank and one of the leading individuals in difference makers in the evolution of BNG.
David will be talking to us about BNG, what it is, how it works and the responsibilities facing developers and investors in this area. I think it is fair to say the Environment Bank has been a first mover in collaborating with forward thinking landowners and other stakeholders to create a network of Habitat banks to ensure planners and developers can meet their BNG responsibilities outlined in the Environment Act. In short the approach is a win-win for all parties involved. Landowners secure to put a revenue stream over a 30 year period while planning authorities and developers have a workable means of meeting their BNG requirements and locking sustainable development opportunities.
Welcome, David. We are delighted to have you on the Podcast to talk about the work that you are doing at the Environment Bank and in the BNG space.
Moving on to some specific questions for you David, as I said in my intro we are delighted you have given up your time today to talk to us about BNG so thank you and there is nobody better to talk to about it than you. Can we start by talking about what BNG actually is maybe in layman's terms what it means in practice and why it is an important part of sustainable development?
Professor David Hall: Yes sure Nath well it goes back quite a long way when I was doing a lot of work on environmental impact assessments and realising that they were not delivering for biodiversity so I lobbied hard from about 2006 to change the biodiversity system in the way it was accounted for in the planning development control sector and effectively, cutting a long story short, that led to the mandating into law that all developments or most developments will now from now on have to provide at least a 10% uplift in biodiversity as a consequence of that development so what it is, it is a mechanism, an initiative whereby developers have to measure their unit impacts on biodiversity as a consequence of that development and they then add on to that those units that they calculate using a Government metric at least a 10% uplift and then that gives you the number of biodiversity units that need to be accounted for as a result of the development so some of that can be placed on site but as we will probably come on, we believe that the majority of it will have to be placed off site, so it is a net gain biodiversity as a consequence of the development and the developers have to provide in order for them to secure planning permission.
Nath: Great! Thank you, David. So how has the recent Environment Act changed things then for developers both financially and maybe from a regulatory perspective and, in your mind, how important is it that Parliament follows up that primary legislation quickly with the secondary legislation that will be required to fully implement the legal framework around BNG?
David: It is a really good point. It is undoubtedly the case that this will change planning and development forever in a good way and just let's set the scene really as to why biodiversity is important. If we look across the piece we know that climate change is existential threat to us well so is biodiversity loss. Those two things together have equal weight and we spend a lot of time talking about reducing carbon emissions quite rightly but until now, we have not actually dealt with the issue of biodiversity loss and how we are going to do it so although there will be a cost to the development sector, the cost of not doing anything for biodiversity will lead to an existential threat and perhaps we can just focus on some features of that for the moment. Basically, our economy the global economy depends on the goods and services that nature provides something in the order of around 55% of global GDP, even though GDP is a pretty poor measure of progress to be honest, but 55% of global GDP relies on what nature provides, and yet one fifth of the services that nature provides are on the verge of collapse and we have lost in the order of 60% of our biodiversity in the UKM in the last 60 years, in the last six decades since the late 1960s and it is quite extraordinary that until now, we have just seen and treated the environment as a charity case and that includes nature. It is no longer a charity case. Unless we solve the biodiversity loss problem we are going to see some substantial financial risks leading to valuation declines in corporates, approaching perhaps 50% or more, and that is not our work, it is based on work from the task force for nature related financial disclosure and other such as World Economic Forum. So we have got to do something about it now and so it is at the heart of sustainability and it was introduced to start the process.
Now we know that biodiversity loss is not just impacted by development, the biggest impact is really from agricultural intensification and that is actually being dealt with by new policies and models for factors such as regenerative agriculture etc. but biodiversity net gain plays a really important part and so getting into legislation has been absolutely critical and the reason for that is until it was made a mandatory requirement, as in embedded in law, it was voluntary and it was incredibly difficult certainly for us and many others to actually see how biodiversity net gain could be delivered by developers if was only voluntary and we started the whole process of as I say in 2006 and we set up about 20 or so bespoke off-set sites under the voluntary regime but now it has gone mandatory we are seeing a massive uplift in interest and commitment and that is really important because it is the only way to leverage the types of financial resource that are required to restore nature at scale. So we are moving from seeing conservation as a grant aided thing to something that we have all got to invest in, and actually the price to a developer is always going to be less than around 0.5% of the gross development value so really it is pretty immaterial and if it is done correctly it is immaterial in financial terms.
Nath: Thank you, David. I think there is a lot in there and I think we will come on in a minute to the point that you are making around this now being imperative in investment cases because of that mandatory nature of the obligations that are being enshrined in the legislative framework, but there was something there that I wanted to just pick up on is that you mentioned that this all sort of started for you in earnest in 2006, and I know that you have made comments before around it really started to get serious traction within Government around the time of David Cameron's Government, but I did wonder whether you could just explain a little bit around that early history of this as a concept and I would be really interested to know whether there was a specific moment in time that sticks out in your mind as being a turning point when this really did start to gain traction and you became confident that it would end up becoming law which is where we are today.
David: Well definitely as I said I had spent quite a lot of time doing design mitigating schemes for developments that really just did not go anywhere and I had asked many of my ecological consultancy colleagues as to what they were doing and whether their mitigating schemes were working and it was across the piece that there was no real value being delivered for biodiversity, you were just continuing to get attrition and the system was not geared up to actually oversee, enforce etc. so the local planning authority did not have the capacity and still do not actually to enforce developers into doing things within the development site boundary and of course it never works anyway because if you take a housing scheme those sites, those areas are disturbed by people quite rightly and they do not really want lots of untidiness, which is what biodiversity is, where they want tidy places so I lobbied again hard and by 2010 I could start to see some interest being generated but I have to say that there was a lot of pushback in the early days by the environmental NGO sector, of which I am a member of many, because they thought that it would lead to a licence detract so a developer would just buy his way out and destroy sites of importance for nature conservation. That was never ever going to happen because the planning system at least does protect those sites down to county wildlife sites in most cases unless there are a variety of socially economic reasons at regional scale and beyond which over-rode the biodiversity interest and even if it did the mitigation that is put in place now through biodiversity net gain will be much, much better than was historically the case.
So there were two turning points I think when the Government at the time set up the Ecosystem Markets Task Force, and I joined that as a member under DEFRA, and I could see that the wind of change was blowing and there was at the time that that reported I think in 2013, the first recommendation of how to make nature economically visible came in about 2012/2013 with the publication of the first report which made biodiversity offsetting to be made a mandatory requirement. However, it took the Government quite a while to get its head round and it did not progress it at all very well I do not think and there were various pilots that were undertaken. We took part in a couple of those and they did not really have the bite because the LPAs did not have a resource to follow it through and as I said before it was voluntary, so the turning point really came I would say in 2019 when the Chancellor of the Exchequer, Philip Hammond, said that in the Queen's Speech biodiversity net gain making developments deliver gains for biodiversity not just no net loss but gains as we have been lobbying since 2006, was going to be made a mandatory part of the planning system. I knew then we were on to something big but of course we then had to wait for various delays for the Environment Act to kick in and for the bill to be enacted in November 2021. So by 2019, up until that point, I was still concerned that there was not the understanding or the impetus or the urgency but now we have had that and every credit to the Government and those supporting the piece that is now enshrined in law.
Nath: Thank you, David. That is really interesting. I would like to pick up a little bit then on the delivery models that are available for achieving this and to my mind at least, they fall into two primary categories. The first being on onsite solution whereby developers effectively manage their own projects and the other being an offsite solution where developers are contracting out that obligation or the delivery management of that obligation to a party like the Environment Bank which is better placed to manage the risk of undertaking a BNG project.
You made some comments earlier around the fact that housing sites which is an obvious example of a potential on-site solution are not necessarily always suitable for BNG projects because of the disruption to those projects by people coming and going and I know that you have also made comments in the past about the farming intensification that we have seen in this country over the last 30 or 40 years really making arable farmland a prime candidate for BNG projects because of the gain that is capable of being realised on those sites.
So that to my mind is a clear advantage of the offsite delivery model as opposed to the onsite delivery model and I wondered whether you would agree with that statement and whether you had any other thoughts on the advantages and disadvantages of those two models.
David: Yes thanks, Nath. Definitely, I have been saying for well since 2006 why I set the Environment Bank up was that the onsite very rarely works and there are going to be a lot of constraints on the developer for that onsite so first of all they will need to register the onsite by the rest of the net gain, and whether it is at a national or local level. They will have to guarantee funding for 30 years so underwrite the actual delivery of it for 30 years which they have never done before and the history of delivering within the site boundary for developments is actually non-existent to be really honest. I mean some large scale housing schemes can achieve something onsite but you know if you have set it into the context of the Government's ambition and society's ambition for at least a 500,000 hectare nature recovery network, we are not going to recover nature by fiddling with fragments within housing schemes and then when you look at commercial logistics plants and warehousing sites, ports, airports etc. they are operational sites which are generally dominated by large slabs of concrete and tarmac and sheds and there is not the capacity and space and so we have really got to decide on how we want to do this and so for me it has always been that the offsite solution were you can aggregate large areas of land like we are doing with our Habitat banks. You can aggregate them together to make these big areas which are much better for biodiversity and meet the John Lorton principles of bigger, better and joined so you are not going to get that if onsite is where the BNG is placed.
The other factor of course is that for every hectare that is taken up onsite by the so called biodiversity that is a hectare that is removed from developments, so net developable area declines and so in order for a corporate let's say house-builders to meet their viability objectives, they are going to have to look for new other sites to make the schemes work so I think all in all let's say a notional 20% of the BNG requirement may by onsite and that's fine but probably 80% will need to go offsite into these much bigger, better areas and just one final thing I would say is that, it is not just me saying that if you look at this whole range of academics that have been looking at this at various places such as the Durham Institute of Conservation and the University of Exeter, University of Oxford Brookes where pretty eminent people in the ecological field have been looking at onsite delivery and saying basically, offsite if where we should be focusing and I think that is a really good point and as I say, I would finally say we cannot deliver nature recovery by fiddling with fragments within housing schemes or any other development for that matter.
Nath: Ad so if I am a housing developer or a commercial property developer or an infrastructure project developer and for all of the reasons you mentioned I decided that I would like to discharge my obligations by partnering with someone like the Environment Bank in order to execute an offsite solution, how in practice would I go about doing that?
David: So what we are doing within the Environment Banks is that we have raised a large, very large financial fund to enable us to front funds and create around 200 Habitat banks across England in the first tranche over the next three years so we are aiming for at least one Habitat bank in each planning authority area of course there are 350/360 planning authorities so we have got a way to go but that first big fund will go into setting up large scale Habitat banks of a minimum of between 10 to 100 hectares in size working with landowners, farmers and conservation bodies and in some cases planning authorities here they have got land, and we lease that land from them and then we pay all the upfront costs to create the Habitat and we take on all the risk of doing that and then we are in a position to sell the assets from that Habitat bank to the likes of developers for them to be compliant with the BNG legal situation and s they just simply contact us and we will look at where we have got those Habitat banks and we will certainly within a relatively short period of time, we should have enough Habitat banks to service a large amount of the demand across England. We have looked at about 85% or 90% of the planning authorities to look at what their demand for BNG units is likely to be over the next 10 years and we know where the demand hotspots are so we are focusing our delivery model there at the moment but we will be intended to roll out Habitat banking in every planning authority area so they just get in touch with us directly on our website and we will then take up that. We will also help them where we can with checking the measurements using the DEFRA metric 3.1 which is used to work out the boundary of the units that the development is likely to impact upon link that to the master plan to tell us how many units they are likely to need and in fact it is going to be a lot cheaper to do the offsite by buying credits from us than as a I say locking down land and then having to change the master plan accordingly. I would say one thing of course though that this does not mean that the developers are not going to want to really do fantastic landscaping and planting on these housing schemes. I am focusing on housing schemes because those are the ones where there is the opportunity for a bit more onsite than perhaps elsewhere and of course there is infrastructure that is captured now by the BNG mandate so all infrastructure is largely going to be needed to say road infrastructure, rail infrastructure etc. and we can deliver on those as well and what I would say is that in housing schemes of course they are going to do great place making which is what we want to see so it gives green space for people and residents living in those places, but at the same time if you were to look at what makes a really good biodiversity area, it is largely woodland, woodland scrub, wood meadows, species of its grassland mosaics and wetland areas and those do not sit very well within a housing scheme, and will often in fact almost always, get transitions to something much more simple by a residents association and we do not foresee the developer anyway putting forwards 30 years of funding to ensure that is management and then maintaining the liability for that for 30 years. Who is going to enforce it as well so it puts a burden on the planning authorities so doing the offsite is much more satisfactory and the residents get what they want which is good place-making, good landscaping and good planting.
Nath: Thank you, David. That is a very useful answer to that question and I am sure all manner of developers that are listening to this Podcast will be very interested in the opportunities for them to fulfil their obligations through contracting someone like the Environment Bank you can take that long term liability off their balance sheets.
So we have talked about the genesis of this and we talked about the present, I would like to just talk a bit about the future, a bit of crystal ball gazing, and ask you what do you see as being the main challenges to the roll out of BNG on the scale that we are all hoping will be achieved, and overall, what does success look like around this over the next 20/30 years in your eyes?
David: Well Nath the real evidence of the criteria for success will be that BNG has made a major contribution to the nature recovery network and at the moment, we feel that the scale of this is probably in the order of probably 3,000 to 4,000 hectares maximum per year being put down into this, so we need a lot more than that. We are not going to deliver the nature recovery network if we as I said before if we focus lots of this onsite so the major challenge is to make sure that whilst the developer follows the mitigation hierarchy and they can do what they can onsite but they have a pressure valve for the majority of it by an offsite solution and that flexibility is really important. So, we have been hearing that some planning authorities have said well we cannot give you planning permission unless you put it all within the boundary of the development site. Well that is just ridiculous and that will never work so what will tend to happen is that the developer will be tempted to maybe, dare I say, manipulate some of the figures which is wrong and I can understand why they might want to do that whereas they need the pressure valve of an offsite solution and it makes it a lot easier for them. It is cost effective. They are not ecologists, they are not conservationists, they are good at doing developments and hopefully good quality developments and they should be allowed to get on and do that.
The second challenge I think is from the planning authorities themselves. We hear stories where planning authorities suddenly see this as a major income generator which it actually isn't really because the money that you gain, you have got to spend on those sites so they do see that they have got sites in some cases where they could see biodiversity net gain credits to a developer but of course they have got to really guarantee that site for 30 years and what happens when the finance director comes along and says what are these sites in these really prime development areas that you have done this biodiversity offsets, biodiversity net gain on why have we done that? So it is going to need a lot of oversite from legal departments in LPAs to enable that so there is huge amount of risk and of course the big risk that we see is the planning authorities; should they really be taking money from those whom they regulate. Well we do not think that is true so we think and we have said this to Government that there needs to be a level playing field with all the providers of these offsite areas, Habitat banks being one and big ones I know but the level playing field is critical because what will happen is that the private sector will simply walk away from investing in these set up models like ours if it is being done by taxpayers subsidised regimes that the Government might introduce so we would encourage planning authorities not to take on the risk. I mean there could also be risk of judicial review if they suddenly assume to take money from a developer and then give a permission for a controversial development. I can see this happening very quickly and one would only need to look at the details of the biodiversity game-plan which the developer had to submit with his planning application to create a bit of mischief there I think and so we would say just keep it arms-length absolutely do not go there. You do not need to either because the private sector will take up the challenge and provide the funding necessary to guarantee 30 years and that is going to be the right way forward and the final challenge I suppose if that Central Government itself through DEFRA Natural England have a statutory credits regime well we know from examples in the United States that it was only when Federal Government stepped away from providing sites for exactly this for mitigation of compensation. It was only when the Federal Government stepped away from it themselves that did a market start to develop and if Government does interfere in the market then a market will not develop in the same way as the investors will simply just not engage but actually having said all of those challenges and it is all about simply creating a level playing field for private sector involvement. There are big opportunities and the big opportunity is that once we can demonstrate this Habitat bank model works and we are there now we have shown that it works well, it opens up the opportunities for the corporate sector to start to look at their own impacts on nature and natural resources. If you go back to what we said at the beginning, you know 55% of global GDP relies on what nature provides, there is a massive shift now in investment pressure and probably regulatory pressure on corporates to measure and disclose their impacts on natural capital and when do that there will be a residual impact that they cannot reduce and they can then invest in these land based management interventions that we are creating for BNG with development in mind and so we have got our eye now on extending this out to the corporates and we will soon be selling nature credits to the corporates in a big way. So if you like it is a bit of Blue Peter scenario - here's one we have done already - and we can then take it out to the corporate sector and then we will see a very substantial increase in the amount of necessary investment into the natural environment.
So there are challenges but I think the opportunities also are huge and that is why I would just encourage planning authorities and Central Government to understand that and to get behind that and I have said for a long time that really the only way to actually deliver nature recovery at scale both in this country and globally really is through private investment into private landholding. That is the truth and reality of it and that is what sits behind the driving force of why we are doing what we are doing.
Nath: Thanks very much, David. Before we wrap up, there was one other question I wanted to ask you which was just focusing on the Habitat banks. Could you just talk us through a bit about how they work and what benefits they deliver in the context of BNG?
David: Yes sure Nath. We coin the term Habitat banks some years ago as a bank of land from which we can generate what we call the bonus net gain credits or bonus net gain units and how they work is that we go in and work with the landowner as I have mentioned before and we pay all the upfront costs of creation and from taking for example a really degraded arable farmland scenario usually grade 3 grade 4, we can uplift its biodiversity value at scale by management intervention so we go in and as I mentioned, woodlands, probably a mosaic of Habitat types because those mosaics are where you get the biggest bangs for your bucks in terms of biodiversity and we underwrite those for 30 years and so we will end up with effectively if you like the new nature reserves of the future although perhaps we should not be using nature reserves as the taxonomy. We perhaps just be simply talking about nature because we need to see it everywhere really so our Habitat banks are up to 100 hectares. We may actually look to buy land but I am really passionate about the fact that in our mode, we are not brokers, we do not broker deals, we take control of what that land will look like with the landowner's agreement and with the landowner's involvement all the way through the process and we have a Habitat management plan that sits with that land and we have a detailed legal agreement between us and the landowner to deliver that and the landowner gets paid every year to manage that land or he might contact that out to someone else and we will pay that to them indirectly, and what we end up with are these large scale Habitats where biodiversity can function where it cannot necessarily function in smaller scale environments so you start to build a whole ecosystem value by doing things at scale and that is really important, and what we get from it is that the uplift that we can deliver and we guarantee and underwrite it for 30 years is the unit that we sell to the developers to make them compliant and you can see a situation where we can sell our biodiversity net gain credits or units to multiple developments so that you end up with something of real value rather than lots of scattered fragments across the landscape so a much better deal for biodiversity overall.
Nath: David, thanks very much indeed for all of those fascinating thoughts. I mean I have certainly learnt a lot about BNG from this conversation and it is very clear that whilst a detailed legislation is still developing, BNG will impact us all and is something that is here to stay. Developers need to be thinking about and planning for this now but they do have a route to market to facilitate contracting out their obligations to parties like the Environment Bank with a far better place to manage the risks. Equally, investors and corporates that have made it their business to invest in sustainable projects will inevitably be putting BNG considerations close to the centre of their ESG policies. Great progress has been made in BNG in recent history and I think it is fascinating and I think really exciting to see how this will play out over the mid to long term but one certain is that this will be driven by private capital and private investors and that is only way of delivering this at scale.
I would like to say finally a huge thank you to Professor David Hill from the Environment Bank for joining us on this edition of How We Live Sustainably Podcast.
David: Thank you. It is a pleasure.
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