Biodiversity – Gains for nature and investors alike

Most developments in the UK must now deliver at least a 10% biodiversity net gain (BNG), namely, leaving the natural environment in a measurably better state than it was beforehand. While the BNG regime significantly changes the regulatory framework and may increase costs for developers seeking planning permission, it also presents opportunities for investors to participate in the market for off-site BNG units, which the UK government expects may be worth £274 million annually.

What is required under the BNG regime? 

As part of the Environment Act 2021, most developments in England are now required, as a condition of planning permission, to deliver at least a 10% BNG, which must generally be maintained and secured for at least 30 years.  

Initially, BNG was only mandatory for “major developments” (including commercial developments where floor space created is 1,000 m² or more, or residential developments with 10 or more dwellings), however, as of 2 April 2024, the obligation also applies to small sites (subject to certain exemptions) and will apply to “nationally significant infrastructure projects” (namely, large scale developments that require specific planning permission from the relevant Secretary of State) from late November 2025. 

Under the BNG regime, developers must produce a “biodiversity gain plan,” explaining how BNG will be delivered, including disclosing the biodiversity value of the site (measured using the statutory biodiversity metric, a formula which considers various factors including the habitat’s size, condition, and type). Biodiversity gain plans must be submitted to the relevant planning authority and approved before development can lawfully commence and these changes will potentially affect over 100,000 planning applications every year.

To deliver the required BNG, developers must follow a prescribed hierarchy but can achieve gains either fully or in part through:

• On-site habitat;
• Off-site habitat, by enhancing biodiversity on their own land, outside of the development site, or by purchasing biodiversity units on the market from third parties (at a quantity and price to be determined by various factors including the proximity of the off-site habitat from the development site and the type of habitat); and/or
• Purchasing statutory biodiversity credits (which will be sold by Natural England at an intentionally high price to ensure that credits are only used as a last resort). 

The win-win – challenges and opportunities of delivering BNG

On the one hand, investors, particularly those in the planning, energy, and infrastructure sectors, should be alive to the additional costs and hurdles that the BNG regime poses to their real estate investment transactions. These changes will affect the lifecycle of a development, from pre-acquisition discussions (where the costs associated with meeting mandatory BNG obligations must be factored into site evaluations and business plans), to site disposals (where BNG maintenance obligations may need to be passed on to, or shared with, buyers). 

On the other hand, the BNG regime poses both financial and ESG opportunities for investors, for example, through the market for off-site biodiversity units. While in its nascency currently, this market is expected to generate hundreds of millions in revenue every year. 

One way of meeting demand for these off-site units will be through habitat banks, which are forward funded projects where land is developed to enhance biodiversity, for example, turning non-arable land with low alternative use value into biodiverse wildflower meadows, and then “banking” the resulting biodiversity units for future sale to third party developers. Several investors are already active in this space, including Gresham House who has launched a fund, aiming to raise around £300 million, which will focus on investing in English habitat banks created by Environment Bank Limited, a portfolio business of Gresham House.   

Such opportunities also apply beyond the UK biodiversity market. The World Economic Forum estimates that global demand for biodiversity credits could reach almost $70 billion by 2050. Not only can investments in biodiversity projects deliver financial returns, through the profitable sale of the biodiversity units on private markets, but such investments present ESG opportunities to enhance the reputation, environmental and social ratings of an investor’s portfolio. Clearly a notable win for nature but expect to see a proliferation of investors seeking opportunities in biodiversity units. 

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