The birth of a biodiversity credits market?

Decarbonisation is a huge global challenge, but the urgent need for ‘nature repair’ is arguably an even longer-term issue. Carbon offset schemes should become redundant when carbon emissions are eventually eliminated from the production stream. It might take 100 or 200 years, but there is an end in sight.

For as long as the need to feed and house the world’s growing population increases, the destruction of biodiversity continues. Nature repair will be needed in perpetuity.

Biodiversity loss is a complicated problem that cannot be solved by the global community creating an international offset scheme because it is not globally transferable – it is a local problem.

A fledgling market for nature or biodiversity units has been emerging in England since February 2024, when developers were required by law to offset biodiversity loss from their projects. The UK’s Environmental Act 2021 stipulates that the real estate industry must obtain biodiversity net gain (BNG) credits in proportion to the scale of any project before local government councils will approve the planning application.

The legislation ushers in the biggest change to England’s planning regulations in decades, requiring developers, landowners and others to make a significant contribution to nature’s recovery. The goal is to improve the biodiversity of property development by at least 10%.

Property consultant Knight Frank, has analysed 1,300 planning applications submitted to 29 local planning authorities (LPAs) in the first five months of BNG regulation. Patrick Dillon, a senior analyst with Knight Frank’s analytics team, found 245 applications had triggered BNG assessments, and a further 97 were identified as needing BNG credits. All told, the Knight Frank analysis found that the applications required 31 BNG units. 

“Suppose we were to scale all LPAs in England – that would suggest an annual demand of around 3,100 BNG units,” the firm says. “However, this is total requirement and not all developers will turn to off-site or statutory credits. Many will be delivering on-site solutions.”

Tapping into this potential market, alternative asset manager Gresham House was quick off the mark, launching a biodiversity strategy, which raised US$380m (€364m) to fund the acquisition of sites for conversion to habitat banks. It became the first asset manager in the UK to offer such a strategy. 

Currently, England is the only country in the world with a compliance BNG market. In a joint paper, the World Economic Forum and McKinsey say the current voluntary biodiversity market could grow rapidly, with the potential to reach US$2bn by 2030 and US$69bn by 2050. But early movers are optimistic that, over the next three years, the size of the UK BNG market alone will likely be worth £2bn.

Biodiversity markets are still a developing concept in European countries. The US has long operated what are known as mitigation banks. New Forests, a global land-based asset manager, says the US mitigation banking industry transacts more than US$1.5bn a year. 

Australia is poised to introduce a market for what it calls ‘nature repair’ credits, due to come into force in early 2025. Consultancy firm PwC forecasts that the value of an Australian biodiversity market could be as much as A$137bn (€82bn) by 2050.

But there is reason for caution. The sector is protective of its product and wants to differentiate it from carbon credits. 

Peter Bachmann, managing director at Gresham House, says: “We call our product a biodiversity unit and not credit. We don’t use the word credit because we want to distance ourselves from the carbon market which has become discredited and damaged substantially by unscrupulous operators.”

Bachmann says a voluntary BNG market existed in the UK from 2021 to 2024 because some nature-conscious local government planning authorities were pre-emptively asking developers to provide BNG units to support their planning applications.

The concept of mandatory biodiversity net gain was introduced to the UK by the Environment Act 2021. However, BNG did not become compulsory until February 2024.

Since 2020, Gresham House began creating a national network of habitat banks and has sold BNG units from these habitat banks to property development and other companies seeking planning permission. The buyers have the same objective – they must comply with requirements under the Environment Act.

“We have created a market,” says Bachmann. “We have developed thousands of acres of habitat banks. These are woodlands, grasslands and wetlands on depleted land which has been over-farmed and can no longer support agriculture because there has been too much chemical and pesticide usage or topsoil erosion. We remediate the land to create nature corridors and an environment almost like nature intended for more birds, bees, insects, flora and fauna.

“So far, we have cultivated 4,000 acres. Our plan is ultimately to develop more than 10,000 acres for new habitats to meet the anticipated demand for BNG units. We have BNG demand of around £200m worth of BNG units and transacted north of 50 deals with [companies] like National Grid, [warehouse developer] Panattoni, supermarket chains and water utilities companies.”

Bachmann says the firm has researched market potential and, based on development applications lodged with local planning authorities, estimates the total value of biodiversity net gain units required at around £2bn. This will grow every year with more housebuilding and industrial development.

Gresham House offers offsite habitat banks, and this segment of the market could be worth more than £500m per annum, says Bachmann. Gresham House will potentially have a market share of £200m-plus each year.

Bachmann expects more demand for offsite habitat banks. It is a trade-off for developers who are not prepared to sacrifice land on their projects for biodiversity gain. Opting for offsite BNG credits could save developers as much as £50m on some projects, while also having a materially better benefit for nature, he says.

Gresham House is not sacrificing returns for environmental impact. Bachmann says: “Our investors can expect attractive double-digit returns from this strategy because we think, in future, there will be capital gains on our habitat banks.”

In July 2024, Principal Asset Management launched its Global Sustainable Food and Biodiversity Fund to capture what it sees as “an under-appreciated investment potential” in the companies delivering solutions that can help improve biodiversity and feed the world sustainably. 

Martin Frandsen, manager of the new fund, says: “This was based on thorough fundamental research, through which we saw that the demand for food will grow by 56% by 2050, given that the global population will reach 10 billion people. Feeding these 10 billion people cannot be met through the same playbook we have used historically without having a material negative impact on biodiversity.

“Therefore, we need new innovative solutions that can help us create more food with a lower environmental impact. Technology will be key to this, with one example being precision agriculture, which can help farmers become much more efficient.”

Frandsen says: “Investors are allocating to biodiversity funds because they are seeing significant value generation and growth potential for companies that are delivering innovative solutions to reduce negative impacts on biodiversity. They also see a material financing gap required to combat the global nature crisis. The combination of the two helps investors target value generation and positive impact at the same time.”

Unlike climate, where there is one common bottom line – the reduction of CO2 – nature is much more complex, and reductions of nature impacts, such as area restored or untouched, have a very different value depending on the location, says Frandsen. 

Principal uses the Kunming-Montreal Global Biodiversity Framework – which was adopted by 196 countries at the UN Biodiversity Conference (COP15) in December 2022 – to “target companies that can either have a positive biodiversity impact through their products or solutions, or companies that can have a material positive impact through their business operations or supply chain”, Frandsen says. “In the second group, we would like these companies to adopt strategies or policies that can get them closer to net zero nature impact.”