Building the foundations of a Restoration Economy - raising investment for habitat banks - Prof David Hill CBE Chairman, Environment Bank

 
Building the foundations of a Restoration Economy - raising investment for habitat banks - Prof David Hill CBE Chairman, Environment Bank
Building the foundations of a
Restoration Economy – raising
investment for habitat banks

                            Prof David Hill CBE
                  Chairman, Environment Bank
Building the foundations of a Restoration Economy - raising investment for habitat banks - Prof David Hill CBE Chairman, Environment Bank
Policy background
• 25-year Environment Plan and National Planning Policy
  Framework
• Restore 500,000ha of land for ecosystem benefits - Nature
  Recovery Network
• Mandatory biodiversity net gain consultation – out now
• New approaches to funding needed - both public and private
  sector. Basic payment scheme (CAP subsidy) to end
• 75% of land in the UK is farmed and farming intensification
  has inflicted greatest impacts on wider-countryside
  biodiversity
• Target funding at interventions in the farmed environment that
  can deliver large-scale significant improvements within as
  relatively a short a time period as possible
Building the foundations of a Restoration Economy - raising investment for habitat banks - Prof David Hill CBE Chairman, Environment Bank
The Restoration Economy
                               Policy Framework           Value            Action needed
 Sector                                                              Mandatory on Planning Authorities to
                                                                     require development to deliver net
                                                                     gain much of which would be off-site.
                                                                     Investment in Habitat Banks (potential
Development                      National Planning                   tax incentivisation for investors).
Biodiversity offsetting/ net     Policy Framework and   £1.2bn p.a
gain delivery, including         local plans;
newts/European Protected         supplementary
Species                          planning documents
                                                                     Environmental land management
                                                                     contracts (Market-based
                                                                     commissioning of contracts with land
                                                                     managers). Paid for efficiencies of
Agriculture                      25-year Environment    £3.2bn p.a
                                                                     production and environmental goods
Improving environmental          Plan                                and services – aggregate value not
                                                                     mutually exclusive.
performance of farming                                               Tax incentives (?)
                                                                     Credit trading scheme – standard
                                                                     needed.
Corporate business
Corporate natural capital         ONS/NAO. Metrics.
accounting – offset                                      £3bn p.a
                                  Financial annual                   Offset business impacts on natural
business impacts on               reporting                          capital throughout supply chain.
natural capital                                                      Demonstrate responsibility – measure
                                  requirement                        increased investment value of
                                                                     company; Biodiversity Disclosure
                                                                     Initiatives; licence to operate. Credit
                                                                     trading scheme – standard needed.
Building the foundations of a Restoration Economy - raising investment for habitat banks - Prof David Hill CBE Chairman, Environment Bank
Biodiversity net gain
• The most significant conservation policy development for the
  wider terrestrial environment in the past decade. Included in
  NPPF and 25-year Environment Plan
• LPAs have duty to protect biodiversity in planning system –
  NPPF
• Most are not delivering on their legal responsibility
• A mandatory system would signal investment opportunities
  which would facilitate scale-up and create, enhance and
  manage large areas of habitat for biodiversity conservation
• – MHCLG Garden Towns and Villages prospectus – includes
  BNG as a requirement
Building the foundations of a Restoration Economy - raising investment for habitat banks - Prof David Hill CBE Chairman, Environment Bank
Map of LPAs engaged with
   Environment Bank

              77 LPAs in 34 Counties
              have engaged with
              Environment Bank as at
              2018
Building the foundations of a Restoration Economy - raising investment for habitat banks - Prof David Hill CBE Chairman, Environment Bank
Recent & forthcoming sales
                                                                Credits
Location                    Development                                    Compensation
                                                                required
                                                                           Type                                  Location
Coventry                    Business development                4          0.5ha grassland restoration           Within 2km

York, North Yorkshire       Large residential                   1152       On-site grassland/birds               On-site/adjacent

Medway, Kent                Large residential                   ~ 850      Bird compensation                     Within County
                                                                           Wet grassland - indirect impacts to
NE Lincolnshire             Industrial zone regeneration        711        SPA                                   On-site/adjacent

                                                                           3 ha lake restoration + woodland
Rochford, Essex             c. 600 houses + school              14         creation                              Within 2 km

                                                                           32 ha arable margins and grassland
Cambridge, Cambridgeshire   Large residential                   211                                              Within 1 km
                                                                           restoration

Rugby, Warwickshire         c.100 houses                        19         5 ha grassland restoration            Within 4 km

Rugby, Warwickshire         c. 860 houses + school              13         3 ha grassland restoration            Within 1 km

Thundersley, Essex          c. 7 houses                         30         6 ha woodland restoration             Within 2 km
Wheatley, Oxfordshire       c. 50 houses                        8          1 ha Grassland creation               Within 7 km
Warwick, Warwickshire       c. 60 houses                        5          1 ha grassland restoration            Within 3 km

Southam, Warwickshire       c. 240 houses + sports facilities   11         2 ha grassland restoration            Within 6 km
Building the foundations of a Restoration Economy - raising investment for habitat banks - Prof David Hill CBE Chairman, Environment Bank
How to make net gain work
•   LPA requires application of biodiversity impact accounting metric on
    ALL development to deliver net gain
•   Impact of development assessed – 80% of gain should be off-site;
    20% on-site. Net gain is not about ‘prettifying’ development
•   Developer purchases conservation credits from broker of
    strategically located ‘habitat bank’ which yields the credits based on
    a Biodiversity Management Plan
•   Environment Bank (EB) brokers deal - signs legal agreements to
    purchase the credits with developer, and to manage receptor site
    with land manager
•   Money paid by EB under a contract with land manager against
    specific conservation management delivery
•   Monitoring and reporting to LPAs
Building the foundations of a Restoration Economy - raising investment for habitat banks - Prof David Hill CBE Chairman, Environment Bank
Case study example - development

  •   Biodiversity value of existing 12.96ha site = 48.68 units
  •   Biodiversity value of the proposed development = 16.78 units
  •   Biodiversity Offset units = -31.90 units
  •   Large areas of low value habitats, but significant impact due to small
      areas of mitigation to allow development to meet housing need.
Building the foundations of a Restoration Economy - raising investment for habitat banks - Prof David Hill CBE Chairman, Environment Bank
What is a habitat bank?
• Area of land restored for biodiversity at scale – 40-100ha
  in size
• Value added by being linked to existing sites of
  conservation value - spatial plans for conservation –
  bigger, better, joined
• Delivery agent : Landowner/farmer; wildlife trust; other
  conservation NGO; Community Benefit Society (not-for-
  profit)
• Brokers used to raise and validate conservation credits
  from the land management interventions – use existing
  and agreed metric so standardised assessment.
Building the foundations of a Restoration Economy - raising investment for habitat banks - Prof David Hill CBE Chairman, Environment Bank
Benefits of habitat banking (1)
• Developers
     o   Clarity and certainty
     o   Increased net developable area
     o   No long-term on-site liabilities or costs
     o   Developer knows price beforehand
     o   Allows immediate purchase
• Planning Authorities
     o Transparent, consistent, auditable (eg per NPPF, 25 yr
       Environment Plan)
     o LPA already signed-up to assured gains and knows the net
       gains will be delivered
     o New secured wildlife habitat, easy
Benefits of habitat banking (2)
• Biodiversity Conservation
     o   Proper funding of biodiversity – not just landscaping
     o   Financial disincentives for habitat destruction
     o   Enables long-term and large-scale habitat conservation
     o   Biodiversity is a material benefit in planning

• Landowners
     o   Restoration economy
     o   Provides a realistic income with long-term funding
     o   Land status not affected
Setting up a habitat bank
• Locate landowner(s), identify area, identify habitat type
  to be delivered
• Survey receptor site
• Calculate biodiversity units created, convert to
  conservation credits to be sold to developers
• Produce Biodiversity Management Plan with objectives,
  measurable deliverables, outcomes focused, timescales
  set, payment regime (payment by results)
• Implement governance documents
• Implement monitoring and reporting regime
Habitat bank NE Lincs
Governance
• Conservation Credit Purchase Agreement – between
  Environment Bank and the developer purchasing conservation
  credits
• Letter of Sale provided by Environment Bank to the developer
• Conservation Credit Certificate – presented to the developer by
  Environment Bank on purchase of the credits (before
  development starts), which in turn is presented to the local
  authority to demonstrate the discharge of their biodiversity
  liabilities
• Conservation Bank Agreement between Environment Bank and
  the landowner of the habitat bank
• Biodiversity compensation management plan between
  Environment Bank and offset provider
Habitat bank costs
Eg for a lowland grassland habitat bank:
• Uses Environment Bank costing model
• To create/restore and manage 2 habitat banks in each
  LPA area
• 40ha each in size; yields 240 grassland credits
• 30 years duration, inflation proofed
• Total cost for capitalisation and long-term management
  = £1.58m; £3.16m for 2 banks for 30 years
• Delivery agent gets capital establishment costs plus
  £600 per ha per year
• Credit price to developer = £6-8,000 per credit
Financing (1)
• Upfront funding of the habitat bank is best - provides
  instant, predictable, cost-effective supply of conservation
  credits – third party investors/ LPAs (?)
• BUT relies on certainty of market – mandatory BNG in
  planning would provide this
• Habitat banks can also be funded ‘incrementally’ as
  credits are sold to developers
• Provides clarity to landowner and >25 year revenue
  stream to create eg wildflower meadows, wetlands,
  woodlands etc.
Financing (2)
• Regulatory framework – case law has confirmed habitat
  banks are fully compliant with planning legislation using
  Section 106 or planning conditions BUT CIL is not an
  appropriate mechanism to use.
• Development is therefore not permitted until such time as
  conservation credits have been purchased
• These factors mean limited exposure (low risk) for
  investors
Example demand analysis
Parameter                                  Data
No. houses in development         220,000/yr to year 2030
allocation
No. houses per year                       11,000
5-year period                             55,000
Housing build density (mean)            35 units/ha
Area of land-take                        1,571 ha
No. biodiversity units lost on             6648
average
No. conservation credits to be             7313
purchased (10% net gain)
Potential area of habitat banks          1463 ha
required
Example demand analysis cont…
Parameter                                Data
No. 40ha habitat banks to                 37
establish
Approx. cost of a conservation          £7,900
credit
Cost of 1463ha of habitat banks         £57.8m
Average house price                    £210,000
Total sales income                     £11.55bn
Profitability applied                    23%
Net profit for 55,000 houses           £2.657bn
Cost of habitat banking as % of   0.5% of gross income
income and profit                   2.1% of net profit
Estimates of value of UK
       biodiversity net gain market

Estimate             Source
£54m p.a             Defra (2011) for White Paper
£500m - £1.2bn p.a   Ecosystem Markets Taskforce (2013)
                     report
£700 - £800m p.a     Vivid Economics and Environmental
                     Finance, Natural capital finance model –
                     Strategic Outline Case, Defra, March 2018
Third party investment
                                             • Habitat banks provide
                                               more cost-effective
                                               solutions for developers
                                             • Bespoke offset site
                                               conservation credits cost
                                               c. £9k - £20k depending
                                               on habitat and length of
                                               term. Habitat bank credits
                                               c.£6k - £8k.

•   Proposal to set up 20 habitat banks (800ha) for 30 years in first
    instance.
•   Investment sought of £31.7m over a 5 year period
•   Sale of 4800 credits at £7.5k per credit
•   Yields return of £4.19m over the 5 years
Opportunities and barriers
Opportunities
•   Ability to make a transformational change to the countryside and its
    biodiversity
•   Attract in third party investors and recycle that investment
•   Transparency, LPA complying with their duties
Barriers
•   Need a mandatory regime with an effective regulatory framework
•   Some LPAs won’t prioritize or care – so mandatory is essential
•   Too much emphasis on delivering ‘biodiversity conservation’ within
    development site boundary – evidence is that this does not provide value for
    money
•   Lack of mandatory regime and regulatory framework means investors don’t
    engage
Net gain and habitat banking for
       Great Crested Newts
• Moved to system based on status of populations
  rather than individuals
• Implementing habitat bank model for newts with
  agreed species offsetting metrics
• Newt habitat created in advance in key areas,
  credits purchased by developers as needed
• Natural England provides District organisational
  licence to LPAs via NatureSpace Partnership
Scheme coverage 2018-20

• South
  Midlands now

• Expansion
  into the other
  regions 2019
  onwards
Income and costs
£1.2m investment raised to set up South
Midlands and secure District Licence

Allocation of scheme income
   • 20% SMNCP Habitat creation
   • 20% SMNCP Endowment fund
   • 20% SMNCP operational costs
   • 40% NatureSpace operational &
     monitoring costs
Investment vehicle – Green Bonds

 Bloomberg Barclays MSCI Global Green Bond Index; 2017 c.£200bn
Investment vehicle : Impact investments and
              environmental credits
• £117bn of impact investments globally
• Address worlds most challenging problems eg
  conservation and biodiversity loss
• Who? High net worth and Foundations
• ?In UK - impact to be addressed is deterioration of
  biodiversity and natural capital as a result of intensive
  farming and development
• eg restore biodiversity through land sparing – capitalise
  schemes with returns paid by Government ELM funds –
  farmer clusters and Community Benefit Society structure
What the Restoration Economy could
   achieve for the Nature Recovery Network
Cost of 40ha high quality mosaic grassland habitat bank –          £1.585m
creation and 30yr management
Value of fund from Environmental Land Management contracts          £3.6bn
Value of fund from net gain/offsetting (NG)                         £1.2bn
Value of fund from corporate natural capital accounting (CNCA)      £3.0bn
Area of land restored through habitat banking (exc. CNCA and     90,850 ha/yr
NG)
Time to deliver Nature Recovery Network (exc. CNCA and NG)         5.5 years
Area of land restored through habitat banking (inc. CNCA and     196,845 ha/yr
NG)
Time to deliver Nature Recovery Network (inc. CNCA and NG)         2.5 years
Summary
Mechanism                       Habitat bank solution            Action
Biodiversity net gain/habitat   Habitat banks –                  •   Mandate net gain – clarity
offsetting                      conservation credits yielded         and consistency across
                                by creation and                      planning authorities
                                management interventions
                                                                 •   LPAs will then deliver their
                                Value potentially £1.2bn/yr          biodiversity duties
                                from development
                                                                 •   Accredit brokers and
                                Conservation credits, locally        biodiversity compensation
                                raised and delivered, far            (offset) sites
                                better than a general tariff –
                                more fine-scale, relevant        •   Provides better regulatory
                                and proportionate to impact          framework for LPAs

                                Major contributor to the         •   Bring forward third party
                                Restoration Economy and              investors to capitalise
                                Nature Recovery Network              habitat banks

                                                                 •   Tax incentives for investors
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