Although the consideration of biodiversity risks remains limited for most assets so far, their longer-term impact is undeniable and needs to be considered when funding real estate.
Read this article to understand:
- Why real estate debt investors should consider biodiversity
- The risks and opportunities of biodiversity for real estate lending
- What practical steps owners can take to incorporate biodiversity into their assets
In May, the UK government strengthened the “biodiversity duty” in its Environment Act 2021, which will require public authorities in England to define policies and objectives to conserve and enhance biodiversity. This includes preparing for biodiversity net gain (BNG), “an approach to development or land management that aims to leave the natural environment in a measurably better state than it was beforehand”.1
The concept of biodiversity net gain aligns to the mitigation hierarchy commonly used by developers to limit projects’ possible negative impacts on biodiversity. The first step is to avoid creating impacts at the outset of a development; the second to minimise a development’s impact on nature; the third to restore or rehabilitate degraded ecosystems; and the fourth to compensate for any residual or reverse impacts through offsetting. BNG reinforces and complements these steps, as it creates net-positive biodiversity benefits compared to the baseline - the state of the local environment before the start of the project.
“The new legislation, which will come into force in 2024, requires any new UK development dependent on a local authority to deliver a minimum of ten per cent BNG compared to the baseline,” says Kiran Sehra, biodiversity analyst at Aviva Investors.
“In addition to new developments contributing to BNG, the intention is to allow the trading of biodiversity credits nationally,” she adds. “Biodiversity credits are a nascent, but increasingly developing, area which doesn’t have any exact definitions, standards or third-party verification. Different countries are taking different approaches as the opportunities are site-specific.”
However, this is a space to watch as the UK and French governments have committed to creating an initiative of what a biodiversity credit system should look like to support the Kunming-Montreal Global Biodiversity Framework.2 The intention of biodiversity credits is to go beyond the offsets that follow the mitigation hierarchy. Biodiversity credits focus on additional uplift, beyond the “no net loss” approach. These uplifts need to be proven, but the idea is for biodiversity credits to contribute to nature recovery in the same way carbon credits do for net zero.3
This also means the importance of BNG will likely grow across real estate projects as private developers and investors begins to follow the lead of public authorities.
We are a long-term lender, so we have to focus on factors that matter tomorrow and in future
“We are a long-term lender, so we have to focus on factors that matter tomorrow and in future,” says Gregor Bamert, head of real estate debt at Aviva Investors. “Biodiversity, and nature more broadly, is an area that will have to be taken into account.”
In this article, we explore why the issue is important for real estate, what investors and developers can do to begin tackling the issue of BNG, and how the dynamics of real estate could evolve in response to biodiversity requirements.
Why owners and developers should engage now
Given the importance of improving biodiversity, but also the cost of delaying action, Bamert says owners and developers of real estate assets should begin engaging without waiting to have all the answers.
“There is no silver bullet whereby a single action should systematically be taken whatever the development or existing building,” he says. “Owners and developers should be designing plans, defining potential yardsticks and trying to make improvements to and around the assets.”
In the 2021 Dasgupta Review on the economics of biodiversity,4 led by Professor Partha Dasgupta, the authors wrote: “By acting now, the cumulative social cost5 of stabilising biodiversity intactness by 2050 is estimated to be US$7 trillion dollars (equivalent to around eight per cent of global GDP in 2019). Delaying action by ten years would more than double the social cost, at approximately US$15 trillion (equivalent to around 17 per cent of global GDP in 2019).”
The World Economic Forum’s 2023 Global Risks Report also listed biodiversity ecosystem services as the fourth biggest risk over the next decade.6
Greta Talbot-Jones, responsible investment director at Aviva Investors, says the issue is exacerbated by the systemic character of biodiversity risk, as high-functioning biodiversity and ecosystems underpin 55 per cent of global GDP.7
The global economy is inherently reliant on biodiversity, meaning everyone has a stake in its conservation
“The global economy is inherently reliant on biodiversity, meaning everyone has a stake in its conservation,” she says.
On the positive side, restoring nature delivers material benefits, from flood mitigation to reducing heat in urban areas and improving residents’ wellbeing and connection to nature. However, while the social benefits may come quickly, economic ones such as flood mitigation will be delivered over the long term. As a result, Talbot-Jones says investors should consider the risks and opportunities over a longer time-horizon than they usually would.
“That links back to the point about long-term investment,” says Bamert. “If we are making a 20-year loan and wait 19 years before we tackle this issue, we will not get our money back in year 20. It's as simple as that.”
He adds that, while biodiversity considerations are not factored into the majority of real estate funding decisions, investors face an increasingly pressing question as to whether they want to be involved in projects that don’t take it into account.
“A 12-month loan that did not integrate any biodiversity considerations may well be commercially viable today, but over five, ten or 20 years, the chances of that being a sensible strategy become less likely,” he says. “That is why investors need to ensure it is a key focus and begins impacting the overall availability of capital as much as its pricing, for equity and debt.”
Taking biodiversity into consideration in real estate is dependent on context in three areas.
One is the need to coordinate nature-positive and net-zero plans. There is intense competition for roof space between air-source heat pumps, solar panels and green spaces. In addition, timing is important. Asking an owner or manager to undertake large adaptation works for biodiversity when they have just finished a refurbishment to lower the carbon footprint of a building will probably not work.
The second area is assessing what is suitable for a particular site, like understanding whether a building was structurally built to withstand the additional load of a green roof. Talbot-Jones gives the example of London’s bus stops. In theory, putting a green roof on every one of them would be a small intervention with potentially meaningful results given the number of bus stops in the city.
“The problem is they were not designed to withstand the load of a green roof,” she says. “That means it is only possible to add them as bus stops are replaced, which will take several years.”
Any intervention must be designed for the catchment radius of the building
The third area where context matters is the immediate environment around a site. Any intervention must be designed for the catchment radius of the building. A building on a square or with garden space allows for more biodiversity improvements than one on a paved road.
“The question then is whether the owner can talk to others to try and make a difference collectively,” says Bamert. “That’s much more relevant in some cases, whereas if you have a whole estate or campus, you can manage everything on your own.
“That is why we don't want to be prescriptive about an exact answer, but we expect borrowers to be able to articulate what they're doing,” he adds.
On urban interventions, he cites the example of a collaborative initiative led by landowners in London’s West End, called Wild West End. This can multiply the positive effect of even small initiatives thanks to their coordination, which gives local wildlife access to more habitats and food sources.8
“Biodiversity is different to climate, where you can have an impact by decarbonising a building in isolation,” says Talbot-Jones. “You need connectivity for biodiversity, to create green corridors or pathways for nature to traverse, and that lends itself to greater collaboration across the industry.”
Assessing BNG in real estate
BNG is focused on creating, maintaining and restoring wildlife habitats. While this approach is limited compared to a broader focus on goals like species introduction or population increase, the advantage is habitats are something landowners can control.
“The biodiversity side is more akin to social value in that there are multiple possibilities in terms of implementation or interventions. The outcome you're trying to achieve is important,” says Talbot-Jones. “Otherwise, great opportunities will be lost, while smaller achievements may be overstated.”
In that regard, property owners and lenders should first calculate the baseline – where they are today in terms of biodiversity – then assess the risks and opportunities within their portfolio.
“Biodiversity is more complex than climate because you can’t reduce it to a single metric like the carbon footprint of a building,” says Talbot-Jones. “It needs to be broken down into measurable and achievable pieces to make interventions possible.”
The risk assessment will cover threatened species, key biodiversity areas and important habitats that lie within the properties’ catchment area.
“On the risk side, we use an array of international biodiversity datasets to identify critically endangered species as well as important biodiversity areas in the vicinity of our properties,” says Sehra.
The other aspect involves exploring the opportunities that exist on the sites, for instance to implement green roofs or increase green spaces.
Natural England has created a tool which creates a standardised way to assess the potential BNG
“Natural England [a public body that advises the government on the natural environment] has created a tool which creates a standardised way to assess the potential BNG,” says Sehra. “It’s a great initial stage for people to understand what the opportunities and risks are.”
BNG and other kinds of implementation measurement programmes are not perfect, but they allow for a standardised and cost-efficient approach to assess the impact of potential interventions.
“Standardisation is important to gain an understanding of risks and opportunities across a large portfolio and prioritise interventions for mitigation actions,” says Sehra. “Going further requires on-the-ground assessments, which are costly and time-intensive, so prioritisation is essential to deliver real benefits.”
After conducting a standard analysis across the portfolio and before an on-the-ground assessment, owners can also run desktop analyses, zooming into maps or using map layers to delve deeper into a site’s potential for enhancements.
Not all interventions will be major; some might simply entail installing bug hotels and bird boxes. However, they require working in partnership with ecologists.
Larger initiatives will have to be built into business plans, falling within traditional asset management
“This also requires good relationships with property managers because a lot of the time you'll be reliant on them to implement the initiatives,” says Talbot-Jones. “And, similar to decarbonisation work, larger initiatives will have to be built into business plans, falling within traditional asset management processes.”
As a lender, Bamert expects owners to provide a reasonable level of detail on how biodiversity fits into their overall asset management plan and strategy, usually through a phased approach.
“We're not expecting owners to have done everything on day one,” he says. “But when we lend against specific assets, we want standards to improve, including on biodiversity, to deliver better risk/reward for our investors.”
Although the government has postponed the implementation of BNG, Talbot-Jones says it has already been adopted by many local authorities as a planning requirement.9
The legislation only applies to new developments, as do other requirements like the Greater London Authority’s urban greening factor used for city centre developments, and there are no current plans to expand these to existing buildings. However, Bamert says investors and owners must begin to include those in biodiversity plans.
Regardless of legislation, we have to improve our standing assets
“We are kidding ourselves if we think we are going to make a real difference by only focusing on new developments,” he says. “Regardless of legislation, we have to improve our standing assets.”
Talbot-Jones says the growing adoption of the Taskforce on Nature-related Financial Disclosures (TNFD) framework may increase the number of biodiversity initiatives implemented on standing asset portfolios. As the sister framework to the Task Force on Climate-related Financial Disclosures, it is a voluntary assessment and disclosure framework for companies and financial institutions to understand their nature-related risks, opportunities, impacts and dependencies.10
By increasing transparency, TNFD will create reputational risks for firms that don’t take action. But it also creates an environment enabling a knowledge exchange of what has and hasn’t worked, which Sehra says will drive action in a scalable way.
“Many institutions have started to implement TNFD pilots and are making progress,” she says. “There is a lot of momentum towards this kind of disclosure framework aligned to the Kunming-Montreal Global Biodiversity Framework, whereby transnational companies are expected to assess and disclose their impacts and dependencies on nature.”11
Existing assets must be included if owners want to understand the risks they are exposed to, the opportunities to mitigate them, and what can be achieved in the context of each site.
“It’s about understanding your interaction with nature, which will be different in urban and rural areas,” adds Sehra.
Connections with nature and access to biodiverse green and blue spaces are central to people’s sense of health and wellbeing
In addition, the importance of assets’ social value is also gaining momentum, which should further support biodiversity initiatives. According to research by the Quality of Life Foundation, connections with nature and access to biodiverse green and blue spaces are central to people’s sense of health and wellbeing.12 And while there isn’t yet as much tenant demand for biodiversity as for climate initiatives, anecdotal feedback on the implementation of green spaces is positive.
“When I recently toured a building whose refurbishment we had funded, tenants said the green space on the roof had been a key driver in their decision to rent,” says Bamert. “Although they hadn’t specifically required biodiversity credentials, it was central to their decision, so we think it is coming.”
The bigger picture
Sehra links this to the broader implementation of nature-based solutions, which aim to deliver multiple benefits for climate, people and biodiversity together.
Biodiversity systematically needs to be in the same conversation as climate
“Looking at it more holistically will help with the uptake,” she says. “Biodiversity systematically needs to be in the same conversation as climate.”
The Science-based Targets for Nature is another voluntary framework that complements the TNFD disclosures, enabling organisations to set specific, measurable, achievable, relevant and timebound (SMART) targets for nature, which can include freshwater and land. In some cases, this could lead to the implementation of nature-based solutions.13
“It can be complementary to BNG, which only looks at the habitat,” says Sehra. “It is great to create areas for habitats, but there needs to be consideration and understanding of additional drivers of biodiversity loss. If the air is polluted or there is agricultural runoff into the soil and water causing quality depletion, it defeats the purpose for nature recovery.
“Owners need to take a step back and understand their interaction with nature and biodiversity within their assets’ area of influence, because some of the impacts will be further downstream,” she adds. “They don’t stop at a one-kilometre radius.”