Habitat Banking

  • The development of a parcel of land into a ‘habitat bank’ in order to trade in Biodiversity Units, or other ecosystem service credits.
  • Usually means restoration or creation of habitat on undeveloped, or ecologically poor land. For BNG typically, habitat banks include creating species-rich habitats, on low-yielding land where this is a significant opportunity for biodiversity uplift.
  • It requires funding, surveying, monitoring and management, along with related documentation and legal agreements.  For BNG, land must be legally secured for at least 30 years with either a S106 agreement or a conservation covenant.
  • Within the LCR, Local Authorities are working collaboratively to address BNG, aiming for a consistent policy and Biodiversity Unit price. Work is progressing on a centralised habitat bank which Biodiversity Units can be bought and sold.

NOTE:  The greatest economic uplift in the Defra metric, does not necessarily mean the most suitable biodiversity and ecosystem service outcomes. The habitat interventions need to make ecological sense across the landscape and be able to thrive in the long term.

High Integrity Project

Many existing environmental projects and investment opportunities are describing themselves as being ‘high integrity’ – but what does this actually mean? There is no official definition, but typically high integrity propositions include :

 

  • Delivery organisations with a track record and good reputation that can be trusted to operate ethically and sympathetically towards the environment, staff and local community
  • Projects which adhere to landscape character guidelines, and local ecological priorities (e.g. helping to deliver local biodiversity action plan)
  • Fair pricing for nature-based environmental services that reward parties for integrating nature with agriculture, forestry, and infrastructure
  • Only working with buyers or investors who are actively following green policies in other areas of their business (not supporting greenwashing)

Hybrid/Blended Finance

  • For sustainable funding you should aim to develop a hybrid, or blended, funding model where finances are drawn from a number of different sources
  • This ideally includes public, private and third sector funders, where sources of finance have different risk and return on investment expectations thereby offering flexibility.
  • For example, a project might commence with initial public or third sector funding and then be expanded by the addition of business or investor finance attracted by the development of biodiversity units, the reduced level of perceived risk and the proven success of the project.

 

Debt and Equity Finance

There are two main types of financing from investors. Debt, where a project borrows money and pays back with interest; and equity, where the investor buys a portion of the project and therefore has a share in it. There are advantages and disadvantages to both forms.

If using Equity financers (e.g. venture capital, crowdfunding, anger investors etc.) the project needs to check if the structure and governance allows for this, whether a shareholder agreement is needed,  and should try to set pricing only when most project preparation has been done (exclusivity agreements, partners, feasibility studies, draft contracts, work programmes, business models, etc.).

If using Debt financers (e.g. loans, business lines of credit, etc.), the project needs to provide security or collateral for the investor, they may think about negotiating step-in rights, and discuss the term of the loan. This may be a fully Amortizing loan (paid in scheduled periodic payments), a mortgage (includes a charge on property, pays back mostly interest in early years, and mostly capital later years, or structured like a bond (interest payments required regularly, entire principal amount due on maturation).

Multiple Benefits

  • In order to attract a wide range of potential funding streams, and cover the requirements of Local Authorities and businesses, your proposed projects should identify and cover as many different ecosystem services benefits as possible.
  • Many projects could be designed with several markets or benefits in mind, including biodiversity, carbon, water and air quality, reducing flood risk, access to green space, leisure, and health. Usually the project will have a market focus (e.g. BNG), with other ecosystem services being maximised where possible.
  • Multiple benefits can be especially important to Local Authority stakeholders, even if a benefit doesn’t have an associated income-generating market, as it can still be politically attractive and important.
  • There are many tools available to assess multiple benefits: in the project area we used the LJMU intervention map LINK, nationally you could use the Natural England EBN tool LINK.

EXAMPLE: A woodland funded by BNG and carbon credits will pay for itself and help the environment, but by emphasising how it could reduce air and noise pollution, give people a pleasant recreation environment and allow them to reconnect with nature will be very attractive to the local authority.

 

 

Stacking and Bundling

  • Any approach to developing natural capital markets and income streams must demonstrate an awareness of stacking and bundling. These terms refer to different ways of packaging and selling multiple ecosystem goods and services, and may be dictated by legislation.
  • Bundling is when a suite of benefits produced on a piece of land is sold as a single package, for example a ‘Liverpool woodland credit’ could include carbon sequestration, BNG, water quality and flood risk mitigation.
  • Stacking is when various overlapping benefits produced on a given piece of land are measured and separately ‘packaged’ into different credit types or units of trade that together form a stack. The components of the stack can then be sold individually to different buyers and separate payments received for each set of services. Stacking prevents ‘double counting’ or charging twice for the same benefit.
  • Defra are updating guidance on stacking and bundling regularly, the most recent guidance is here Nature markets: (publishing.service.gov.uk)
  • It is important that you are able to bring in these funds and finance in a coordinated, responsive and synergistic manner. Flexible funds will facilitate project development and reduce the risk of investment, thereby encouraging capital and knowledge flow and leading to the market developing and maturing.
  • Plan along a medium to long term timescale: different sources will be applicable during different stages. For example grant funding is more likely in the early stages, but corporate investment could become a major source once income streams and returns are well established.

REMEMBER: the wide range of stakeholders entering the project at different stages may wish to buy and invest in the outcomes – plan ahead for this.