Six months into Mandatory Biodiversity Net Gain (BNG), where is the risk?
Biodiversity Net Gain got off to a rocky start. Many developers were unprepared and left scrambling, and the National Audit Office published a report raising concerns in areas including the readiness of local planning authorities and the use of funds generated from selling ‘last resort’ statutory credits.
However, things are settling. Labour is committing to both getting Britain building and protecting nature. The private BNG offset market is growing rapidly, and the first impacted developments are discharging their BNG-related conditions.
The concerns the NAO raises will become less important as the private offset market matures. This means the focus will shift from the availability of offsets to their quality and the companies supplying them. Because while the BNG offset mechanism transfers the obligation from the developer to the offset supplier, in theory enabling the developer to wash their hands, in practice, the developer should still ask, “where am I exposed?”
Beyond the standard questions – do you have the habitats I need? Are the units legally secured? What price are they? When can I discharge my conditions? – developers should ask more long-term-focused questions with a strong focus on risk mitigation.
Given the level of investment into offset schemes, and some offset providers withdrawing from the market already, two of the most important questions they should ask suppliers are: How will you protect my offsets for the statutory period, and what happens to the nature after that?
How are the offsets protected for 30 years?
BNG legislation requires that offset habitats be protected and managed for at least 30 years, which presents the fundamental risk that the project fails or the supplier becomes bankrupt.
It’s conceivable that the mitigated developments could still be under construction during a failure, or housing stock could still be for sale. Under the BNG legislation, the LPA or Responsible Body should enforce against the supplier.
But what happens to the developer’s reputation, and would they feel compelled to step in if the project fails? The exposure could be many millions on a single large development, not accounting for the impact of any knock-on delays.
To minimise this risk, developers should ask three fundamental questions of suppliers.
Firstly, how will they protect the scheme and the capital for the 30-year term? This includes whether they are leasing the land or own the freehold and if they directly control it, a plan for safeguarding the funds needed to manage land with reasonable assumptions on capital, and plans for if they go bust.
Secondly, how are they monitoring that scheme? Are the correct, independent processes in place, to ensure that if habitats are failing, it can be identified early on?
Thirdly, they need to ask are schemes sufficiently insured? This means having the correct level of PI insurance covering all relevant parts, PL insurance covering the land, and habitat insurance covering against future failure.
What happens after 30 years?
Next, developers should ask what the land will be after the statutory period is up, because much of the nature set to generate the BNG units is at risk of removal.
This is not just bad for nature, it introduces significant long-term reputational and financial exposure for developers.
Even the most ardent climate sceptic will accept that social, regulatory, and legal scrutiny will continue to increase the burden on companies to account for and be responsible for their environmental impacts. Ignoring this could have significant future ramifications on a company’s financial health, valuation, and reputation.
In the context of BNG, this leads us to consider several questions: in 30 years, will developers be comfortable that their environmental mitigation is removed when their development still stands, and will the local population and wildlife groups mind? If they do mind, who will they blame, and who will they look to fix it? What does this do to the developer’s corporate value and reputation?
Given the cost of onsite and offsite BNG, the compounded liability could be in the billions of pounds within 30 years. Do developers need to assume that liability, or can they find suppliers that will commit to ensuring the habitats are not removed?
Developers should consider the short and long term. The critical factor is balance. Nature is unpredictable, and not all risks can be hedged. However, developers and stakeholders should ask harder questions of offset providers and be aware of the legacy liabilities they may inadvertently retain today and in the future.