How nature-positive are you? The impact of evolving biodiversity and nature requirements on the real estate sector
01 December 2023
01 December 2023
In this briefing we explore how the treatment of nature-related risks and opportunities (NROs) is shifting within the real estate sector and what this means for UK property investors, funders, developers and occupiers. We consider the impact on sustainability reporting and investment and development decisions.
A number of nature-related changes have coincided recently. They highlight how nature has risen up the corporate agenda and how sustainability reporting is responding.
The TNFD's fourteen recommendations are grouped according to the four Taskforce on Climate-related Financial Disclosures (TCFD) pillars (that is, governance, strategy, risk management and metrics & targets). Eleven of the TNFD's recommendations mirror those of the TCFD together with three additional recommendations. For a summary of the recommendations, see TNFD makes major contribution to sustainability reporting landscape.
The TNFD suggests a double materiality approach to reporting. The TNFD references the EU Sustainability Reporting Standards' definition of double materiality1 which includes two interrelated concepts: impact materiality and financial materiality:
Although the status of the TNFD is currently voluntary, many organisations including global financial institutions are starting to carry out nature-related assessments and reporting. The expectation is that organisations will be able to start reporting on the recommended disclosures by 2026 based on their 2025 financial years.
The UK government has said it will consider how the recommendations should be incorporated into domestic policy and legislation and, like the TCFD, the TNFD's recommendations may become mandatory for large UK companies.
The Environment Act 2021 introduced a mandatory BNG requirement in England that comes into effect on January 2024 for most development and for small sites from April 2024. The BNG requirement will take effect as a pre-commencement planning condition attached, or deemed to be attached, to any planning permission granted after the BNG requirement comes into effect unless an exemption applies.
The aim of the requirement is to deliver improvements to the natural environment through habitat creation or enhancement after avoiding or mitigating harm as far as possible.
Developers must submit a biodiversity gain plan to be approved by the local planning authority before the development can begin. The BNG increase can be met by onsite biodiversity improvements, offsite improvements or the purchase of biodiversity units from landowners or credits from the government.
The BNG requirement, and the achievement and maintenance of biodiversity gains for affected developments in England, may become matters which will need to be included in sustainability or TNFD-aligned reporting that is required of developers if such matters are considered to be material.
Summarised below are some of the key impacts that the TNFD's disclosure recommendations are expected to have on the property sector.
Developers and property investors are already familiar with assessing the impact of developments on habitats and species (for example, through habitats assessments and environmental impact assessments needed to obtain planning permission).
However, the double materiality aspect of the TNFD (i.e. the need to assess not just the impact of the business on nature, but also the material financial effects on the organisation) expands how these issues have been treated to date. The need to assess and report on NROs across the business will also be an expansion of this issue into all areas of corporate activity, elevating nature-related issues from a site-level concern to a management and board-level issue. In Australia, Pollination and the Commonwealth Climate and Law Initiative have published a 'joint memorandum of opinion' on nature-related risks and directors' duties, which asserts that under Australian law, "Directors of companies should at least identify the company's nature-related dependencies and impacts, and consider potential risks this may pose to the company. Directors who fail to consider nature-related risks could be found liable for breaching their duty of care and diligence." The opinion cites research by the Swiss Finance Institute and the European Governance Institute, which concluded that following the UN Biodiversity Conference (COP 15) "firms with larger corporate biodiversity footprints lost value".
It is worth noting that it is likely to be more challenging to measure and monitor biodiversity and nature-related impacts as compared to climate-related impacts. For businesses with many resource inputs, it will be a complex and time-consuming task to track these impacts back through multiple supply chains.
As nature-related reporting takes off, the information that is generated alongside that relating to other sustainability issues could result in portfolios being ranked as regards their biodiversity impact. Property companies will need to consider whether the property they are holding is having a negative impact on their nature-related or wider sustainability reporting. Consideration of the nature-impacts of specific holdings will become a strategic issue that affects performance and potentially value. In the same way that the market expectation is that there will be a 'greenium' for EPC A/B properties, we may also see a similar split in values between nature positive properties and the rest.
As the number of property companies that make nature-related financial disclosures increases, this will give investors and funds a much clearer picture on nature-related impacts across the real estate sector. Increased transparency from nature-related reporting will allow banks and other financing entities to factor NROs into their financing decisions. An example of this is the 150 financial organisations have signed the Finance for Biodiversity Pledge, which commits them to call on global leaders and to protect and restore biodiversity through their finance activities and investments. Signatories agree to assess their biodiversity impacts, set targets, and report on biodiversity matters before 20252.
The NRO disclosures will support the due diligence needed for banks to change their lending practices and valuations to support a shift towards nature positive outcomes. Banks and other financing entities are likely to ask for more information on the nature-related impacts of a property to support their investment decisions 3. Early adopters of the TNFD may find that this reporting helps access to finance.
As large corporates that occupy much of the commercial office stock in the UK become subject to nature-related reporting requirements, they will want to occupy buildings that have a positive impact on nature.
They will want to work with landlords and developers whose sustainability values and portfolio are aligned with their own values and targets. The sustainability due diligence that is undertaken when deciding on premises is likely to increase. Large occupiers are likely to develop their own nature-related criteria, which must be met for them to lease or buy a property. These will also be driven by the financing that they might require. It is envisaged that more nature positive properties will benefit from better access to finance and potentially cheaper finance.
As organisations start to focus on managing nature-related risks and, in England, the BNG requirement takes effect, regenerating land into wetlands, rewilded land and forestry etc becomes increasingly attractive as a way for developers and occupiers to demonstrate effective management of nature-related risks and deliver against BNG targets. The UK Government's March 2023 Nature Markets Framework4, describes the principles for developing high-integrity markets to enable land managers and farmers to attract investment in natural capital and aims to contribute to the development of this asset class.
The play-book for NROs is being developed at pace and the evolution of the biodiversity and nature-related reporting landscape is well underway, which could significantly change how the real estate sector is financed and valued. As we are seeing with climate change and the transition to net zero emissions, capitalising on the opportunities and effectively managing material risks is inevitably going to require leadership, vision and resource allocation.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.