Milestone 6: Develop a Governance Structure
A governance structure will inform the way in which the project is run when fully operational and for what purpose. It identifies appropriate decision making processes, who is responsible for what actions, and what controls are in place to make sure that the project is meeting its stated goals, all while abiding by the risk appetite of its engaged stakeholders. The legal entity to host the project will be a key driver in this, and the appropriate choice of entity will be dependent on several factors that are outlined below.
Your governance structure should align with and underpin your business case, as a necessary component of how the project will deliver its environmental outcomes and other strategic targets.
This milestone contains four subsets of considerations or ‘themes’ that project developers may want to explore at this stage. Click on each of these themes to the right in order to read more.
You can also read case studies of projects that have successfully completed this milestone of development and view a summary of the common activities undertaken at this stage below.
Decision making and performance reporting
There should be a clear view on who has decision making capacity in the project and how these individuals make decisions as a group. These decisions must also be underpinned by a reliable flow of information on the performance of the project and other key insight, such as feedback from external stakeholders.
To develop a governance structure, you should first clarify who will lead the project once operational, as represented by major decision making capacity. Those who have this capacity will generally be included because they are to directly benefit from the project, they have liabilities or risks linked to the project’s success, and / or they have the relevant skills and experience that can help guide the project in its operations.
This will most likely be a similar group of people that led the development of the project, but where different this change needs to be examined to make sure those who hold significant decision making powers are an appropriate choice.
For example, if the project has relied on a commercial advisor who has led the financial model and business case development, but will leave the project once it is launched, is the project team comfortable that these skills are being retained or are no longer needed in the core project team? If the project is bringing in a community representative as a director with voting rights, do they have connections with all relevant community groups?
In most cases, it will not be possible to give all stakeholders decision making powers, and project developers should consider how their interests are best served and inputs are captured.
For instance, if a project is working with a large number of land managers across a landscape, consider forming an elected body of land managers who can represent wider interests in decisions while keeping engagement manageable.
Another example is community representation, which can be a powerful feature if the project team wants to instil a sense of communal ownership in the project. A community representative could be similarly nominated, for example as a registered director, to act as a connector between the community and the project, and have a say in the project’s major decisions.
Smaller and simpler projects may simply rely on unanimous agreement between a few core stakeholders. Larger and more complex projects will likely need structures to show that decisions are taken wisely and in line with the project’s stated aims and core values.
In many cases, it’s common for projects to form a Board of Directors or Steering Group with all key decision makers and defined terms of engagement. This process is often formalised through the formation of a legal entity for the project and the registration of directors with voting rights (see below).
The need for these formal structures becomes more pressing as the number of dependent and/or influential stakeholders without direct decision making capacity grows, such as grant funders, community groups, minority shareholders or regulatory bodies.
With projects big or small, consider defining how decisions are taken within this group, with a clear conflict resolution strategy in case of disagreement, and also the potential for conflicts of interest to arise from those with decision making powers.
Consider what information the core team needs to receive about the project’s performance and how often in order to make effective decisions. This will likely include the Key Performance Indicators (KPIs) of the project that should be identified in your business case – namely measures of financial, social and environmental outcomes. However, other relevant information might include written feedback on the project from a community group or progress reports on ongoing habitat creation work.
This reporting should generally be kept in a centralised and accessible place for the core team and other relevant stakeholders to review, such as a SharePoint site or a custom built website. Regular reporting will present an additional cost to your project, but decreases the risk of non-delivery of targets and looks better to external stakeholders.
While responsibility refers to someone’s duty to carry out an activity, accountability generally refers to the consequences of its delivery or non-delivery, and who those consequences sit with.
As outlined in the business case (See Milestone 5), the goals of the project will be underpinned by key activities and certain individuals, groups or organisations will be responsible for these activities – for example, a contractor for peatland restoration work. However, depending on how these activities have been legally agreed, any failure to deliver may have consequences for members of the core team or the project itself.
For example, if a contractor does not abide by certain standards or regulations in restoring a peatland site, then this could mean non-delivery of any certified carbon units that the project has already sold in advance to a corporate buyer. This could then have financial or legal ramifications for the individual or entity that has contractually accepted the buyer’s payment, as they are accountable for this lack of delivery. Where accountability and responsibility are misaligned, these can be addressed effectively with legal contracts, legal entity features and other risk controls (see below).
Financiers, including grant funders, impact investors and banks, will have ongoing reporting requirements as to the project’s financial performance, and how it is delivering on its environmental and social targets. Some financiers may want to see evidence of sound decision making that aligns with the core values and ambitions of the project, which links to how information on decision making is being recorded (see below).
Whether these financiers are directly embedded in the governance structure, such as through a directorship role, or if they maintain a more ‘arms-length’ relationship by simply providing financial support, it is important to integrate their requirements on performance reporting and other aspects of governance in the project.
This question should align directly with your communications strategy (See Milestone 5). If you’ve not got a defined communications strategy, a useful exercise to start with is mapping all stakeholders of your project onto the Power-Interest matrix, deciding what level of information each of these stakeholders should receive, and then through what channel – e.g. parish council meetings, email updates, bulletins, specific meetings.
You may also consider at this point what two-way communication with these stakeholders would be beneficial for the project. For example, local eNGO groups may be considered in your project to have a ‘low power high interest’ position and regular email updates are sent to them, but how is their feedback on the project’s impact being captured? Is this feedback being recorded and passed to the core team?
Some projects chose to include a completely separate third party in the governance structure, such as an independent Chair, who is inherently unbiased and can help ensure the project’s operations do not deviate from its stated aims. If you are considering independent oversight, it is important that they have a strong understanding of the project and the space in which it operates, for this oversight to be effective.
Record keeping can help to justify and explain why the project team has decided to take certain decisions, and can help prevent oversight of key factors. These records, such as minutes from meetings with delivery partners, emails from lawyers or decision logs used in director meetings can be crucial if these decisions are called into question, such as by shareholders, buyers, or regulators.
Projects should therefore have a clear records-keeping strategy for decision records, alongside other types of records like financial accounting and legal contracts.
Note: for many legal entities, certain record keeping, such as for director meetings, is mandatory and has an applied standard.
Your project may only need auditing to comply with regulation, such as financial account audits imposed by Companies House or the Registrar of Companies. However, to add an extra layer of confidence that the governance structure is working, a project can undertake voluntary audits of different types. For example, these audits can check the project is managing its financial accounts correctly, that it is engaging with the community in an effective way, that its organisation of personnel and procurement of services is efficient or that the project is meeting its legal and regulatory obligations.
If your project has the resources and there is significant uncertainty on certain topics within the business, consider engaging with an external auditor or consultant. As with legal and tax advisors, it is possible to receive these services on a pro-bono or discounted basis due to the nature of your project.
Common types of risk
Risk management is critical for nature market projects that can run over several years. It’s advisable to have a clear understanding of the likelihood of the risks involved, what will happen if the risk materialises, what you as a project developer and other project stakeholders might be liable for, and how the risk is being managed to prevent this liability.
Physical risks relate to the health of the habitat that delivers the ecosystem service or environmental improvement itself. It is linked to the concept of permanence.
Physical risks usually refer to events that can affect or destroy the habitat, such as wildfires, floods, storms and droughts, or perhaps even failure of the habitat to establish properly to begin with. They can also include chronic or longer-term impacts, including rising temperatures, the growth of invasive species, and plant diseases.
Some considerations around physical risk include:
- How is the new habitat being designed to withstand the effects of climate change?
- What ecological expertise is being used to design and deliver the habitat?
- What budget is being set aside for remedial or maintenance works over the lifetime of the project?
- Who is responsible for maintenance and monitoring?
- If I am using a Standard of Code – does it have a process in case the habitat fails?
- Should I use a land buffer in case some of the habitat is destroyed?
Market risks relate to changes in market factors such as price, inflation, interest rates and exchange rates – though this latter example is rarely found in nature markets in the UK.
In the context of nature markets, changes in price and inflation tend to be the primary forms of market risk, but it’s also important to think about what other market movements can affect the project.
Some considerations around market risk include:
- When is best for me to sell?
- I’m selling to a third party – can I negotiate a share of any uplift in value they get?
- How am I accounting for inflation in all of my costs and incomes over the years?
- Should I put the proceeds of the sale into an account with a strong interest rate?
- Am I taking on any repayable finance that exposes me to changing interest rates?
- Do I have any exposure to exchange rates shifting?
Reputational risk is simply the risk of damage to your reputation. This damage could lead to a material loss, such as a loss of confidence from the buyer who then exits the nature market deal.
Reputational risk should be considered carefully in the context of nature market deals and transactions, as many have doubts as to whether they are capable of being an overall force for good – in terms of the robustness of the environmental gain, but also issues like displacing food production and exclusion of local communities.
On the other hand, a strong reputation can present lots of opportunities – such as more negotiating power with buyers, engaging the local community, and influencing wider market thinking as a high-integrity practitioner.
Some considerations around reputational risk include:
- How is the buyer showing that they are trying to meet their environmental obligations before using an external solution with me?
- In turn, how am I showing the buyer and other stakeholders that my actions are in the best interest of the local environment?
- What controls do we have in place around ‘greenwashing’ or misrepresenting the project in public?
- Are all stakeholders that are affected being fairly represented?
- How can I involve the local community in the project?
Operational risk relates to flawed processes and systems that can disrupt the execution of the deal. This is a broad type of risk that speaks particularly on how you are working with others to keep things running smoothly.
Questions that you can ask around your operational risk include:
- How are the decisions around the project being recorded?
- How is the performance of the project being tracked?
- Where are the potential bottlenecks in the project that can cause delays?
- Are there any single points of failure with individuals involved?
- What advisors or experts are being brought in on certain operations?
- Should I use a risk register to track risks more broadly?
- Is everyone clear on their responsibilities and liabilities in the project? How are these reflected in the legal agreements?
Political risk relates to how political decisions, legislation, or events affect the nature market deal.
Political risk is very hard to manage, but clear lines of communication with government, regulators, and other rule setters are always advisable and could help you spot and prepare for potential changes down the line.
Some questions you can ask around political risk are:
- What is the political or regulatory infrastructure that underpins the project?
- What line of communication do I have with the local government?
- Can I feed into local government nature initiatives, such as the Local Nature Recovery Strategy (England only)
Identifying Individuals risk appetite and controls
Based on earlier steps, you will have formed a risk management strategy for the overall project and its delivery, and this will be an important part of sound governance. However, the below points specifically focus on the individuals key to the project and how to consider their risk appetites and controls.
Stakeholders will be affected differently by any risks that materialise in the project’s delivery. Consider taking the risk register or matrix of the project to identify what the impacts of every risk will be on each major stakeholder, and then determine how comfortable these stakeholders are given the likelihood of the risks. This will give a comparative basis for risk appetite across stakeholders.
For example, a project where the interventions fail a year from implementation may pose a financial loss to the up-front investor and a reputational loss to the eNGO that was in charge of installing these interventions. These stakeholders may be more or less inclined to accept these risks and require different risk controls and measures to bring the project in line with their own risk appetites.
Individuals that face certain risks of legal action or financial loss can often limit this liability by forming an appropriate legal entity – such as a limited company or community interest company (see below). This entity would then be the official participant with which contracts are formed, and any successful legal action against the project would affect the assets of the legal entity but not the personal or separate assets of its directors and key managers.
This can also be done through transactional contract design, either excluding liability for certain types of loss through the ‘exclusion of liability’ clause, or putting a financial cap on liability for such losses through a ‘limitation of liability’ clause. Legal entities can also build these clauses into their contracts.
For both measures, it’s advisable to seek legal advice, and the appropriate choice will depend on the risk appetite of these individuals. For example, a group of farmers that want to sell nutrient credits to a developer may wish to form a cooperative to protect their personal assets. Conversely, a sole trader they have engaged to construct the wetlands needed may be sufficiently comfortable with a financial cap built into their contract that limits how much the sole trader would need to pay if these wetlands are not installed in line with standards.
A third measure for limiting liability of individuals is Directors and Officers insurance – often called D&O insurance, that covers the cost of compensation claims made against a legal entity’s directors and key managers (officers) for alleged wrongful acts, such as neglect or breach of trust.
For individuals that play a core role in the project, such as seller representatives and delivery partners, consider how the project would be affected if this specific individual were to leave the project and plan ways to minimise any disruption.
For example, if an eNGO representative left the project’s board of directors to retire, who would have the appropriate skills, knowledge and experience to replace this person, are all processes this person is involved with well documented and ready to hand over, and is the administrative process of officially switching directors in the legal entity clear?
Where possible, it is important for good governance to limit ‘single points of failure’ that arise in these individuals’ absence, and this is also true where this absence is temporary, such as sick leave.
Choice of legal entity
As your project becomes more developed, it is possible that a new legal entity will be needed in order to support its objectives and requirements. Below offers an overview of the options you have and considerations around what makes an appropriate entity choice.
You may question if a new legal entity is needed or if you can host the relevant elements of the project – its legal contracts, accounts, assets, liabilities, and ownership rights – under an existing enterprise or personal holding. This can be appealing as setting up a legal entity will take time and resources, and you may already have an appropriate structure that you would like to embed the project into, such as a charity entity.
The primary reason for setting up a new legal entity is to separate the liability of the project from the liabilities of any existing enterprise and the individual owner(s), protecting them against financial loss or litigation.
Below is a list of entity types across the UK that you can use. These will each have sub-types with varying features, and may operate differently depending on the devolved administration your project is registered under.
- Private Limited Company – limited by shares or guarantee
- Unlimited Company
- Community Interest Company (CIC) – limited by shares or guarantee
- Community Benefit Society (BenCom)
- Co-operative (Industrial and Provident Society)
- Charitable Incorporated Organisation (CIO) / Scottish Charitable Incorporated Organisation (SCIO)
- Sole Trader (Sole Proprietorship)
- Limited Liability Partnership
Consider researching these types of entities in more depth and comparing their suitability for your project against the below considerations. These will be guided by the overall objectives of your project.
These legal entity types will have different implications for how partners of the project, including the key-decision makers, delivery partners and other stakeholders engage with each other. For example, if the project is being driven by a private estate owner with ambitions to embed the nature-based project within its wider estate operations, a private limited company may be suitable with the majority of shares being held by the estate owner. If the project aims to foster a deeper sense of collaboration across multiple stakeholders and avoid the impression of any one party having primary ownership, then a company limited by guarantee, with multiple directors registered, may be more preferable.
Individuals engaged in these entities will face different financial and legal liabilities. For example, a sole trader or shareholder of an unlimited company could face unlimited financial costs and be liable for any direct legal action, shareholders of a limited company will generally only lose the amount they have paid into the entity, and directors of companies or CICs that are limited by guarantee (which do not have direct ownership) will not be liable for any losses these entities incur.
This question will be key if certain stakeholders are expecting a share in the profits. For instance, community benefit societies will not permit any distributions of profits to individuals or entities, whereas CICs or private companies that are limited by shares will allow shareholder dividends. It is possible to restrict how often and where profits are distributed, through specific clauses in the incorporation certificates of legal entities, such as asset locks (see below).
An asset lock ensures that the assets of a legal entity cannot be cashed in or transferred other than for the stated purposes of the project, such as for community-based investments. They are generally used to show that a project will credibly distribute any profits to create further social and environmental outcomes. In practical terms, an asset lock is an enshrined clause in the certificate of incorporation for the entity and is legally enforceable.
Some legal entities – such as CICs or CIOs – have statutory asset locks, whereas for others this would require bespoke drafting in the articles of incorporation when setting the entity up.
In line with your financial model, project developers may consider a form of investment that may not be compatible or likely with certain entity types. If you are targeting an equity investment, for example, this will not be possible with entities that operate without share equity, such as private companies or CICs that are limited by guarantee.
Similarly, any tax treatments that the financial model has built in will depend on the legal entity type. CIOs, community benefit societies, sole traders and partnerships are exempt from paying Corporation Tax, for instance.
Project developers should be clear on what is the minimum reporting standard for each entity type in order to preserve compliance, avoid fines and the risk of dissolution. This reporting requirement may need to be built into the financial model itself, as drawing these reports together can take time and resources on an annual basis.
For example, on top of the regular reporting of an equally sized private limited company, a CIC must submit an annual report that includes details of the remuneration of the directors, the dividends paid on any shares and the interest paid on capped loans. It will also need to explain what the CIC has done to benefit the community and how it has involved its members in its activities, with sufficient evidence gathered.
For reporting requirements and their resource costs, consider speaking to an accountant with experience working with the legal entity types you are contemplating using.
Though manageable with planning, this may be a key consideration if you are under a time constraint, and delays to forming your legal entity can cause delays to wider project work, such as the development of contracts.
Anecdotally, receiving approval for your legal entity can take as little as one day to six months from application submission to the relevant body, with charitable entities usually taking longer to approve. This does not include the time taken to draw together this application, which itself can take months, and so project developers are advised to review this process in their decision on which legal entity they choose.
You may have ambitions to scale or replicate this project to other sites and areas in the future, such as with different farmer clusters and regional environmental charities.
In this case, it may be worth considering what level of governance and oversight you would like to maintain of these future projects, and whether the legal entity structure you are choosing allows for this. For example, companies limited by shares can be overseen by overarching holding companies by majority share ownership, whereas this would not be feasible in the same way for CICs limited by guarantee.
