Milestone 2: Identify and Work with Sellers
Initial ownership of the ecosystem services will belong to the landowners or, in some cases, the tenants of the sites that the project is using. However, these can be passed onto others, such as third-party project developers, with appropriate legal arrangements and compensation. In some cases, there may be a sole seller of the ecosystem services, where the site or landholding is large enough that it delivers the volume of ecosystem services needed to cover the costs of the project and attract buyers.
However, in order to achieve scale and impact, a project will likely involve multiple sellers, such as neighbouring farmers and estate managers. Scale of land is often needed to deliver significant environmental outcomes, and also to attract private finance. Project developers must plan how they initially contact and engage with these sellers going forward, building their wants and needs into the project.
This milestone contains five 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, find useful links and a checklist of all considerations specific to this milestone below.
Identifying a need for multiple sellers
The complexity of a project will increase with more sellers, and so project developers should put thought and planning on the scale they seek and what aggregation models they are using to draw sites together, before starting to engage with sellers.
This will depend entirely on the project’s aim. For example, if your aim is to reduce flood risk for a local community, the project will almost certainly require a large-scale approach across a catchment. Conversely, if you are a landholder looking to diversify your income streams with nature market trades, then you may be able to make these trades independently – though partnering with other landholders could be desirable to achieve economies of scale.
Project developers may think of this question in terms of the ‘why’ and the ‘how’ of getting sellers’ initial agreement to explore the project.
The ‘why’ encapsulates the value proposition of the project to sellers. If a project developer is engaging with multiple sellers, then developing a clear and consistent value proposition will be essential to avoid confusion and maintain credibility with sellers.
Common value propositions of drawing together multiple sellers are:
- Greater environmental impact, including landscape-scale resilience
- Greater bargaining power with buyers – through a ‘strength in numbers’ approach
- Improved accessibility to such projects and deals for smaller landholders
To communicate a consistent message to potential sellers, you may create some introductory documents for the project, set up a public website, or plan a series of webinars to demonstrate this value proposition.
The ‘how’ is both the information you will use to get in contact with these sellers – i.e., what data you’re using to identify them – and what organisations you will partner with to approach them. This latter point will be vital if you are not based in the landscape yourself and need a credible and trusted partner to get sellers’ initial agreement. For example, you could approach the steering team of a local farming cluster, an eNGO with relevant ecological experience, or a public-private initiative that is working towards the same environmental goals.
Though working with a single land manager would increase the pace of project development, you should be aware of the risk that the project becomes unfit for inclusion of other sites and sellers.
If you’re developing an innovative landscape-scale project with many tools, processes and mechanisms that need to be developed, then it may be wise to stage your seller engagement. You can start with a smaller pilot of one or more sites. One site alone may not properly capture the variances and technical difficulties that your project will face with your wider group, so it is important to draw together a representative sample.
Mapping sellers
Once you have determined the need for multiple sellers, you will require a single view of where your sellers and their sites are located, including relevant information on each of these sites. You will most likely need to work with others to map this information.
The site, the landholding or the wider area might already be under some form of nature improvement or data gathering initiative that you can draw information from. Organisations that commonly undertake this work include Local Nature Partnerships, Local Biodiversity Partnerships, Catchment Based Approach initiatives, Wildlife Trust nature recovery projects and initiatives under the Tweed Forum.
There may be public databases readily available online for your initial mapping, which can be found with a basic desktop search. For example, the EA has produced an evidence base and an online interactive online map for ‘Working with Natural Processes to Reduce Flood Risk’ across England and Wales.
There are over 100 farmer clusters across England, Wales and Scotland, having first been conceptualised and piloted by the Game and Wildlife Conservation Trust in 2014. These are established groups of local farmers that are working towards a common set of objectives, whether they are commercial, environmental or otherwise, and will be essential to work with if the project or enterprise involves interventions on multiple farms.
If there is not a farmer cluster in your area, you may consider starting one. Note: you do not have to be a farmer to form a farming cluster, but will need the support of local farmers to do so.
Approaching sellers
Sellers will vary in terms of their motivations, concerns and capacity to engage. How you approach them will be crucial for getting their initial agreement to help build the project and set expectations on what will be delivered.
As the concepts of environmental markets, trades and natural capital are fairly recent, you may consider the varying levels of appetite amongst groups of sellers. Some sellers may have previous experiences with nature market trades which, depending on the outcomes of those experiences, may affect their willingness to engage. Conversely, land managers may feel at a disadvantage without prior knowledge of these concepts. Consider gauging sellers’ existing thoughts and experiences in this space before you pitch the idea.
Note: a more bespoke version of this Investment Readiness Toolkit has been developed for farmers – the Farming Toolkit for Assessing Nature Market Opportunities. This includes an Introduction to Nature Markets that you or the sellers you’re engaging may find useful.
Likewise, you may also need to prepare for dealing with landowners and land managers (e.g., tenant farmers) as separate entities. You can find underlying ownership of a site on the UK’s Land Registry, or, more easily, ask the land managers directly. Local organisations, such as Rivers Trusts and Wildlife Trusts, may also have this information to hand.
In any case, project developers should be prepared in initial seller engagement to answer or acknowledge questions from land managers relating to their land tenure and how it works in practice with the project. For example, what the division of financial benefits will be from the project, who will be legally responsible for maintaining the change in land use or intervention, and how the project may affects the underlying property value.
For working with tenant farmers on a nature-finance project, you can read more about the challenges and considerations in a GFI blog post here.
In Milestone 1, you may have already undertaken some research on existing obligations on the site(s), such as site classifications, loan covenants and lease agreements. However, you should ask these same questions directly of the sellers to make sure that you have not missed any key information. The land managers will most likely be best placed to know how existing obligations affect the project’s feasibility. If they are unsure, both parties should consult with the relevant regulatory body, such as the Rural Payments Agency or the Environment Agency.
No two sellers will have the exact same combination of goals for their landholdings. Sellers might be concerned with maintaining agricultural activity, maximising long-term income streams, preserving and restoring natural habitats, creating social ‘amenity’ value from the land, or looking to sell the site in the next decade for their retirement. All of the above goals have the potential to affect the design of the project.
In initial engagement, project developers should get a clear picture as to the wider goals of the sellers, including their ability and appetite to enter into long-term agreements. If you are engaging a large number of sellers, you might consider using a short survey to gauge what goals are most common, and be clear on how the project is serving these goals throughout seller engagement.
Sellers will likely have a range of options in terms of site use, for instance using the site for agricultural production, or leasing it to a solar farm company to host solar panels. Project developers might ask the seller what economic alternatives they have considered for the site in order to assess their opportunity costs.
This is important as sellers with high opportunity costs may not be willing to engage with the project, and basing the project on such sites may not be sustainable over several years.
Note: Sellers may be happy to accept some financial opportunity costs, depending on their overall goals. For example, nature restoration of their landholding or increased landscape resilience.
If you are working across multiple sites and sellers, you may consider on a practical level how the differences between these will affect the project’s delivery of ecosystem services. For instance, if you are developing a nutrient mitigation scheme, dairy farmers, poultry farmers and arable farmers will all have different capacities for reducing their nitrate run-off.
There is the potential for any of these practical differences to also affect the cost and benefit distribution to sellers, and so this merits careful consideration.
For any project, sellers will have to dedicate some time and resources. Project developers must be clear on how much input they need from the sellers to develop the project. If they are unsure, project developers should also be honest about this uncertainty.
If you require a lot of input from potential sellers in the design of the project, you may consider a financial incentive, such as an onboarding fee, that rewards sellers for engaging with the project. The Wyre Catchment Natural Flood Management project is an example of where this tactic was used.
Ongoing engagement with seller groups
Once your sellers have agreed to explore or build the project with you, you should think about how best to engage with them on a regular basis.
A facilitation group in the context of seller engagement is a group of representative sellers and other relevant project stakeholders – e.g. local eNGO representatives – to help test and develop processes relevant to the seller group as a whole. For example, you might test ideas about payment mechanisms, payment figures, maintenance and reporting obligations that all sellers might face once the project has begun implementation stage. Depending on the size of your seller group, this might be different to your seller ‘steering group’ that is part of the core project development team.
In terms of how you set this facilitation group up, you might consider engaging with existing organisations, such as farmer clusters, to act as facilitation groups and set up regular meetings with a defined scope. Outputs from each facilitation group meeting should be clearly recorded, in case you need evidence that you have taken the sellers’ feedback into consideration.
For example, the Wyre Catchment Natural Flood Management project set up a seller steering group, borne out of an existing farmer cluster, to engage with their sellers more effectively.
Some projects can be designed to not allocate any serious risk to the landowners or managers. However, this is not always the case. For instance:
- Sellers might retain the right to decide when they sell carbon credits that are generated from their site, which might translate to a market risk from the fluctuation of carbon prices. In this case, they may want to set up bankruptcy remote SPV structures to ensure this risk does not impact on their personal/wider business interests.
- Any obligations on the land – such as the permanence of a habitat and its condition (see Milestone 1) – will most likely decrease the value of the land while that obligation is in place. This is usually perceived as a risk to landholders as it can limit their options.
- Some sellers might feel hesitant about accepting responsibility for effective maintenance of the interventions. Maintenance is a core component within the delivery risk of the project. Investors may also require robust O&M contracts with an experienced contractor such as an eNGO to mitigate risk around site management.
Project developers should set out the risks of the project clearly with the seller once they have been identified, and discuss what risks the seller feels comfortable taking, versus what needs to be mitigated or transferred away from them.
The types of risks associated with nature finance projects are included in Milestone 6.
More broadly to the above, project developers should also be clear on what activities the sellers are responsible for when the project is launched, even when this does not affect their liability in the project. Examples include administrative burdens and community engagement activities, and any roles they take in the legal entity that hosts the project (See Milestone 6 for more information).
Warranties and indemnities are legal tools of security or protection against a loss or other financial burdens. For example, buyers may be concerned with the non-delivery of ecosystem services that they have already made payments for.
As such, project developers may ask sellers to commit to warranties or indemnities for various aspects of project delivery, such as proper maintenance and monitoring of the interventions. Clauses on various issues beyond the sellers’ control, such as extreme weather, can be built into the warranties and indemnities to excuse the sellers of any loss beyond their control.
A generic overview of warranties and indemnities can be found here.
It is normal for some disagreements to come up between landholders when working together as a group. Having a plan for how decisions are made and processes in place to deal with disagreements can ease periods of disagreement. You will want to decide whether decisions will be made by consensus, by majority vote or through a smaller steering group if you have a particularly large group.
You will also want to think about what to do if this process breaks down. You may consider engaging an external mediator to help deal with disagreements or have a process or forum for negotiation between parties who are disagreeing. Planning for this up front will help guide decision making during challenging times, as it will allow members of the group to follow an already agreed upon process for dealing with internal challenges.
A Memorandum of Understanding (MoU) is a non-legally binding agreement between two or more parties to undertake a ‘common line of action’ or a set of actions. It is an expression of willingness to work together under defined terms.
In the context of nature-based projects, an MoU usually sets out (at a high level) the background and objectives of the project, what activities each party is agreeing to undertake for the project’s development and what they will be responsible for if the project reaches implementation stage, including who are the lead contacts from each party. It might also include where funding for development is coming from and what financial benefits will be allocated to which party.
Though MoUs contain only high level detail, they are useful for making sure there is a common understanding between all parties, and for saving time and resources when legal contracts are initially drawn up (see Milestone 8 for more information). MoUs vary in length but can be as short as one or two pages long.
If you are working with multiple sellers, the value of using an MoU will become more apparent. You can use an MoU template developed by a legal advisor and then alter the terms of each MoU for different sellers. MoUs may reflect differences in seller agreements, including payment terms, seller responsibilities, or potential exit strategies.
Pricing discussions
It may be helpful to discuss prices with sellers at the outset, as this could be a key determinant of their engagement. However, many projects will carry higher degrees of price uncertainty that will mean discussions around pricing and seller expectations need to be managed carefully.
Sellers might have requirements over the type and timing of the income they receive.
They may accept a ‘results-based’ income that varies over time and by environmental outcomes, for example if they are selling verified carbon credits over a staged period. These credits can face changing prices over a project’s lifetime and so present a price risk. However, some sellers may instead want a fixed payments schedule to reduce price uncertainty and smooth their income streams over several years. This could be achieved by paying sellers an ‘action-based’ fee for hosting and maintaining the interventions instead of a varying income, for instance.
A mixed approach to this may be preferable, involving both results-based and action-based payments, which would ensure a base income for the sellers, while also offering a potential uplift that aligns seller incentives with the quality of environmental outcomes delivered.
A key question for project developers is how the price is determined and what precedent this project has in terms of prices agreed.
Is the price typically minimised and based on the costs that the project (and the sellers) face, or does it reflect the maximum value that the buyer is willing to pay based on the benefits it is receiving? (See Milestone 4 for buyer pricing considerations). For instance, a developer may be willing to pay for a series of wetlands delivering nutrient credits, so long as these costs do not make it unprofitable to build the houses it is using the credits for.
Third parties, such as brokers, can offer services such as guaranteeing to act as a buyer of last resort or lending a lump sum up front (effectively acting as short term investor) until a buyer is located. If the seller has a limited risk appetite, then these options may be appealing.
As environmental markets are a nascent area, there may not be any third parties offering these services. However, carbon credit brokers are more common than those for other ecosystem services. You can find examples engaging with these brokers in the case studies of this Milestone.
If you are working with multiple sellers, then you will need to have a clear compensation strategy to maintain fair outcomes for all sellers. For example, identical payment figures may not be a fair outcome if some sellers are facing higher lifetime costs or are contributing more land. Conversely, to achieve catchment scale, you will want to make sure that smaller farmers are sufficiently compensated, as they may face fixed costs of project participation that are not proportionate to the potential benefits from their landholding.
While being careful not to disclose exact figures, you may choose to test ideas on how to calculate compensation with the seller group, in order to maintain transparency and credibility.
Due to the longer-term nature of projects, if your project is offering payments over several years, how these vary will likely be a key consideration of sellers, especially given recent inflation rates. Commonly used indexes are the Consumer Price Index (CPI), Consumer Price Index and Housing (CPIH), and the Retail Price Index (RPI).
If you are linking payments to inflation, it is advisable to include this in the sensitivity analysis or scenario modelling within your financial model (see Milestone 5), taking into account long-term historic inflation trends, as opposed to recent levels of inflation.
Sellers committing to projects over several years may also want to have options to exit the project at certain points,. This may be more or less complex depending on the number of sellers you have engaged, but is generally appreciated by sellers to provide flexibility.
If you are providing sellers with exit points, you may consider clauses in the legal agreements that require returns of payments made to the sellers over certain intervals that compensate the project for the loss of the ecosystem service provision (which may have been paid for by buyers already). A similar structure is employed in agri-environmental subsidy schemes, such as the Countryside Stewardship scheme.
