Milestone


02

Identify and Work with Sellers

Introduction

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 lease arrangements. In some cases, there may be a sole seller of ecosystem services. This would be the case with a site or landholding large enough that it delivers the volume of ecosystem services needed to cover the costs of the project.

However, in order to achieve scale and impact, a project will likely involve multiple sellers, such as neighbouring land managers and landowners. 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.

Milestone 1: Initial Project Scoping

The initial task is often to understand the site(s) you want to use and the land use change needed for nature restoration or creation. This includes considering the goals of the land managers involved, the vision within the wider catchment or neighbouring area, and whether there are permits or planning consent needed for any proposed changes.

At this stage, you can also conduct a high-level assessment to determine which revenue streams can be generated from ecosystem services,  i.e. carbon credits, flood reduction cost savings, biodiversity units, which will be crucial for identifying buyer interest.

Finally, it is useful to have an idea of the costs of the project and potential grant funding that may be available to support initial development.

Introduction

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 lease arrangements. In some cases, there may be a sole seller of ecosystem services. This would be the case with a site or landholding large enough that it delivers the volume of ecosystem services needed to cover the costs of the project.

However, in order to achieve scale and impact, a project will likely involve multiple sellers, such as neighbouring land managers and landowners. 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.

Introduction

At this point, you will have understood the vision for the project and you’ll have chosen a particular ecosystem service or set of services to be sold. The next step will be to carry out detailed analysis – baselining each ecosystem service and quantifying what will be able to be delivered from the interventions, as well as planning how to monitor and maintain these interventions. You will need to rely heavily on ecological expertise for this more scientific milestone.

At this step, standards, verification and accreditation methods will be considered in more depth.

Introduction

Based on your earlier market analysis in initial project scoping, you will have identified one or more groups of beneficiaries who may be willing to ‘buy’ or pay for the ecosystem service(s) to be created, restored or maintained. Buyers vary – as do their requirements – but At this step, greater buyer engagement is now needed to develop a deal that channels financing.

 

 

Introduction

You’ll have started building your business case and financial model in earlier steps – laying out your vision, the market proposition and estimating costs and income. This step offers a review, in addition to providing details on information needed to build out the financial model and business case more fully. Both of these key documents will be iterated throughout project development, and may be altered during project delivery as new information emerges. These documents are interlinked and, if developed correctly, will ensure your project’s viability and also help you with discussions with stakeholders including sellers, buyers and future investors.

The financial model will also enable you to better understand the type of structure your project may take to attract investment (i.e., an environmental bond, a loan, an equity investment) and what sort of returns you can afford to pay/offer.

Introduction

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.

Introduction

It is important to note that not all projects will need up-front investment, but for those that do, this section provides a framework for thinking around the development of the investment model. This does not constitute financial advice – as the GFI is not licensed to do so. However these considerations are based on the insight offered by project developers and other market stakeholders.

An investor will be a new core stakeholder in your project, and it’s just as important to think of what you require from investors, as much as what they require from you – so that you can build a positive and collaborative relationship with them.

This entails defining the investment ask (in line with the financial model), the strategy for approaching the right investors, and the negotiation of terms that can then be formalised in contract development (Milestone 8).

 

Introduction

When all relevant stakeholders have been engaged and their terms of engagement are clarified as much as possible, this is the time to develop the legal contracts and close the deal. This stage is last because legal fees are expensive, and it is generally advised to determine as much as possible in previous stages before

Note: The information in this Milestone does not constitute any form of legal advice but instead serves as practical advice on how to manage engagement with lawyers and the process of contract development.

The Green Finance Institute is not a firm of solicitors or connected in any way with the courts. The information and opinions we provide in this section and across the Toolkit do not address your individual requirements and are for informational purposes only. They do not constitute any form of legal advice. We recommend that appropriate legal advice should be taken from a qualified solicitor before taking or refraining from taking any action.

Introduction

Community engagement is highly advisable for any project that aims to sell ecosystem services, to ensure fair outcomes for local communities and the long-term success of the project. Project developers can build connections with local stakeholder groups early on to spot both risks and opportunities.

Introduction

Project developers and enterprises will need to keep a continuous check on how current and future policy may affect the project, and also opportunities for the project to inform policy. The role of private finance for nature across the UK is being encouraged by the UK government and its devolved administrations, and new rules, standards and markets are being developed.

 

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.

Case Studies

Checklist

Useful Links

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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.

Considerations

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Does the project require a large-scale approach?

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 environmental trades, then you may be able to make these trades independently – though partnering with other landholders could be desirable to achieve economies of scale.

 

What are the possibilities of curating a connected landscape?

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. You may, for example, create some introductory documents for the project, 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.

 

Can I start with one site and include other sellers later?

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 and start with a smaller pilot or core testing group of 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.

Considerations

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Are there community groups or eNGOs working together around the site?

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.

 

Are there public or private databases that map the site type I am interested in?

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.

 

Is there an existing farmer cluster or can I create one?

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.

Considerations

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What is their appetite for engaging with environmental markets and natural capital?

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 environmental 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.

 

What is the land tenure of the sellers you are approaching?

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 the land tenure. 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.

 

What are their legal and regulatory obligations?

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.

 

What are the goals for their overall landholdings?

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.

 

What would be their opportunity costs for hosting the interventions?

Sellers may 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.

 

What are the similarities and differences between the sites across different landholdings?

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. Different landholders will also have distinct opportunity costs.

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.

 

What is their capacity for committing resources to the project’s development?

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, then in this case project developers should also be honest about this uncertainty.

If you are working with large groups of sellers, you may consider having a seller ‘steering group’ formed of seller representatives, who have both the capacity and the trust of the wider seller group to undertake this work and represent their best interests.

 

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.

Considerations

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Should I build a facilitation group? How?

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.

 

What is the risk appetite of the sellers?

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. Landowners may want to set up bankruptcy remote SPV structures to ensure any risks do not impact on their personal/wider business interests

Another example is effective maintenance of the interventions, which some sellers might feel hesitant about accepting responsibility for. 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 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 from them.

 

Who should take what responsibilities when the project is launched?

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).

 

What warranties or indemnities would be required of sellers?

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.

Will I need a Memorandum of Understanding?

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.

Considerations

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How and when do sellers want to be paid?

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.

 

Are there other relevant transactions for price guidance? What are the price drivers?

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.

 

Are there third parties which can offer guarantees or price risk reduction services?

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.

 

Should compensation vary between sellers?

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 (equalisation), 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.

 

Should sellers receive compensation during the project development phase?

This may not always be necessary, but more complex projects that take up sellers’ time could offer an ‘onboarding’ incentive or fee for participating in the project’s development.

 

Should payments be index linked?

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 Prices Index (CPI), Consumer Prices Index and Housing (CPIH), and the Retail Prices 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).

 

What exit strategies are provided to sellers? Should there be return or clawback clauses?

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.

All Case Studies
Checklist

 

You can download a Word copy of the Milestone 2 Considerations as a checklist here, to help with your own project planning.

Alternatively, you can find a simple list of the Considerations below:

 

Identifying a need for multiple sellers 

  • Does the project require a large-scale approach?
  • What are the possibilities of curating a connected landscape?
  • Can I start with one site and include other sellers later?

 

Mapping sellers 

  • Are there community groups or eNGOs working together around the site?
  • Are there public or private databases that map the site type I am interested in?
  • Is there an existing farmer cluster or can I create one?

 

Approaching sellers

  • What is their appetite for engaging with environmental markets and natural capital?
  • What is the land tenure of the sellers you are approaching?
  • What are their legal and regulatory obligations?
  • What are the goals for their overall landholdings?
  • What would be their opportunity costs for hosting the interventions?
  • What are the similarities and differences between the sites across different landholdings?
  • What is their capacity for committing resources to the project’s development?

 

Ongoing engagement with seller groups 

  • Should I build a facilitation group? How?
  • What is the risk appetite of the sellers?
  • Who should take what responsibilities when the project is launched?
  • Will I need a Memorandum of Understanding?
  • What ‘exit routes’ do sellers want from the project?
  • What warranties and indemnities are sellers being asked to commit to?

 

Pricing discussions

  • How do sellers want to be paid?
  • Are there other relevant transactions for price guidance?
  • What are the price drivers? Are there third parties which can offer guarantees or price risk reduction services?
  • Should compensation vary between sellers?
  • Should sellers receive compensation during the project development phase?

 

On the 25th of January 2023, the GFI hosted the second in a series of ‘Investment Readiness’ webinars that focus on UK nature-based project developers’ experience. This webinar focuses on Milestone 2, ‘Identify and work with Sellers’, with an overview of what this entails, and a panel of project developers who share their insight and experiences on this Milestone.

The panel includes:

  • Ed Shuldham, Environmental Farmers’ Group
  • Olivia McGregor, New Forest National Park Authority
  • Paul Nolan, Mersey Forest

The Panel was moderated by Helen Avery, Director of Nature Programmes at the Green Finance Institute.

 


On the 2nd of May 2023, the Green Finance Institute hosted the fourth in a series of webinars in support of the Facility for Investment Ready Nature in Scotland (FIRNS).

The webinar hosted a panel of advisors and experts in bringing landholders together, including:

  • Derek Robeson, Senior Conservation Officer, Tweed Forum
  • Eleanor Harris, Natural Capital and Carbon Leader, Galbraith Group
  • Dee Ward, Chair, Wildlife Estates Scotland, and Owner & Manager, Rottal Estate

Helen Avery, Director of Nature Programmes, chaired the event.

If you have any further questions or comments, please contact firns@nature.scot