Milestone 02


The Wyre Catchment Natural Flood Management Project


Identify and Work with Sellers


Project Summary

The Wyre Catchment NFM project is the first example in the UK of private investment enabling the delivery of natural flood management. The project will deliver more than 1,000 targeted measures to store, slow and intercept flood water and prevent peak flow in a catchment in England, with the interventions hosted by local farmers. Beneficiaries of the reduced flood risk are paying for the interventions, and the Project’s Community Interest Company has successfully raised a nine-year £850k private loan facility to help fund the interventions.

Milestone 1: Initial Project Scoping

Often the initial task is 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 , e.g. carbon credits, flood reduction cost savings, or 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.

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.

Milestone 3: Baseline and Estimate Ecosystem Services

At this point, you will have understood the vision for the project and identified 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.

Milestone 4: Identify and Work with Buyers

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 money towards the nature-positive outcomes that your project wants to deliver.

 

 

Milestone 5: Develop Business Case and Financial Model

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.

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.

Milestone 7: Identify and Work with Investors

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).

 

Milestone 8: Establish Legal Contracts and Closing

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.

Community Engagement

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.

Policy and Regulation

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.

 

Acknowledgements 

With many thanks for their time and insight on this case study:

Dan Turner, Technical Lead, Land Management and Market Creation, The Rivers Trust

 

The Rivers Trust - Wildlife and Countryside Link

 

Dan Hird, Principle and Founder, Nature Finance

 

Thomas Myerscough, General Manager, Wyre Rivers Trust

Wyre Rivers Trust - Environmental Organization - , England

 

Date published: 08/12/2022

Next Milestone

 Mapping Sellers

The hydrological modelling carried out in initial scoping (see Milestone 1) showed what locations the specific interventions would need to be delivered on – there are over 1000 NFM interventions planned out, to be hosted by 10-15 land managers in the area.

The Wyre Rivers Trust examined the map that was used in this hydrological modelling and compared it with its own data to identify the ‘sellers’ or land managers that operated in the area. Although this information would have been attainable through the Land Registry, the Wyre Rivers Trust also used prior engagement and local connections having a good understanding of  who owned and occupied the land, versus who were tenant farmers.

Turner comments that for those considering NFM projects, the approach is highly place-based: “This is true for all nature-based solutions, but for slowing peak flood flow, your options are particularly restricted to what the data tells you. A hedgerow along one farm field verses another might not deliver the same impact, even if those fields are right next to each other,” explains Turner.

 

Approaching Sellers

The project team approached the sellers (land managers) via the Upper Wyre farmer facilitation group, hosted by the Wyre Rivers Trust. Farmer facilitation groups, sometimes called farmer cluster groups, are groups of local farmers that develop and work together towards a common set of goals that is specific to their area. This might include conservation or business specific objectives. Farmer cluster groups can currently be found across England, Scotland and Wales.

The land managers in scope had first been approached by the Wyre Rivers Trust, as part of their ground truthing exercise in initial project scoping (See Milestone 1). This exercise identified high level possibilities to diversify income streams using payments for ecosystem services, such as nutrient reduction, carbon and biodiversity credits.

However, with a more developed understanding of the potential of the project to deliver flood risk reduction, the project team utilised the Farmer facilitation group to engage with the members.

Members of the team attended famer cluster meetings to present the project’s aims and the work done to date. Turner says that the presence of a local project partner that is trusted by the seller group is key in approaching sellers. For the Wyre NFM project, this partner was the Wyre Rivers Trust, which had longstanding relationships with each of the land managers and who ran and hosted the group.

 

Identifying Seller Motivations and Challenges

The land managers were receptive to the idea of the project, especially given that buyers were already engaged and considering payment figures. The land managers liked that the project was based on specific local priorities and needs. They also viewed this as an opportunity to diversity their income streams in a time where Basic Payment Scheme (BPS) payments were being withdrawn.

However, this factor also presented a major challenge in terms of opportunity cost. The farmers wanted assurance that they wouldn’t lose income overall by being excluded from future payments of Environmental Land Management schemes (ELMs) as a result of participating in this project. This presented a ‘hold-up’ problem for the project team.

There were also existing agreements in place – Countryside Stewardship (CS) agreements – that posed the threat of penalties to farmers who hosted interventions on sites under these agreements. Farmers could have theoretically had to pay back up to 10 years of previous funding from their CS agreements if this conflicted with their agreement. This was due to the legal restraints the CS agreements place on land to prevent a conflict in delivering environmental outcomes.

To overcome these barriers, the project team had a series of conversations with Defra and the Rural Payments Agency, which are designing the ELMs and also administer the CS scheme. These bodies then provided a written statement to say that project participation wouldn’t exclude farmers from ELMs participation, or result in penalties from existing CS agreements. This was under the provision that the environmental outcomes of the project and any scheme would not conflict with each other.

Farmers generally accepted this statement as sufficient assurance to continue engaging with the project. Many farmers also looked upon the project more favourably for being able to take local issues to national government bodies and resolve barriers.

 

Structuring Payments

One of the earlier design principles that the project team decided on was the shift away from compensating landowners based solely on the amount of land they owned – what they term ‘land-based payments’, which they consider to put smaller landowners at an unfair disadvantage.

Instead, land managers receive these payments as annual management fees. The project team agreed on this payment mechanism to reflect the land managers’ role of hosting and maintaining the interventions, with the Wyre Rivers Trust responsible for monitoring and replacement of interventions when needed.

However, land managers also dedicated a significant amount of time to ‘co-designing’ the project by giving feedback, for example on such elements as payment rates. Recognising this as a resource, the project team also offered a £500 onboarding fee for every land manager to compensate them for the engagement they would be contributing to the project’s development.

The above terms were set after testing ideas directly with the land managers. To do this, the project team spoke regularly to the farm clusters. This collaborative and transparent approach also appealed to the land managers, as it gave them confidence that all farmers were engaged on payment terms.

To date, 10 land managers have signed up to the project to deliver the interventions necessary for the first year of the project. Negotiations are ongoing with five further land managers for the interventions scheduled in the second and third years.

 

Addressing Land Tenure

Another design principle agreed by the project team was that these payments should go towards those who manage the land, and not simply those who had underlying ownership. Of the land managers who were identified to deliver the target reduction, a number of them were tenants and the others were owner-occupiers. As the land managers would be helping to develop the project and host the interventions, the project team felt that directing payments to them was a fair outcome.

However, land owners also needed to agree to the project for it to have legal validity. There were several different types of tenancies involved, and each tenancy had their own conditions, which made engagement with landlords more complex.

There were two landlords engaged. These landlords did not receive any direct financial compensation, though adjustments on a site-by-site basis were made to comply with special features of the tenancies that the sites were part of, such as business practice commitments.

Though each landlord had slightly different motivations for agreeing to the interventions, a major underlying driver was the fact that this project increased payments towards their tenants. This meant that the landlords were benefiting by having a more financially secure tenancy agreement. One landlord was particularly supportive due to the environmental outcomes of the project.

 

Reaching Agreement

Once negotiations with the land managers were concluded, the project team created and used a standard Memorandums of Understanding (MoU) for the purpose of documenting a non-legally binding agreement with each land manager. These clarified the standard commercial terms of engagement, including the payment figures for the particular interventions agreed between the parties and planned for each site. Overall, it took 15 months from the initial pitching of the project to getting the majority of the MoUs signed.

The MoUs were developed with guidance from Triodos Bank and designed so that the terms of the MoUs were consistent across the land managers, with the exception of the payments and interventions that were bespoke to each land manager. No external legal advice was required at this stage because the MoUs were non legally binding.

Turner comments that this set of MoUs, though not legally binding, was useful to the project for two reasons. Firstly, it made sure there was no confusion from the land managers as to what participation in the project looked like, preventing difficulties later. It was also essential for showing other external stakeholders, namely the investors, that the ‘sellers’ of the ecosystem services were not only engaged but also agreeing to defined terms.