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Milestone 01


Environmental Farmers Group


Initial Project Scoping


Green Finance Institute / GFI Hive / Investment Readiness Toolkit / Initial Project Scoping / Environmental Farmers Group

Project Summary

Environmental Farmers Group (EFG) is a farmer-led organisation focused on delivering environmental improvements financed through nature markets. The farmers work together to identify where natural capital improvements would best be made, and where opportunities exist for nature markets. The EFG shares knowledge and processes across its members to strengthen their position as owners and managers of natural capital. The EFG was launched in May 2022 in the Hampshire Avon river catchment and completed its first trade in March 2023. As of October 2023, it comprises of 257 farmers and 140,000 hectares, with a mix of owner occupiers and tenant farmers, and has since expanded its model elsewhere in England.

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 project’s vision, the market proposition and estimating costs and income. This step offers a review, in addition to providing details needed to build out the financial model and business case more fully. Both of these key documents will be iterated throughout project development, and will likely be altered during project delivery as new information emerges. These documents are interlinked and, if developed correctly, will ensure your project’s viability and 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.a loan, an equity investment, a bond) 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:

 

Robert Shepherd, Farmer and Board Member, Environmental Farmers Group

Ed Shuldham, Farmer and Scoping Group Member, Environmental Farmers Group

Digby Sowerby, Operations Officer, Natural Capital Advisory

Rachel Ridd, Business Officer, Natural Capital Advisory

 

Date Published: 11/04/2024

Next Milestone

What is the current state of the land?

As of November 2023, the Environmental Farmers Group covers 135,000 hectares in three different catchments in the south-west of England;

  • the Hampshire Avon (EFG’s starting location),
  • the Test & Itchen, and
  • the Dorset Stour.

 

Farming in these areas is predominantly based on permanent pastureland for grazing and arable farmland, with most farmers dependent on the Basic Payment Scheme for their businesses.

Each catchment has its own unique features and specific environmental goals – such as the reduction of certain nutrients in waterways, protection of rare chalk streams and restoration of wildflower meadows. However, each catchment agrees on the same broad environmental objectives that were set by the founding farmers in 2021:

  1. Cleaner Water
  2. Biodiversity and species recovery
  3. Net carbon zero farming by 2040

 

You can read more about how this initial group of farmers came together on EFG’s website, and how farmers of EFG work together in the Milestone 2 case study.

 

Creation of a Catchment Scale Conservation Plan

In partnership with the GWCT, EFG has started to build a Catchment Scale Conservation Plan (‘Plan’) that will identify across the catchments where ecological interventions, such as tree planting near rivers and wildflower restoration, would be best placed ecologically.

Several different ecologists have been engaged to develop the Plan, but also farmers for their own knowledge of their land, and to build in how much land they would like to keep in food production.

One of the aims of the Plan is to take national targets around nature restoration, and scale these down to the catchments, so that the Plan is best aligned with government ambitions. For example, EFG wants to restore 75% of protected sites back to favourable conditions by 2042. EFG also hopes to feed their work into the Local Nature Recovery Strategies of the catchments.

EFG is still defining some of the methods by which it is tracking these targets – including its definition of net carbon zero farming. However it believes that by collecting this data now using robust and trusted methodologies, the farmers of EFG will be better placed to create joined up plans that can meet the requirements of financiers and government – such as additionality and proving the avoidance of perverse incentive.

This in turn will help to transform the Plan into what EFG calls an Investible Landscape, which can create nature market trades (and other types of funding).

 

How is EFG assessing its nature market potential?

EFG hopes to create a pipeline of nature market trades that align with the Plan. It is working with Natural Capital Advisory (NCA), which is a subsidiary of the GWCT that specialises in nature markets, in order to do so.

Rob Shepherd – one of the founding farmers and now Chairman of EFG – says the most common concerns that farmers have about the nature markets space are usually either “missing the bus entirely or overcommitting their farms.” EFG recognises that, if it could achieve enough scale, farmers could “dip their toe” by committing parcels of land together, and have better negotiating power as a collective.

Since its launch in May 2022, EFG has pursued different ecological and land assessments across its membership, including 57 biodiversity audits to assess the potential of BNG sales.

So far, the main nature market opportunities for EFG farmers appear to be unit sales via Biodiversity Net Gain and Nutrient Neutrality, as the catchments are all located in areas with a housing development pipeline under Nutrient Neutrality requirements. EFG has further plans to assess land opportunities, including Soil Carbon trials with a small group of farmers and a service provider that the NCA and EFG has assessed and chosen.

You can hear more about the EFG’s role in the video below:

 

How has EFG funded this work?

To date, EFG has received different sources of funding for its development, including:

EFG also has a ‘trade equalisation policy’ that means any trades pursued by its farmer members involve a share of profits, with 3% going to EFG to help cover its administrative costs. You can read more about this in the Milestone 2 (Working with Other Farmers) case study.

 

 

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