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Milestone 01


Esk Valley Project


Initial Project Scoping


Green Finance Institute / GFI Hive / Investment Readiness Toolkit / Initial Project Scoping / Esk Valley Project

Project Summary

The North York Moors National Park Authority and Palladium have been working to develop a blueprint for catchment-scale nature restoration, working with a farmer group in the Esk Valley. By exploring options for generating ecosystem services with the farmers and undertaking market research, it has identified a concept for a ‘project aggregation facility’ that could address certain barriers to nature restoration using private finance. The project links to Revere, a UK-wide collaboration between National Parks and Palladium that aims to raise private capital to fund nature restoration.

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.

 
Acknowledgement

 

With many thanks for her time and insight:

Briony Fox, Director of Conservation, North York Moors National Park Authority

 

 

Date Published: 19/04/2023

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Project Vision

The North York Moors National Park covers 143,500 hectares in the North-East of England, 20 miles north of the City of York. It is home to 23,000 residents and is one of the most sparsely populated areas in England, with just 0.16 residents per hectare.

The North York Moors National Park Authority (NYMNPA) hopes to restore and improve its natural habitats across this area, including species-rich grasslands, riparian woodland and riverside meadows. The overall aim of the project is to test that such nature restoration can deliver long term economic returns for land managers by generating revenue through sale of ecosystem services. If successful, the project could also be scaled to other national parks.

 

Working with Palladium

For this project, NYMNPA took part in the wider Revere partnership between Palladium and the UK National Parks Association.

In 2020, the National Parks Partnerships – a company created by the UK National Parks Association to form commercial and philanthropic partnerships – issued a tender for organisations that wanted to explore the use of private finance in nature restoration and preservation. Palladium approached the National Parks Partnerships to offer its commercial services on a pro-bono basis, connecting with each of the UK’s 15 National Parks to scope potential pilots.

Briony Fox, Director of Conservation & Climate Change at NYMNPA, said that the NYMNPA team welcomed the partnership with Palladium, but due consideration was needed on certain factors, such as engaging with landowners. The team wanted to manage expectations and avoid the impression of being able to offer a panacea of financial solutions to the land management community at the project’s end, or bringing in a commercial organisation that would prioritise profit over high-integrity nature restoration.

Conversations to scope the pilot took place over several months, in step with conversations with other National Parks. It was agreed that in its first year or so, the project team would undertake natural capital accounting, conduct market research, engage with landowners to determine potential restoration scenarios, and build a financial model for each of these scenarios to determine whether a catchment-scale restoration would be economically viable.

Subsequently, Revere was launched in October 2021, with the aim of designing restoration projects within the National Parks and raising private capital to fund the restoration. One of its pilots included the North York Moors Esk Valley project, which was funded by the NEIRF (see below). You can watch an overview of the Revere partnership below.

 

 

Catchment Selection

The Esk Valley within the NYMNPA was chosen as the pilot area for the project, primarily due to the fact that the NYMNPA team was already exploring the use of private finance in nature restoration with the Esk Valley Farmers Group. This group hosts 52 farmers that manage over 10,000 hectares.

Fox says that working with an existing cluster that trusted the NYMNPA team was key to saving time and resources. A smaller group of farmers from this cluster agreed to take part in the project (see Milestone 2 for more detail).

The Esk Valley itself is a catchment of 36,000 hectares in the north of the North York Moors National Park. It is characterised by a mosaic of habitat types including moorland, farmland, grassland, woodland and rivers. The landscape demonstrates great potential for connecting and softening boundaries between distinct habitats, improving water quality and conditions for iconic local species.

 

Natural Capital Accounting

One of the first steps of the project was to capture a natural capital account of the entire Esk Valley. The project team – NYMNPA and Palladium – wanted to understand what natural habitats existed and their quality (stocks), what ecosystem services these were delivering (flows) and therefore where the project may enhance its natural capital with the greatest uplift in quality.

The project team agreed to engage with NatCap Research for this work, due to its expertise in this area and the fact that Palladium had previously established a relationship as part of its wider Revere work. This initial natural capital accounting took around two months to undertake, and NatCap Research used several datasets, including the National Tree Map, OpenStreetMap and the Digital Elevation Model, to name a few. The NYMNPA had its own GIS system that was used to compile these datasets.

The subsequent report, finalised in September 2021, showed that the greatest opportunities for natural capital improvement in the Valley were water quality improvements and carbon sequestration. Most habitats and waterways in the catchment were identified as of moderate or poor quality. It gave a complete spatial overview or ‘heatmap’ of where the largest and smallest quantities of ecosystem service flows were coming from.

Heatmap of Combined Ecosytem Service Flows, Esk Valley Natural Capital Baseline Report, NatCap Research , 2021

 

Fox says that the report was very useful for taking a wider view of what was possible in the catchment and where the project team may be able to introduce private finance. For instance, the report showed that flood risk was not a serious threat to local populations in the Valley and therefore it was highly unlikely that payments for natural flood management would be made.

 

Market Research

Palladium undertook market research to complement this work from November 2021 to February 2022. The research covered the four key ecosystem services for which a market currently exists in the UK:

  • CO2e removal and reduction
  • Biodiversity Net Gain (BNG)
  • Water quality improvements
  • Flood risk reduction (ruled out in early scoping)

Palladium first spoke to the businesses located in and around the North York Moors to capture the likelihood of local demand.

Voluntary carbon offsets from woodland creation was seen as the most likely source of revenue for the project in the near term.

The project team view the Woodland Carbon Code as a well-established mechanism for offset sales, with WCC units selling for around £25-40. Palladium spoke to businesses and corporates in the area, such as Quorn and Yorkshire Water, which stated their interest but also highlighted the need for scale to make a viable transaction.

BNG sales were considered but ruled out as an option for the near-term, potentially to be considered in the future. Most developments in England and Wales will need to achieve BNG from winter 2023. However, as sales of offsite units are restricted to the National Character Area of the development and the fact that there are very few developments occurring within the NYM National Park, this greatly limited the potential demand. However, the team considered that there are other routes for paying for biodiversity gain to be considered, such as S106 payments and voluntary biodiversity credits. These were viewed as routes to be explored further down the line.

Payments for water quality improvement were likewise ruled out as an option for the near-term, but may be considered in the future. The North York Moors National Park does not fall within a nutrient neutrality bound local authority, meaning that mandatory payments from developers were not possible. Conversely, Yorkshire Water is the area’s water utility provider and has previously set up several Corporate Social Responsibility funds and initiatives to address the water quality issues in the catchment, and it expressed an interest in smaller up-front payments for habitats, however it was not ready to consider annual payments at the time of engagement.

Finally, natural flood management payments were also explored, but the natural capital accounting showed that flood risk was limited in the catchment and that it was highly unlikely for properties or populations to be impacted.

Fox comments that two key learnings came from this market research – that aggregation of habitats was needed to reach the scale attractive to most buyers, and in general businesses and corporates were keen to understand their obligations and regulatory requirements before considering any voluntary arrangements.

 

Initial Costs and Grant Funding

The first 15 months of the North York Moors Esk Valley project was predominantly funded through the Natural Environment Investment Readiness Fund (NEIRF), which opened its first round in February 2021.

After submitting an application, the project team received £100,000 in August 2021. This was mainly used to fund a part-time project officer from the NYMNPA team, Palladium’s time including resource from a Project Development Associate, and the natural capital accounting report from NatCap Research. However, Fox says that some time dedicated by the entire team was not captured or was valued at cost only, and that realistically the total cost of the first 15 months was closer to £150,000.

Fox highlights the benefits of speaking to other projects in the NEIRF’s Community of Practice, including the New Forest Net Zero project that is also part of the Revere partnership.

 

 

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