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Milestone 06


Aire Resilience Company


Developing a Governance Structure


Green Finance Institute / GFI Hive / Investment Readiness Toolkit / Developing a Governance Structure / Aire Resilience Company

Project Summary – Aire Resilience Company

The Aire Resilience Company (ARC) is a partnership between the Rivers Trust, Leeds City Council, the Environment Agency, the Aire Rivers Trust and the Yorkshire Wildlife Trust. It will be an independent, commercial mechanism enabling the delivery of long-term natural flood management interventions (NFM) in the Upper Aire Valley. NFM interventions will be paid for partly by businesses and companies across the Aire catchment in return for enhanced flood risk reduction, along with a range of additional benefits derived from the use of nature-based solutions, alongside public grants.

Location: Leeds, England

Revenue stream focus: Payments for natural flood management

Key partners: Leeds City Council, Nature Finance, Environment Agency, Aire Rivers Trust, Yorkshire Wildlife Trust, White Rose Forest, Rivers Trust

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 starting to draw up contracts in earnest.

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.

 
Acknowledgments

 

With many thanks to the following individuals for their time and insight:

 

Rob Horseley, Project Manager, The Rivers Trust

 

 

Keith Davie, Senior Advisor Green Finance, Environment Agency

 

 

 

 

Date published: 26/04/2024

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Key Learnings:

  • ARC is currently developing its governance structure and plans to set up a Community Interest Company that is governed by representatives of all major stakeholder groups, including the landowners, the buyers and the local community.
  • ARC’s initial delivery is complementary to the existing Leeds Flood Alleviation Scheme, though it remains independent in terms of its formal Board and decision-making process.
  • ARC is using initial three-year delivery and five-year maintenance  contracts and an adaptive management phase to mitigate against several risks and accommodate the risk appetites of its key stakeholders.
  • The governance structure has also been formed to allow future opportunities to be considered, such as supporting other projects beyond its current programme and sharing learnings more widely.
  • In its development, the project team says that it was crucial to engage individuals of enough seniority in the larger organisations to get their support, and also people with specialist expertise, such as those with experience in detailed financial modelling and tax planning.

 

 

 

How will the ARC be governed?

The ARC plans to form a Community Interest Company governed by a Board of Directors that represent each of the major stakeholder groups of the project. There will be representatives of;

  • The landowners (sellers) that are hosting the NFM interventions
  • The local businesses and companies (buyers) who will act as a consortium to pay for the hosting and maintenance of the NFM interventions
  • Leeds City Council – to maintain alignment with the Leeds Flood Alleviation Scheme
  • The local NGO sector
  • The local community
  • The Environment Agency & RFCC (having a jointly appointed  representative)
  • An independent Chair that will help to settle any agreements or debates on the Board

The Aire Rivers Trust and Yorkshire Wildlife Trust are installing the NFM interventions as part of the model – but will not be on the governing board as it was decided this could cause a conflict of interest.

It is  anticipated the Board will meet once every two months to monitor delivery, and its Directors are remunerated to compensate for the expected time they will spend on governing the ARC.

Rob Horsley, Project Manager at the Rivers Trust, says that one of the challenges in designing the ongoing governance of the ARC is deciding who should be represented on the Board versus who will give input through other channels. “The ARC is serving a wide community and there are many stakeholders invested in its protection against flood risk, along with other interests like biodiversity and water quality benefits. At the same time, we do not want the Board to be so big that it hinders effective governance.

The Board of Directors may itself decide to expand its membership, to include additional directors where specific skills or experience are required. It could also invite associate members or observers who have limited participation but can ensure that information is shared with other parties where necessary.”

 

Who is managing the delivery of the project?

It was acknowledged early on that the Board could not manage the day-to-day operations of the ARC and a separate, dedicated role would need to be created.

The ARC team plans to employ two roles – a programme management role to undertake day-to-day tasks such as managing contracts, performance reporting, public communications and website maintenance. An asset management role will also be handling the financial administration of the company, including financial planning and helping to manage contracts. In case any buyers or landholders want to exit the ARC, the programme manager will also be responsible for exiting arrangements and onboarding new partners.

The programme manager will likely need to be a local organization that aligns with the values of the ARC, but be separate from any of the existing stakeholders – including the delivery partners – as this would be a conflict of interest. As of March 2024, the ARC project team are exploring options including the potential for this role sitting with a public body.

 

ARC Governance Structure

 

What risks does the ARC face?

ARC has developed a risk management strategy that ties in with its governance structure in several ways.

For example, ARC is signing initial contracts with its buyers and landowners for five years, with an option to extend further if parties are in agreement. Although ARC wants to see these interventions maintained in perpetuity, this contract length allows for more flexibility in the face of uncertainties, such as political risk and the first five years of the model where the interventions have been installed. Once ARC enters the maintenance phase of the model, longer contracts may be more realistic.

Dan Hird, Principal of Nature Finance, one of the development partners of the ARC, comments “the five-year contract is really a pragmatic view to get everyone involved and get ARC up and running, and we’ve based that on [stakeholder] feedback… importantly in five years time we may have a new government with a new agricultural subsidy regime. These five years is appropriate to get the ARC up and running with the interventions in the ground, but perhaps there may be an opportunity to structure these ongoing annual maintenance payments through a new combination of public and private sector funding.”

ARC’s governance structure has also been designed so that, in future, it can expand to new mandates, activities and services, such as, Sustainable Urban Drainage Systems (SUDS) in Leeds city and NFM interventions delivered further afield. However, for now the focus is primarily on flood risk management as the buyer contracting requires complete clarity over what is being paid for and delivered with the funding. In the future, ARC could develop other arrangements with buyers that either use separate contracts or amends existing ones but fundamentally the contracts need to be clear what is to be delivered for the finance received.

The ARC is using an adaptive management approach, regularly recording data and remodelling at key stages to maximise the physical performance of the NFM interventions.

Part of its risk management strategy has been to form a Community Interest Company that can host the ARC’s operations and insulate any other organization from financial risk.

 

Why has the ARC chosen a Community Interest Company?

The ARC plans to form a Community Interest Company limited by guarantee. The ARC team agreed that though there would be some drawbacks such as lack of charitable status for tax and more complex governance reporting, such a legal entity would be aligned with its community-based interests. The ARC will have an asset lock that means any profits must be either retained or distributed to environmental and flood-risk reduction initiatives that serve the catchment.

CICs are relatively more complex to set up, but the ARC team plans to take many learnings and processes on its formation from the Wyre Catchment Natural Flood Management project, which also formed a CIC and was supported by the Rivers Trust, Nature Finance and the Environment Agency.

 

 

Sources:

Interview with Rob Horsely, the Rivers Trust

Introduction to Aire Resilience Company (youtube.com)

 

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