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Milestone 06


Environmental Farmers Group


Developing a Governance Structure


Green Finance Institute / GFI Hive / Investment Readiness Toolkit / Developing a Governance Structure / 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 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.

 
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

Published 11/04/2024

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How is the EFG led by farmers and maintaining the farmers’ best interests?

EFG was founded by farmers and its governance is designed to prioritise the interests of its farmer members. EFG has four main entities within its structure to help with this:

  • EFG Board – To ensure EFG remains farmer led and independent, there is a Board made up of the founding farmers who provide decision making and direction. The Board meets monthly and agrees on the strategies and activities that will support its Members.
  • Executive – EFG contracts Natural Capital Advisory (NCA – a subsidiary of GWCT) to complete all day-to-day management of the business. The executive reports to the Board.
  • Steering Groups – As EFG has expanded to different catchments, it has created Steering Groups that are made of the farmers that worked to replicate the EFG model in their area, or ‘cell’. Although each cell adopts EFG’s model, Steering Groups provide local focus on key priorities and opportunities. To date, EFG has four running Steering Groups in Dorset, Test & Itchen, Northern Lincs and Northants.
  • Members – Every farmer who wants to become a Member signs a Membership Agreement which gives them rights and obligations as part of the cooperative. The farmer members themselves are kept updated regularly through the EFG’s online portal, virtual meetings and in-person meetings every three months. When farmers choose to pursue nature market deals, EFG works with them directly to help achieve the best terms.

 

 

How does EFG help farmers address risks and liabilities in nature market deals?

When a farmer member wants to pursue a nature market opportunity, for example for the sale of BNG units to a local developer, EFG advises the farmer on the details and practicalities to help make sure they are achieving fair terms.

However, the farmers ultimately sign a contract directly with their buyer that means they are responsible for delivery of the ecological uplift. EFG does not accept any contractual liability as an intermediary. Digby Sowerby, Operations Officer at NCA, says that while some farmers may prefer to have this risk transferred away, EFG’s model also allows them to maintain their independence, which many of its members consider to be a strong advantage.

EFG’s model can help farmers to address risks in the following way:

 

Physical risk – how are the habitats being designed to be resilient?

To help identify where ecological changes are most suited, EFG is developing a Catchment Scale Conservation Plan (see Milestone 1 for more detail on the ‘Plan’) across the areas it operates. The Plan is being developed with several ecologists looking at factors like soil type, hydrology and habitat connectivity. This helps to identify where new or restored habitats, such as riparian planting or enhanced grasslands, have the greatest chance of resilience and permanence.

Farmers do not have to adhere to the Plan when considering deals and trades. For example, if a farmer member is separately approached by a buyer for a particular type of habitat on their land, then they have first rights of refusal, in line with EFG’s trade allocation policy. However, EFG can help to determine the physical risk of a habitat in a particular area, whether this is in line with the farmer’s risk appetite, and what other mitigating factors (such as maintenance liability caps) may be negotiated.

 

Market risk – what if things like prices or inflation rates move adversely?

As part of its core function, EFG gathers market intelligence on behalf of its farmer members to ensure that the prices it negotiates, and the costs that go into its calculations, are at a fair value.

To keep this intelligence up to date, EFG has built a network with other project developers, accountants, buyers, solicitors and other market actors across England. Sowerby comments that this service is a huge draw for EFG’s farmers, who do not have time to develop such a network and keep abreast of nature markets. EFG gives market updates as part of its members meetings.

EFG also uses its seller collective advantage to negotiate better prices for its farmers – with its membership now representing 1.6% of farmed land in England.

 

Reputational risk – what if the project is accused of bad practices?

EFG is farmer-led and assesses all potential activities and service providers with farmer needs and priorities in mind. For example, in 2023 EFG assessed several soil carbon measurement companies for a potential pilot with some of its farmers. It assessed, among other things, the credibility of their underlying methodologies, and the input that would be required from the participating farmers.
EFG also uses an open-book methodology to negotiate prices in discussions with prospective buyers. This helps to increase trust on the demand side and demonstrate what it considers to be a fair price for its farmers, while having conversations on what buyers can reasonably afford.
Political risk – what if changes in legislation, regulation or public schemes take place?
EFG has developed relationships with central government, local government and other policy actors to stay updated on political developments. Sowerby comments that while political risk is always hard to manage, active conversations can help to set confidence in future plans.
For example, EFG is feeding into the work of Defra and the British Standards Institution (BSI)’s Nature Investment Standards Programme, which is creating an overarching framework for nature markets in the UK, and covering topics such as buyer integrity, additionality, robust methodologies and seller requirements.

 

 

What legal structure does EFG take, and how does this work with the farmers?

While EFG acts more as a cooperative with no intention to retain profits itself, it has set up a limited private company (Ltd) for its operations.

While other legal entities were considered, such as a Community Interest Company, EFG chose a Ltd because this will allow re-distribution of any excess profits. Sowerby says that in the future the EFG may have excess funds, and it wants to retain the option of re-distributing these profits back to EFG’s farmer members. The Ltd structure was also the simplest structure to use, in terms of both set-up and ongoing administration.

 

You can hear more about the EFG’s model below:

 

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