Identify and Work with Investors

Background and Investment Needs

Oxygen Conservation is a member of Oxygen House Group, an investment group focussed on scaling solutions to climate change that deliver positive environmental and social impact.

Oxygen Conservation was set up in 2021 with a mandate from the Group to scale conservation across the UK. To date, ten sites have been acquired, each of which have different business models tailored to the unique landscapes of those estates.

Oxygen Conservation is targeting the acquisition and management of 250,000 acres of land for nature restoration by 2025. To help reach this scale, the team looked for additional financing from outside of the Group to secure two large estates in Scotland – Blackburn & Hartsgarth, and Invergeldie

An estimated £20.55m was needed for the acquisition and extensive nature restoration works. The debt package would be underpinned by carbon finance – with future revenues raised through the sale of high-quality carbon credits.

 

Approaching the Investor

Oxygen Conservation first approached Triodos Bank UK (‘Triodos’) in early 2022, before identifying the two estates in Scotland for acquisition. Oxygen Conservation’s intention was to identify potential lenders with a strong position on natural capital and a shared commitment to scaling the UK nature finance sector.

Oxygen Conservation was introduced to Triodos’ commercial lending team via their professional network. It was clear from the initial in-person meeting that both organisations shared a similar set of values and commitments towards scaling conservation.

Following this meeting, the Oxygen Conservation team invited Triodos for a walk, talk, and organic lunch made from food produced on site at the Leighon Estate in Dartmoor. This provided an opportunity to further demonstrate Oxygen Conservation’s work and allow Triodos to get a sense of the practical challenges and opportunities of nature restoration projects in the UK.

Simon Crichton, Head of Relationship Management at Triodos, comments that one of the key factors that stood out was the company’s demonstrable commitment to environmental and social outcomes above financial return.

For example, Oxygen Conservation showed how it was working with stakeholders in the area to improve the condition of natural capital at the Leighon Estate, and some of the practical environmental actions the team had taken in their initial six months of management. These positive actions were being undertaken prior to any registration of natural capital credit schemes that would provide financial gain. Crichton says this was a powerful message – “Oxygen’s approach was to ask what can we do on Day One to improve the land, rather than leaving the land in poor condition and starting implementation once baselining had occurred to maximise returns.”

Later in the year, Oxygen Conservation identified two large estates of interest in Scotland –  Blackburn and Hartsgarth, located in the Scottish Borders, and Invergeldie located in Perthshire, Scotland.

In order to help secure the funding needed for acquisition and restoration of these two sites, Oxygen Conservation asked for a term loan agreement with Triodos. The Oxygen Conservation team presented their vision for the two estates with details on the key environmental and social targets, a proposed structure for the debt package (combined with capital from Oxygen Conservation), and the details of the underlying business model predicated on the sale of high-quality Woodland Carbon and Peatland Code carbon credits.

 

Negotiations and Due Diligence

Oxygen Conservation and Triodos spent the following several months exploring the scope of this arrangement and determining the details of the debt package.

Oxygen Conservation supplied the outputs of the extensive natural capital modelling work done across the two estates and its management plans. These plans included areas of degraded peatland identified for restoration, areas suitable for large-scale native woodland planting, as well as agricultural land that could support organic and regenerative farming.

Financial modelling of the potential returns from the sale of carbon credits were provided for a 50-year period, showing the potential cashflows across a range of different scenarios. These models were analysed by Triodos, as well as independent advisors Strutt and Parker and John Clegg & Co who were engaged by Triodos to provide a further level of assurance. The Triodos team also ‘stress tested’ the modelling across a range of key factors such as unforeseen delays to upfront works, fluctuations in carbon pricing, and failure of woodland planting projects due to environmental factors.

 

Repayment Profile

Instead of a fixed repayment schedule, Triodos offered a flexible arrangement that would trigger repayments based on the sale of carbon credits via the Peatland and Woodland Carbon Codes, varying the amount repaid per credit across the 25-year timeframe. This gave Triodos the option to change the figure on an annual basis, and react to developments in the carbon markets.

Crichton comments that this flexibility is important to both the loan agreement and to the project for several reasons.

“Firstly, natural processes do not follow spreadsheets, so it is important to build in flexibility for that reason alone – if there was a fire or a storm that destroyed some of the estates’ habitats, we could lower the amount taken to account for remediation works at certain points and raise future amounts to cover the difference. Secondly, nature markets operate in a nascent but increasingly popular space with potential volatility. For example, what if there is a shortage of tree saplings when Oxygen wants to do most of its planting? This might mean it needs to create tree nurseries onsite that again would necessitate more funds freed up in the near term,” says Crichton.

Overall, Triodos and Oxygen Conservation agreed to a £20.55m term loan over 25 years, with an interest only period for the first five years. Triodos expects to take around £10 per credit sold for the first tranche of credits but can vary this amount annually at its discretion.

Elly Adams, Finance Director of Oxygen Conservation said, “From the first time we met Triodos we were hugely impressed by their commitment to financing nature recovery in the UK. They have been a fantastic partner to work with on this complex, and sometimes groundbreaking, arrangement, thanks to their flexibility and willingness to explore unconventional structures to make a financial product that works for this new and exciting sector.”

 

Security and Ongoing Reporting

As security for the term loan, Triodos has taken first charge of both estates. It has also set up guarantees and debentures in line with Triodos’ standard lending criteria and in common with traditional project finance, meaning that Oxygen Conservation was comfortable with the security requirements.

In terms of reporting, Oxygen Conservation is required to submit quarterly management accounts. However, the teams are regularly having ad-hoc catch ups around progress, including their ambitions on delivering environmental and social impact beyond carbon.

Triodos and Oxygen Conservation will undertake an annual Business Review, with a full update on Oxygen Conservation’s business plan. Oxygen Conservation also expects to reach Net Zero within three years and will be reporting on this as part of the process. Crichton comments that while the Business Review is a standard requirement for its commercial lending, it will also be important to reflect on the learnings and  developments from the Oxygen project, as well as  other nature-based finance programmes as the sector continues to grow.

 

Post Completion and Next Steps

The deal was completed and announced to the public in April 2023. It was believed to be the largest conservation-focused commercial debt package in the UK to date.

There was a generally positive response from the media and the public, although there was some pushback on the fact that this was a private company acquiring land, which ties into the ‘green laird’ narrative of land not being under local ownership or concerns around profit maximisation being prioritised over nature conservation. Both Oxygen Conservation and Triodos expected this response, and Oxygen Conservation has stated that it is open to such criticism and is keen to take feedback on how to best create benefits for the local community.

Post completion, Oxygen Conservation has recruited an estate manager at Invergeldie from the local area and is working with a number of stakeholders and strategic advisors to develop ambitious strategic plans for each site that will set out a long-term vision for building a more sustainable future.

“We need leaders like Oxygen in the sector to develop the financing approach,” adds Crichton. “Just as we saw in the renewable energy sector in the 1980s, where Triodos developed approaches that, in maturity, enabled community engagement, benefit and ownership. We hope we can accelerate this learning in the natural capital field.”

 

Lessons learned

Triodos Bank offers the below lessons learned from the financier’s side:

• It is important for all parties (including legal teams) to understand that these projects rely on natural processes that do not function perfectly in line with a spreadsheet or financial model.
• Financiers need to build trust with their clients on the best terms they can offer – Oxygen Conservation had to trust Triodos to get the best value, which necessitated sometimes restrictive yet flexible clauses in negotiations – such as the flexible repayment schedule based on carbon sales and Triodos’ discretion.

 

Photo Credit: Josh Craddock