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Natural capital projects aim to restore ecosystems and deliver biodiversity benefits. They also generate carbon credits which can be sold or used for the benefit of the landowner, developer or initial project investors. These projects are vital for climate action and sustainability, but they involve long-term, complex, multi-party agreements and technical processes. This complexity often leads to disputes that can escalate into litigation. In this article, we explain where disputes can commonly arise during the lifecycle of a natural capital project.
Pre-project stage (contract formation)
The earliest stage of a natural capital project involves negotiating the contracts and defining responsibilities. Disputes often arise over land access and who owns the benefits provided by nature, such as carbon credits.
Carbon credits are tradable certificates representing one tonne of carbon dioxide that has been removed from the atmosphere or prevented from being emitted. Businesses purchase carbon credits to offset their own emissions, helping them improve their own sustainability credentials and potentially achieve “net zero”. If ownership of these credits is unclear, conflicts between landowners, developers, and investors are inevitable.
Misrepresentation is another risk: where environmental benefits or project feasibility are overstated. This can lead to greenwashing claims, where companies are accused of misleading stakeholders about sustainability, or to carbon credits being invalidated after they have been sold. Greenwashing and misrepresentation are major ESG concerns for businesses and will likely continue to be going forward.
Funding commitments also pose challenges; if investors fail to meet agreed milestones, it can trigger breach of contract claims.
It will not be a surprise that we consider clear contract drafting and early legal due diligence on the feasibility and sustainability benefits of projects to be essential to avoid these pitfalls.
Finally, community engagement is also important; failure to secure local support for projects can result in injunctions or reputational harm.
Baseline assessment
Once the project begins, a baseline assessment establishes the starting environmental conditions at the site. This step is critical to show the improvements provided by the project.
Disputes can occur if data accuracy is questioned or if valuation methods for natural capital assets differ. It is essential to use recognised, standard methodologies and transparent reporting from the outset to give clarity to all interested parties, including regulators where relevant. For example, this will reduce the likelihood of disputes over the increased value of the site attributable to the improvement in biodiversity.
Quality of work
Contractors exceeding (or failing to meet) the scope of agreed tasks or failing to deliver tasks to the appropriate standard can lead to claims for delays or defective work. Poor quality, such as planting unsuitable species, may result in a project failing or under-performing.
Successful projects require clear scopes of work and contracts; a clear understanding amongst all parties of the required quality of work and a regular assessment of that work as it progresses to ensure quality (including, for example, potentially prescribing an agreed list of species and age of trees to be planted at a site); and active dialogue with all parties, including contractors and the community to maintain trust and avoid disputes.
Financial model
Natural capital projects often generate revenue through carbon credits.
Disputes frequently arise over the ownership of credits and revenue sharing between landowners and investors. To mitigate these risks, contracts should define ownership clearly, include profit-sharing mechanisms, and address market fluctuations.
Governance and risk management
Breaches of environmental obligations, ESG objectives or misrepresentation in related statements (i.e. greenwashing) can lead to enforcement actions by regulators and civil claims by interested parties.
Another major risk is force majeure: unforeseen events like floods, climate change-related events or policy changes that disrupt projects but have not been caused by the conduct of any of the parties. For example, projects could foreseeably fail in the medium term due to the effects of climate change. If contracts lack clear force majeure clauses, disputes over obligations and termination rights can arise. These risks can be managed in the contract drafting stage and also through the purchase of appropriate insurance, which is essential.
Shareholders are also increasingly active in holding boards to account in relation to taking the environment into account (or complying with any express provisions in a shareholders’ agreement or the company’s Articles). In particular, by suggesting that nature considerations are now part of a director’s statutory duty to exercise due care and skill and promote the success of the company, which includes the long-term consequences of decisions and their impact on the environment.
Monitoring and reporting
Natural capital projects have to be actively monitored throughout their lifespan to ensure that they continue to deliver their intended outcomes, such as carbon capture or biodiversity gains. If they fail to deliver their objectives, carbon credits generated by the scheme and sold can be invalidated. In that case, claims can arise between any parties who have purchased the carbon credits (or who effectively funded the project to benefit from them), those who own or developed the natural capital asset and contractors or those deemed to be at fault for its failure.
Regular independent audits and the use of digital reporting platforms that transparently display the data and are readily accessible by interested parties can reduce the risk of disputes and build confidence in the performance and management of projects.
Long-term management
Long-term management of natural capital projects is a key risk area because they often span decades.
Arrangements must be unambiguously documented in contracts, otherwise disputes can arise over things like ongoing maintenance obligations: who is responsible for maintaining different aspects of a project after the initial investment and funding have ended. Lifecycle funding plans and contracts can cover what happens in different scenarios, like a landowner selling the land or a developer or investor selling its stake in a project, ensuring continuity over the life of a project.
Developing law and policy
This is a developing area of law and policy in England and Wales and that means the law has not always caught up with what is happening on the ground. In early natural capital projects, parties relied on published “guidance” and draft legislation. The fact that the law is developing means that it can change and those changes can impact projects that are already documented. These projects need to be kept under review to ensure they are compliant or are drafted in a way that protects them from such legal developments.
Summary
Natural capital projects offer immense environmental and financial benefits, but they also carry significant legal risks. By understanding these risks and implementing robust governance, transparent monitoring and reporting, and fair and comprehensive contractual arrangements, stakeholders can minimise the risk of disputes and build resilient projects that deliver long-term value.
If you have a dispute relating to ESG compliance, reporting or a natural capital project please contact Nick Roberts, a Managing Associate in Michelmores’ Commercial & Regulatory Disputes team.