288 Project Assessments Later, Here’s What We Want Project Developers to Know
We’ve gathered our top lessons and insights to help project developers (PDs) better prepare for due diligence.
Author: Núria Garcia Forner
Achieving net zero and ongoing climate mitigation requires a significant contribution from Nature-based Solutions (NbS). Success is feasible but necessary funding must be made available.
With NbS projects still in formative stages, due diligence diverges from traditional approaches used for more established asset classes. At Xilva, we reframe due diligence – it’s not just a tool to filter out projects - where possible, we want PDs to have the space to engage and improve.
NbS projects cover a wide variety of types, such as afforestation & reforestation, avoided deforestation, and agroforestry, each with approaches that are unique to specific geographic, ecological, and cultural contexts.
As a developing field it’s also characterised by continuous learning and refinement, and PDs are emerging from varied stakeholder groups, for instance, landowners, local communities, NGOs, government agencies and the private sector.
Given the diversity of these projects and the absence of a “one-size-fits-all” approach, due diligence can feel overwhelming, even intimidating for experienced and less experienced PDs alike.
Here, it’s useful to remember that the goal is shared – PDs, investors, and Xilva are all committed to seeing these projects succeed.
Here we share high-level insights to support PDs as they work to develop investable projects:
Assessment Stages: How They Influence Project Rejections
Guiding Project Developers is more than support for what to do; it’s also helpful to understand risk types and how they influenced project rejections during both the screening and deeper diligence stages.
From a sample of 288 project assessments, Xilva’s study Navigating Risks & Realizing Opportunities in Forest and Nature-Based Investment revealed:
201 projects or 69.8% did not pass the screening phase
Only 1 project was rejected during the deeper assessment stage
To date, it’s clear that most issues are identified during the screening phase. However, it’s worth noting that DD outcomes depend more on the severity of the issue and not necessarily the nature of the issue itself.
Some issues equate to outright rejections (red flags), while others are mitigable and may present opportunities for project improvement.
Risk Types and Their Distribution
Risk Types
Xilva GRADE classifies risks into three main types:
Red Flags: These are critical issues that may stop a project if not resolved; they are severe reputational, environmental and socio-economic risks.
Potential Red Flags: These are areas of concern that could escalate without mitigation.
Mitigable Risks: These are identified risks that can be addressed or managed with appropriate interventions.
Of the three risk types, our study shows that 50% of the risks are mitigable risks, followed by potential risks, with red flags being the least frequent.
This means that armed with the knowledge of these mitigable risks, and with proper early intervention, projects can reduce 50% of the perceived risks and increase investor confidence.
Figure 1: Distribution of Risk Types
Source: 2024, Xilva, Navigating Risks and Realising Opportunities in Forest and Nature-Based Investments.
Top Reasons for Red and Potential Red Flags
Top Reasons for Red Flags:
Controversies Related to Teams or Associated Projects: This relates to team or project involvement in significant controversies such as conflicts of interest or unethical behaviour.
Conflicts with Indigenous Peoples or Local Communities: Projects face immediate rejection when they are perceived to infringe on the rights of indigenous peoples or local communities.
Overestimating Carbon Credits: Projects that overestimate carbon credits face heavy scrutiny.
Unrealistic Baseline Claims: Overstating deforestation threats or failure to establish reliable baselines for emissions reductions undermines credibility.
Issues with Timber Harvesting in REDD+: Some REDD+ projects were rejected due to timber harvesting activities that conflicted with the project's carbon sequestration goals.
Potential Red Flags:
Examples include projects without sufficient information and/or documentation, those in conflict zones, or those primarily driven by financial gains with limited environmental or social impacts.
These types of projects were either further investigated, placed on standby or eventually rejected.
Mitigable Risks:
Xilva GRADE typically provides insights into mitigable risks, enabling project teams to transform challenges into strategic opportunities to strengthen projects.
Mitigable risks span a spectrum: some improvements can be implemented by PDs with existing resources, others will require an implementation plan with tailored timelines and milestones. In some cases, these plans will form an integral part of negotiations to release funds.
Most Common Risk Categories Affecting Projects
The following were the most frequent risk categories that affected projects.
It serves as a helpful guide for PDs to prepare for DD. For instance, clarity on land rights is one of the first things to be scrutinised. PDs can prepare by ensuring that documentation matches the reality on the ground. Lack of transparency, no evidence or uncertainty is a deterrent to investors.
Figure 2: The Most Frequent Risk Categories Affecting Projects
Source: 2024, Xilva, Navigating Risks and Realising Opportunities in Forest and Nature-Based Investments.
Key Recommendations to Help Develop Investable Projects
Focus on Alignment
Projects that didn't align with the carbon and sustainability mandates of Xilva’s clients were considered out of scope.
Ensuring that project goals match the client’s expectations and mandates is critical for progressing through the screening phase.
To assist with this, thoroughly read the requirements and expectations of the request for proposals (RfP). If anything is unclear, seek clarification before preparing your response.
When engaging directly with potential clients/ investors, and if your project is flexible enough to accommodate some of the investor’s mandates, a better understanding of expectations can make it easier to propose alternative scenarios that satisfy both parties.
In all instances, your proposal must clearly outline any assumptions made due to lack of clarity, and provide detailed reasoning behind your proposed approach, including the pros and cons.
2. Maintain Due Diligence Readiness
Work from minute zero with the mindset that you will have to deal with DD processes on a regular basis throughout the project lifetime.
Many projects were rejected due to poor responses to investor questions or lack of critical documentation. To avoid this, you want to be able to quickly and efficiently respond to any DD requests.
DD readiness can be supported by:
Impeccable Data Collection and Management
Prioritise thorough and transparent record keeping.
While DD documents and requests vary by project, organising documentation around key investor themes and Xilva assessment areas can be highly beneficial:
Key Investor Themes
Not an exhaustive list, but key themes include:
Environmental and social impact: Any documentation that demonstrates project contributions to environmental sustainability and social impact. Examples include baseline reports or impact assessments.
Financial viability: While your financial model will evolve over time, it's essential to have key financial information at hand. This includes a clear breakdown of costs, financial projections under different scenarios, and evidence to support benefit-sharing models.
In the same vein, avoid overly optimistic scenarios without evidence that the project has assessed product-market fit.
Risk management & mitigation: This is documentation that highlights key project risks and provides strategies for managing or mitigating these risks. Examples include fire plans or resettlement plans when these risks exist.
Stakeholder engagement: Plans and evidence of engagement with rights-holders, local communities, governments and other stakeholders.
Governance & Transparency: This includes governance structures, policies for accountability, compliance with relevant regulations, and descriptions of decision-making processes.
Additionality: Evidence showing that project outcomes won’t occur under business-as-usual scenarios, justifying the need for investment to achieve project outcomes.
Xilva GRADE Assessment Areas
Closely aligned with the above, the six key areas of Xilva GRADE that evaluate ESG and impact attributes, as well as risks and opportunities are:
Ensure Documentation is Clear and Updated
Conflicting or outdated information creates doubts; unwanted questions arise from contradictions between information.
Further, as AI tools become more adept at analysing vast datasets, including public records, ensuring that internal project documentation aligns with external information will only grow in importance.
Maintain accurate, up-to-date records to strengthen your project's credibility and streamline the due diligence process.
3. Develop a Solid Theory of Change
What is a Theory of Change?
At its core, a Theory of Change is a plan that outlines the steps required to achieve a project’s goals.
Why you need one:
A solid Theory of Change is critical to understand why and how the project is going to generate changes in the context it operates.
It’s your project road map and a good Theory of Change will help your project team and investors understand where the project is now and where it’s going.
As a strategic design tool, it aligns financial and impact objectives and provides a clear framework to track progress through measurable indicators. Such clarity around project systems and processes can also strengthen defence against greenwashing claims by better equipping you to demonstrate credible, measurable results.
Further, given the long-term nature of forest projects, your Theory of Change will help guide decision making along your project journey – it serves as a valuable reference to check if what you’re doing aligns with the long-term vision.
9 Steps to create your Theory of Change:
Although the process of developing a Theory of Change can vary depending on the project or organisation, the following steps provide a useful framework to help you get started:
1. Define your long-term goal:
What is the long-term vision or change you want to bring about?
2. Identify preconditions and assumptions:
Identify the necessary preconditions and assumptions, such as policies, behaviours, and external factors that must be in place for the desired impact to occur.
3. Map the pathway (backwards mapping):
Map your pathway (roadmap) by working backwards from the long-term goal, identifying the outcomes, outputs and steps needed to achieve impact.
4. Determine key activities:
Identify the specific actions required to achieve desired results (link actions to intended outputs and outcomes).
5. Establish the inputs (resources) required:
Determine the resources required for each activity.
6. Develop Key Performance Indicators (KPIs):
Decide how you will measure success at each stage, using simple and clear indicators that can be tracked over time.
7. Identify potential risks:
Identify potential risks and develop strategies to manage or mitigate them.
8. Test and refine:
Likely, your Theory of Change will not be a once-off exercise. Allow time to test and refine, ideally include your project team and decision-makers in the creation process. You want a Theory of Change that resonates with all stakeholders.
9. Communicate and use your Theory of Change:
A highly detailed Theory of Change can overwhelm your audience if used for communication purposes. Consider developing a short and long version; the short form serves as your “elevator pitch,” while the longer version acts as your roadmap for execution.
4. Early-stage Carbon Models Must be Clear
Projects evolve and it’s common for early-stage carbon carbon models to be simplified. However, if this is the case, any assumptions or limitations of your model must be clearly stated and provided to the due diligence provider and the client.
Use conservative ex-ante estimates - likely there will be many uncertainties - and overestimation may rapidly erode investor confidence.
Note that when carbon credits are a primary project focus, one of the first due diligence checks will be an assessment of the reliability of the GHG removals estimated. Inflated project scenarios or underestimated baselines can lead to early or immediate rejection.
To build trust, you must present a realistic and clear model.
5. Highlight Interrelated Themes
It can be greatly beneficial to your project to showcase interconnections between different themes. For example, if your project works to enhance biodiversity and improves ecosystem services that benefit local communities.
However, it is expected that any such claims are adequately detailed in your proposal. In the above example, this would be the inclusion of biodiversity experts in your project team, a monitoring plan for measuring biodiversity baselines and tracking progress, sufficient resources allocated to the planned activities in the financial model, as well as safeguard mechanisms to address any potential harms.
By mapping interconnections and presenting a clear, cohesive view of multiple angles of the project, you can build a stronger, more compelling case that highlights your project’s holistic value. This approach can make your project more robust and appealing to investors.
Developing a solid Theory of Change will certainly help you to map these interrelationships.
In Closing
Be transparent: Withholding information is not always a bad thing, but you must explain why.
Trust is key: Forest projects are long-term and a key part of success is relationship building. While data plays a crucial role, the process of implementing NbS is equally about fostering human connections and collaborations.
Ensure clear messaging: Keep your messaging consistent and aligned across all documents. Regularly update project information to ensure it’s current. Not only will this avoid confusion, but it will also strengthen your credibility and readiness for DD.
📥 Download and read our report: “Navigating Risks & Realizing Opportunities in Forest and Nature-Based Investment”.
For further information about Xilva GRADE or the due diligence process, we invite you to GET IN TOUCH.
