Private investors are finding new opportunities to invest in large-scale conservation efforts intended to protect biodiversity and boost "ecosystem services" such as clean water, clean air and carbon storage.
Earlier this year, 50 leading practitioners of "conservation finance" came together for a two-day workshop hosted by the Federal Reserve Bank of San Francisco to discuss successful deals and innovative transactional structures. Participants sought to identify scalable and repeatable models that generate returns for investors. The workshop was intended to accelerate the emergence of an investor-driven approach to conservation.
The steering committee for the Conservation Finance Practitioners Workshop included representatives from Coady Diemar Partners, Equilibrium Capital, The Lyme Timber Company, and Credit Suisse.
Some of the highlights and takeaways:
Conservation finance is moving up the 'S curve'
Workshop participants grappled with the challenge of creating scalable projects and replicable business models that meet the needs of institutional investors. Specific conservation markets and products are at different points along the 'S curve' from early-stage, even concessionary, capital to large-scale, market-rate finance. Wetlands mitigation banks are fully investable, for example; many fisheries and oceans projects, not yet. For many participants, the workshop fell short of identifying fully investable deals. "Our best success stories are still working to achieve scale in institutional terms," says Pat Coady of Coady Diemar Partners. What projects are ready to move from concessionary financing to mainstream capital in the next 18-24 months?
Wall Street is interested
On the eve of the workshop, Credit Suisse (with World Wildlife Fund and McKinsey & Co.) issued "Conservation Finance: Moving Beyond Donor Funding Toward an Investor-Driven Approach." Goldman Sachs convened an Environmental Finance Innovation Summit in February. JP Morgan, The Nature Conservancy and EKO Asset Management, backed by the Moore and Packard foundations, will report on the size of the opportunity in a range of environmental markets later this year. Wall Street "smells something going on," says Dave Chen of Equilibrium Capital.
Conservation NGOs and institutional finance are coming together
Environmental and other non-governmental organizations are shifting from "Just Say No" to "Let's Make a Deal." But deeper connections are needed to break down silos. "The deep greens ask, 'Is this really conservation?'" says Joe Whitworth of Freshwater Trust. "The finance guys ask, 'Is this really finance?'" Indeed, NGOs will require "a dramatic cultural shift," says Eric Swanson of Forest Trends. "We need to deeply engage mainstream financial firms to reach the scale of investment needed to save the planet."
Early-stage risk capital is crucial
Standard benchmarks will help define values
The standardization of "currencies" that allow everyone to speak the same language will help build a broader investment base. Benchmarks can help establish the value of specific benefits. What is the conservation equivalent of #2 Corn or West Texas Intermediate, wonders Dave Chen? Measuring the cost of kilocalories allows riparian restoration to compete with cooling towers, says Joe Whitworth. Wetlands have similarly mature standards, notes Todd Gartner of World Resources Institute. "With a more robust conversation, financiers can understand what you are financing," says Kyung-Ah Park of Goldman Sachs.
Policy can create markets and catalyze capital
The U.S. Department of Agriculture is working to develop new ecosystem services markets through a half-dozen agencies, says Deputy Undersecretary Ann Mills, including with loan guarantees and demonstration projects to enhance financial incentives for conservation. Beyond wetlands, workshop participants are working on mitigation opportunities in the Endangered Species Act, water quality and nutrient management.
Local value-creation is key
Workshop participants want to emphasize 'working lands,' not 'forever wild.' In the Brule-St. Croix Legacy Forest project, "Biodiversity couldn't be mentioned, conservation easements couldn't be mentioned," Peter Stein says. "We had to focus on rural economic development." Freshwater Trust doesn't emphasize watershed restoration to its local utility clients, says Joe Whitworth. "We just say, 'In compliance. Saves money.'"
There is plenty of room for new financial products
Kyung-Ah Park sees the need for third-party credit rating if we are to bring in institutional investors looking for investment grade, plain-vanilla opportunities and suggests a clearinghouse of conservation finance projects in the pipeline could more efficiently match interested investors with opportunities. Dave Chen sees a need for a merchant banking function for raises of $200-400 million. Evan Smith of the Conservation Fund wants to explore ways conservation can monetize reduced government outlays, such as through better wildfire management. "Can we turn future avoided costs into something we can use now?"
Incubation of new products and funds could accelerate the field
An incubator could seed success stories and expand the deal pipeline. An "environmental finance capital alliance" could support first time fund managers with research and development, back office functions, standard-setting and other heavy lifting, Dave Chen says. Lyme Timber, for example, seeded the first investments of Ecosystem Investment Partners. "That gave them a track record," says Peter Stein. An incubator could help mitigate a looming shortage of talent to structure projects, suggests Carl Palmer of Beartooth Capital. "The range of skills to pull off these deals is pretty extraordinary," Adam Davis says, requiring knowledge of conservation real estate, capital formation and the science of restoration.
Keeping track of deals and products will measure and validate progress
"Count those capital flows over time," recommends Jim Levitt of Harvard Forest. "It's boring, clerical and very important." A starting point could be an inventory of investable products, tagged by their position on the 'S' curve, suggests Logan Yonavjak, a Master of Forestry candidate at Yale University. Two good places to start are The Ecosystem Marketplace produced by Michael Jenkins and his team at Forest Trends and the Summary of Natural Infrastructure Finance Mechanisms by Todd Gartner and team at WRI.
Creating a market will require collaboration -- and competition