Tuesday, Mar 25 2014
Welcome to the third phase of conservation finance. Over the last 25 years, we have moved beyond public and philanthropic capital and begun to witness the growth of private sector involvement in conservation. This process has involved the emergence of mitigation banking, carbon finance, and nutrient trading, and we are now seeing replicable and scalable models, like water funds, emerging worldwide.
However, in order to truly preserve the health of natural ecosystems globally, a much larger amount of capital is needed – not to replace, but rather, to supplement traditional sources of conservation capital. Moreover, while many conservation finance mechanisms have already been tested, most of the work has been focused on the conservation objective and how to meet financing demand for conservation initiatives. However, the supply side of conservation finance – essentially the perspective of investors and their investment approaches – has received much less attention.
A recent report by Credit Suisse, McKinsey, and WWF identified, among other findings, a concrete number to put some perspective on the global need for conservation funding. The authors found that investible cash flows from conservation projects need to be at least 20-30 times greater than they are today, reaching $200-300 billion per year (if we assume that current government and philanthropic funding at least doubles). The good news is that if we can capture just 1 percent of the new and reinvested capital from high net worth/ultra-high net worth individuals, retail, and institutional investors, we can meet this goal.
It is within this context that a team of representatives from Credit Suisse, Equilibrium Capital, Lyme Timber, and Coady-Diemar Partners, joined forces to convene a discussion on how to move conservation beyond donor funding toward an investor-driven approach. In January 2014, more than 50 conservation finance professionals – including public agencies, NGOs, natural resource funds, and institutional investors and advisors – met to discuss scalable conservation finance models at the Federal Reserve Bank of San Francisco.
Broadly, the workshop goal was to identify the conditions needed to attract and redirect private capital toward conservation. Specifically, the conveners wanted to begin to match a number of direct conservation finance strategies and available investible funds with the long-term intent of creating a conservation finance asset class.
“More and more of our clients are looking for opportunities that can deliver conservation impacts while also generating a return,” said Fabian Huwyler, Vice President of Sustainability Affairs at Credit Suisse Group, “that means we need some investible deals that can accept higher volumes of capital.”
The problem is finding the investible deals. Investors need transparency, clear information on risks and return, and assurance that investments will have a tangible conservation impact. Currently, there are several reasons why conservation projects remain underinvested; a major one is that projects are not set up with the same focus on return/impact maximization and replication as traditional business models. For instance, immediate beneficiaries of conservation investments are often difficult to identify, which makes generating a cash flow difficult.
To catalyze the effort to identify investible deals, each workshop participant was asked to submit an idea that either is currently investible, or has the potential to scale and attract larger scale investor capital. The short story is that specific markets and products are at different points along the ‘S curve’ of investability, which ranges from early-stage, and often concessionary capital to large-scale, market-rate finance. Wetlands mitigation banks are fully investible, for example, while many fisheries projects are not. Temperature trading is one project arguably poised and ready for scale.
Case Study: Temperature credit trading
The Freshwater Trust, under the guidance of Joe Whitworth (2003 Kinship Fellow) has operationalized water quality trading in Oregon and is now working to scale up this model nationally. Under this water quality trading framework, a regulated entity (e.g. wastewater treatment facility) signs a contract with a qualified organization with restoration expertise to generate a certain number of temperature credits – built to rigorous quality specifications – which the entity will use to offset the impact of warm liquid effluent it discharges into streams and rivers and comply with the Clean Water Act.
In return, the offset projects entail planting native trees on the streambank within the affected watershed of the effluent discharge and cool the watershed – a cheaper approach than building large cooling towers to treat the effluent.
In terms of meeting large-scale investor requirements:
Transparency: Projects are third party certified, registered, maintained, and monitored annually for a minimum of 20 years.
Risk/return: In addition to the regulated buyers, agreements have been secured with the U.S. Forest Service and Oregon Watershed Enhancement Board to purchase credits that will be retired for conservation purposes.
Clear impact: The conservation impact is clear: temperature reduction.
Follow up from the January meeting will involve the development of concrete committees that can begin working on some of the most promising ideas discussed, and also looking at a clear communications strategy that can continue to educate the investing community about the opportunities in conservation finance. The plan is to host a follow-up event in early 2015.
In order to develop appropriate financing structures and ensure that private sector conservation finance results in measureable conservation outcomes, financial institutions and non-governmental organizations must experiment and define their respective roles and approaches. We also need clear policy drivers, new financial products, incubation opportunities for new products and funds, and to keep track of investible deals and projects. For further discussion on making conservation finance investible, here is a recent discussion article that features perspectives from six conservation finance professionals.
We have a new opportunity for collaboration that can help preserve natural capital for future generations – the private sector is starting to see promise in the emerging conservation asset class – let’s start bringing more deals up the S curve.
 Logan has been an independent consultant since 2012. Most recently, she has been consulting with Beartooth Capital, a private equity firm that performs ecological uplift for ranchland in the western U.S.; Working Lands Investment Partners, a private equity fund focused primarily on wetland mitigation banking in the eastern U.S.; and the Conservation Private Capital Group, a team of conservation finance experts working to launch a new U.S. fund for land conservation. She is a freelance writer for Nextbillion.net, Ashoka Changemakers, and Forbes. Logan received her B.A. with Distinction from UNC-Chapel Hill in Geography with a concentration in GIS. She is a 2012 Property and Environment Research (PERC) Fellow, a Fellow with Tule Partners, and a 2013 Kinship Conservation Fellow. She is also a class of 2015 Master of Forestry candidate at Yale. Logan has been an active CFA member since 2011.
Photo Credits: Fredverillo