Investors Put Over $8B Into Conservation: Can It Continue In The Trump Era?

This article is cross-posted on TriplePundit.

1 February 2017 | On a mild, rainy day in Washington, D.C., America inaugurated its 45th president. The incoming administration represents a fundamental shift from the outgoing Obama administration. And the White House website was updated accordingly. Instead of a clean-energy future, WhiteHouse.gov now announces: “President Trump is committed to eliminating harmful and unnecessary policies such as the Climate Action Plan and the Waters of the U.S. rule.”

However, labeling something “unnecessary” doesn’t make it so. Our environment remains beset by challenges: Global emissions are still rising, fertilizers and other chemicals continue to pollute waterways, and our forests remain under threat from development.

The United States may still meet its climate pledges, thanks in part to cities, states and even activist corporations. But without deeper cuts, the world will still fail to keep temperatures from rising beyond 2 degrees Celsius – a critical red line.

A rising tide of capital

The good news is that additional action is being taken – by individuals, companies and states. And the better news is that this momentum is increasing.

In the past decade, from 2004 to 2015, investors directed $8.2 billion toward preserving forests, protecting watersheds and more, according to the State of Private Investment in Conservation 2016 report which Forest Trends’ Ecosystem Marketplace released last week.

This is an upward trend: Most finance came in 2015 alone, when investors committed $2 billion.

But barriers remain to unblocking additional capital. And investors cited returns, management experience and transaction sizes as key concerns.

They put their money where they were most comfortable: in sustainable forestry and agriculture, rather than in emerging “environmental markets” such as those for carbon offsets or watershed investments.

That could be because these sectors have simply been around longer, and investors perceive environmental markets as riskier than more traditional sustainable agriculture programs. This is a perception that must be addressed if these markets are to grow.

“$8.2 billion is really less than a drop in the bucket when you think about $55 trillion or so washing around in capital markets,” Forest Trends CEO Michael Jenkins said at a launch event earlier this month.

Many roads to conservation

How do we reach even a fraction of $55 trillion?

Ultimately, investors need to see more viable investments. But in the meantime, not-for-profit and public organizations can help address current investment barriers.

Eric Hallstein, director of conservation investments at the Nature Conservancy (TNC), sees a role for nonprofits in providing expertise and research around deals – which is why the Conservancy created its own impact investing unit: NatureVest.

The unit aims to “create and execute investable deals” and has $1 billion to this end. Outside of the small investment team, Hallstein sees value in tapping into broader TNC resources: from using donor capital to source smaller deals that otherwise wouldn’t be financially viable, to working with TNC’s staff of more than 600 scientists help quantify non-traditional ecosystem services.

“We’re seeing pretty significant deal flow across everything that we do, but much of it requires foundation or philanthropic support to get started, because the diligence itself relative to the deal size doesn’t necessarily ‘pencil out,’” Hallstein explained.

“Our expectation is that at some point, that sweet spot for [TNC], if we’re successful, will move over and create markets that capital markets will begin to invest in.”

Politics provide key conservation infrastructure

Another way to encourage conservation markets is to mandate them – and this, unfortunately, may prove difficult in the current political climate.

Still, one of the longest-running – and most successful – environmental markets in the United States evolved out of the Clean Water Act. Section 404 essentially tells companies that if they build on a wetland, they need to make sure another wetland is created nearby.

Most businesses have no interest in building wetlands, so they instead contract out to environmental project developers. Now, over 1,500 habitat credit banks are in operation in the United States, and institutional investors are starting to show interest in this market.

Ecosystem Investment Partners, a private investment manager that invests in mitigation banks, is now on its third fund and has raised capital from New Mexico’s Teachers Retirement Fund. Meanwhile, Resource Environmental Solutions, a mitigation banking company, received a “significant investment” from multinational private equity firm KKR to grow its business last year.

As Forest Trends’ Atlas of Ecosystem Markets in the United States shows, mitigation banking has taken off thanks to this federal mandate, while other environmental markets – typically regulated at the state level or not at all – have grown more slowly. For example, Nutrient trading, a type of watershed market, has been implemented in only some states and had mixed success due to opaque rules and restricted opportunities for project developers to get to market.

Forest carbon projects provide another vehicle for conservation finance in the United States. They were initially developed to meet carbon offset demand for corporations voluntarily acting on climate change. Since then, California’s AB32 law has created a statewide cap-and-trade program and spurred additional projects. However, the state now faces uncertainty with a lawsuit pending against the cap-and-trade program.

Jeremy Grantham, noted investor and co-founder of the firm Grantham, Mayo and van Otterloo, during his keynote address at the launch event recognized the value of strong public policies by saying: “I think we were extremely unlucky environmentally [in this election]. I mean, I sound like a Democrat but I’m not really; I’ll vote for the devil if he has a great carbon tax.”

Next steps

It’s doubtful that environmental markets can reach the necessary scale in a hostile regulatory environment. But it’s also telling that most of the investments we tracked went into sustainable farming and forestry – which require no legal mandate.

At the same time, private-sector leaders made it clear that they are voluntarily working toward a low-carbon future. In addition to the 206 companies that pledged to make science-based emissions reductions targets, 695 institutions – including pension and hedge funds – have pledged to divest from fossil fuels.

For the latter, Grantham noted that it only takes a few hedge fund managers to make a key difference due to the sheer amount of capital they have. By my calculations, if only the top 10 private asset managers diverted less than 0.0002 percent of their assets under management, they could meet the reported $300 billion to $400 billion gap needed annually to protect our waters, climate and land.

In the meantime, existing conservation investors are ready to ramp up. Respondents claim they have another $3.2 billion of already-raised capital that is waiting to be deployed – over 1.5 times more than in 2015.

These organizations simply need investable recipients. As the map above shows, the problem isn’t the supply of projects. But for smaller deals, investors need help identifying and understanding more niche markets.

“We’re clearly still in the space we were in a long time ago: These are all emerging markets; these are all things that in many mainstream investment conversations would be considered niche,” Jenkins said. “To me, that’s the box that we’re really trying to break out of.”

Kelley Hamrick is a Senior Associate at Forest Trends’ Ecosystem Marketplace. She has authored numerous reports on carbon markets and, lately, this report on conservation investments.