Valuing Nature by William J. Ginn

Va l u i n g Na t u r e a handbook for impact investing

WILLIAM J. GI N N

Island Press’s mission is to provide the best ideas and information to those seeking to understand and protect the environment and create solutions to its complex problems. Click here to get our newsletter for the latest news on authors, events, and free book giveaways.

Valuing Nature

Valuing Nature A Handbook for Impact Investing

William J. Ginn

Copyright © 2020 William J. Ginn All rights reserved under International and Pan-­American Copyright Conventions. No part of this book may be reproduced in any form or by any means without permission in writing from the publisher: Island Press, 2000 M Street NW, Suite 650, Washington, DC 20036 Island Press is a trademark of the Center for Resource Economics.

Library of Congress Control Number: 2019952824 All Island Press books are printed on environmentally responsible materials.

Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 The opinions expressed in this publication are the author’s own views and do not necessarily reflect the views of other individuals or organizations.

Keywords: agriculture, cattle management, climate change, climate economy, Conservation Notes, fisheries, green infrastructure, Happy Seeder, impact capital, impact investing, impact multiple of money, International Monetary Fund, investment capital, islands, JPMorgan Chase, land conservation, measuring impact, mission-­related investments, Morro Bay, Murray-­Darling basin, natural capital, NatureVest, oceans, program-­related investments, stormwater, The Nature Conservancy, Tropical Landscape Finance Facility, water

To my wife, June, my children, Will and Eliza, and my grandchildren, Clayton and Olivia

’Tis not too late to seek a newer world.

—­Tennyson

Contents List of Figures and Tables xiii List of Deal Books xv Acknowledgments xvii Introduction: Finding Value in Nature 1 Part I. Nature’s Assets Chapter 1. Transforming Water Use 14 Chapter 2. Investing in Green Infrastructure 31 Chapter 3. Feeding the World 48 Chapter 4. Investing in Land 63 Chapter 5. Oceans and Islands 80 Chapter 6. Transforming the Way We Fish 88 Chapter 7. Natural Capital and the Climate Economy 106 Part II. Tools for Investors Chapter 8. The NatureVest Story 128 Chapter 9. Lessons from Other Sectors 141 Chapter 10. Measuring Impact 148 Chapter 11. Legal Challenges 158 Chapter 12. Raising Investment Capital 172 Epilogue: Finding Wealth in Nature 184

xi

xii

contents

Resources 191 Notes 196 Index 208 About the Author 217

Figures and Tables Table I-1. Emerging Natural Capital Asset Classes 6 Table 1-­1. How Money and Water Flow in the Murray-­Darling Basin Balanced Water Fund 23 Table 1-­2. Potential Areas for Water Investing in the Colorado River Basin 28 Figure 2-­1. Before and After Green Stormwater Improvements 38 Figure 3-­1. The Happy Seeder 58 Figure 6-­1. The California Risk Pool in Practice 99 Table 10-­1. Impact Management Project Methodology 155 Table 10-­2. Steps in Calculating the Impact Multiple of Money 157 Table 11-­1. Key Legal and Securities Issues for Nonprofits and Foundations 159 Table 12-­1. Sources of Capital 178 Table 12-­2. Who Are the Potential Investors? 179

xiii

Deal Books The following transactions are discussed in this book.

Water Murray-­Darling Basin Balanced Water Fund 24 Water Property Investor, LP 29 Green Infrastructure District Stormwater LLC 39 Philadelphia Water District 42 Corvias Solutions 43 Greenprint Partners 44 Agriculture and Food Livestock to Markets—­Kenya 54 Ending Crop Residue Burning in India 59 Conservation Land Heart of the Adirondacks 69 Large Landscape Projects in the United States 71 Conservation Notes 73 Cumberland Forest Project 75 Oceans and Islands Seychelles Debt-for-Nature Swap 86

xv

xvi

deal books

Fisheries Morro Bay Community Quota Fund 102 Climate Using Loan Conditions to End Deforestation 114 Improving Cattle Production in Mato Grosso, Brazil 115 Tropical Landscape Finance Facility 118 Working Woodlands 119 Forest Resilience Bonds 120 Kenya Forest Carbon Project 121 Wood Fiber–­Based Insulation 124 Conservation Investment Organizations NatureVest 131

Acknowledgments There have been a few constants in my life. Nature has intertwined with much of what I have done both professionally and personally. My first job, at fifteen years old, was leading canoe trips in Ontario’s Georgian Bay system of rivers and lakes. There I made my first canoe paddle, killed a rattlesnake (to my regret now), and introduced boys, only a year or two younger than I was, to wilderness.

Today, I am energized when I see entrepreneurs working on problems in new and different ways. These innovators are not just focused on business. If you look, they are found in all sectors of the economy, including governments and nonprofit organizations. I like to think that these mentors inspired me to make my own work better.

These passions have guided me in most of the important career, family, and homeplace decisions I have made over the years. Being grounded in nature and focused on tackling even impossibly difficult problems are, fortunately, values that also inspire some of the great people who have been part of my journey. I am deeply humbled by their energy and wisdom.

I would like to mention a few people in particular who made it possible for me to write Valuing Nature: A Handbook for Impact Investing.

First, my incomparable research assistant, Lauren Lynch, whose persistent digging and deft editing made this book possible, deserves enormous credit. She joined this effort when she was a graduate student at

xvii

xviii

acknowledgments

Tufts University and an intern at The Nature Conservancy (TNC). She now works in Singapore for the World Wildlife Fund in fields allied with those discussed here.

Second, special recognition goes to the NatureVest team for living so much of what is discussed here. NatureVest’s first managing director, Marc Diaz, is a smart, capable person—­and a decent human being—­who is a joy to work with. Years ago, I hired Charlotte Kaiser because I had an instinct that she would be great at whatever she did. I was not wrong, and I am pleased the NatureVest ship is now in her hands as managing director. Other colleagues from that time include Eric Love (my partner in some audacious and enormous land deals), Kamil Cook, Eric Cooperstrom, J. C. Danilovich, Lauren Ferstandig, Deb Froeb, Taryn Goodman, Caitlin Henning, Tom Hodgman, Craig Holland, Natalya Skiba, Michele Tetreault, Rob Weary, Melissa Weigel, and Peter Wheeler.

There are many others, and the whole team was the most enjoyable and inspiring of the many I worked with at TNC. I must also give recognition to others within the TNC family who helped me: state directors Mike Sweeney, Mike Tetreault, Jamie Williams, Kent Wommack, and Bill Ulfelder; Hans Birle, Wisla Heneghan, and Phil Tabas, whose legal expertise made my deals work; David Banks, Giulio Boccaletti, Matt Brown, Mike Carr, Greg Fishbein, Lynne Hale, Eric Hallstein, Sarene Marshall, Kathy McLeod, Seema Paul, Glenn Prickett, Brian Richter, Molly Wallace, Janine Wilkin, and Denis Wolkoff, among my many great colleagues; John Cook, Russell Leiman, Brian McPeek, Audrey Newman, Kelvin Takata, and Peter Thomas, some of my wonderful bosses at TNC; and Steve Denning, Joe Gleberman, Tony Grassi, Roger Milliken, and Muneer Satter, TNC board members and incredible volunteer leaders.

Critical funders who have supported this work include JPMorgan Chase, where Doug Petno, Matt Arnold, and Camilla Seth were involved from the very beginning of NatureVest; the Grantham Foundation and

acknowledgments

its founder, Jeremy Grantham, and its executive director, Ramsay Ravenel; and the Robertson Foundation, whose president, John Hood, was an early champion. Earlier in my career, the Doris Duke Foundation and its environmental program staffed by Peter Howell funded much of the forest conservation work I undertook.

I also owe a lot to Steve Weems, Tom Rumpf, and Dick Anderson, who influenced my thinking in the early days of my career, and Josh Henry and Matt O’Malia, who remind me today of how much fun—­and nerve-­racking—­being an entrepreneur can be.

To all of you, my thanks for giving me so much inspiration and more than enough reason to get on planes and into cars at impossible hours of the day to respond to the rough outlines of an opportunity.

xix

introduc tion

Finding Value in Nature It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

—­Adam Smith, The Wealth of Nations Some people think greed is good. But over and over it’s proven that ultimately generosity is better.

—­Paul Polman, CEO, Unilever

The more we value nature, the more likely we are to protect it, but what we each value is not the same. For some of us, nature is our cultural identity; for others, it is beauty and emotional connections; for others still, it is a recreational paradise. These values have been and will continue to be important drivers in supporting the environmental movement across the world. The concept of valuing also has an economic element, and when we begin to think of nature as an economic asset, with tangible financial value—­as natural capital— things become far more complicated. Consider the following examples: • High demand for campsites in Yosemite Valley has led to a black market for reservations; some campers have paid resellers as much as

1

2

v a l u i n g n at u r e

$700 for three nights’ stay. The park, however, receives no benefit, and regular campers now have less access than the wealthy patrons who can use the park without waiting in line.

• In an effort to prevent poaching, the sale of elephant ivory has been illegal for many years, and legal supplies are now few. But continued demand from places like China and the Philippines has driven up the price of ivory dramatically, as high as $4,620 per pound.1 As a result, sophisticated illegal poaching cartels are exploiting the value of ivory to fund civil wars and corruption across Africa. Elephant populations continue to plummet, having lost 30 percent of their population since 2000.2 The value of ivory has led to the loss of—­not the conservation of—­elephants.

• In Maine, wildlife authorities raise funds by holding a regular lottery for the chance to hunt moose. If you do not win the lottery, though, there is another way: an auction that gives licenses to the highest bidders. In 2017, ten bidders paid a total of $150,000 for the right to shoot a moose.3 Similarly, in some African countries, wildlife departments fund their operations by charging to hunt, from $3,000 for a giraffe to $9,900 for a lioness to $35,000 for a black male lion.4 Trophy hunting selects for the fittest animals and may be decreasing the population’s vitality.

• Paying for the carbon stored in forests should reduce the pressure to cut trees or convert forests to agriculture. But in many of the remaining big forest landscapes like the Amazon, these trees are claimed by both the government and indigenous people. As one leader observed, “A family gets 300 reais, . . . which isn’t enough to live on, and then they’re . . . prohibited from going into the forest, so . . . the government can sell carbon credits to multinational corporations . . . to offset their pollution.”5 For these tribes, this scheme amounts to nothing more than a land grab.

f i n d i n g v a l u e i n n at u r e

• In late 2018, France erupted with protests from the Yellow Vests, a group of mostly poor, rural citizens reacting to new taxes designed to incentivize a switch to climate-­friendly electric cars. To these protesters, it was little more than a tax on the poor. As one commentator suggested, President Emmanuel Macron has had a modern-­day “let them eat electric cars” moment.6 • In January 2019, Japan’s self-­described king of tuna, restaurateur Kiyoshi Kimura, paid more than $3 million for a 612-­pound bluefin tuna—­about $4,900 per pound.7 Responding to tuna’s high value, fishermen have put the species’ population on the verge of collapse. Japan consumes 80 percent of all tuna consumed in the world and thus bears the greatest burden of increasing scarcity and price, yet the Japanese government continues to resist restrictions.

These examples show the pitfalls of using the economic value of nature to shape the management of our ecosystems. Consider these questions: • Higher prices can reduce demand, but should only the rich have access? (campgrounds in Yosemite) • Can restricting natural resource exploitation lead to dwindling supplies and drive the prices higher, further accelerating declines in natural capital? (tuna, ivory) • Should we be selling wildlife so as to pay for its management costs?

(Maine and Africa) • Who owns natural capital, and who has the right to benefit from its use? (forest carbon and indigenous people) • Can taxing bad practices have unintended impacts on the most vulnerable people? (carbon taxes in France) Traditionally, policy makers have responded to these challenges with regulations and laws that force companies and individuals to consider

3

4

v a l u i n g n at u r e

their impact on nature while creating a safety net for the most vulnerable. But businesses argue that government should compensate them if the government wants change. Furthermore, many environmentalists contend that there is no price that can be put on natural beauty, endangered species, or critical ecosystems. They fear, perhaps rightly, that reducing nature to a commodity market will undermine, not increase, protections of critical habitats and culturally important landscapes. And auctioning off nature to the highest bidder, as we have seen, does not necessarily mean that wise choices will be made.

On the other hand, economists argue that the root of many of our environmental problems is our failure to account for the economic value of the world’s natural capital—­its climate systems, freshwater, forests, soils, and biodiversity—­in our decision-making. Even when there is a price charged for exploiting these public resources, it often fails to cover the full costs to our ecosystems. Without an economic feedback loop that accounts for these costs, we have overused many of our natural resources to the long-­term peril of the planet and its people.

Who is right, and how do we navigate between these two polls—­that nature must be valued for its economic contribution if it is to be saved and that nature is priceless?

In 2012, a consortium of the World Wildlife Fund, McKinsey, and Credit Suisse, among others, assessed the problem this way: it estimated the funding necessary to provide for global biodiversity and ecosystem protection at $300 billion to $400 billion per year.8 Against this need, the group calculated that governments were investing around $41 billion annually, and all other sources, including private philanthropy, were contributing another $10 billion per year, which left a gap of $250 billion or more between the cost of protection and currently allocated resources.9 Yet it is difficult to make the case that either governments or charitable contributions can fill this huge gap—­five times the size of their current contributions—­especially when much of the most productive natural

f i n d i n g v a l u e i n n at u r e

capital left in the world is in poor, weakly governed countries. The gap grows even bigger when accounting for the compounding impacts of long-­term degradation due to climate change.

A central thesis of this book is that the only practical way to fill this gap is through empowering the private sector to invest in nature. To make that happen, we will need to find practical solutions to the equity issues, policy challenges, and perverse incentives that such efforts could engender. Finding a way forward is not a preference; rather, it is essential to ensuring our own survival. We need the private sector, empowered by thousands of entrepreneurs, to be working on solutions to the biggest problems facing the world. What’s more, we need to align business with nature and not against it.

Not everything in nature can be priced or treated as an economic asset, but there is a set of new nature-­based investment areas that offer opportunities to bring private capital to bear on important problems.

Those addressed in this book are summarized in table I-1.

Although it is easy to find critics of the use of market mechanisms to solve environmental challenges, we need to move beyond simplistic debates about whether it is just a pay-­for-­pollution solution. A thoughtful conversation is needed about how we create the resources we need for the challenges we face and when and how to engage the private sector in this work. The good news is that there are emerging examples of how markets are transforming the management of our natural capital in sustainable and equitable ways, building on a long history of how other sectors have leveraged private investment to advance people’s lives. This book chronicles some of these successes and highlights the work ahead.

Recent years have seen the growth of the impact investment sector.

Investors in this sector take an entrepreneurial approach to addressing societal problems and, with patient, or long-­term, capital, help reduce the risk—­derisk—­early-­stage investment in high-­risk strategies. A good working definition for impact capital is “investments ‘made with the

5

Table I-1. Emerging Natural Capital Asset Classes Natural Asset

Strategy

Sample Transactions

Climate

Incentivize forest landowners to keep forests as forests by valuing their ability to store carbon

• Kenya (International Monetary Fund and Conservation International) • Working Woodlands Program (TNC) • Cumberland Forest Fund (NatureVest) • Forest Resilience Bond (Blue Forest)

Fisheries

Create property rights in fishing stocks to improve incentives for marine conservation

• Morro Bay Project (TNC) • Cape Cod Fisheries Trust

Green infrastructure

Make investments in green landscapes to solve pollution problems

• DC Stormwater (TNC) • Greenprint Partners • Prince George’s County (Corvias)

Small islands and ocean protection

Reduce the debt of small island nations in exchange for conservation commitments

• Seychelles Debt Conversion (NatureVest)

Water

Create salable water rights to incentivize increased water use efficiency to benefit people and nature

• Murray-­Darling Basin Balanced Water Fund (NatureVest) • Water Asset Management Fund (private)

Land conservation

Use private partnerships to conserve high-­priority conservation lands

• Cumberland Forest Fund (NatureVest) • Great Western Checkerboards Project (NatureVest)

f i n d i n g v a l u e i n n at u r e

Natural Asset Soils and food

Strategy Grow more food sustainability

Sample Transactions • Livestock to Markets—­ Kenya (NatureVest) • Happy Seeder Project— ­India (TNC) • Improving Cattle Production in Mato Grosso (Althelia) • Sustainable Soy Lending Facility (Bunge, Santander, and TNC)

intention to generate a measurable, beneficial social or environmental impact alongside a financial return.’”10 Impact investing is rapidly becoming a third leg alongside philanthropy and government funding, providing a new source of capital against the challenges we face today.

A 2017 study by Forest Trends and sponsored by The Nature Conservancy (TNC), JPMorgan Chase, and others put the current private-­ sector investment in natural capital–­related projects at $8.2 billion across 1,300 transactions.11 That amounts to a growth of 4,000 percent since 2003, when the figure was less than $200 million. Through investments in social services, health care, and natural assets, impact investors advanced more than $15 billion to more than seven thousand projects, and more is already in the pipeline.12 These figures bode well for the continued growth of impact investments as a vehicle for advancing natural solutions to water shortages, agricultural productivity, biodiversity conservation, and climate change, among other areas.

But why is private philanthropy not enough? For one, it has been growing much more modestly than impact investment, at about 4.1 percent in 2015. In the United States, the environmental and animal welfare sector garners only 3.5 percent of the $359 billion in charitable

7

8

v a l u i n g n at u r e

contributions given each year, or about $10 billion in 2015, which is dwarfed by the $120 billion given to religious causes and the $57 billion given to education, and environmental giving is the smallest of all the categories tracked.13 Of note is that impact investments in natural capital have already exceeded annual charitable contributions for this category.

Not only is investment capital from the private sector essential to fill the gap, but it is also growing much faster than charitable sources.

It would be a mistake, however, to think that the sole rationale for engaging the private sector is about money. Although resources are important, there are other reasons to engage the private sector. The first is the amazing capacity of entrepreneurs to invent new ways of solving problems through technology or new services: witness the power of Grameen Bank in revolutionizing how development projects are designed across the world with its brilliant microfinance idea. Second, if business is not with you, it is most likely against you. Finally, the financial and political power of businesses increasingly eclipses that of government and certainly that of charities. We need business to find reasons why investing with nature, or alongside it, is a more attractive approach than investments that destroy the world’s climate or undermine the sustainability of essential resources like water and soil.

Despite the opportunity, early-­stage investors in natural assets report significant challenges in achieving both positive impacts on conservation and environmental issues and competitive financial returns. Among the challenges are few incentives and little policy support for natural capital projects when compared to low-­income housing or community development projects, lack of deals that meet their financial return expectations as well as their impact goals, and inadequate measures upon which to judge environmental and social results alongside financial metrics.

In the United States, good examples of markets created for investors by governmental policy can be found. For example, the provision of federal tax credits for developers of housing for elderly and low-­income

f i n d i n g v a l u e i n n at u r e

citizens has resulted in an estimated 2.9 million housing units and a private-­sector investment of at least $250 billion.14 Similarly, in 1977, the Community Reinvestment Act began requiring banks to meet the credit needs of the local communities in which they were chartered, which meant that they must lend money to members of all the communities they served, not only those from affluent neighborhoods. Filling this need incentivized banks to support nonprofit community development and financial institutions (CDFIs) to provide these services. Today, hundreds of CDFIs across the country originate, structure, and lend to a wide array of community needs from women-­owned businesses to farms and fishing activities to housing and real-­estate projects such as food pantries and daycare centers.

Tax incentives offered for wind and solar development across the United States and much of Europe are credited with jump-­starting the renewable energy market. We are at or near the point where solar and wind reap the benefits of large-­scale manufacturing and improving technology and are, without subsidies, competitive with coal and natural gas. Without governmental incentives, the growth of renewables would have been slowed, but without the private sector, none of it would have been possible. Government simply cannot do what the private sector can.

There is no guarantee that well-­meaning policy and incentives will always generate positive outcomes, however. The billions of dollars spent on ethanol is a case in point. Early expectations that ethanol would be a sustainable biofuel option led to the issuance of mandatory requirements to blend ethanol with gasoline, which, along with tax credits, dramatically lifted the fortunes of corn farmers. Growing corn for energy proved to be so lucrative, however, that it also led farmers to plant even marginal lands for ethanol production. Critics contend that such actions are not only driving up the cost of food products but are also contributing to further land conversion and degradation along with the release of additional carbon emissions as ethanol is burned for fuel. The agricultural

9

10

v a l u i n g n at u r e

lobby is powerful, though, and funding for ethanol has become a sacred cow.

Finding investable deals that further sustainable and climate-­friendly agriculture, support freshwater conservation and water-efficient uses, grow the markets for green infrastructure, and drive sustainable forest management practices is a challenge. That is at the core of the rationale for why my colleagues and I created NatureVest, a project of TNC and its initial collaborator, JPMorgan Chase. NatureVest operates like an investment bank within TNC, structuring business transactions to fund projects that engage private investors. Many of the examples in this book are drawn from TNC’s experience in developing the NatureVest platform. As one of the oldest and largest global conservation charities in the world, TNC is realigning its business model to include partnerships with investors as a path to scaling its impact. NatureVest has a goal of putting more than $1 billion in investments to work by 2020 and, in its first years, has mobilized more than $600 million of private capital in its work.

The goal for NatureVest was not simply to establish another private equity fund making passive investments in other’s projects; rather, it is to create a dynamic project development group that brought TNC’s long history of deal-making to the private sector. Building investable transactions that make financial sense and have real impact remains one of the central challenges for the sector. Many of the climate and environmental funds created by government and private-­sector stakeholders have underperformed. One example is the Land Degradation Neutrality Fund. Initially chartered with aspirations of putting $300 million toward improving agriculture, forests, and water use in developing countries, the fund has closed only a handful of transactions despite substantial efforts.

It is clear that having investment capital available is important, but it is not sufficient to getting this industry off the ground. A big challenge is capacity—­or lack thereof—­to implement; most of the developing

f i n d i n g v a l u e i n n at u r e

world struggles with providing financial and technical services to the poor communities most in need of improved water access, sustainable agricultural practices, or other sustainable development skills. This so-­ called last-mile capacity is one of the biggest barriers to attractive investments essential for the development of the natural assets–­based industry.

The search for meaningful ways to report on the impact of individual investments and funds also continues to be elusive. In a survey commissioned by TNC, only a third of investors believed that they were getting clear and effective reporting on impact measurement for the transactions they have funded.15 Unless this problem is solved, it will be hard to sustain enthusiasm for investors who, in exchange for taking early-­stage business risks, want to at least know that these risks are being offset by improving environmental and conservation outcomes.

Can conservation groups pivot to embrace the challenge of making deals that foster entrepreneurial investment, or will we need wholly new institutions with the skills to advance these strategies? For years, the basic qualification for employment at an environmental organization like TNC was a degree in a natural science. Today, TNC employs more than six hundred scientists, but the skills to manage and develop new business models for nature rest with a new cohort of MBAs and financially oriented people working alongside these scientists. This shift will require new skills, new hiring, and, frankly, new missions for many organizations. At the same time, conservation’s historic donors will need to become comfortable embracing investing as well as giving, which has proved, in NatureVest’s experience, to be harder than first thought.

Although donors consider TNC highly effective in its charitable work, they need to be convinced about its track record in managing profitable investments. Interest is growing, though.

Foundations are increasing their allocations to two forms of impact investing-program-­related investments and mission-­related investments (see chapter 11). Giving Pledge supporters, like Pierre and Pamela

11

12

v a l u i n g n at u r e

Omidyar of eBay, are transforming their foundations and personal investing toward mission-­related investing (see chapter 12). Private wealth managers across the spectrum report increasing interest in projects and programs that their clients can feel good about, albeit with good financial returns as well. Providing products and approaches that service this need must quickly become core competencies for the conservation and environmental community if the full potential of investment-­oriented approaches is to be achieved.

In the subsequent chapters of this book, two main themes will be explored: the natural capital sectors that are most ready for investment and the practical tools needed to build the capacity to invest. Part I (chapters 1–­7) details case studies of projects, deals, and investment approaches that demonstrate how private capital can be used to achieve more sustainable use of our natural resources without the unintended consequences plaguing so many of our current efforts. Part II (chapters 8–­12) provides tools and a roadmap for investors and organizations to consider as they develop their own projects, from understanding the legal and regulatory environment to meeting the expectations of investors to tips on how nonprofit organizations can successfully navigate this new space.

chapter

7

Natural Capital and the Climate Economy We are the first generation that can end poverty, and the last generation that can take steps to avoid the worst impacts of climate change.

—­Ban Ki-­moon, former UN Secretary-­General

The process of mitigating and adapting to the impacts of climate change presents one of the greatest global challenges—­but also one of the biggest business opportunities—­of the twenty-­first century. By 2040, more than $90 trillion of infrastructure will be built, more than all the infrastructure that exists today.1 How we harness our collective technological, financial, and human resources to design this next generation of urban, water, agricultural, energy, and transportation systems and how we address, or fail to address, the risks presented by climate change will determine the shape of the world for many generations to come.

To assume that the bulk of this infrastructure must be manufactured and built through industrial systems, however, is a mistake, one that overlooks the potential cost savings and efficiency gains that can be 106

n at u r a l c a p i ta l a n d t h e c l i m at e e c o n o m y

realized by leveraging the existing infrastructure of the natural world. In fact, a 2017 study found that 37 percent of the targets set in the Paris Climate Accord can be successfully achieved by simply protecting and restoring three critical natural systems: forests, soils, and wetlands.2 Maintaining the world’s forests alone can provide two-­thirds of this impact through three critical pathways: (1) carbon dioxide emissions avoided from the conversion of existing forests, (2) additional carbon dioxide sequestration via reforestation of degraded land, and (3) enhanced carbon dioxide sequestration via better management of existing forests. Improved agricultural practices—­in particular, agroforestry along the tropical rain belt—­can provide another 20 percent of this impact through better fertilizer and nutrient management (reducing runoff pollution into important waterways) and the retention of organic matter in soils, which plays a critical role in carbon dioxide sequestration.

The 2017 study also suggests that wetland conservation and restoration can contribute 14 percent of the overall potential impact.3 The protection of these critical ecosystems provides additional benefits beyond keeping the stored carbon in wetland peat out of the atmosphere. Wetlands serve as an important physical barrier during storm surges and act as a buffer from sea-­level rise, particularly in some of the low-­income countries most at risk.

Even though the benefits of protecting and restoring natural infrastructure systems are evident, those interested in investing in natural capital as part of the climate solution face two challenges. First, although more than seventy countries have adopted some form of carbon tax or carbon market, the price—­about $10 per ton of carbon equivalents—­is still far too low to incentivize systemic changes on the part of forest owners, farmers, and governments; thus, deforestation, soil erosion, and wetlands degradation continue unabated. Second, the current level of investment devoted to protecting and restoring natural infrastructure systems is still too low to support impact at scale; a mere 2.5 percent

107

108

v a l u i n g n at u r e

of all dollars invested in climate mitigation pathways are tagged to the protection and restoration of natural capital systems.4 Fortunately, useful lessons can be taken from the development and investment trajectories of some of the more advanced climate mitigation technologies—­such as wind and solar energy—­and can be applied to the way we approach investment in natural capital. For example, when wind and solar were in their infancy, costs to implement were extremely high, and thus, adoption was limited. To support the maturation and scaling of these technologies, early-­stage subsidies played a critical role in expanding the circle of early adopters to include mission-­ driven nonprofit organizations and impact investors. As this circle grew larger, clean-­tech investors and governments began to see the investment opportunity and the market really began to take off, driving production volumes up and costs down. Today, solar and wind are poised to graduate from subsidies and will soon stand on their own against alternatives, including coal, oil, and gas.

Some years ago, my wife and I decided to walk the talk and install a photovoltaic system on our house to take advantage of the relatively new solar tax credits. The price quoted at $78,000 was beyond our means at the time, but every few years I would get a new quote, and finally, in 2013, we pulled the trigger. By then, the cost had declined $23,000 for a system about a third bigger than what we had looked for a decade earlier.

Both solar and wind industries have been following a textbook development and implementation curve and can be a lesson to other nature-­based assets. First, the technology matured, albeit at a high cost to implement. Subsidies bridged the gap, with early nonprofits and impact investors expanding the circle of early adopters. Valuing the ability of these assets to store and manage carbon and convert carbon dioxide to oxygen is part of the opportunity.

Natural capital assets like forests, soil, and wetlands do not need manu­ facturing per se, but they do need markets, incentives, and policies that

n at u r a l c a p i ta l a n d t h e c l i m at e e c o n o m y

encourage investment in their restoration and long-­term sustainable management. Putting a financial value on the ability of these assets to store and manage carbon, convert carbon dioxide to oxygen, filter and purify our water, and provide coastal protection is a critical part of creating a viable investment opportunity.

It is clear that renewable energy alone will not solve climate change.

The reasons are simple: electricity and heating are only 25 percent of total global emissions. The transportation industry only emits 14 percent of all carbon, and industry in general, 21 percent; agricultural, forestry, and land-use changes clock in at 24 percent of all global emissions, the second-largest category.5 To address global climate change, we cannot neglect these latter sources. The mathematics of winning simply does not work.

As the window to protect and restore our remaining natural assets shrinks, catalyzing these types of opportunities now becomes critical.

In 2017, the world lost sixteen million hectares of forest, breaking a decades-­long decline in deforestation. Such a loss represents a huge blow to global efforts to meet the Paris Agreement; for example, in the United States, it is thought that the nation’s forests offset as much as 10 to 20 percent of the country’s overall carbon dioxide emissions.6 The government elected in Brazil in 2019 has seemingly rolled back efforts to reduce deforestation in the Amazon, one of the critical remaining large forest areas in the world, and land clearing has already jumped, presenting new dangers to global climate efforts. In August 2019, more than twenty-six thousand fires were logged, the highest number in a decade.7 The 2019 fires in the Amazon, coupled with the Trump administration’s disavowal of the Paris Agreement and its efforts to undo climate regulations on everything from coal to more efficient cars and trucks, add to the sense of gloom in the policy arena.

Replacing even a small portion of the more than three billion hectares of natural forest lost since the beginning of civilization will not come

109

110

v a l u i n g n at u r e

easily or cheaply, and the longer we wait, the more challenging preservation and restoration will become. A 2015 US Forest Service study suggests that conditions in many US forests are declining due to lower precipitation, increased insect activity, and stronger and more frequent fires, all of which will only be made worse as the impacts of climate change intensify.8 Invasive species like the Asian long-­horned beetle and emerald ash borer are devastating forests in the East, and as temperatures rise, their range is likely to shift and potentially expand. In the West, forest fires like those in 2018, which raged across more than eight million acres, are indicative of the potential destruction that warmer and drier weather can bring. If such trends continue, by the end of the century, the world’s forests will cease to be a net recycler of carbon dioxide. And, as the forests decline, so do the levels of organic matter in the soils. These declines add not only to our woes about lost carbon storage but also to increasing requirements for commercial fertilizer and concerns about our ability to produce sufficient food for a growing population.

So even if we meet the emissions reduction goals we have set today in transportation, utilities, home heating, and manufacturing, the lost storage capacity of our forests and soils effectively shifts the goalposts, requiring even greater emissions reductions from other sectors just to meet our targets. Simply put, unless we address the loss of our natural capital, we will not be able to effectively control carbon pollution.

Given forests’ substantial potential to store carbon, investment in restoring and conserving them is an obvious place to start. So far, however, efforts to jump-­start investments in forests through mechanisms like carbon credits and trades have been largely disappointing. When the Kyoto Protocol was signed in 1997, a new mechanism to incentivize forest protection in developing countries was created: Reducing Deforestation and Degradation (REDD). Almost immediately, REDD became mired in technical debates about leakage (the idea that avoided deforestation in one location may simply reemerge somewhere else) and

n at u r a l c a p i ta l a n d t h e c l i m at e e c o n o m y

concerns about whether indigenous peoples’ rights to the benefits of forests were being compromised (through the sale of carbon credits on the land that they occupy). These debates stalled progress on implementation, and today, as a result, REDD has failed to materialize as a meaningful driver of change.

Fortunately, there is growing evidence that other efforts to manage and restore the world’s forests are starting to make progress. In India, for example, some 23 percent of the land area is technically considered a publicly owned forest estate, yet the boundaries of this forest—­a relic of British colonial authority—­overlay numerous villages and tribal areas where millions live, graze their cattle, and chop wood for fuel supplies.

As a result, much of this land became less productive as the pressure of people and livestock took their toll over time. But in August 2018, India announced that it had successfully restored approximately 9.8 million hectares of degraded land between 2011 and 2017 and that it was on track to meet its goal established as part of the UN lead climate convention meeting in Bonn: to restore thirteen million hectares by 2020.9 For a country with a population of 1.2 billion people, of whom 70 percent still use wood for cooking and heating, India’s restoration effort is an extraordinary feat10 if it is true—­and there are many skeptics about this claim. Still, just that one of the world’s most important economies is focused on forest restoration is an important indicator of the potential. To achieve its goals, India has rolled out programs that provide guaranteed labor for low-­income people, focused on tree planting, invasive species removal, fencing, and general forest cleanup. In addition, every Indian state now gets a portion of its revenue from the central government based on how well it is doing toward meeting its forest goals, thus creating an extra incentive to advance forest improvement activities. In addition to the benefits of increased carbon sequestration, better management is also supporting wildlife populations in some areas.

For example, tiger populations—­of which India has half of the world’s

111

112

v a l u i n g n at u r e

population—­have increased by more than 30 percent, to almost three thousand individuals, since 2014.11 In South America, a growing number of cities bordering the Amazon have taken the lead in voicing their concerns about the impacts of deforestation on their access to a critical natural resource—­water. São Paulo and Rio de Janeiro are both in the grips of long-­term water shortages, exacerbated by deforestation in the watersheds that supply their drinking water. As more trees are cut down, less moisture is released into the atmosphere, resulting in lower rainfall; at the same time, fewer trees mean fewer roots to absorb the already declining rainfall, so less water is stored and available for future use.

The corporate sector is also stepping up to lead efforts to reduce forest loss, with a growing number of soybean trading companies, cattle processers, and meat buyers committing to rid their supply chains of deforestation amid mounting pressure from civil society. Companies like Cargill, for example, are leading some of these efforts by committing to multi­stakeholder initiatives like the New York Declaration on Forests, a partnership of multinational companies, governments, civil society, and indigenous peoples that aims to halve deforestation by 2020 and end it completely by 2030. David MacLennan, Cargill’s president, said, “We’ve committed to do our part in ending deforestation. Our word is our bond.”12 Although the process for mapping ownership in many frontier communities has been painstaking, many of these companies, with support from TNC Brazil, are working to make their agricultural supply chains transparent and to demonstrate their compliance with each nation’s forest codes.

Even with huge companies acting, though, the long and complicated agricultural commodity supply chains that intertwine vast networks of producers, traders, and buyers make effective management of deforestation complex. In Bolivia, for example, Cargill sources just 8 percent of the country’s soy crop; and in Brazil’s Maopiba region, Bunge, Cargill’s

n at u r a l c a p i ta l a n d t h e c l i m at e e c o n o m y

major competitor, buys only about 20 percent. Thus, despite the companies’ strong commitments, Stewart Lindsay, Bunge’s vice president for global corporate affairs, explained, “One company alone cannot solve this issue. A positive step would be for more companies to adopt zero deforestation commitments, apply controls to block crops grown in illegally cleared areas from entering their supply chains, report publicly on progress and invest millions of dollars to support sustainable land use planning efforts, all of which Bunge has done.”13 Additional commitments from more companies would drive progress more quickly, but players like Bunge and Cargill are not waiting around while the rest of their peers get on board. In late 2018, Bunge, The Nature Conservancy (TNC), and the bank Santander SA announced a joint effort to pilot a new agricultural financing mechanism designed to incentivize large soybean growers to refocus their expansion efforts on degraded land rather than converting new habitat. The $50 million fund will provide long-­term financing—­up to ten years—­to help soybean growers expand production to degraded land in exchange for signing a conservation agreement that limits expansion to lands outside of areas identified and approved by TNC. Risk is shared between the partners but with Santander carrying a majority of the risk. Bunge makes the financing available through its agricultural trade financing system—­a common way to provide seeds and fertilizers, wherein costs are deducted at the end of the season from payments for the farmers’ crops. Historically, this approach has been an effective way to ensure repayment from challenging borrowers. If the program gets traction—­and borrowers have so far been few—­the partners are prepared to expand the scope significantly. It remains to be seen whether this kind of purely commercial, albeit sustainable financing, is enough to drive significant change.

Cattle ranching is another major driver of tropical deforestation in the Americas; by at least one estimate, it is responsible for up to 80 percent of the land clearing in the Amazon.14 Poor animal husbandry, inattention

113

114

v a l u i n g n at u r e

Deal Book Using Loan Conditions to End Deforestation Developers/Investors: Bunge, Santander, and The Nature Conservancy Approach: Provide long-­term loans to soybean producers on reasonable terms to help them improve and expand production in already-­degraded areas. The loans have covenants that prohibit the borrower from converting natural ecosystems to agriculture. This approach aims to shift the focus of farmers away from forests and grasslands to the millions of available acres of degraded land. The initial pilot program makes available $50 million that will be distributed and collected through Bunge’s existing crop financing program, which already provides seeds and fertilizers to farmers to help them meet annual cash needs and deducts payments from the purchase price of the crop at the end of the season.

Contact: www​.nature​.org/​Brazil

to breeding practices, and a failure to manage the land effectively means that yields are low—­less than one cow per hectare in many areas that could be supporting four or more with new agroforestry grazing systems.

Thus, more and more land is needed to support herds that, if more efficiently managed, could be raised in a fraction of the space.

Efforts to help cattle ranchers understand and implement such systems, thus improving yields and reducing the amount of land necessary for grazing, are at the heart of some new financing concepts. One group of investors led by Althelia—­a climate-­oriented European firm supported by many multinational and national development agencies—­has invested in PECSA (Pecuária Sustentável da Amazônia, or Amazon Sustainable Cattle Ranching), a start-­up company in Mato Grosso spun off from the Brazilian nongovernmental organization Instituto Centro de Vida (ICV). Mato Grosso is one of the centers of deforestation in Brazil. PECSA will operate as ICV’s technical assistance and project delivery arm in its Novo Campo sustainable cattle-­ranching program,

n at u r a l c a p i ta l a n d t h e c l i m at e e c o n o m y

with a target to manage in excess of one hundred thousand hectares of pastures and 340,000 head of environmentally compliant cattle for the supply of high-­quality beef over the next five years.

Althelia has provided PECSA with $13.3 million financing facility, which enables ranchers to fully reform pastures as well as riparian forests. The investment also helps implement the necessary infrastructures and facilities for rotational grazing systems as well as provide health and animal welfare services, technical assistance, a route to market, and the technical protocols for traceable, forest-­friendly beef. Since the start of the project, 6,879 hectares of degraded pastures have been restored, and sustainable management has contributed $34 million to the local economy through supply chain spend.

The investment provided by Althelia uses a partnership model between PECSA and individual cattle ranchers. The profits of the venture will be shared in a transparent and equitable benefit sharing structure fully compliant with the Brazilian forest code.15 Approaches like Althelia’s are precisely what are needed to improve yields and reduce expansion pressure on forests in a practical, scalable way. Such efforts build on an existing track record of success, with similar programs being rolled out in other parts of the world. In the United States, for example, contract growers often receive up-­front financing Deal Book Improving Cattle Production in Mato Grosso, Brazil Developers/Investors: Althelia and PECSA Approach: Transform the management of the ranches by investing in rotational grazing, agroforestry grazing practices, and improved genetics.

Investors share the advantages of improved yields during the investment period.

Contact: ​althelia​.com/​investment/​amazon​-sustainable​-beef/

115

116

v a l u i n g n at u r e

from companies to implement practices and processes in line with a larger corporate vision in exchange for being guaranteed access to markets for their products. When integrating enhanced sustainability is measured in, these approaches enable investors like Althelia to leverage a central set of resources alongside experience working with multiple farmers, thus streamlining improvements.

In Southeast Asia, a leading cause of deforestation has been the production of palm oil. Between 1990 and 2010, annual global demand for the highly versatile oil grew by more than 257 percent,16 contributing to the loss of about 3.5 million hectares of tropical forests in Indonesia, Malaysia, and Papua New Guinea.17 Although oil palm trees can produce crops in less than four years, they remain productive for up to thirty years, making them an attractive investment for both the short and long term. As a result of the market for palm oil’s appealing growth prospects and quick and long-­lasting revenue generation, the conversion of forests and peatland to palm plantations, usually by burning, blankets much of Southeast Asia in an annual haze.18 Similar to the commitments made by buyers of soy and beef, a growing number of companies that produce, trade, and buy palm oil—­including Wilmar, Cargill, and Unilever—­have promised to rid their supply chains of deforestation by 2020, but achieving this goal will not be easy. Current traceability systems typically track oil palm from the mill to the market, but tracing to the plantation from which they were grown (to ensure that no deforestation occurred) becomes complicated. In addition, given the large number of smallholder farmers involved in the palm oil production system, efforts to standardize production practices to integrate best practice sustainability measures are challenging to roll out.

To tackle these and similar issues, a group of socially minded investors from ADM Capital and BNP Paribas joined forces with the World Agroforestry Center and UN Environment to launch the Tropical Landscape Finance Facility (TLFF), a platform that provides financing to improve

n at u r a l c a p i ta l a n d t h e c l i m at e e c o n o m y

forest management and agricultural practices. The fund closed the first phase of its initial deal in 2018, a $95 million investment in PT Royal Lestan Utam, a joint venture owned by, among others, France’s Michelin Company. The fund will support sustainable rubber production on about thirty-­four thousand hectares in Indonesia as well as the conservation and restoration of an additional fifty-­four thousand hectares on two World Wildlife Fund ecosystem restoration concessions. This work, alongside the rollout of Community Partnerships Programs, should ultimately generate sixteen thousand new jobs, enhance the livelihoods of fifty thousand local people, and eventually supply upward of 10 percent of the demand for natural rubber in the world. Deals like TLFF demonstrate that the pace and volume of capital flowing to natural capital investments is gradually beginning to pick up.

The next few years will be telling as to whether environmental, social, and governance (ESG) commitments set by companies have any real impact on practices on the ground. Not only is pressure to demonstrate impact coming from expected avenues like advocacy-­ oriented nongovernmental organizations, but it is also coming from less-­anticipated sources, like the finance sector itself. In early 2019, BlackRock’s CEO, Larry Fink, sent an important letter to other CEOs, calling for enhanced management of environmental and social issues and indicating that BlackRock’s managers will be engaging more deeply with their portfolio companies on these issues in the years ahead.

Yet corporate commitments to best-­practice standards and changes in procurement policies are not likely to be enough to drive all the change needed to remove deforestation from agricultural supply chains. For example, in Indonesia, 40 percent of oil palm comes from smallholders with little access to conventional financing or the training and technical advice necessary to pivot to wholly new practices quickly. For this reason, the next layer of financing innovation such as that being piloted

by Althelia, Bunge/Santander, and ADM and BNPP will be essential.

117

118

v a l u i n g n at u r e

Deal Book Tropical Landscape Finance Facility Developers/Investors: ADM Capital Foundation and BNP Paribas Approach: Fund sustainable forest management. The first investment is in PT Royal Lestan Utam, a joint venture owned by France’s Michelin Company, among others. This $95 million initial project will grow natural rubber for tires on thirty-­four thousand hectares and conserve an additional fifty-­four thousand hectares of forests in protected areas in partnership with the World Wildlife Fund.

Contact: www​.admcf​.org/

In another hopeful sign, the State of California—­itself the seventh-­ largest market in the world by gross domestic product—­has recently added protocols for trading carbon credits derived from the conservation of forests; through 2018, more than $400 million of these credits had been sold at about $10 per ton of carbon dioxide. Although there has been considerable interest from timber investors, large companies like Weyerhaeuser have not yet joined the conversation because of requirements for one-­hundred-­year limits on forest management and longer rotations. Still, efforts like the Garcia River Forest Project in California, codeveloped by the Conservation Fund and TNC, and TNC’s new Cumberland Forest Fund are demonstrating a path forward: ensuring the sustainable management of productive timber forests while restoring critical natural ecosystems and generating salable quantities of carbon offset credits.

Smaller forest owners are also getting involved in the offset credit market through innovative programs like TNC’s Working Woodlands project in the eastern United States. By bundling together small family forests to obtain the necessary credit approvals, this project is able to use the long-­term potential for credits as a way to pay for improved

n at u r a l c a p i ta l a n d t h e c l i m at e e c o n o m y

management and carbon sequestration in the short term. These and other innovations are making slow inroads into the US market for carbon credits and, if scaled up, could become important incentives for long-­term forest management.

Another idea is being pioneered by Blue Forest Conservation, an upstart group of forest-­focused investors. Its goal is to tackle the problems posed by the growing number of major fires in the US West, which are both being exacerbated by climate change (warmer, drier weather is making forests more prone to fire) and are contributing to climate change itself (the fires release massive amounts of carbon from the forests, and the loss of trees lessens the forests’ capacity to sequester future carbon emissions). Decades of so-­called Smokey Bear policies, suppressing the frequent low-­intensity natural burning typical in these forests, combined with development along the forest interface have intensified the damage caused by these fires. For example, in 2018, millions of acres burned in massive fires like the Camp Fire in northern California, which on its own resulted in damage estimated at $11 billion to $13 billion.19 Although foresters know how to do preventative thinning and brush removal, doing so is expensive. Annual budget appropriations to the US Forest Service are not enough to support these much-­needed investments, even though such investments can protect forests from future Deal Book Working Woodlands Developer/Investor: The Nature Conservancy Approach: Bring together small woodland owners to share the cost of certifying and managing forest carbon credits across many small ownerships, thus bringing carbon funding within financial reach of landholders who otherwise could not afford to participate.

Contact: www​.nature​.org/​workingwoodlands

119

120

v a l u i n g n at u r e

catastrophic fires. In addition, unless this kind of treatment is done on a large scale, the benefits of fire suppression are not maximized, and the US Forest Service estimates that there are more than 129 million dead trees in California that need removal and restoration.20 To solve this problem, Blue Forest is advancing the idea of forest resilience bonds, the proceeds of which would be used now to pay for preventative forest fire treatments while retiring the bonds over time as appropriations become available. Zach Knight, Blue Forest’s managing director, said, “It wasn’t a question of what to do; it was a question of how to pay for it. We are following the science, not proposing a new solution. We realized that the main innovation needed to come on the finance side.”21 Blue Forest’s inaugural launch of its forest resilience bonds in northern California’s North Yuba River watershed funds a $4.6 million project to restore forest health across fifteen thousand acres in and around Tahoe National Forest. The stakeholders that directly benefit from restoration activities (the Yuba Water Agency, State of California, and US Forest Service) have signed contracts agreeing to share the cost of reimbursing investors (the Rockefeller Foundation, Calvert Impact Capital, CSAA Insurance Group, and the Moore Foundation) over time. Already, the

Deal Book Forest Resilience Bonds Developer/Investor: Blue Forest Conservation Approach: Fund management of wood debris in publicly owned forests to reduce the fire potential of these forests. The first investment is a bond for $4.6 million to demonstrate the potential in northern California. The bond’s investors will be paid by the US Forest Service and the State of California as work is completed.

Contact: www​.blueforestconservation​.com/

n at u r a l c a p i ta l a n d t h e c l i m at e e c o n o m y

Deal Book Kenya Forest Carbon Project Developers/Investors: International Finance Corporation (IFC) and Conservation International Approach: Fund management development of forest carbon restoration projects in Kenya. The bond is issued by IFC to private investors such as large banks at IFC’s AAA credit rating, so the cost is very low. Investors have the right to take their return in carbon credits at $5 per ton, or if they desire to be repaid, the bond issuer has an agreement with mining company BHP to purchase the credits instead. The initial $152 million bond sold quickly through the London Exchange.

Contact: www​.conservation​.org or www​.IFC​.org

first contract thinning work is under way. If such an approach proves able to be scaled up, it may be possible to greatly accelerate forest fire treatment programs and abate the forces undermining the health of US forests while saving billions of dollars’ worth of valuable natural infrastructure.

In Kenya, the International Finance Corporation (IFC), a wing of the World Bank specializing in funding private projects, is piloting a $152 million carbon forest bond. In partnership with Conservation International, the IFC has issued five-­year notes at its AAA rate, meaning that the cost of financing is very low. These notes have then been sold to banks and other financial institutions—­JPMorgan Chase is one of the many buyers, for example—­and the proceeds will be used to pay for reforestation projects in Kenya. Here is the interesting twist: the purchasers of the bonds have a choice—­to get paid back in dollars per the bond offering or to take their return in the form of carbon credits that they can either use internally for their ESG commitments or sell to others. In the event that the bondholders want cash, mining giant

121

122

v a l u i n g n at u r e

BHP has agreed to buy the associated carbon credits at $5 per ton of carbon dioxide. Either way, the IFC cannot lose: the bondholders forgo the cash and take the carbon credits, or BHP will provide the cash to redeem the credits.22 This kind of clever financial structure could drive billions of dollars into campaigns to restore private forests. As momentum builds, the number of related innovating financing facilities is poised to grow exponentially—from international efforts like the Global Carbon Facility, which already has billions of dollars in pledges from countries like Norway, Germany, and the United States, to industry-­led initiatives like one being led by the International Civil Aviation Organization to craft a global emissions reductions plan for the airline sector through a combination of efficiency improvements and offset purchases. Only time will tell if these kinds of initiatives will be able to jump-­start what has been a lackluster market for forest offsets to date.

At the sovereign scale, an interesting type of financial instrument, sustainable land bonds—­sovereign bonds issued in the name of a participating government, which bear their full faith and credit behind them—­are being developed to address climate issues. The proceeds of these bonds would be used by the issuing country to finance efforts to secure forests from being converted to agriculture or other purposes. Here is the key innovation: each country issuing such bonds would agree to a set of performance targets for forest protection. If, after an evaluation of progress toward these goals, it is determined that adequate progress has been made, a consortium of other countries interested in funding climate change abatement efforts would pay the interest on the bonds. Thus, as long as participating countries make adequate progress against their goals, they would never pay any interest and could instead retire the principal or refinance at the end of the term. Such an effort could bring billions of dollars to countries like Indonesia, Colombia, Bolivia, Congo, and others who currently face big challenges when it comes to finding

n at u r a l c a p i ta l a n d t h e c l i m at e e c o n o m y

the necessary financial resources to invest in their forests. Although this idea is bold and large in scale, it’s not clear that it will get any traction as it requires big commitments from donor countries and borrowers alike.

Yet another category of investment around climate change is the effort to make new products out of forest resources that both encourage better management and provide reductions in carbon emissions. One such effort is the work of GO Lab, Inc. to manufacture insulation out of wood fiber from Maine forests. Thirty-­two percent of the world’s energy is used directly or indirectly by buildings, and 19 percent of the world’s carbon emissions come from heating and cooling these structures. 23 Until now, the most common insulation investments make buildings into giant “beer coolers,” according to Josh Henry and Matt Omalia, the founders of GO Lab. “To address energy and climate issues by wrapping buildings in hydrocarbon-­based foams just doesn’t make any sense,” said Henry.24 Using German technology, the company is rebuilding a former paper mill in Madison, Maine, to make fiber-­based insulation in three forms: blown-­in cellulose replacement products, so-­called batts that complete with fiberglass, and panels that can replace foam boards.

All these products have at least comparable energy-saving properties and, in some cases, improved moisture and sound handling than competitive products. These products already have about 8 percent of the market in Europe, and GO Lab believes that these products could lead to at least a $1 billion industry across North America. These and other new products made from natural sources are pointing the way toward substituting renewable solutions to common climate problems in innovative ways.

Beyond direct investments in forest restoration and conservation, the rapid transformation of the coal industry in the United States—­with more than 50 percent of coal companies having now filed for bankruptcy—­highlights the possibility of engaging in discussions to keep coal reserves in the ground to limit future carbon emissions. The Sierra Club, for example, has been pressing for full acknowledgment of the

123

124

v a l u i n g n at u r e

Deal Book Wood Fiber–­Based Insulation Developer/Investor: GO, Lab Inc. Investment: Manufacture wood fiber–­based insulation products that compete on price and performance with nonrenewable/energy-intensive conventional insulation products. The first plant, in Madison, Maine, will cost $65 million, and funding is being raised from equity investors.

The company hopes to build ten to fourteen more plants across North America.

Contact: www​.golab​.us

costs of restoration and has been extracting commitments to retire certain coal rights; in western Pennsylvania, for instance, it secured a commitment from Alpha Resources to set aside sixty-­five thousand acres of coal rights. In an earlier deal, the Southern Environmental Law Institute secured a commitment from one company to end mountaintop removal in exchange for protection from certain environmental violations.

These efforts work on the supply side and aim to lock away fossil fuel resources to prevent future emissions. As one study in Nature concluded, if we are to meet the target of keeping global warming below 1.5°C by the end of this century, more than 80 percent of current coal reserves must remain unused.25 There is therefore a growing consensus that to meet climate goals, we will need to leave coal and other fossil fuels in the ground.

To hold on to these rights to coal and ensure that the reserves stay in the ground, the Carbon Endowment, the brainchild of Harvard professor Daniel Schrag, has emerged. Through 2019, the group had secured the rights to more than 116 million tons of coal in Alaska and Pennsylvania. This strategy is not without its detractors, however. In 2016, when it appeared likely that the Democrats were poised to maintain power

n at u r a l c a p i ta l a n d t h e c l i m at e e c o n o m y

in the White House, acquiring so-­called worthless coal rights seemed like an ill-­advised strategy. But when the Trump administration took control of the US energy agenda, coal had a significant rebound, with coal companies becoming more financially stable and utilities putting off planned coal-­fired electric plant shutdowns. It is a cautionary tale.

Changing policy can impact financial value, and what was once considered a near-­stranded, or nonperforming, asset has regained its market value. Although there are no plans to build new coal plants in the United States today, the looming shutdown of most of the country’s nuclear plants in the 2020s means that coal power may remain a key player in the country’s energy mix until the rights to mine coal are permanently extinguished. Thus, finding a way to fund the retirement of these rights while they maintain their current market value remains a challenge.

Yet another possible avenue for driving investment into natural capital restoration may come from a thus far unmentioned player in the finance sector: insurance companies. For example, in Cancun, Mexico, the many idyllic seaside resorts that dot the coastline are becoming increasingly vulnerable to hurricanes, with massive storms wreaking havoc on the beach sands and coral reefs that serve as the city’s first line of defense.

In an effort to build resilience to these increasingly frequent and powerful storms, a group of hotel owners, alongside TNC and the local government, has banded together to create the Coastal Zone Management Trust, which buys an insurance policy to pay for beach replenishment and coral reef reseeding in the event of a storm. This way, when catastrophe hits—­as it will in a rapidly warming world—­the natural infrastructure systems that offer substantial coastal protection benefits can be repaired quickly. Although these policies will not be cheap, they make up part of a larger system to build both natural resilience—­beaches and reefs—­and financial resilience to restore and maintain the natural assets that keep tourists coming back year after year. Baking in the full cost of development (including these natural infrastructure resilience

125

126

v a l u i n g n at u r e

efforts) to development costs over time would send a powerful economic signal to support more sustainable development over the long term.

With the increasing recognition of the role that natural systems can play in meeting the climate challenge, innovative finance, incentives like carbon offsets, and private-­sector initiatives are showing how we can convert today’s paltry funding in these assets into something more robust, but the gap between hype and reality remains immense. Still, if the same kind of incentives and policies that transformed the financial viability of the wind and solar industries are applied to investments in natural infrastructures like forests, soils, wetlands, and coral reefs, the potential for impact will unquestionably accelerate. The challenge that remains is the last-mile problem: converting broad commitments by governments and companies into measurable, implementable projects on the ground. In many cases, this step is made doubly hard because in many places where these projects must happen—­from Kenya to India to Brazil to Indonesia—­financial capital is in short supply. Nevertheless, although the challenges are great, the opportunities are greater, and early success stories demonstrate that change is possible.