Making Investing in Conservation Projects Mainstream

Sean Penrith, The Climate Trust
Weekly Policy and Finance Update – April 24, 2017

Leverage for Impact

Last week I was in the Log Cabin at the Presidio in San Francisco for the Conservation Finance Practitioner Roundtable sponsored by Natural Resources Conservation Service (NRCS). In one of the sessions, Encourage Capital challenged us to think about new ways to leverage public and philanthropic dollars to attract private capital to environmental impact markets. One of their ‘what if’ bullets on their last slide addressed a conservation fund with capital protection via a guarantee. Credit enhancement as offered under a guarantee mechanism is vital to usher in many investors who are not yet engaged in the world of true impact investing. The beauty of a guarantee is how much it can leverage multiples of private capital. This is clearly spelled out in the April issue brief by the Global Impact Investing Network (GIIN) addressing the scaling of guarantees in the U.S. GIIN’s report specifically focuses on how under utilized guarantees from foundations can greatly improve the investability in new sectors and programs. Guarantees from foundations have been effectively put to work to support the housing sector, healthcare and even energy efficiency, but are not prevalent to improve the risk-return profile in the conservation field. Foundations have the option of offering an unfunded (a commitment to pay contingent on conditions being met) guarantee or a funded guarantee where capital is allocated for use should the guarantee be called on.

Many U.S. foundations are well versed in making mission- or program-related impact investments. Many of those transactions are bespoke and lengthy in assembly. Guarantees deliver the advantage of reducing the level of direct involvement for a foundation in any transaction without increasing the levels of current liquidity. While the environmental impact of climate friendly projects is compelling, the sector is largely unproven and the risk-return attributes are unfamiliar. A guarantee from a foundation can go a long way in delivering comfort to investors who are entering the eco-impact space. Guarantees stimulate better financing terms, encourage lower cost capital, enable longer tenor for repayment and higher loan-to-value ratios.

Ricardo Bayon of Encourage titled his last slide, “If anything were possible….” My wish is for our forward thinking foundations to focus on offering sorely needed guarantee mechanisms to the conservation impact space so that we can prove the models and turn our pro-formas into actuals, and begin to mainstream investing in conservation projects that protect our climate.