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Cultivating Market Maturity Will Unlock Billions for Conservation

Published: August 30, 2017 by Editorial Team

Guest Post by Leigh Whelpton of The Conservation Finance Network
The Climate Trust’s ‘Point of View’ guest blogger initiative fosters and amplifies expert industry voices
August 29, 2017

With $3 billion sitting on the sidelines, the case for speeding the development of environmental markets and investment vehicles is clear

Over the past few years we have witnessed the convergence of conservation and finance. This intersection is where public, private, and nonprofit interests align to use markets and investment vehicles to deliver positive outcomes for the environment and communities, alongside financial returns.

This type of impact investing activity is gaining traction. A 2016 Forest Trends report found that investments in sustainable food and fiber (i.e., agriculture and forestry), habitat conservation, and water quality and quantity grew from $900 million to $8.2 billion between 2004 and 2015. And yet, the report also revealed that $3.1 billion of that total was sitting on the sidelines. The money had been raised, but fund managers had not yet found projects to invest in.

The need for financial resources for conservation is well understood among stakeholders, who include fund managers, investors, public agency staff, conservation practitioners, and foundation staff, among others. What it takes for a conservation project to pay back investors—at a profit—less so. Most conservation investment models are either new or still being proven. These models have the potential to attract private investment, but not until they reach a certain level of maturity. More models need to demonstrate they can be replicated, that the cash flows can be predictable, that transaction costs can decrease with greater scaling, and that underlying rules and regulations remain stable over time.

Overall, the gap between what is needed for on-the-ground conservation projects and the $3.1 billion waiting in the wings has more to do with the lack of market maturity than the availability of investment dollars. This gap stems from a lack of price stability or standardized accounting measures, unproven protocols, unpredictable regulations, or other risk factors that cause investors to doubt the success of a given deal.

What if the development of these approaches could be responsibly accelerated? What if we could shorten the time it takes for environmental markets and investment vehicles to be defined, piloted, scaled, and matured—without cutting corners?

The Conservation Finance Network’s recent report, “Private Capital and Working Lands Conservation: A Market Development Framework,” responds to these questions by translating practitioner insight into a framework and common language in the hope of speeding solutions to market development. The report attempts to describe how stakeholders could better delineate their roles and focus their money and authority. It is meant to help stakeholders set realistic goals, expectations, and timeframes to see more capital deployed, faster.

This framework was developed by Dave Chen, Principal and Chairman of Equilibrium Capital, with input from Susan Phinney Silver, Mission Investing Director of the David and Lucile Packard Foundation.

Insight in this report was captured from an ongoing series of stakeholder workshops, the Conservation Finance Practitioner (CFP) Roundtable, which brings public sector, private sector, nonprofit, and philanthropic thought leaders together with recipients of Conservation Innovation Grants (CIG) from the U.S. Department of Agriculture’s Natural Resources Conservation Service (NRCS). The goal of these convenings is to advance innovative partnerships and approaches that increase the amount of private sector capital deployed for conservation outcomes on private working lands.

The framework provides a general overview of how market development occurs, categorizing in broad terms the roles, deliverables, and funding or financing characteristic of each phase. Case studies showcase how progression occurs from the market formation and definition phase to the pilot, early market, and mature phase. For each of these, it is critical to understand what needs to be proven for an approach to move to the next phase, how it might be financed and what type of capital is available, whether infrastructure is needed to support the market overall, and any hurdles that must be overcome.

The field of wetland and stream mitigation banking exemplifies this phasing by showing how specific actions can create inflection points that speed market growth. While the use of private investment for mitigation began in the late 1980’s, a new Federal rule led to the very rapid scaling-up of the marketplace for mitigation credits. Understanding how the 2008 rule mitigated policy risk and solidified enforcement—and how that greatly expanded the pace and scale of project development—yields valuable insight for unlocking the potential of other environmental markets and investment vehicles.

Even without federal rulemaking or other policy signals, the Market Development Framework report demonstrates how funding and innovation can create similar types of inflection points. These targeted injections of capital and creativity help shorten the time it takes for markets to materialize and mature.

A uniquely compelling example of this synergy can be found in the Conservation Innovation Grant (CIG) program. With a modest amount of grantmaking capacity, CIG functions as a publicly funded research and development facility. CIG funding has led the way on testing and bolstering market based approaches to working lands conservation practices. It has enabled fund managers to structure new investment funds targeting conservation gains, and it has allowed project developers to work with agricultural producers and landowners to try new management strategies on their farm, forest, or ranch.

This type of support—whether public or philanthropic—and the financial engineering it supports is key to speeding solutions and creating inflection points in the market. Project developers, fund managers, and other practitioners use grants or other awards to create basic market infrastructure, reduce risk, unlock deal flow, and solve environmental problems. This public and philanthropic support is critical to the success of early approaches, but it is also in limited supply. Stakeholders must advocate for this funding and put it to work in catalytic ways.

If the goal is to speed the creation of markets and investment vehicles that deliver conservation benefits, we hope the Market Development Framework may serve as a roadmap and decision support tool. We aim to help stakeholders shorten the time for markets to be defined, for pilots to be completed, for early markets to scale, and for mature market activity to reach the mainstream financial sector. Though much work lies ahead, the Conservation Finance Practitioner Roundtable meetings will continue to convene stakeholders to advance these approaches and reduce the degradation, fragmentation, and conversion of working lands across the country.