Valuing Nature: A Handbook for Impact Investing

By William Ginn

As the world faces unprecedented challenges such as climate change and biodiversity loss, the resources needed far outstrip the capabilities of nonprofits and even governments. Yet there are seeds of hope—and much of that hope comes from the efforts of the private sector. Impact investing is rapidly becoming an essential tool, alongside philanthropy and government funding, in tackling these major problems. Valuing Nature presents a new set of nature-based investment areas to help conservationists and investors work together.

NatureVest founder William Ginn outlines the emerging private sector investing opportunities in natural assets such as green infrastructure, forests, soils, and fisheries. The first part of Valuing Nature examines the scope of nature-based impact investing while also presenting a practical overview of its limitations and the challenges facing the private sector. The second part of the book offers tools for investors and organizations to consider as they develop their own projects and tips on how nonprofits can successfully navigate this new space. Case studies from around the world demonstrate how we can use private capital to achieve more sustainable uses of our natural resources without the unintended consequences plaguing so many of our current efforts.

Valuing Nature provides a roadmap for conservation professionals, nonprofit managers, and impact investors seeking to use market-based strategies to improve the management of natural systems.

• Language: English
• Publisher: Island Press
• Release date: May 21, 2020
• ISBN: 9781642830927

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About Island Press

Since 1984, the nonprofit organization Island Press has been stimulating, shaping, and communicating ideas that are essential for solving environmental problems worldwide. With more than 1,000 titles in print and some 30 new releases each year, we are the nation’s leading publisher on environmental issues. We identify innovative thinkers and emerging trends in the environmental field. We work with world-renowned experts and authors to develop cross-disciplinary solutions to environmental challenges.

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Valuing Nature

Valuing Nature

A Handbook for Impact Investing

William J. Ginn

Washington | Covelo

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

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

List of Deal Books

Acknowledgments

Introduction: Finding Value in Nature

Part I. Nature’s Assets

Chapter 1. Transforming Water Use

Chapter 2. Investing in Green Infrastructure

Chapter 3. Feeding the World

Chapter 4. Investing in Land

Chapter 5. Oceans and Islands

Chapter 6. Transforming the Way We Fish

Chapter 7. Natural Capital and the Climate Economy

Part II. Tools for Investors

Chapter 8. The NatureVest Story

Chapter 9. Lessons from Other Sectors

Chapter 10. Measuring Impact

Chapter 11. Legal Challenges

Chapter 12. Raising Investment Capital

Epilogue: Finding Wealth in Nature

Resources

Notes

Index

About the Author

Figures and Tables

Table I-1. Emerging Natural Capital Asset Classes

Table 1-1. How Money and Water Flow in the Murray-Darling Basin Balanced Water Fund

Table 1-2. Potential Areas for Water Investing in the Colorado River Basin

Figure 2-1. Before and After Green Stormwater Improvements

Figure 3-1. The Happy Seeder

Figure 6-1. The California Risk Pool in Practice

Table 10-1. Impact Management Project Methodology

Table 10-2. Steps in Calculating the Impact Multiple of Money

Table 11-1. Key Legal and Securities Issues for Nonprofits and Foundations

Table 12-1. Sources of Capital

Table 12-2. Who Are the Potential Investors?

Deal Books

The following transactions are discussed in this book.

Water

Murray-Darling Basin Balanced Water Fund

Water Property Investor, LP

Green Infrastructure

District Stormwater LLC

Philadelphia Water District

Corvias Solutions

Greenprint Partners

Agriculture and Food

Livestock to Markets—Kenya

Ending Crop Residue Burning in India

Conservation Land

Heart of the Adirondacks

Large Landscape Projects in the United States

Conservation Notes

Cumberland Forest Project

Oceans and Islands

Seychelles Debt-for-Nature Swap

Fisheries

Morro Bay Community Quota Fund

Climate

Using Loan Conditions to End Deforestation 114

Improving Cattle Production in Mato Grosso, Brazil

Tropical Landscape Finance Facility

Working Woodlands

Forest Resilience Bonds

Kenya Forest Carbon Project

Wood Fiber–Based Insulation

Conservation Investment Organizations

NatureVest

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 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 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.

Introduction

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 $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.

• 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 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 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 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.

Table I-1. Emerging Natural Capital Asset Classes

A 2017 study by Forest Trends and sponsored by The Nature