New White House report highlights nascent conservation finance sector

Last month, President Barack Obama connected conservation with climate change, calling the two environmental challenges inseparably linked.

He announced a range of initiatives to tackle both issues including a strategy focused on conservation finance outlined in 12-page document Leveraging Innovation to Boost Private Investment in America’s Natural Resources.

The document calls for strategic innovations in the federal government’s approach to policy, finance, and technology to stimulate private and philanthropic investments in conservation. The strategy envisions creation of a $10bn annual market for private sector investment within 10 years.

It highlights ‘pay for success’ or social impact bonds saying they could present “an exciting opportunity for new innovation that can further drive investment opportunities in conservation”.

It comes as the District of Columbia Water and Sewer Authority (DC Water) plans a first-of-its kind environmental impact bond that the White House’s Social Innovation Fund provided grant funding for to help develop.

The model is similar to social impact bonds with investors funding a DC Water green infrastructure programme with the total rate of return dependent on the effectiveness of green infrastructure in managing stormwater runoff – which causes water quality issues.

The environmental impact bond is expected to be announced formally shortly.

Climate finance has seen increasing global investor focus, especially since the Paris COP21 talks and the recent G20 meeting that had green finance as one of its main policy themes. But conservation finance is also starting to attract attention.

Recently the Coalition for Private Investment in Conservation was launched — with founding members Credit Suisse, the Nature Conservancy, the International Union for Conservation of Nature and Cornell University.

Vice chairman at Credit Suisse Mark Burrows has been vocal in his support for conservation finance. Speaking at COP21 last year, Burrows said his personal passion was devising a financial instrument to prevent environmental degradation of the barrier reef. “It could be a debt instrument guaranteed by the certainty of the ecosystem itself, like sovereign debt,” he suggested.

But while he said people were starting to value natural capital, he added that conservation finance was “very emerging”.The Coalition for Private Investment in Conservation says conservation finance represents a “massive, undeveloped private sector investment” and private investors could supply as much as $300bn per year.

US-based environmental charity Nature Conservancy has been at the forefront of trying to develop the market, mainly through its impact investment arm NatureVest that was set up with help from investment bank JPMorgan in 2014.

Earlier this year, NatureVest got backing from the Leonardo DiCaprio Foundation and leading climate philanthropist Jeremy Grantham for an innovative impact investment/sovereign debt-swap to finance marine conservation in the Seychelles island chain in the Indian Ocean.

And in April, the Nature Conservancy joined with National Australia Bank and the billionaire Besen family to launch impact investment fund called the Murray-Darling Basin Balanced Water Fund.

The Fund, which has already raised AUD$27m with the goal of scaling to AUD$100m, buys and leases water rights while protecting wetlands that support threatened species in the Murray-Darling Basin in southeastern Australia.

In times of low rainfall it will sell or lease the majority of annual temporary water allocations to the agricultural community, while donating the remainder of allocations to the environment each year. A majority of environmental donations will occur in years of high rainfall when farmers need the water least.

The Nature Conservancy has called this model the Water Sharing Investment Partnership (WSIP) that is profiled in new report Water Share. Through the WSIP structure, investment capital is used to acquire a pool of water-use rights within existing markets. Nature Conservancy says those rights can be used to reallocate water to the environment, provide ongoing water security through lease arrangements to users in the community and generate financial return to investors.

At least 37 countries in water-scarce regions have established water allocation systems based on the issuance of water rights. But the issue of water rights is a sensitive area.

Speaking to RI, Lauren Ferstandig, Director of Product Development for NatureVest and an author of the report, said she understood that water markets could be controversial and said the WSIP structure would ensure they took into account that some people may not have access to water but could integrate this when reallocating water through the WSIP.

Brian Richter, co-author of the report and Chief Scientist for the Water Programme at the Nature Conservancy, said they will face this issue in Chile, an area he says has opportunity for a similar fund structure to Murray-Darling Basin in Australia.

Richter said that in Chile a segment of the population had been left out of the water allocation system due to language barriers, lack of education on the application filing process and long distances to filing locations. “Indigenous people or those with poor economic status didn’t file for water rights when they were first established, so had not had legal entitlement.”

He said creating WSIPs could help address this through reallocating water to underserved communities and to nature. NatureVest is actively scoping a fund opportunity in Chile.However, not all countries will have the same ecosystem water needs as in Australia’s countercyclical model, and won’t be able to follow the same model.

“Some eco-systems need water at the same time as farmers,” said Richter. But he said it looked possible to create funds large enough to provide water to farmers and ecosystems simultaneously. He added that when water storage is available, such water sharing would be easier.

Ferstandig said other ways to make water investible and profitable was purchasing and selling water in different years, due to fluctuations in price driven by scarcity. Focusing on Latin America, Ferstandig said there could be the possibility of water being purchased upstream, used environmentally midstream and sold downstream.

Other models highlighted in the report include short-term water leasing exchanges between farmers and cities; or similar models between farming communities. Link