Invest in Land for Impact & Profit
As populations rise, land for water, food and open space is increasing in value. For smart investors, it is an opportunity that cannot be passed up.To see all charts and full article, please see magazine.
NatureVest, a division of the Nature Conservancy, in a recent report on conservation investing provided fascinating insights into a growing market. Funds can invest in—and earn income from—land for food and fiber, for habitat conservation, or for water security. Non-profits seem to be fairly equally divided between habitat conservation, and food and fiber production. Water quality and quantity investing, seems to be in its infancy, with family offices showing the most interests.
The reasons that non-profits and for-profits invest are slightly different. Although both seek out conservation investments as part of their strategic goals, financial return and diversification is more important to for-profits. For profits also have a variety of more personal goals, such as an interest in the sector or a desire to support their social responsibility objectives.
As reasons for NOT investing, a scarcity of deals that meet the organization’s risk/return goals is important for both profits and non-profits. However, a concern over exiting the investment as well as transaction sizes is more important to for-profits, while the lack of reliable impact measurements more important to non-profits.
Government support does not rank high for either, although NatureVest interviewees did note that the sector would benefit from more widespread use of capital stacking, which combines private capital with more risk-tolerant funding such as government loans and concessionary capital—low to no interest loans—from philanthropic sources. More robust impact assessment tools are thought to foster more capital stacking, incentivizing more private investors to partner with philanthropic organizations.
Looking at returns, non-profits providing guarantees and private debt are more apt to accept returns with a maximum of 4.9%, while equity-like debt and private equity generally seek 10% IRR or better. Although the initial motivation for non-profits is to advance their organizations’ conservation objectives, yet generating financial return is ranked a close second. The report concludes that during 2004-2008, over 80% of investments have performed in-line or above the investors’ expectations of financial return. Types of Investments
- Green Bonds
Originally green bonds were issued by municipalities and large multinationals like the World Bank. However, corporations are now issuing over 50% of Green Bonds in 2014. Green Bonds have the same standing as senior unsecured debt of the issuer. This fact makes them attractive for institutional investors, since the bond is subject to the credit risk of the issuer, which is typically much stronger than project credit. The Climate Bonds Initiative forecasts 2014 Green Bond issuance to be $40 billion, a four-fold increase.
Reducing Emissions from Deforestation and Forest Degradation (REDD+)—has a variety of ‘flavors’. Since 2005, the World Bank has launched 11 carbon funds and facilities with a total capitalization of over $2.3 billion. These funds cater predominantly to parties seeking to comply with emissions reduction. REDD credits have been used to reimburse farmers for land that they do not clear, particularly where deforestation has taken a toll. The biggest hurdle that REDD+ faces is measurements that accurately predict how much carbon is sequestered in healthy trees. In the US, the Forest Carbon Markets and Communities (FCMC), a division of US AID, promotes REDD+ by managing the analysis.
- Sustainable Seafood
As fish consumption and population grows, the number of over-fished areas is increasing as sustainable areas are decreasing according to the United Nations Food and Agriculture Organization. Investing in sustainable seafood can increase sustainable fishing, grow healthy aquaculture and advance new technologies. Public-private ventures are helping local communities—fishermen as well as seafood buyers, municipalities and residents—understand the advantages of imposing their own regulations in order to maintain healthy fisheries. Aquaculture constitutes a $125 billion-per-year industry, accounting for roughly half of global seafood production by weight. New technologies, such an innovative reverse pumping system in Veta La Palma in Spain, reestablished a 27,000 acre marshland habitat, providing a “free water” fish farm and the largest bird refuge in Europe.
- Notes & Trusts
Notes from reputable organizations provide a credit worthy counter party that financially backs the investment, providing expertise to evaluate credible projects.
- The Nature Conservancy Notes has a high-impact use of proceeds; shorter durations as low as one year, although institutions tend toward three to five year contracts.
- The Renewable Resources Group (RRG) is an asset management firm specializing in rural land, agriculture, water, conservation, and renewable energy. Since 2005, the firm has developed over 2 million acre-feet of water projects, 1.5 gigawatts of solar energy, and 840 megawatts of wind energy. It has also owned and managed over 100,000 acres of agricultural land.
- The Antelope Valley Water Bank and the Antelope Valley Solar Projects which includes the The Delta Wetlands Project, the Global Environment Fund (GEF), The Forestland Group (TFG), and The Freshwater Trust. The latter has been pioneering the use of water quality trading to facilitate the restoration of rivers and streams.
- Foundations and Conservation Impact Investing
Foundations use program related investments (PRI) to achieve conservation impacts by providing bridge funding for time-sensitive land-protection opportunities, supporting conservation-related businesses, developing markets for environmental credits, building commodity certification systems, and helping to attract private capital. They also use a variety of financing tools such as loans, equity investments, and guarantees. Foundations, following their mission, are developing resources to support the development of investment impact metrics while building capacity in prospective investor organizations. This expertise is likely to have positive impacts for the market as a whole.
Impact investing is becoming mainstream as corporations and individuals seek to put hard-earned funds into investments that make a financial return while helping to heal our warming planet. Nature Vest’s report is an example of the research that is helping to build this important market.