Q: What is NatureVest?
NatureVest is the impact investing unit of the Nature Conservancy, launched in 2014. Our purpose is to demonstrate how private capital can support greater scale in conservation. We’ve closed 12 deals capitalized with $1.3 billion. No one else is doing exactly what we do. We fill a gap in the market by offering examples of how capital markets should be valuing natural capital, and how doing so both reduces risk and supports commercial returns.
Q: What do the deals look like?
Some deals are straightforward. The terms on our $130 million Cumberland Forest project are similar to any traditional private equity timber investment. The difference is, with the Nature Conservancy as the general partner, we are managing the 253,000 acres of working forests in Virginia, Kentucky, and Tennessee for maximum conservation benefits, including carbon sequestration and biodiversity, alongside financial returns.
Some deals are less obvious. It’s not immediately evident that there’s a conservation component to a commercial debt product, but we’ve developed what we call Blue Bonds for Conservation. We acquire public debt of countries with large ocean areas and restructure it to reduce the country’s overall annual payment, in exchange for which the country makes a commitment to create a marine protected area of as much as 30% or more of their exclusive economic zone.
Q: You tested the Blue Bond model with a deal in the Seychelles in 2014. How has that worked?
In 2014 we bought $21.6 million in Seychelles public debt at a discount. This reduced Seychelles’ payments with a portion of the savings dedicated to fund conservation work. In exchange for the debt restructuring, the Seychelles committed to a number of covenants on the new loan—a failure to meet them is an event of default, so that’s a real incentive.
The loan is being repaid and the Seychelles is delivering impact by funding marine conservation projects and by creating a new 158,000-square-mile marine protected area. That’s the size of Germany or Montana and represents about one third of their territorial waters.
This is a tweak on an existing model, the Debt for Nature Swap, which was invented by Tom Lovejoy when he was with the World Wildlife Fund during the Latin American currency crisis in the ’80s. In that instance, the U.S. government forgave bilateral debt to Costa Rica, Peru, and a number of other countries in exchange for a conservation commitment.
However, Blue Bonds are different and structured with credit enhancement such as political risk insurance so that investors are repaid at commercial rates, making them scalable. There are many island and coastal nations where this could be a means of managing debt and funding conservation.
Q: How do you decide which financial products are worth developing?
It’s a good question because these deals are pretty hard to put together. Embedding a charitable entity inside of a commercial investment takes some doing. It takes time and money to structure them, and so it needs to be worth it.
One piece we consider is investors. In our first few years at NatureVest, we drank our own Kool-Aid. We thought “There’s so much money sitting on the sidelines looking for impact deals; all we needed to do was show them the possibilities.” It turns out, novelty is very hard for investors to understand and underwrite. They want to invest for impact, but they want to do it through structures that are familiar and where the risk-return profile is something that they can underwrite.
“First, we ask, ‘What are investors looking for?’ Then we figure out ways to embed conservation into existing asset allocation strategies and existing investment vehicles.”
So, after a few years of really struggling to find buyers for our wares, we made some strategic shifts. First, we ask, “What are investors looking for?” Then we figure out ways to embed conservation into existing asset allocation strategies and existing investment vehicles.
The other critical piece is the conservation value. The Nature Conservancy’s 2030 global goals are focused on climate change mitigation as well as protection and improved management of land and water. Those goals are very high level, which means we can work in a lot of sectors. At the same time, we hold ourselves to making a meaningful contribution to those goals.
For example, we’re looking at a global aquaculture investment fund with a particular focus in Asia. If that plays out as we hope, we think we could deliver more than 100% of the Nature Conservancy’s Asia program target for improved ocean management.
Another example is playing out in Sub-Saharan Africa, where the Nature Conservancy has substantial goals in particular for land management and protection. As you might expect, tourism operators in that region are a major contributor to local jobs and the work that community conservancies do. But with COVID, tourism has completely collapsed and we have already seen more wildlife poaching, more burning of trees for charcoal, and decimated revenues that are needed for employing rangers and funding conservation projects. So, what can impact capital do? We’re collaborating with a fund manager to provide bridge capital to ecotourism operators, with the aim of supporting jobs and conservation payments that then help meet conservation goals.
Q: Who are your investors?
An important thing to note is that the Nature Conservancy is a co-investor in each of our deals. To date, our commitment is $77 million.
In terms of outside investors, we have seen a broad range because each of our deals has had different scales, returns, risks, and timeframes. With deals built around distressed debt, private equity in water and agriculture, and program-related investments, each instrument typically has different investors.
On the Cumberland Forest deal, the investors are primarily family offices, endowments, and high-net-worth individuals.
On the other end of the spectrum is our partnership in the $900-million Sustainable Water Impact Fund (SWIF), which seeks to provide competitive, risk-adjusted returns to investors by acquiring land and water assets to more sustainably manage those resources. We see it as a way to support farming long-term while benefiting the environment and the agricultural economy. Because of the scale in the SWIF, that attracted institutional investors.
Program Related Investments (PRIs) are a very cool animal of the IRS tax code in which a foundation has to give away 5% of its endowment every year in order to maintain its foundation status. However, an investment that is advancing the charitable purposes of the foundation also counts toward the 5%. The Packard Foundation and the Gates Foundation therefore have huge PRI “envelopes.” It’s a great way to catalyze market activity as part of your mission.
This type of investor came into play with a $1.5 million fund we helped launch to provide loans to local fishermen in Alaska to buy landing shares on the quotas for the fishery. This pilot project is very small, very risky, and we expect pretty concessionary returns, so we sought foundation money structured as a PRI. Two foundations that care a lot about sustainable fisheries put money into this vehicle.
What’s exciting to me about this deal is that we’re testing a new solution to a very big problem. With limited-access, rights-based fisheries, we’ve seen ownership leave communities and go to capital owners. We’re trying to bring it back because the local stewardship ethos is needed for a healthy fishery.
“Investors like liquidity. Conservation takes a long time. That mismatch is tough.”
This program is risky because we’re providing loans to local fishermen who don’t have equity and for that reason don’t have very good credit and we’re getting repaid in landing shares. If it works, they can refinance into a traditional loan once they have built equity and credit history.
If it works, there are many, many other fishing communities. And I think PRI money is there at a scale that we could catalyze a lot more local ownership.
Q: Conservation work isn’t quick. What sorts of timeframes do you work with?
Investors like liquidity, of course. Conservation takes a long time. That mismatch is tough.
A number of our deals are structured as private equity 10-year holds because that’s a place where investment norms and conservation impact have some overlap. But sometimes that’s not enough time to achieve results, and it can be very challenging to find “patient capital.”
Our most recent deal was a $10 million 17-year mezzanine investment into a renewable energy project that generates a conservation dividend. Not a lot of people want to have money out the door for that long.
The Blue Bonds have a 20-year term, but that’s not unusual for sovereign debt. Because we’ve structured it with a credit enhancement and we’re working with an investment bank to underwrite it, we hope they will trade in the way that bonds do. In that case, the secondary market creates the liquidity. But, in general, we haven’t cracked the liquidity nut yet.
Q: Is impact investing developing quickly enough that private capital can do it all or is there a need for policy intervention, too?
In short, we do need policy interventions, but we also need policy that paves the way for existing market momentum. Let me explain why.
When J.P. Morgan and the Rockefeller Foundation issued “Impact Investing: A New Asset Class” in 2010, it was the report heard around the world for people who think about this stuff. The market has exploded since then. Increasing numbers of investors want high-quality impact yields. There’s increasing awareness of the materiality of climate change and biodiversity loss as a meaningful risk to investments and to the world. It’s rapidly becoming very mainstream.
I find hope in how mainstream the conversation has become. There are near-daily announcements by important players in the global economy. I believe the efforts by governments and financial institutions to understand, manage, and mitigate the risk from climate change and biodiversity loss are sincere.
Obviously, my biggest concern is we’re too late and we’re not moving fast enough. We’re still missing systematic public support. My banking experience is in community development banking which is underpinned by a few key pieces of regulation: the Community Reinvestment Act, the Low-Income Housing Tax Credit, Fannie, and Freddie. They create an ecosystem of investment activity that catalyzed affordable housing and small business loans in low-income communities.
We don’t have the equivalent in the climate and biodiversity market. It would be great to have some regulatory support. A price on carbon. Reforming agriculture subsidies would have a surprisingly huge impact. The Nature Conservancy partnered with the Paulson Institute and Cornell University on a report that came out in September 2020 called “Financing Biodiversity.” It calculates that you need $700 billion a year to protect biodiversity. We spend $450 billion on agricultural subsidies that are harmful. Flip those harmful subsidies to supporting biodiversity and we’d be more than halfway there.
Another element that is super unsexy: most major banks are signatories to a risk-management framework called the Equator Principles. They include the commitment to adhering to a mitigation hierarchy—avoid impact, minimize impact, offset impact. Banks don’t really report whether they are following through, so there isn’t awareness of the biodiversity impact of investments. It’s an old saw, but what gets measured is what gets managed. Better disclosure and better reporting would change behaviors.
Q: As impact investing takes off, are you concerned about quality?
Big institutional investors are, today, saying all of the very good things that you need to say about creating a portfolio that’s Paris-aligned, or that supports biodiversity. But the financial products that would let them deliver on those promises aren’t there in a lot of instances.
Three years ago, I was worried that our work would be lost in a sea of impact-washed products claiming to deliver all kinds of stuff. Our products are more complex because they look for measurable impact backed by the Nature Conservancy’s extensive science. I was concerned nobody would be willing to get into those complexities.
Instead, the opposite is happening. The SEC is now giving more scrutiny to ESG branded funds. There’s some latent distrust of claims, which is fine with us. It’s incumbent on us to have a lot of integrity with what we’re delivering. Since our whole purpose is to achieve the mission of the Nature Conservancy, delivering conservation impact is not an add-on, it’s our starting point.
Q: How do you see NatureVest developing going forward?
We’re working to meet investors where they are now. People are investing in agriculture; we help them invest in regenerative agriculture. People are investing in aquaculture; we create a model to invest in sustainable aquaculture. There’s enough work to be done in these more straightforward areas to keep us busy for a while.
Looking ahead, there are more complex things to think about. How do we make nature-based climate solutions economic and investible? How do we design investment products that let private capital support solutions to climate change at scale? Right now, the costs are high and carbon prices are low. That’s the challenge.