ETFs for the Amazon? LBOs for Biodiversity?
Creative Deal Making Will Help Us Reach Our Conservation Goals
It was great to see the world pay close attention to the climate crisis during the UN’s Annual Climate Summit held last month in Glasgow. We have a long way to go, but the various pledges, commitments, and new coalitions are reasons for cautious optimism.
But now is not the time to relish in our accomplishments (modest as they were). Let’s turn our attention to the equally pressing and urgent biodiversity crisis.
There’s a COP for this challenge too: the Convention on Biological Diversity set to take place in Kunming, China in April 2022. The headline goal here is “30 x 30” — aiming high to protect 30% of our planet's lands and oceans by 2030 (vs current protection levels at about 14% and 7%, respectively).
Success will not be easy, but we know what we need to do.
Now let's talk about the money.
Take it from me, having served as CEO of The Nature Conservancy for 11 years: protecting nature is a very capital intensive endeavor. There are never enough dollars – whether from government grants or philanthropic donations – to do everything we need to do. If we’re going to protect a full 30% of the planet, we’ll need to be very strategic in how we deploy the capital we have.
We’ll also need to ramp up our understanding of which conservation strategies work best and why.
How do we do this?
One move I recommend: ask for help from the private sector’s best deal-makers and financial engineers. These pros are great at creatively structuring deals. They do this every day. Let's get them to also structure deals on behalf of Mother Nature too.
Two very good things will follow:
More capital and lower cost capital for conservation
A big ramp up in metrics, accountability, and finding out what works and what doesn't
Memory Lane
Right after I joined The Nature Conservancy in mid-2008, we closed on a huge and tremendous acquisition of precious forests in Montana. The purchase price was a whopping $500 million. NGOs don’t often close half-billion dollar sized deals on their own balance sheets. That was a very big lift even for mighty TNC.
We wanted to do more deals just like it. We saw many opportunities to protect precious ecosystems at scale. We seemed to be the only conservation buyer for these mega deals.
How could we do more? It takes a long time to raise philanthropic capital. We wanted to move quickly.
“Wait,” I thought. “I used to lead the corporate finance department at Goldman Sachs. Why don’t we try raising money the same way GS did for clients?“
Fast forward a few months. . . a few generous individual donors and JPMorgan backed us with significant philanthropic support for capacity building. We recruited some “bankers-for-nature” and formed NatureVest — our in-house deal shop. Thanks to these new team members, some other very entrepreneurial and creative colleagues, and – importantly – some smart collaborations with private sector players, we started doing conservation in a financially more powerful way.
First, we stretched our limited philanthropic dollars very far. We used the Finance 101 playbook. For every dollar of precious donor-supplied capital — think of those philanthropic dollars as our equity capital — we’d lever up with additional and very low-cost investor-provided debt capital. Usually, we obtained this additional funding at terms much below the market rate.
Second, we took measurement, reporting, and accountability to the next level. When we pitched debt capital providers on our deals, we had to show them detailed projections of cash flow and conservation outcomes — just like bankers would do on private market fundraisings. Our investors expected us to report back to them at regular intervals on how we were doing against our original plans. This meant we had to track our efforts and disclose outcomes in a rigorous way that nonprofits (including TNC) usually didn’t do.
As the boss, I loved this. By measuring outcomes against the plan, we had concrete evidence of what was working, what wasn't, and where we were behind or ahead. We were able to refine our conservation strategies with this information as we moved forward. This may sound obvious but such practices are not the norm with non profits. Such knowledge unlocks a lot of opportunity.
Plus, since we’d be reporting so clearly on actual results, we could dispense with the exaggerated claims that sometimes weaken NGO marketing.
What did these financial deals for nature look like?
Here are some of my favorite deals from my time at TNC. Note that private sector partners, impact capital investors, and flexible donors helped in each case.
A leveraged buyout of nature to protect precious forestland. In 2015 TNC purchased 165,000 acres of precious land in Washington’s Cascade Mountains and Montana’s Blackfoot River Valley for $134 million with only 5% of the capital provided by donors. The rest of the purchase price – a full 95% – was very low-cost debt. That’s stretching philanthropic dollars very far! Our partners at JPMorgan were great advisors.
Health insurance for coral reefs to repair damage from extreme weather and storms. SwissRe, marine scientists, and TNC dealmakers together with the government and the tourism business worked hard for this big win.
Debt-for-nature-swaps to fund huge marine conservation projects like this one in the Seychelles. Again, donor dollars are stretched very far through both deal structure and deal-making (i.e., buying back sovereign debt at big discounts). TNC recently announced another one of these spectacular deals – this time for Belize. These transactions are not easy, but they are a powerful way to scale marine conservation.
Water investment funds to pay for ongoing restoration and protection of watersheds. In these deals, ecosystem service beneficiaries (for example, beverage companies who need ample clean water) are persuaded that paying up to protect nature will pay off for them by ensuring a high quality supply of water.
A $1 billion buy-out fund co-led by PE firm RRG and TNC to protect water in the arid west. Why not use the play that's making fortunes for Wall Street, but this time with nature as a full co-beneficiary?
Impact investors provide all of the capital (zero philanthropy) to pay for upgrades of nature in Washington, DC to address excess water and also bring some much-needed nature to the inner city in my hometown. Environmental/Impact investment bank Encourage Capital was a savvy partner with us.
Cash flow from sustainable timber, carbon capture, and recreational leases allow for $130 million of investor capital to buy 253,000 working forestland in Appalachia.
A tech accelerator focused on nature-based startups aiming at both financial and conservation outcomes (with ace partner Techstars).
Of course, TNC wasn't the only NGO doing deals like this. Here are some noteworthy projects from other leading conservation organizations:
Apple, Conservation International and my former firm, Goldman Sachs, recently announced their Restore Fund to make investments in forestry projects with the goal of both removing carbon and generating attractive investment returns. The team looks great – cross-sector collaboration (i.e., tech people, bankers, conservationists) like this usually produces good new ideas. I look forward to seeing how the fund performs and expect positive outcomes.
WWF, the Brazilian government, various multilateral banks and savvy philanthropists teamed up on this $215 million bridge loan to protect 150 million acres of the Brazilian Amazon Rainforest. Wins like this are just what we need for 30x30. (This good case study shows how this deal structure was used earlier very successfully by TNC and superb partners to protect 1.3 million hectares of terrestrial habitat and 1 million of marine habitat in Costa Rica). We need more deals like these.
Rare led an ambitious and bold impact investment fund to support small scale fisheries in Southeast Asia.
All of these creative deals do two big things:
They stretch financial resources – allowing more protection of nature per dollar.
They bolster accountability, measurement, and transparency since reporting against milestones is mandatory.
What’s holding us back?
Financial deal-making for nature is not easy. Why?
Transactions costs are high
Widely accepted standards for measuring impact are lacking
Many projects are very speculative
Cash flows are not always available
Beneficiaries of “green infrastructure” are often unwilling to pay for the ecosystem services they receive
Nature is inherently dynamic and doesn't always behave as predicted.
But – as the deals noted above show – such challenges can be overcome.
My list above probably omits some other great, more recent examples of impressive deals for nature. Readers: what great innovative deal-making for nature do you see? Please send in summaries of the deals you admire most. Likewise, what other deal structures and strategies should we borrow from the for-profit sector?
To Do list:
Conservation NGOs: You’re the leaders for nature that we are all counting on. You have the expertise and experience to design successful conservation programs. You have the science to identify the highest priorities for protection, as well as the boots on the ground and local relationships to ensure excellent execution. But you’re not bankers. Reach out to financial players for help. See if your top projects can be organized in ways that will allow you to get more done.
Philanthropists: To come anywhere close to achieving 30 x 30, we need your continued support. But please don’t just make donations for big projects. Make gifts to pay for deal-making teams too. Building deal-structuring capacity will accelerate progress more than anything else you do.
Impact Investors: Thanks for stepping up in recent years. You’re providing the additional capital which allows conservation orgs to be more ambitious than ever before. Speak up and let the conservation world know what kind of deals and structures will allow you to put even more capital to work.
Financial Orgs: Most of you publicly aspire to be environmental leaders. One good way to do this – encourage your savviest and most creative dealmakers to roll up their sleeves and work with conservation organizations. Study the JP Morgan-TNC example. Lending your pros to conservation initiatives can be a win-win: they’ll help save the planet, which is good for your climate commitments, and it will also sharpen your team’s creative structuring skills in the process.
Protecting one-third of the planet is a very big lift. To pull this off, all resources – including capital – need to be optimally deployed. By teaming up, conservation NGOs, philanthropists, impact investors, and financial deal-makers can increase the odds for success.
The Index
“An ingenious proposal for scaling up marine protection”
My friends at TED produced this great video explaining exactly how debt-for-nature swaps work. (See: innovative finance is not as complicated as bankers would like you to think).
“The places we can’t afford to lose”
Conservation International lays out where biodiversity protection and carbon sequestration go hand-in-hand. Smart way to prioritize biodiversity investment opportunities.
“Nature-based solution for climate resilience”
Another win-win approach to biodiversity – protect nature while also enhancing climate resilience.
Jonas Tobiassen is the great young environmentalist behind the Climate Finance Podcast, which I highly recommend to everyone interested in financial innovation for nature. In this episode, Jonas and I discuss how to accelerate environmental progress with smart deal-making (as well as other Instigator topics).
One Last Thing
Speaking of biodiversity conservation, I’m proud to be on the team that announced an important new initiative last week — the Society for the Protection of Underground Networks. SPUN will map the vast networks of underground fungi, aka the “circulatory system of the planet,” in an attempt to protect them from damage, improve their ability to absorb and store carbon dioxide, and achieve a number of other very positive outcomes. I hugely admire all of the heroes who have led the movement to achieve biodiversity conservation on land and in our oceans over the years. It will be exciting now to see the same happen underground as SPUN and other initiatives tackle this challenge.
Onward,
