Raising the Capital to Protect and Restore a Forest
Awareness around the concept of “green-infrastructure” is growing, which is great. But scaling nature-based solutions requires large amounts of capital — more than philanthropy or government grants can provide (the lifeblood of nonprofit organizations). So how can well-meaning environmentalists structure environmental projects in a way that attracts a lot of capital?
In my first blog, I introduced the idea of nature as an investment. So let’s apply our investing framework to a nature-based solution that’s getting a lot of press these days: restoring forests at huge scale.
It’s easy to be enthusiastic about this opportunity. Forest restoration can provide carbon capture to address climate, protect watersheds to secure fresh drinking water, and restore habitat to bolster biodiversity. But how exactly do we transform this high-level, theoretical idea into something really happening on the ground and at the large scale needed?
Can we ask environmental philanthropists to just donate the money that will allow us to purchase and restore a degraded forest? We can try — we might be able to do some nice pilot projects. But it’s unlikely to work at scale.
Can we persuade developed countries like the U.S. to pay for the ecosystem services (think carbon sequestration or biodiversity) that rainforests in developing countries can provide? We should do this, in my view. But don’t hold your breath expecting it to happen a meaningful way.
If we are really serious about accomplishing forest restoration at a transformative scale, we need business plans to do so. We need projects that generate cash flow and jobs, while also enhancing the health of forest ecosystems all the environmental benefits forests provide.
And to do this, we need a broader and more inclusive team than traditional environmentalists have assembled in the past.
First, our illustrative forest restoration project needs to be designed to see whether and how it might generate cash flows. Why? Because that’s what will allow us to raise the capital we need. Investors will provide capital up front in exchange for the prospect of earning a fair return on their capital over time. It sounds very obvious, but enviros sometimes forget: to raise investment capital up front, we need to generate cash flow over time.
“It sounds very obvious, but enviros sometimes forget: to raise investment capital up front, we need to generate cash flow over time.” — @MarkTercek
How can we generate sources of cash flow from a restored forest? Perhaps we can sell carbon offsets (for which demand is likely to soon soar) or biodiversity and water offsets. Maybe the sale of sustainable timber. Perhaps permitting and outfitting for eco-friendly recreational opportunities. This is the project team’s first job — turn a theoretical investment opportunity into a feasible project from which cash flows can be generated. And very importantly, at the same time, and with the same rigor, we need to make sure the environmental outcomes are carefully projected and likely to be realized too.
Next, assuming the models show there is a strong likelihood that the overall project can work and generate cash flow and positive environmental outcomes, actual capital needs to be raised. Real investors need to be persuaded to put up real money.
For our forest project, we might imagine government aid (say, provided by a developed country to a developing one) as the most junior risk-taking capital. Philanthropy could work here too. For traditional donors, facilitating an entire capital structure like this should be attractive, as it allows for more total capital to be raised. Next, perhaps impact capital or climate fund institutions can provide a mezzanine level of capital — and let’s hope these investors will accept a lower rate of return in exchange for specific and measurable environmental outcomes. Finally, it’s likely the senior capital can be arranged on market terms.
To make these assessments about our project, we need experts with the specific skills that will allow them to build models along these lines, manage negotiations with a diverse range of prospective investors, and crucially of course, actually close the deals. It’s not impossible, but it’s not as easy as it looks.
Assuming our team closes the deal, there is still is plenty of work to do afterwards — and it will continue over the life of the project. Someone needs to keep a close eye on our project and keep investors fully apprised on how things are going. Deals like this almost never work as planned, of course — both in terms of environmental and financial results — and that’s fine. We can learn both from what goes well and what goes poorly and adjust along the way. But the monitoring of financial and environmental outcomes must be continuous and rigorous. And those responsible for managing the project need to respond in real time and course correct as necessary.
My point is: we need the right team — a diverse group of experts with different skills and resources — to facilitate investments in nature at this scale. A number of early movers in this field deserve a lot of credit for getting things started. But it’s time now to take a close look at what works in private sector investing and to start providing the same framework for nature-based opportunities.
In my next post, I’ll offer some specific ideas on what we can borrow from the world of private sector capital markets to make all of this happen.
The above blog is the second in a series on investing in nature. It was originally published on LinkedIn. Read the first blog in this series: Nature Needs Investment Bankers (March 3, 2020)
@MarkTercek is an advisor to companies, start-ups, institutional investors and NGOs on environmental strategies, organizational management, and impact investing. He is the former CEO of The Nature Conservancy (July 2008 — June 2019) and former Partner and Managing Director for Goldman Sachs (1984–2008). He believes that business can be a force for good and strives to help organizations realize benefits for both the environment and their bottom line.
