Ecological restoration investment: an introduction – update

Ways to get access to this sub-sector of agri investment are growing as new regulations and methods to conserve natural habitats come into force in the US.

**Adds comment and information from New Forests.

Ecological restoration investment started out with wetland mitigation banking – the practice of preserving, enhancing, restoring or creating wetlands, streams or other wildlife habitats to compensate for wetland destruction from building works and other development. It is regulated under the US federal government’s Clean Water Act.

Mitigation credits are issued in return for the restoration work and project developers can purchase the credits to offset the impact of their work on natural resources.

There are currently 1,900 mitigation banks at various stages of approval and the potential for further scale is big.

“Every motorway and large scale development, shopping centre and mall needs wetland mitigation credits,” said Dave Chen, principal at real assets platform Equilibrium Capital. “The government is one of the biggest buyers of credits. A wetland is so important because its waterways are the liver and kidney of nature.”

There are a few investment firms that have been involved in wetland mitigation banking since the beginning, including Ecosystem Investment Partners (EIP) which has raised two funds totalling $207 million including commitments from pension funds such as the New Mexico Educational Retirement Board.

The sector is essentially a real asset play for investors because there is ownership of an underlying land-based asset although the source of returns is different to other land investments, according to Adam Davis, partner at EIP.

“The difference with other land plays is that we drive revenue and returns through the sale of credits that are recognised as a legitimate way to achieve compliance by US laws,” said Davis.

Other investment firms active in the growing market include Timbervest, the US timberland manager that has raised about $300 million across its conservation fund series Timbervest Crossover Partners; it is currently on the road with its fourth vehicle for $200 million.

Timbervest Crossover Partners IV is not only targeting wetland mitigation banks; it will include other types of ecological restoration including endangered species conservation under the Endangered Species Act (known as conservation banking), natural resources damage compensation under the Oil Pollution Act, fishery banking and water quality.

And Timbervest estimates that mitigation and conservation banking alone is a $3 billion a year industry. Other investment firms active in the growing investment sector include New Forests, the Australian timberland manager, which has the $50 million Eco Products Fund currently consisting of five mitigation banks.

There are also other initiatives including water temperature regulations – relating to industry wastewater heating up local waterways – and soil carbon levels, which are at varying degrees of maturity, according to Equilibrium’s Chen.

“The water temperature credits market has the potential to create and trade $5 billion of credits,” he told Agri Investor. “Non-governmental organisations are developing some of the first sets of credits now and that’s where it should be. These first pilot projects are critical in that they prove out the market, and they develop the important market tools needed for scale, such as price discovery and risk pricing that sets the base for secondary transactions [and private sector involvement].”

Equilibrium’s platform company Bio-Logical Capital also offers investors ways to get access to the growing sector, which the firm calls stewardship development.

In order to recognise this growing ecological restoration sector, EIP recently coined the term Land-based Environmental Offsets (LEO) to classify the sphere of regulations and investment opportunities.

“Our thinking about this market has matured since we started out in 2007 when we originally used the term ‘payments for ecosystem services’, and while that is still factually accurate and describes the creation of economic value through environmental improvements, we felt that the phrase ‘payments for ecosystem services’ was a bit too broad,” he told Agri Investor.

Diversifying across the different sub-sectors within ecological restoration investment is essential, argues David Brand, chief executive of New Forests. Investors that haven’t done so might run into difficulty if certain sectors, such as oil and gas, slow down their development, he argued.

While each sub-sector within the ecological restoration investment market involves very different systems and methods, the theory is the same and can be related back to how mitigation banking works, according to EIP’s Davis.

There are three fundamental components to a restoration project: science, finance and a legal requirement.

For the science part, each project has ecological success criteria that provide measures of restoration success through keystone indicators including the absence or presence of certain wildlife, the movement of waterways, the existence of certain plants and other ecological functions. These criteria are set by the project managers and reviewed by government bodies including the Army Corps of Engineers, the US Fish and Wildlife Service and the Environmental Protection Agency and put into a contract. This process has been refined over several years and includes timelines for review, according to Davis.

Legal assurance that the restoration can never be undone is also essential. “You have to know with certainty that the land can never be developed and the restoration undone,” said Davis.

Finally, financial assurance must be given that the buyer will meet the cost of continued monitoring and maintenance over the long term, even after divestment. While the typical active phase of a mitigation bank, during which credits are sold, is 12 years, the land is permanently protected from future development.

When looking for a site, investment managers will not just look for appropriate ecological restoration sites, but also for credit demand in that area.

“There is steady and growing demand for mitigation related both to the pace of development in the US and the efficiency of buying mitigation credits instead of doing the mitigation yourself,” said Davis.

Working with the public sector is essential at various stages in the development of each credit market, as Chen pointed out. But there are also examples of private investment firms collaborating with non-profit organisations on individual projects.

In one project, non-profit The Conservation Fund identified land in northern Minnesota, home to various species of bird but unprotected, that needed restoration. In order to acquire it the Fund bought timberlands from forestry company Potlatch, and exchanged them for the lands in question held by Minnesota School Trust and St Louis County. The Conservation Fund then sold them to EIP for restoration. The land area totaled 32,000 acres.

“As extraordinary as this project is for conservation, equally impressive is that the Fund, and our partners, found a creative solution for saving this imperiled landscape without the use of public funds,” reads a post on the Conservation Fund’s website.

“This project highlighted the ability of private capital to go to work for the public benefit in a profitable way,” added Davis.

Diversification is key for investors