How to make money from conservation investments

A fresh report seeks to address the ‘disconnect’ between conservation organizations and institutional investors. Its authors told us how LPs can hope to generate returns.

On the face of it, all the conditions are there for conservation investments to be a trendy phenomenon. Escalating environmental threats, including climate-related risks, demand a step-up in the way ecosystems are protected; public money alone is not enough, so private capital is solicited.

Yet the strategy remains niche. A recent survey by Ecosystem Marketplace focused on land-based investments found that just $8.2 billion have been allocated so far to conservation investments, most of which come from a clutch of DFIs.

In a report released this week, Swiss advisory Clarmondial and the World Wide Fund try to understand what has so far been keeping institutional investors at bay.

Bob l’Eponge

The first hurdle, says Clarmondial’s Kaspar Baumann, a co-author of the report, is the sheer effort and time it takes to put such investment opportunities together. “Conservation projects involve quite a lot of stakeholders on the ground. Adding that investment component is just another dimension of complexity,” he told Agri Investor.

Further complicating matters is the fact that conservation organizations and investors don’t always speak the same language, Baumann noted. “Sometimes there is a bit of a disconnect.”

Tracking IRRs

The second difficulty is more fundamental. Simply put, “there’s not always a straightforward way to make money on a conservation project,” he explains. But this is where answers are currently being crafted.

As Baumann observes, institutions can generate returns from conservation by reaping the revenue that comes out of the use of natural resources, through the harvest of agricultural produce grown on land sustainably managed or timber cut from a well-run forest, for instance. “This is produce you can sell for cash.”

In other cases, they can also receive payments from local authorities for “ecosystem services,” as he dubs it. Investors can enter contracts with municipalities, for example, that see them manage a forest that protect a village from strong rains. Such strategies, Baumann admits, are still being developed.

And other obstacles remain. Institutional investors like volume; they also get more comfortable with an asset class once a track record is built. For now, conservation has little of both.

First-loss instruments

But here again some solutions are being tested. The WWF is currently trying out a more holistic, “landscape” approach, said Baumann, that calls for a focus on region-wide schemes rather than single projects. Such strategies could help resolve the volume problem, he noted.

A number of philanthropic investors, DFIs and governments are also mulling risk mitigation methods that would see their capital bear a first tranche of risk so as to entice commercial investors. That will help, Baumann conjectures, though the paucity of performance data remains an issue.

Some trailblazers are forging on regardless. On the DFI front, the IFC is experimenting with “Forest Bonds”, and Austria’s Erste Bank has joined forces with the WWF to form a green equity fund, which invest in stocks selected for their conservation attributes.

A number of private financiers are also designing solutions that are a better fit for long-duration strategies, in the form of early-stage funds and deal platforms.

“Despite the rising popularity of impact investments, few investors are willing to accept lower financial returns in exchange for performance on impactful, nonfinancial metrics,” the report remarks. Later this month, we will look at how a handful of trailblazers are seeking to square this circle.