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US states hold the key to mobilizing conservation finance

The $4.2bn deployed over two decades in the Chesapeake Bay could provide lessons for investors and policymakers as the need for a private capital injection looms large.

Ag- and timber-focused managers have always had reason to track federal legislation on climate change, infrastructure and other initiatives that have the potential to shape markets.

A report from the non-profit Environmental Policy Innovation Center – which details how $4.2 billion in private investment was spent over 20 years in support of public conservation goals in the US East Coast Chesapeake Bay region – reminds that as investors look to participate in emerging new approaches to managing environmental public goods, much of the action will flow from policy at the state and local levels.

Chesapeake Conservancy chief executive Joel Dunn told Agri Investor that recent years have seen a growing willingness among state and local lawmakers to consider partnering with private capital for environmental management and improvement efforts.

“The biggest thing is that conservationists realize public financing is just not going to be enough in the face of climate change, development pressure and biodiversity loss,” said Dunn. “We’ve done the math. We need to increase the pace of conservation.”

EPIC’s report details how investors including Ecosystem Investment Partners, KKR-backed Resource Environmental Solutions, Lyme Timber Company and others have utilized incentives like tax credits and impact bonds designed to support forestry certification, stream and wetland mitigation, and other conservation efforts at the state and local levels.

EPIC executive director Timothy Male told Agri Investor that Maryland’s counties alone have spent $2 billion over the past decade on compliance with the Federal Clean Water Act. “One state, one level of government spending $2 billion; that’s a big number,” Male said. “If you imagine there’s the same Clean Water Act across the whole country, then scale that up by 50 states and you have a really big number.”

Of course, the nature of conservation challenges and political receptiveness to investor participation in meeting them varies widely. Lawmakers in the Southeast, for example, are generally comfortable with private sector conservation, according to Male. In the Pacific Northwest, although retrofitting bridges and highway overpasses to facilitate salmon migration is potentially a $200 million-a-year investment opportunity, the private sector’s role has not been embraced.

“The policy environment is not right there, in terms of leaderships’ willingness to let intermediaries deliver and then buy what they deliver,” said Male. “I’m not saying it’s been fought, it’s just that the effort hasn’t been made by any investor willing to put a lot of capital into that approach.”

Growing interest and activity in mitigation finance and related markets suggest the years ahead will see managers engage such local resistance in a more sophisticated way. In fact, BlackRock’s Larry Fink recently highlighted cumbersome permitting processes at the state and local levels (also cited by EPIC) as important potential bottlenecks for improving overall sustainability.

While broader sentiment will inevitably be shaped by federal proposals that frame policy challenges in a global context, EPIC’s report highlights that successful strategies for private sector conservation are likely to be developed closer to the ground at the state level.