Dramatic increases in investment in conservation over the last decade are the focus of a new report authored by Forest Trends’ Ecosystem Marketplace, “State of Private Investment in Conservation 2016.” The report sheds light on the many dimensions that drove growth between 2004 and 2015.
The report aims to aggregate information about conservation investments in order to paint a comprehensive picture of work taking place across the emerging field, according to the report’s author, Kelley Hamrick, senior associate at Forest Trends.
In doing so, Hamrick said, the report will hopefully “provide validity to new markets and show that there are investors making these investments globally.” The ultimate goal “is to spur investment.”
The recent report is a follow-up to the 2014 publication “Investing in Conservation: A Landscape Assessment of an Emerging Market.” The first report was coauthored by NatureVest and EKO Asset Management Partners. The 2014 report was the first-ever comprehensive survey of investment in conservation.
Like its predecessor, the 2017 report is based on a survey of private investors – as well as select interviews and case studies. Both reports focus on three areas of conservation investment. These are sustainable food and fiber production, habitat conservation, and water quality and quantity protection.
Report findings are intended to benefit a variety of audiences. These include project developers, institutional investors, high-net-worth individuals and families, fund managers, and philanthropic foundations.
Funding for the 2017 publication was provided by JPMorgan Chase & Co., Gordon and Betty Moore Foundation, and The David and Lucile Packard Foundation. In addition to these funders, representatives from NatureVest, Encourage Capital, Credit Suisse, and the Charles H. Dyson School of Applied Economics and Management participated in an advisory committee for the project.
Expanding the Market
The report tracked $8.2 billion in committed capital going to conservation between 2004 and 2015, a significant increase above the $2.8 billion tracked in the 2014 report.
Results indicate that the pace of investment in conservation has accelerated. Between 2009 and 2013, investors committed an average $0.8 billion of capital per year. In 2014 and 2015, this average doubled, with investors committing an average of $1.6 billion each year.
Report findings show that 66 percent of the $8.2 billion of committed capital is attributable to the top 10 investors participating in this project. Five of them invested more than $400 million between 2009 and 2015. This trend was especially significant over the last two years; top investors accounted for 80 percent of committed capital in 2014 and 86 percent in 2015. Seven of the 10 top investors were for-profit entities.
80 percent of the committed capital ($6.5 billion) was applied to sustainable food and fiber production. This included sustainable forestry, agriculture and fisheries.
This dwarfed investment in habitat conservation ($1.3 billion) and water quality/quantity ($0.4 billion). Investments in habitat conservation include land ownership and easements, carbon offset investments, and mitigation banking. Water quality and quantity includes watershed protection, water infrastructure, stormwater management, and water credits trading.
The report shows that high levels of investment in sustainable food and fiber were primarily driven by investments in forestry (55 percent) and agriculture (40 percent). And yet the report likely doesn’t capture all of the work undertaken in these areas. “There’s a lot of money going into forestry, but there’s likely a lot that we don’t capture because [this work is] more mainstream” and therefore not always thought of as an investment in conservation, Hamrick said.
Investment in habitat conservation has trended upwards since 2009, while investment in water-related projects has varied year to year. Hamrick noted that “water quality and quantity can be really difficult to capture since projects involving water often span many outcomes, in some cases with water as a secondary impact.” In addition, she noted that the language used in Forest Trends’ survey might not have captured the right terminology for its questions.
While the capital committed to conservation has grown significantly, Forest Trends also found that $3.1 billion of the total $8.2 billion committed has not yet been invested. Hamrick said it’s not new to see more capital committed to conservation than investment-ready projects. But still, the scale of undeployed capital surprised her. Study participants identified the lack of attractive risk/return profiles as the biggest disincentive to investment. In addition, investors cited the small transaction sizes and lack of management track records as causes for hesitation.
Despite the fact that Forest Trends only tracked capital from six public organizations, findings confirm public investment in conservation still dwarfs private. Public organizations include all levels of government, development finance institutions, and bilateral and multilateral organizations.
However, the focus of public investment is different. Almost 70 percent of the $31.7 billion in public funding tracked between 2009 and 2015 went to water projects. Most of these projects focused on sewer treatment and wastewater infrastructure.
Defining the Scope
For Hamrick, the most difficult component of this research was deciding what types of projects to include. The report defines investments in conservation as “investments intended to return principal or generate profit while also resulting in a positive impact on natural resources and ecosystems.” Investors must be motivated by conservation impacts. The impacts cannot be the byproducts of financially-focused investments.
Therefore, no data have been collected on other projects that have beneficial environmental results but are primarily financially driven. These projects might be a productive topic for future research by Forest Trends or other organizations.
Even with this definition in mind, Hamrick said decisions about whether to include certain investments could be difficult. She provided two examples of investments in clean cookstoves that were also mentioned in the report. One project was included in the study because it had a direct, intended impact on deforestation. The other, which indirectly helped to reduce demand for trees, was not.
“Investments in the middle of the supply chain or without direct impacts were not counted,” Hamrick said.
Forest Trends double-checked information reported by study participants when it was feasible to do so. However, given that the survey findings were self-reported, Hamrick said that “sometimes if someone says it’s a direct impact, you just have to take them at their word.”
Developing a Sample
The findings are based on survey responses from 128 investors. This is almost double the number of participants included in the 2014 study. While survey participants spanned a range of investor types and locations, there were notable trends among the respondents in the final sample.
Participants included banks, companies, funds, families, foundations, and NGOs. Fund managers made up the largest bucket of respondents (35 percent), followed by corporations (25 percent).
Hamrick said Forest Trends “reached out to everyone along the supply chain.” This ensured a broad range of responses. But this also meant that $181.3 million had to be removed from the study so as not to be double-counted.
Given the 2014 report’s focus on the United States, Forest Trends made a concerted effort to reach out to investors from Europe, Latin America, Africa and Asia for the follow-up. Results were mixed. 38 percent of survey respondents hailed from outside the United States, but 60 percent of that group is based in the European Union.
Hamrick said the tilt towards North American and European investors could be a result of the survey only being in English. In addition, she said, “Many of the actors we were targeting are based in investment hubs in New York and London. While maybe we weren’t reaching everyone active in the space, there also aren’t as many active investors elsewhere.” Despite this difference, Forest Trends tracked four times more investment in conservation in Latin America in this report than it did in the 2014 report.
Looking to the Future
Hamrick said she hopes the report’s findings build investors’ awareness and confidence and drive additional future investment. “A lot of managers are on their third or fourth fund and starting to attract institutional investor interest. I hope this report gets the information out there that this is a viable investor option.”
At this point it is unclear whether a second follow-up report will be undertaken. If it is, authors may pursue five areas of further inquiry that have already been identified, Hamrick said. These include blended finance, public finance, and supply-chain commitments. Conservation investments outside of the survey scope and investments in emerging economies would also be included.
While Hamrick said she would appreciate further research in all of these areas, it’s also important to ask what’s manageable to address and how best to capture that information. For example, she said, “Work in blended finance is really interesting but hard to show. That might be [a better fit] for case studies.”
Note: Conservation Finance Network has previously cross-posted articles to Ecosystem Marketplace.