Note: This article covers an event hosted by Network. Since the event was held using Chatham House Rules, all quotes in this article are used without attribution.
The Conservation Finance Practitioner (CFP) Roundtable gathered for its third time this year for two days in Washington, DC on Oct. 13-14. The event focused on four topics: the role of government in the creation of well-conceived policies and incentives, the need to increase collaboration between the private and public sectors, the conditions that are necessary to form and scale up conservation markets, and the current state of the soil carbon market.
More than 70 experts and leaders participated in the event, convened by the Conservation Finance Network in partnership with the White House Council on Environmental Quality at the Eisenhower Executive Office Building. Attendees represented nonprofit organizations, federal agencies, philanthropic foundations, academic institutions, and impact-investing firms.
Participants shared their experiences about the development of return-seeking conservation projects in the United States. The meeting convened a number of Natural Resources Conservation Service fiscal year 2016 Conservation Innovation Grant (CIG) recipients while introducing new recipients from that year’s cohort. These projects aim to advance the contribution of private capital to conservation outcomes related to sustainable agriculture, timber management, water quality, and forest and soil carbon.
The CFP Roundtable is an initiative enabled by a CIG award granted to Conservation Finance Network.
At the end of the event, Leigh Whelpton, program director of the Conservation Finance Network, led a discussion of four key takeaways that describe the current state of the field. This discussion provided a coherent agenda for future Roundtable efforts. It provided insight on how to encourage expansion and replication of investments in conservation.
Niche and Boutique Strategies
While the goal is to mainstream effective strategies, the meeting also yielded an interesting insight about the role of boutique or specialized business models.
Currently, the mainstream investment market is seeking well-established conservation projects that are at scale or can be scaled with attractive financial returns. However, there may be a market for niche conservation projects.
These tailored conservation projects strengthen and diversify the conservation finance field by creating new, local markets that preserve cultural traditions and promote social wellbeing.
Opening the market to diverse projects represents a unique opportunity for the impact investing community to expand more offerings that cater to different interests and preferences of funders or investors.
Cohesive Policy and Agency Coordination
The lack of a coordinated and cohesive policy around conservation results in inconsistent protocols and regulations across agencies and sectors. Experts and practitioners expressed the need to “talk the same language” and start moving things in the same direction.
“Currently, the United States Department of Agriculture (USDA) and the United States Environmental Protection Agency (EPA) measure things and purchase outcomes differently,” a participant said.
“Coordination and common protocols between these two agencies would have a massive effect on solving one of our biggest problems.”
Organizational and human circumstances were also identified as contributors to the problem. Participants agreed that inconsistency and separation are magnified by the complexity of the federal government, the number of agencies, and agencies’ inclinations toward territorial behavior.
Stakeholders need to understand the overall conservation landscape better to move policy guidelines forward in a strategic and organized way.
“We have to be smarter on the policy side to promote investments in the field,” a participant said.
Common Standards and Metrics
Setting common standards and metrics would bring significant benefits to the field. According to participants, there is a need to shift from the status quo, which is characterized by “anecdotal stories” and diffused metrics. These lead to confusion and uncertainty about what to measure.
Among the many benefits that common standards and metrics would provide, there are three that stand out.
First, the identification and use of common standards and metrics is key to benchmarking projects’ performance against one another. This sets a foundation for improving communication and understanding among stakeholders.
Second, well-defined standards and metrics would make results tangible. They would facilitate accountability and reporting. For instance, investors would be able to have a clearer understanding of how objectives are to be achieved. Consequently, goals could be tracked from a holistic perspective that includes financial, environmental and social metrics.
Third, the establishment of a comparison basis between projects would enhance competition within the field, promote efficiency gains, and attract more public and private spending.
Risk-Mitigation Tools and Strategies
The risk-return relationship of conservation projects has to be more attractive for investors to increase the flow of private capital into the environmental-services markets. Experts claim that even though the pipeline of projects has significantly increased, investors are holding back because the expected returns are not worth the risk.
To tackle this problem effectively, both sides of the equation have to be considered: risk-mitigation and financial returns.
From a risk-mitigation perspective, experts reiterated the importance of fostering a robust environment characterized by consistent protocols and regulations, and common standards and metrics. These “stamps of approval” would infuse the market and projects with transparency and accountability – two fundamental risk-related concepts that investors look for as they deploy their capital.
On the other side, there is a need to continue innovating within the financial field. The development of new and easily replicable financial instruments and business models will yield higher returns, and therefore, attract more private capital.
The DC Water Environmental Impact Bond, which was sold in a private placement to Goldman Sachs and Calvert Foundation to invest in green infrastructure, was discussed as an example to illustrate how innovation can spur a good risk-return relationship. The $25 million investment grade bond – AAA – which tied safer financial returns to environmental outcomes, was supported and certified by expert third-party hydrologists. In words of an investor, “the bond was a success and an easy choice because of its rating, scientific backing, and transparent issuance process.”
The Conservation Finance Network will launch a new report on a framework for the development of conservation finance and environmental markets in early 2017.
The CFP Roundtable’s next meeting will be held in April 2017.