Conservation Finance and Investment Part 1 - Opportunities & Obstacles

The market for both terrestrial and marine conservation finance offers participants a wide array of opportunities to generate both financial return on investment and to direct environmental and social impact in the support of vital habitats. With the exception of the marine conservation sector, these markets share a common characteristic: the generation of a tradable or transferable credit or right which produces a financial return. The sub-sectors of conservation finance include:

- Wetland mitigation banking
- Habitat and endangered species banking
- Water quality and water temperature credit transactions
- Carbon sequestration projects
- Conservation easements and Transferable Development Rights (TDR’s)
- Marine protected areas and marine conservation agreements

In my previous article I highlighted some of the innovative products and services that provide greater transparency, liquidity and standardized metrics to the ecosystem markets. They create the critical infrastructure needed for this market to scale and appeal to a much wider audience of both philanthropic and PRI and mission investor funding sources. In the first of what will be a series of writings on this topic I will start with some basic observations.

Though some of these sectors have been in existence for over twenty years, they are still not considered an investment asset class. However, as investments in ecosystem services provide opportunities for long-term financial returns coupled with social and environmental impact, a valuable public image for investors, and benefits to stakeholders, they are uniquely attractive and will become moreso with the heightening consciousness among our society of environmental issues.The group of investors which I believe will be the most receptive to these markets includes corporate and state pension funds, foundations, family offices, investment advisors and financial intermediaries, faith based organizations and private equity investors.

With the current economic crisis investors limited to traditional investment choices have become increasingly dissatisfied, and have turned towards investing in the social and environmental sectors that reflect their personal values.

Before this market can be considered for inclusion in an asset manager’s portfolio, it must still overcome various obstacles:

- Lack of standardized financial and environmental metrics
- Limited or lacking transparency in historical financial return data
- Lack of clarity with regards to transactions data and price discovery
- Fragmented and regional/localized nature of the sector
- Limited ability to more effectively monetize credits beyond the current traditional buyers
- No centralized marketplace (exchange) to efficiently facilitate transactions between buyers and sellers

In Part 2 of this series I will detail the rapid innovation currently taking place that will provide the needed infrastructure to globally scale these markets and dramatically increase the flow of capital in support of environmental conservation.

- Mike