Conservation Finance and Investment Part 2 - Creation Of An Asset Class

In part 1 of this discussion I highlighted the challenges that exist within the ecosystem service markets sector which limit their consideration as an investable asset class for mainstream institutions. The following is an overview of what is being done to make the sector more accessible to the investment community.

1) The Learning Curve

Our society has embarked upon the learning curve about how the environment and finance can work together for the benefit of both, but this education process must expand before financial professionals recognize the existence of an investment opportunity in environmental conservation. The carbon markets are accelerating this trend. I like to say that carbon is the entry drug of the ecosystem markets as evidenced by the fact that as recently as three years ago very few people understood what a carbon footprint was, and now the sector is becoming widely researched by major institutional investors.

The next step in the ecosystem services education process has involved increased information and discussion regarding water and biodiversity footprints and the associated risks and opportunities for investors. Eventually, consultants, financial advisors, and investment banks will advise their clients on how best to allocate capital to the ecosystem markets in a similar fashion that they now do wih regards to carbon.

2) Metrics & Price Data

Since information regarding price history and transactions within the ecosystem services sector often remains unpublished, the general public is only able to access a limited portion of reported financial returns data. The profession of wetland and habitat banking is very competitive and information is kept closely held. While those with access to this information hold an advantage, if our society is to scale beyond a niche market, ecosystem professionals will need to disclose such data. When this information becomes more accessible, investors will have a stronger foundational basis for decision-making.

Firms like Parametrix in Portland Oregon, who do have access to this information, are creating effective metrics and research tools to help quantify investment opportunities for both specific habitats and for the analysis of environmental projects. Another organization providing comprehensive information and data, is The Ecosystem Marketplace, which has created Speciesbanking.com, an open database providing details and historical data regarding most of the wetland and habitat banking projects and credits in the US.

3) Regional and Fragmented

The ecosystem services sector is very specific to geographic regions. The credits generated by wetland and habitat projects are not easily fungible, as credit transactions are only valid within a specific geographic region or "Service Area". (Compare these to carbon credits, which are extremely fungible, since a carbon credit in China is equal to a carbon credit in Texas.) As the liquidity of eco-credits is limited to parties focused in a specific area, ecosystem market transactions can be seen as more similar to real estate investing than to a natural resource investment. (Detailed discussions of market mechanisms to navigate this obstacle will be presented in Part 3).

To begin sourcing potential transactions, organizations like Defenders of Wildlife have created databases and useful tools such as The Conservation Registry, which assist organizations that are seeking potential conservation project funding opportunities across the US.

Another valuable resource is a conservation tool created by Sustainable Solutions and The Pinchot Institute, called Land Server. Land Server helps both private landowners and environmental bankers quantify the potential ecosystem services and resulting environmental credits that might be available on a specific property. It is currently in beta test but is expected to be ready for use in a limited number of states this fall.

4) Centralized Ecosystem Marketplace

Investors, service providers, and landowners need a centralized platform or marketplace where they can meet and transact. Such a platform will bring together the myriad ecosystems services transactions into an organized framework. Currently, if an investor or developer desires to undergo a transaction he or she must first contact a habitat banker, a local Department of Fish & Wildlife Services, or an Army Corp of Engineers office. Once credits are located, the buyer must negotiate the transaction in a time consuming private bi-lateral agreement. More importantly, a transaction based on a private bi-lateral agreement is not a process that lends itself to the creation of an investable asset class.

As a solution to this problem, organizations such as the Willamette Partnership and the Bay Bank are creating regional electronic marketplaces that will serve to facilitate ecosystem credit transactions, providing much greater transparency and ease in price determination.

My company, Mission Markets Inc. is also creating a comprehensive electronic marketplace that will provide a national platform for these transactions, and act as a link to these regional exchanges. Mission Markets adds liquidity and visibility for credits and environmental projects. Our platform also serves to enhance the flow of capital to the social as well as environmental markets.

In Part 3 I will detail the necessary next steps to add liquidity, transparency, and investment appeal to this sector.

- Mike