Impact investing: Environment / Water and agriculture

I'm attending an International Impact Investing Summit in New York and will be attaching my raw notes from the conference. here are the notes from the 9:45 a.m. panel titled "Impact Theme: Environment -- Water and Agriculture."

Moderator: Bruce M. Khan, PhD: Director, Senior Investment Analyst, DB Climate Change Advisors
Michael Jenkins, President & CEO, Forest Trends
Ion Yadigaroglu, Co-Founder, Capricon Investment Gorup LLC
Paul J. Young, Managing Member, Conservation Forestry LLC

Michael Jenkins: I'm on the bottom side of the chain that is reducing risk to other investors. I run a nonprofit organization that is an incubator of environmental impact products. We focus on climate change, loss of biological diversity and also the loss of our water and soil resources. We take three different approaches to this:

(1) market information, market intelligence about these. They're all emerging markets. This is carbon, water quality, water payments. In these early emerging stages, information is scant. People don't know how you measure the asset, how you work with that kind of asset. We do state-of reports so that people can find reliable information around these projects.

The ecosystem marketplace was intended to become the Bloomberg of environmental markets, the foundation for these markets to grow and scale up.

(2) How are we measuring, when we talk about something like diversity? Working with any of the sectors that have any impact on natural resources, many of the companies are waking up and realizing that not only do they have a carbon problem, they have a biodiversity impact, but they have no idea how to measure it. We've been working with a wide array of businesses and NGOs to develop standards that people can use.

(3) Projects that we work on. Not only do we need good, reliable information, standards and metrics, but we also need demonstrations of how this works. Example: In the water space, our office is in Washington DC. We sit near Chesapeake Bay, an estuary that has gotten billions in investment to try to clean up nitrogen in the bay, which is killing freshwater sources and all of the businesses around it. Public financing has produced no results. We are working to find out if we can bring marketlike instruments to bring in more performance-based ways of cleaning up the Chesapeake Bay. We bring in colleagues from China, South Africa, Brazil. Another example: We have an African climate facility. How do we channel planet finance to small holders in Africa: coffee and cocoa farmers who have 3-5 acres, so that we can have more sustainable and energy-smart agriculture going on? The idea is to create a large-scale aggregator. The idea is to find ways that we can get some of this planet finance down to small farmers so they can improve their practices. Another project is with indigenous people in the Brazilian Amazon. They have a 50-year development plan that they have put together. Part of that is to attract some donors and private-sector buyers for some of the carbon credits that they will accrue by putting in an environmental program while surrounded by cattle ranchers and soybean growers. There are 8 million tons of greenhouse gas emissions that will not be emitted into the atmosphere if they are successful. There is no cookie-cutter approach. When you work with an indigenous community, their process of consultation is very different. They don't sit around in ties at conferences. On Friday I'm going to Cancun, where we're going to launch the sustainable climate fund. We have term sheets, everything you would need that will be interesting to an investor. We did an analysis with the Surui (sp?) of what's going to happen with their carbon credits. That applies to all of the indigenous communities of the Amazon. The indigenous communities of the Amazon own around 40% of the Amazon basin. If we can get financing to those communities to support their work in preserving the forests, there is potential substantial impact.

We want to be your pipeline. We want to develop the projects so you can invest in them.

Paul Young: We are a private equity fund. We raise money from sources such as public pension funds. Our goal is to merge private equity capital with conservation capital from NGOs, groups such as the Nature Conservancy, government agencies, to buy large pieces of land for conservation purposes. We've been able to raise $600 million toward this endeavor. I'll approach this from what might be perceived as more of a cold business perspective and show how this does allow you to do the direct result of the social impact you're trying to have.

One thing important to us is that the business model had to work, and we had to offer people a market rate of land for investing in timberland. If we were not going to do that, we were not going to raise the amount of money that we have. We met recently with an organization whose single goal was forest conservation. When we got through to the truth of why, their answer flat out was that they were going to offer a higher return. … As a result of what we've done, we have about 800,000 acres of timber land in the United States put in protection in perpetuity. Within that framework is about XX miles of streams and rivers that have been protected, about 80 lakes, … At the same time, our investors are getting a market rate of return for timberland management. During the current recession, our funds are still maintaining a 5% rate of return and outperforming the market.

"Riparian zone": the interface between land and a river or stream.

Generally the conservation was slightly a lesser value. The neat thing of what we did is that we allowed investors, such as a public pension fund, to invest in these spaces. Their goal, their social responsibility, is to earn a return for their retirees. They're not going to invest with a group and have to turn and tell their retirees, "Look, I know you don't have enough money for your retirement now, but look at the great things we did with your money." Because we had a model that provided sound business as well as social impact, they were able to invest with us.

We invested in 69,000 acres of timberland in the state of Wisconsin in 2006. At the time, an acre of timberland was trading at 1,000-2,000/acre, while the timber value of that was X. It was in a bubble like anything else. Other managers would buy that and hope to get additional value from something other than the timber. We partnered with the state of Wisconsin and the Nature Conservacy. They bought out the development value, and we bought the timber value and managed it under a sustainability regime. The timber value has fallen off now. We we able to invest at this for the timber value because we were willing to accept an easement. The value on that investment has therefore held up very well. Other timber funds have lost that.

It needs a sound rule of law that supports what we're doing. We're working forest easements. There is common law that supports that in the United States, but if I go to a third world country, there is no infrastructure and law that supports that, so there is nothing really legally that protects that. Even if we put it in, in a few years it may not be there.

We can get capital from the market because we can show in excruciating detail why we'll perform at at least the market rate of return. However, we're limited in our ability to take this model to another part of the world such as Ecuador or Costa Rica. There's no easement law that we can use there. What's constraining our model is that there's not enough projects. There is some forest land that there's no interest from conservation groups at this stage to protect.

6 million acres was sold in the United States, of which we took 200,000. We're a niche. We're a very large niche, but we're still a niche within the wider field of timberland investing in the United States. We could be a very large model internationally, but we have to look at problems with rule of law issues.

Ion Yadigaroglu
We're affiliated with the Skoll Foundation.

We're not known for being conventional in our investments. One investment in particular that I like to talk about. We took it upon ourselves to build a showcase of a sustainable farm in sub-Saharan East Africa, an area which is fundamentally noncompetitive in agriculture. We said, "Look, let's try to find a way to do it anyway." We have been the bulk of the investment in that project up until 2-3 months ago when Norfund decided to become our capital partner. The criteria are there: The intent is there to become a showcase of environmental farming. It is by the way a hybrid scheme that incorporates large-scale commercial farming but also what we hope will be an extensive network of complementary smallholders.

In some ways it's a very sobering example. My firm has no interest in bad investments. We only want to make good investments. But we have been open-minded about making good investments that are very bad career choices. Why are people making certain decisions? We always talk about the theory of what's a good return on investment. I want Paul's job. It's a nice, crisp model. …

The reason we're able to do this is that we're very successful in what we do, so we can hide it. If had to report this by itself to the Skoll Foundation, we would be in big trouble. It's a greenfield agricultural project, and people tell you that can't be done. It's in Africa, which is far outside the risk spectrum for most people. Besides a fundamental issue that you're trying to make a viable business in a sector where today it's uncompetitive. If you succeed, you look really smart and everyone says it's obvious, but most of the time you don't, and then you look really, really dumb. This sort of thing can only really be done if you're an angel and doing it yourself, or it's buried inside a very successful, liquid portfolio.

I was the sponsor of the project. There was no interest from the Skoll Foundation. The motivation to do this did not come from our investors. It came from me. … I honestly think it's a very good investment. It takes a very long time. It's a lonely investment, one easy to criticize. It's almost because of that that I think it's a good investment. The reason sub-Saharan Africa is competitive is that no one has put in the tools to make it work. You have to have a lot of stamina to put in the work to get there. I thought there was a small chance that we could get through that. I was willing to take that risk because we have enough success in other areas that we could afford it. It was a good fit for us because of unique reasons, which I don't think are replicable.

Bruce M. Khan: How do you measure the social return on investment?

Paul Young: We've done a lot of work with the Nature Conservancy on measurement. A lot of smart people are working on this. We've dedicated resources in our own firm and still have yet to come up with something that is strong and a viable ROR reporting tool. The reason for this is the long timeframe that it takes to perform something like this. We can report that X tons of carbon didn't go into the air, but although we have big impact on carbon, we don't spend time looking at the carbon benefits. It's a very long-term process, so measuring impacts is difficult.

Michael Jenkins: We in the conservation community have been criticized for caring about the beasts and trees but not about the people. Hopefully we see the beginning of an evolving shift in the environmental community that takes on some of these issues. You should look at the tools that help you understand what your impacts are. We have developed a set of tools for looking at the impact. The CCBA. Commmunity and Conservation Biodiversity Assessment. The problem is, it's only a design tool, so no one has said, how do you go back and look at the impact of those. It's really an emerging field. There are huge transaction costs. If you did this for smallholders, you'd never do any investments, because it's too expensive. To a group like this and to folks that would like to be impact investors, you don't have to make it up every time you do it. You should be able to say, "Yes, this is sustainable forestry," and not have to figure out every time what "sustainable" is.

Ion Yadigaroglu
By definition agriculture is a complex combination of issues in terms of impacts. We are the largest user of trucks in Tanzania. We deal with those issues in our own microcosm. We are very quantitative people, and we try to get a lot of people to look at what we're doing and help us make better compromises. We don't have the luxury of being undisciplined about these things. There's enough money and interest that it has to be very professional and very intense.

Ion did a fascinating interview with Global Impact Investing Network.

I'm from an organization in Germany. We have been doing projects in Africa, but good projects are really hard to come by, especially in Africa. What's your secret?

You've made the assumption, first of all, that this is a good agricultural project.

The simple thing was not going to work. At every level you're noncompetitive if you're in this part of the world. Lack of training, corruption. Of the biblical plagues, we've had most of them: locusts, flooding, malaria, I forget what else. It's not that we're fools. We have to look at, "What's a reasonable proposition?"

We focused on a local staple that is consumed there but not elsewhere and is therefore disconnected from global competition. We focused on the fact that they eat a kind of rice that is not consumed elsewhere. Honestly, unless you're willing to

If you do things that are different enough, that look unwise, but if it's important enough and in the end you end up with something that you own that's unique. I wouldn't say this is the best case of that. This won't every be the best investments that we've made. We wanted to have a story in Africa. We wanted to do it for brand identity, personal reasons. There was a real plan behind it. I'm hoping that 10 years from now you'll see a very valuable company there, and we'll look like heroes. I'm not trying to be self-deprecating. I'm trying to be real.

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