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April 03, 2015
Market for Conservation Investments Expected to Grow Dramatically
    by Robert Kropp

A first ever report on the practice of conservation investing, co-authored by The Nature Conservancy, anticipates that private investment will triple by 2018, from $2 billion to nearly $6 billion.


The concept of conservation investing is of fairly recent vintage; so much so, in fact, that a recently published report, Investing in Conservation, is touted by co-authors EKO Asset Management Partners and NatureVest, an investment division of The Nature Conservancy, as the first to study the practice.

What is conservation investing? According to the report, the $23 billion in assets committed to conservation investments from 2009-2013 were concentrated in three categories:
1. Water quantity and quality conservation, including investments in watershed protection, water conservation and storm water management, and trading in credits related to watershed management;
2. Sustainable food and fiber production, including investments in sustainable agriculture, timber production, aquaculture, and wild-caught fisheries, which accounts for two-thirds of all conservation investments; and
3. Habitat conservation, including investments in the protection of shorelines to reduce coastal erosion, projects to Reduce Emissions from Deforestation and Degradation (REDD+), land easements, and mitigation banking.

“This report is intended to speak to a range of audiences,” the authors state, “including institutional investors, high-net worth individuals, family offices, philanthropists, entrepreneurs, NGOs, and others seeking investment opportunities that offer both financial return and conservation impact.”

The report identifies two major sources of conservation investment capital. The lion's share of investment capital during the years captured in the report was committed by development finance institutions (DFIs); DFIs, according to the World Bank, include “not only government development banks, but also nongovernmental micro-finance organizations, that match grants to attempt to promote community development, decentralization of power, and local empowerment.” The assets committed to conservation investments by DFIs from 2009-2013 totaled $21.5 billion.

Private investors were responsible for a far smaller portion of the investment strategy, accounting for $1.9 billion during the time period. However, the report found that private investment has increased by 26% annually. “Further,” the report continues, “from 2014 through 2018, private investors expect to deploy $1.5 billion of already-raised capital and to raise and invest an additional $4.1 billion.”

“The total market is expected to increase to $37.1 billion in the next five years,” the authors state.

Ten institutions were responsible for 80% of private investment; of the ten, one is identified as a foundation while the others are for profit. While private investors project a significant increase in allocations over the next four years, “the most important condition for growth in the sector is the need for more investment opportunities that match risk-reward expectations, which won’t necessarily materialize,” the report observed. “Many of the investors interviewed for the study reiterated this point.”

Most of the allocations by DFIs address water quality and quantity conservation, while private investors focused more on sustainable food and fiber production. While investments in water remained relatively flat during the time period studied, those committed to sustainable food and fiber production increased by 41%.

Assessing the qualitative benefits of their efforts has always been important to sustainable investors, and in this regard the development of standardized assessments is still in its early stages, to an extent that several investors expressed their frustration at the “significant administrative burden of documenting impact.” One measure mentioned in the report, the Global Impact Investing Network's (GIIN) Impact Reporting and Investment Standards (IRIS), provides performance metrics that help sustainable investors track the environmental, social, and corporate governance (ESG) performance of their portfolios.

“Capital structures efficiently combining private capital with public or philanthropic funding offer strong potential for growth,” the report concludes. “A number of private investors said in interviews that governments and philanthropic institutions stepping in to provide adequate catalytic capital to entrepreneurs in the early phases of their ventures could help to increase their own (private) investments.”

 

 
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