Clarmondial recently participated in the 4th Annual Conservation Finance Conference, hosted by Credit Suisse. There was a good turnout of investment banks, advisers and other groups looking to develop new conservation investment opportunities. This event remains one of the highlights of the environmental investments calendar, and has grown steadily in terms of number and quality of speakers. There were some excellent panels such as the one on Environmental Impact Bonds. It included a presentation of the first of these structures, launched in 2016 to reduce storm water runoff and combined sewage overflows in Washington, D.C. (USA).
Several investment advisors (Athena, Caprock and Cambridge Associates) as well as investment banks (Credit Suisse, JP Morgan, Natixis, Goldman Sachs) were also present. It is deeply heartening to see these players showing interest in conservation finance. This is particularly true for the investment advisors who are willing recommend new managers and innovative products, while being accountable to clients requiring financial performance.
Clarmondial participated in a panel on how to bring conservation finance “from niche to mainstream”. To paraphrase David Chen from Equilibrium Capital, achieving this requires conservation finance to become “boring”. In other words, these investments must be wrapped into replicable, scalable, proven structures and asset classes that investors can easily categorize within their portfolios.
Based on comments made on the panels as well as in one-to-one discussions Clarmondial had with investors, it is clear that several obstacles remain, preventing mainstream players from allocating more funds to conservation-oriented investments, some of which are listed below.
Performance track record: conservation finance has seen grand announcements of new funds and commitments, but little has been reported on the performance of resulting investments. This is partly due to legal restrictions on disclosure, but even for the actual investors who have access to the underlying data it can be challenging to assess performance. Many conservation finance strategies are executed within traditional private equity structures, typically with an 8+ years lifetime, which may only allow a comprehensive performance analysis at the end of the fund life. Alternatively, investment strategies building on shorter-term assets (such as private credit) would not only allow a more rapid verification of return assumptions, but can also be designed with frequent liquidity windows allowing investors to exit if an investment strategy underperforms in financial or non-financial aspects.
Scalability: while some existing conservation finance initiatives may inspire replication, their inherent scalability remains largely untested. Adding too many “bells and whistles” (e.g. in the form of blended finance support, guarantees, junior tranches, or technical assistance pockets) can undermine the fundamental investment strategy and its ability to provide a proof of concept, ultimately distorting the market. Nevertheless, blended finance approaches effectively limit down-side risks and therefore facilitate the attraction of private sector funds to untested investment strategies.
Cost: investors in conservation finance are typically willing to accept relatively high fees, in particular when participating in a novel strategy or small projects. However, investment advisors at the Credit Suisse event also pointed out that such fees must be reduced once the product achieves a certain volume. Maintaining this “impact premium” will deter many mainstream investors from making allocations to conservation finance. To achieve scale, investment vehicles should be designed with a fee structure that ensures fair remuneration of managers while also letting investors share in the benefits of economies of scale. If necessary, concessional finance can subsidize operational expenses for novel initiatives, but managers must have “skin in the game”, total expense ratios must be transparent and products must break even once they reach a certain scale.
Using science-based approaches: there was relatively little discussion on the environmental impact of the projects portrayed at the conference. Though this issue was arguably not pertinent for this event, we generally observe a lack of appreciation of much of the science in the industry when it comes to evidence-based impacts. A incomplete understanding the science required to assess the environmental implications of a conservation finance project may result in unintended outcomes or investment in irrelevant issues.
Clarmondial presented various initiatives during the conference, including an innovative investment product that promotes sustainable practices within established agricultural supply chains and relevant partnerships linked to the development of other financial instruments to support conservation efforts. In the closing remarks, we were honoured to be commended on our demand-driven approach to designing investment products, and on our strategy of working closely with corporates as an avenue for ensuring scalability.
We are grateful to Fabian Huwyler, Paul Tregidgo and Wilson Erwin, as well as the rest of the Credit Suisse team for organising this excellent event. We also thank John Tobin from Cornell University for moderating the panel session.