EIP’s Dover Farm Mitigation Bank is featured in Wired magazine.
The New Green Economy
by Hillary Rosner
Stretching across parts of Virginia and North Carolina on the east coast of the US, the Great Dismal Swamp is a ghost of landscapes past. In 1763, George Washington led a group of investors who formed the Great Dismal Swamp Company, which felled trees, drained sections of the marsh and turned it into farms. A century later, during the build-up to the Civil War, remaining portions served as part of the Underground Railroad, providing hideouts for escaped slaves.
During the 20th century, more of it was logged, drained and carved by roads. In 1974, the federal government declared the last 45,000 hectares a national wildlife refuge, restoring a swath of it to wetlands.
Today, viewed via Google Earth, the Great Dismal is a jagged oval of dense forest, an unbroken sea of dark green — save for a lake at the centre and a little chunk of light-green farmland perched on the eastern edge that makes it look as if someone took a bite out of the foliage. For decades, the US government and environmental groups, such as the Nature Conservancy, had been eyeing that missing piece of swamp. But the farmers’ will to sell and the buyers’ ability to raise cash never coincided. Finally, three years ago, the owners of Dover Farms — one of two farms on the former swampland — told the US Fish and Wildlife Service, the agency that administers the nature preserve, that they were ready to do a deal. Needing to act quickly, government officials turned to Nick Dilks.
Dilks, who had spent a decade working for the Conservation Fund — a non-profit that buys and preserves land for government agencies and green groups — had become fed up with the constant scramble for money. “It got me and others thinking, could we find another source of capital to do those deals without stealing from the same pot?” he says. “So we began thinking about the for-profit sector.” Dilks, along with business partner Fred Danforth, founded Ecosystem Investment Partners (EIP) in 2006, with a mission to raise an initial round of $150 million, beginning with small pools of money that would be used for demonstration projects. Instead of soliciting donations, the company offered a chance to invest while helping protect nature.
It’s an approach that’s spreading throughout the environmental world after years of resistance: by some accounts, turning nature into a sound investment represents the last hope of saving it. Humanity’s survival depends on healthy ecosystems — for freshwater, fertile soil, flood protection and climate control. Scientists call these benefits “ecosystem services”, and society generally takes them for granted. We assume rivers will run to the oceans, soil will sustain crops, major cities won’t drown. Yet these assumptions are becoming less certain. And despite our dependence on nature, we essentially value it, financially at least, at nil.
Its absence from balance sheets is particularly striking in the business world, since virtually every business relies on nature. Think of a microchip manufacturer that needs huge volumes of water to make its circuits. Its profits may depend on a nearby river, and yet it pays nothing to ensure that the water continues to flow. Or imagine a farmer who relies on bees to pollinate his crops, but never considers that it might make financial sense to protect their breeding habitat. Such ideas have spurred a new approach to conservation, based on assigning financial values to ecosystems. The “ecosystem-services” approach, proponents say, could be its salvation. “The new story,” says Adam Davis, an EIP partner and a pioneer of the ecosystem-services movement, “is the opportunity to align incentives with outcomes, so that people can participate in the protection of the world in the course of doing business.”
Ecosystem Investment Partners and other emerging environmental investment firms are trying to usher in this new economy. EIP ultimately bought Dover Farms, using private-equity capital. It filed a conservation easement on the land (so it can never be developed) and donated the easement to the Nature Conservancy. It then set about filling in canals, planting 250,000 trees and allowing water to return to Dover — turning the 400 hectares into a “wetland mitigation bank”, a model for a new economy.
In March, Dilks and a few colleagues drove across the Intracoastal Waterway — an inland route along the Atlantic coast — over a steel World War II-era bridge. The owner of the last farm in that missing chunk of swamp operates the bridge, pushing and pulling it across the narrow channel by tractor, in exchange for the right to hunt on the Dover land. A short while later, with the bridge retracted and the farmer busy, Dilks’s crew commandeered a Huck Finn-style wooden raft to ferry additional visitors — including officials from the nearby city of Chesapeake, Virginia — across the water.
Sleet was hurtling sideways by this time, raining gobs of slush upon the Gore-Tex-clad group as they gathered at the muddy edge of the Great Dismal. The sky was pale grey; thin patches of snow clung to the yellow grass. In the distance, a tall forest of cedar closed in. Unfazed by the weather, several pairs of ducks floated on a shallow pond, while a bald eagle flew overhead. More than 100 trumpeter swans had shown up earlier in the day, though they had since moved on to somewhere deeper in the swamp. Just a year-and-a-half earlier, corn and soy had grown here in neat, irrigated rows.
Leading the group across a soggy meadow and into a pool of calf-deep frigid water was James Remuzzi, an independent environmental consultant who is overseeing the wetlands’ reincarnation. Remuzzi proudly pointed out some small trees poking up from the water. Some bore coloured ribbons, indicating that he and his team had planted them. Sloshing beside him, David Mergen of Chesapeake’s public-works department was impressed by a pair of metre-high black willows. They were ribbonless, meaning they’d sprung up on their own. “It’s evolving back to what it should be,” said Remuzzi, whose company, Sustainable Solutions, is based in Washington DC, four hours to the north.
The city of Chesapeake was preparing to expand a 94-hectare park, adding playing fields, nature trails, storm-water ponds and an off-lead dog area. In the process, a sliver of wetland — less than a tenth of a hectare — would be affected. To get a permit, the city would need to show that the project would result in “no net loss” of wetlands, a policy dictated by the federal Clearwater Act. Under the law, any destruction of wetlands must be matched by equal or greater creation or restoration of wetlands within the same watershed. To meet this need, a system of wetland “banks” has sprung up, in which companies such as EIP restore ecosystems and then sell “credits” to developers. Mergen and a colleague had come to see what they’d get by buying credits in EIP’s Dover Farms Wetland Mitigation Bank.
Wetland banking itself isn’t new. Along with species banking, a similar system established under the federal Endangered Species Act to help protect habitat for listed plants and animals, it’s currently a nearly $4 billion industry in the US, and has been steadily growing for 15 years. (There are 431 wetland and stream banks covering about 385,000 hectares, and 77 species banks covering 45,000 hectares.) A 2001 study by the National Academy of Sciences lent it scientific credibility; the arrangement frees developers from trying to engineer substitute wetlands on their own land and it allows conservation on a larger scale.
Today, the banks are gaining attention as an example of successful ecosystem markets. Regulation (federal environmental laws) drives the demand, but the concept shows how ecosystem services — species habitat, water purification, flood protection — can be protected by giving nature financial value.
As the first company to provide wetland banking on a private equity model, EIP has taken an important step towards opening ecosystem markets to investors. “The concept of ‘mitigation’ isn’t new,” Dilks says. “The concept of private-equity investment in real-estate assets isn’t new. What’s new is the melding of private investment capital with these markets to realise real conservation and real economic return on the ground.”
On a breezy March afternoon in Fort Collins, Colorado, a standing-room-only crowd filled a lecture hall at Colorado State University as ecologists piled in. The speaker was Gretchen Daily, a Stanford ecologist and director of the university’s Natural Capital Project, a joint venture with two conservation groups to bring nature into mainstream decision-making. Daily had recently returned from Japan, where she was honoured with the Cosmos Prize (awarded for visionary scientific research aimed at helping humans and nature coexist), and Washington DC, where she attended a government strategy meeting on applying the ecosystem-services model to all US natural-resource decisions. Daily is viewed as the scientific linchpin of the ecosystem services movement. She studied under legendary biologist Paul Ehrlich in the late 80s and through him met a handful of influential entrepreneurs who convinced her of the need to talk economics as well as ecology when it came to effective conservation.
Daily told the Fort Collins audience that the world needs a new business model — one that aligns protection of natural resources with development. “We need to recognise these services as types of capital, as a stream of benefits,” she said. The challenge, she predicted, would be to scale up this approach, moving from a few successful projects to a totally new world order.
Two ideas have long been at the core of Daily’s thinking. The first: unless we can change the way people think about nature, our “basic life-support systems” are at risk. The second: the traditional approach of conservationists — cordon off parts of the world to keep out humans — has failed. “We’ve got to make human enterprise way less hostile,” she says, “in terms of how we produce our food, timber, energy.”
So, nature needs to function in the parts of the planet we inhabit, as well as those we don’t. Protecting nature must become a path, not an impediment, to financial stability. In 1999, Daily laid out her ideas for an “ecosystem services framework” and for a field of study she called “countryside biogeography”, an attempt to protect nature and its services in human-dominated non-urban areas.
Today, the ecosystem-services model is finally starting to take hold in the US, where the Department ofAgriculture now has an Office of Ecosystem Markets. State and local governments are also getting involved. A law passed in Oregon last year encourages state agencies to use market-based approaches to conservation.
New US regulations are establishing water-quality markets to trade seemingly intangible goods such as nutrient pollution and water temperature. In the Pacific Northwest, the programme lets industrial operations such as paper mills or municipal water-treatment facilities, whose activities can raise water temperatures, offset their actions by investing in nature’s ability to cool the water. Instead of spending tens of millions of dollars to build cooling towers, companies might contract with local conservation groups to restore stream-side vegetation that naturally lowers the water temperature and shores up habitat for cool-water fish. In Santa Fe, New Mexico, the Nature Conservancy helped to set up a fund to protect the city’s water supply from wildfires. Nearly a third of Santa Fe’s water comes from streams in national forests just outside the city, and a big wildfire can fill reservoirs with sediment, costing millions of dollars to clean up. A new plan levies a small “ecosystem service fee” on customers’ water bills — 13 cents per 1,000 gallons, or about 60 cents a month for the average household — that’s used to carry out controlled fires in the forests in order to reduce the risk of bigger blazes.
In South America, the Nature Conservancy is also using the value of clean water to bankroll conservation. Companies that rely on consistent, clean water downstream — a hydroelectric power provider, an urban water utility, a brewery — pay to protect the watershed upstream. In the northern Andes, water funds are protecting native forests and paramos, unique neotropical ecosystems whose plants and soils regulate the release of water. “The water funds have taken hold because they’re very simple and straightforward,” said Rebecca Goldman, a former student of Daily’s who’s now a senior scientist with the conservation group. “The water utilities know the value of conservation for their resource. Clean water allows people to live. It’s tangible.”
Nascent markets for trading forest carbon — which stalled, along with a climate deal, at the Copenhagen climate conference in 2009 — also rely on an ecosystem service: rainforests’ ability to store carbon dioxide. These markets could be the quickest to develop, both because other types of carbon markets already exist (trading on technological, rather than natural, means of keeping CO2 from the atmosphere) and because they would be international. Other markets, like wetland banks and water funds, are by nature local. Critics of market-based conservation level various charges, among them the philosophical argument that the only way to protect nature is to value it for its own sake, not for what it’s worth to humans. Others take specific issue with so-called “mitigation banking” programmes, such as the wetland banks, that seek to offset or compensate for destruction rather than stopping destructive practices. Proponents counter that development isn’t going to stop, so the key is finding ways of making it more eco-friendly — to calm Gretchen Daily’s “seas of humanity”.
Yet even systems of “payments for ecosystem services”, based not on offsets but on simply protecting healthy landscapes or restoring degraded ones, leave some conservationists uneasy. “I’m in favour of trying to give nature economic value — of making explicit and forcing recognition of its already existing values,” says Kent Redford, a biologist and director of the Wildlife Conservation Society Institute. “My concern is that this would become the only approach.” Redford has published articles in scientific journals urging caution in taking the ecosystem-services approach. Protecting specific services, he warns, may not always offer the best protection for the ecosystem as a whole. “Care must be taken,” Redford says, “because if used improperly this approach can cause unexpected harm.”
Overall, programmes that assign economic value to nature are far less developed in Europe, but isolated projects are emerging. An international effort supported by the UN and EU has been assessing the precise economic value of biodiversity and nature’s services. In the UK, a study commissioned by the Department for Environment, Food and Rural Affairs last year examined the feasibility of taking an ecosystem-services approach to conservation. The new coalition government is likely to move the idea forward: in February 2009, Nick Herbert, then the Conservatives’ shadow environment secretary, proposed a system of “bio-banking” modelled on projects in the US and elsewhere.
Two of those invited to brief Herbert were Rob Gillespie, a long-time town planner, and David Hill, an ecologist and director of Natural England, a quango that protects the environment. Their company, the Environment Bank, is setting up a mitigation bank intending to restore and link isolated sections of wetlands and natural areas surrounding the Thames headwaters. Property developers would buy “credits” in the bank, and that money would be used to restore damaged ecosystems in Wiltshire and Gloucestershire.
“It’s a fantastic landscape,” Gillespie enthuses, “with opportunities to work with former gravel workings and a lot of denuded landscapes where there have been military installations going back to World War II. And there is a range of development sites between Bristol and London which could deliver the funding mechanism.”
The company has been meeting various government agencies and been in talks with the Natural Capital Initiative, a government-sponsored think tank. As recently as a year ago, few people took the Environment Bank’s ideas seriously, says Hill — but now there’s “a real will within the government to make this work”.
Perversely, the recession may give market-based conservation a boost. “It’s quite clear,” says Hill, “that there won’t be funds in the public sector for the sorts of things we should be doing for the natural environment. So we’ve got to engage the private sector. For so long we’ve not been paying the true cost of the use of land.” The Environment Bank is also working with the EU, which Gillespie believes is on track to pass a habitat-banking directive in the near future. Other smaller projects are under way in the UK, including an effort to restore 300,000 hectares of the Huntingdon fens, which were drained in the Victorian era. Elsewhere, United Utilities, a water provider with nearly seven million customers, has rolled out SCaMP (Sustainable Catchment Management Programme), designed tonsure clean water by working with tenant farmers in the north-west to restore bogs and meadows, reduce fertiliser runoff and keep livestock away from streams.
Despite the flurry of ecosystem-services projects around the globe, many of which are succeeding financially and environmentally, the efforts are still piecemeal. To truly give nature a place in the global economy, to give financial value to the vital services it provides, will require a major shift in the way we think. As resources become scarcer, and thus more valuable, that shift may finally be under way. But mental and philosophical shifts aren’t the only obstacles: building a new economy based on natural capital requires willing investors — lots of them.
“Not a lot of people understand our space, so we don’t have access to much capital,” says Paul Parker, director of the Cape Cod Fisheries Trust, in Massachusetts, which buys fishing permits issued on a quota system and leases them to small fishermen who would otherwise be squeezed out by bigger operators. The leasing system provides investment returns of one or two per cent while also encouraging the local economy. “We have a very good idea but can’t seem to connect with the types of people who would be interested in such an opportunity,” Parker says.
That’s what Michael Van Patten hopes to change. In a small loft on Manhattan’s Hudson Street, just west of SoHo, Van Patten presides over an office so new there’s nothing adorning its white walls. In early spring, the view was of a construction site across the street, where a large building was being demolished. But though he’d been working in the space for a month, Van Patten hadn’t even noticed the project. He had other things on his mind, namely the impending soft launch of Mission Markets, his investment platform for social and environmental markets. A former bond trader, Van Patten has spent the past two years positioning himself as the consummate expert on the “markets” portion of ecosystem markets. “We’re trying to make it easier for investors to identify what these projects are,” he says.
Environmental markets are about more than just equity and debt. “They have values that investors care about,” says David Meyers, Mission Markets’s COO and a biological anthropologist who spent years working on conservation projects in Madagascar before earning an MBA from Yale. “People are fed up with investing with no morals.”
Mission Markets, the first company of its kind, hopes to make environmental investing “more liquid and less fragmented” by turning ecosystem services into asset classes, just like stocks or bonds. A private platform will help match accredited investors with companies seeking capital for conservation projects. An open-access platform will enable anyone to invest in various types of credits, bonds and offsets, from the simple to the overwhelmingly complex.
Still, finding companies looking for investors is the easy part. “We have 90-plus issuers that have expressed interest, and we haven’t done any marketing yet,” Van Patten says. “The difficult part is getting people to invest. One of the biggest challenges is to teach people about these markets.”
But Gretchen Daily, for one, believes the moment has come. “It’s inspiring to see how much change there is in the thinking on conservation,” she told the crowd at Colorado State University. “I’m optimistic that in this century we’re going to develop new models that merge conservation and development.
“It seems,” she continued, “like this is a unique moment we have to seize and try to bring the past 20 years of our ecosystem and conservation science to bear on our visions — and package it in a way that normal people can bring to bear on their decisions.”
Hillary Rosner is a Knight Science Journalism Fellow at MIT