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Investing for Impact: Conservation and Environmental Restoration Through Mitigation Banking

February 07, 2013

(Ashley M. Allen is a founder and managing partner of i2 Capital Group, a merchant banking firm focused on impact investments in the energy and natural resource, education, and health sectors.)

Img-habitat-banking-gaining-groundIn industrial and post-industrial economies around the world, economic development has often come at the expense of the natural environment. Over the coming decades, the United States will experience significant negative impacts to ecosystems and watersheds from energy development, infrastructure build out, and urbanization. Growing demand for low-carbon electricity and biofuel production is likely to involve large amounts of publicly and privately owned land, while energy developers anticipate drilling tens of thousands of oil and gas wells across more than two million acres of leased land. Against this backdrop, the implementation and expansion of effective habitat conservation and mitigation practices and policies has the potential to dramatically reduce and offset many of the less desirable impacts associated with this kind of development, thereby helping to create a sustainable economy in which economic development and conservation are valued and promoted.

Habitat Mitigation

Habitat mitigation is the practice of avoiding, minimizing, or offsetting negative impacts on natural habitats and wildlife from energy and other development activities. In the U.S., the Clean Water Act (1972), the Endangered Species Act (1973), and the National Environmental Policy Act (1969) together form the policy underpinnings for environmental mitigation activities. As defined by the Council on Environmental Quality, mitigation includes: (a) avoiding negative impacts altogether by not taking a certain action or parts of an action; (b) minimizing impacts by limiting the degree or magnitude of the action and its implementation; (c) rectifying negative impacts by repairing, rehabilitating, or restoring the affected environment; (d) reducing or eliminating impacts over time by maintaining mitigation activities over the life of the action; and (e) compensating for negative impacts by replacing or providing substitute resources/habitats (compensatory mitigation).

Habitat "Banking"

Historically, compensatory mitigation activities took place on a one-off basis. Projects likely to cause negative impacts to habitats and species would include minimally required compensatory activities as part of an overall project plan. Over time, this approach morphed into the creation of advanced mitigation efforts led by third-party experts and "credits" that could be "banked" and/or sold on an arm's-length basis to developers in need of offsets. Wetlands mitigation banking, for instance, makes it possible for wetland mitigation efforts to be aggregated across larger sites in ways that drive ecological, operational, and financial efficiencies. Importantly, habitat banking has created opportunities for private landowners to generate profits by investing in a variety of mitigation and conservation activities, thus creating a compelling market-based incentive for them to support conservation and restoration activities. The Environmental Law Institute estimates that private and public expenditures on compensatory mitigation activities has risen to more than $3.8 billion annually. This large and growing segment of the market presents a dynamic and compelling opportunity for impact investors interested in supporting key environmental and conservation goals.

Opportunities for Impact Investors

As the regulatory framework has been clarified, the number of such banks in the U.S. has exploded. According to Ecosystem Marketplace, a leading source of news, data, and analytics on markets and payments for ecosystem services, there are presently 440 active mitigation banks and 77 active conservation banks in the U.S., with several hundred more seeking approval. These banks fall into three main categories: (i) private, entrepreneurial banks established by land owners seeking financial returns from the sale of credits; (ii) public banks set up by federal, state, or local governments; and (iii) nonprofit banks established by environmental organizations such as the Nature Conservancy and the Conservation Fund. Private banks, which account for more than 70 percent of the habitat banks in the U.S., typically are established by landowners or mitigation asset origination firms. The following examples provide models for impact investors to consider:

Wildlands, Inc. in Rocklin, California, is a privately held mitigation and conservation banking company that is working to "create a legacy of thriving and protected natural habitat through ecologic and economic cooperation." The company is the largest mitigation banker in California and manages over seventy-five projects on more than 31,000 acres in California, Oregon, and Washington State. Wildlands has partnered with Parthenon Capital Partners to grow its offerings of economically sound solutions to existing environmental challenges.

Headquartered in Richmond, Virginia, Falling Springs, LLC develops, owns, and partners on a variety of environmental credit trading projects, with a focus on mitigation banking opportunities where preservation, enhancement, and restoration of natural systems meets environmental and economic expectations. The company deploys capital from its parent company, Tredegar Corporation, to restore degraded wetland and stream systems, largely in Virginia, Georgia and Florida.

Timbervest, LLC manages timberland and other conservation-related investments across the United States, with an eye to capitalizing on what it describes as "often undervalued and overlooked environmental resources." Headquartered in Atlanta, the company, which is growing, currently manages two investment portfolios with approximately $270 million dedicated to conservation assets. Investors include public and corporate pension plans, corporations, foundation, endowments, and high-net-worth individuals.

According to the Timbervest site, "Mitigation banking is estimated to be a $3 billion industry that is expanding rapidly due to the growing scarcity of our nation's natural resources, as well as the political and regulatory environment in the U.S., which has increasingly recognized the instrinsic value of our nation's environmental infrastructure."

As the drive to exploit the region's carbon-based and renewable energy sources accelerates, the West, in particular, offers abundant opportunities to expand mitigation banking activities. Indeed, several projects in the early stages of development promise to bring scale and growing awareness to the mitigation banking field. As impact investors around the globe seek new asset classes in which to deploy capital, mitigation banking represents an increasingly important and exciting opportunity. For more information, visit the National Mitigation Banking Association Web site.

-- Ashley Allen

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