Creating the Next Generation of Conservation Finance
The article below is from our BRIEFINGS newsletter of 1 October 2019
At a time of rising climate activism, The Conservation Fund (TCF) – partnering with Goldman Sachs – tapped the capital markets with an inaugural debt issuance to scale its mission: to protect 1 million acres of America’s privately held working forests. We sat down with TCF’s CEO and CFO Larry Selzer and John Gilbert, respectively, and Goldman Sachs’ Kyung-Ah Park and Ritu Kalra to talk about the conservation sector’s evolving approach to sustainable growth and the role of capital markets.
Kyung-Ah, as head of environmental markets and innovation in our Sustainable Finance Group, how are companies, our clients and the industry more broadly addressing critical environmental issues?
Kyung-Ah Park: Our conversations with clients about climate change – both climate transition and resiliency – have ramped up sharply and companies are increasingly turning to sustainable solutions and innovative finance that can unlock greater investment flow. For example, green bonds – or bonds whose proceeds are earmarked for environmentally beneficial projects – have seen significant momentum and are an important tool to tap into the deep and liquid fixed income market for positive environmental impact. If fixed income instruments can support financing for green solutions, they can also do so for other sustainability purposes, including enabling more inclusive growth and providing capital to help disadvantaged groups. As a result, the green bond market has expanded to include social and sustainability bonds and we are also seeing sustainability-linked loans. More recently, there have been other innovations in the capital markets to mainstream sustainable finance, including a first-of-its-kind sustainability performance-linked bond that we helped structure for a global utility. Specifically, the bond is a general purpose bond issued at the corporate level with the coupon linked to a renewable energy performance target.
Last week, the firm served as the sole underwriter for a $150 million green bond for The Conservation Fund – the first such nonprofit to issue a green bond dedicated to permanent land conservation. Ritu, as head of higher education and non-profit finance in our Investment Banking Division, what is unique about the transaction and what was the reception from investors?
Ritu Kalra: What’s unique is that 100% of the proceeds of the green bond will go toward achieving permanent land conservation. TCF – through its Working Forest Fund – has pioneered a financially sustainable model to protect working forests, while supporting the local economies that rely on these ecosystems. The bond itself is structured to offer a market rate of return and has attracted significant interest from a mix of institutional investors and family offices. Keep in mind that timber as an investment has historically yielded about 5% to 6% – which is especially attractive in today’s low-yield environment. TCF is also leveraging the bond proceeds with philanthropic capital which will enable it to make a greater impact. Going forward, we believe that achieving large-scale, long-term success in conservation will require the use of these types of innovative models.
Larry and John, can you explain the catalyst behind the fundraising and the role that TCF plays in combating climate change?
Larry Selzer: Forests are an essential part of America’s infrastructure. They provide us with clean air to breathe, clean water to drink and jobs for more than 8.5 million people. Additionally, forests are an integral part of addressing climate change, offsetting as much as 20% of our annual carbon emissions. Yet we have lost more than 36 million acres of forests in the past three decades, and might lose another 30 million if we don’t step in. Institutional investors, who now own roughly 50 million acres of timberland in the U.S., buy and sell these lands as financial assets, and when they do, many forests end up fragmented and developed. Our model for working forest conservation allows us to acquire these forests when they come on the market, permanently conserve them and return them to the private sector. We have already acquired and conserved more than 650,000 acres through our Working Forest Fund and are targeting 5 million acres of high conservation value forests over the next 10 to 15 years. In the near term, we are targeting the next 1 million acres through this bond coupled with strong philanthropic support. This will deliver crucial benefits to our national effort to address climate change and improve rural economies – something tangible and permanent that we can do today.
John Gilbert: By buying at-risk forests and holding them on our balance sheet, we can buy time for permanent conservation outcomes. Usually that involves one or more public agencies acquiring a conservation easement that locks in the best practices of sustainable forestry, public access and habitat protection while also removing the ability to break up the forest or otherwise develop the land. Once those restrictions are in place, we resell these permanently conserved acres back to the private sector and recycle the proceeds into a new forest project. By protecting the jobs and recreation economies linked to the forests, we are living up to our unique dual charter in the U.S. for both conservation and economic development.