Conservation Finance – Where Wall Street Meets Nature

"The return on sustainable fish is staggering to someone from the world of compound interest rates," said Wilson Ervin, Vice Chairman in the Group Executive Office, when opening the 4^th Annual Conservation Finance Conference at Credit Suisse.

Available capital does not seem to be the problem when it comes to investing in nature, nor the available land or marine base. It is rather how to connect these things to come up with enough adequate risk-returning propositions. And to continuously prove that these propositions can provide the risk-adjusted returns that mainstream investors would want to see.

Conservation satisfies a thematic role in portfolio allocation

On the positive side, some of the leading investment advisors have identified growing interest in sustainable and organic agriculture, in sustainable forestry and land management, and in water investment opportunities with conservation benefits. In their view, such investments provide a good, stable, current yield that is equal to or higher than what can currently be achieved in the fixed income markets. And what is more, investors have the benefit of the potential upside they could accrue similar to a private investment.

From innovative to boring

The way to go is transitioning from new and innovative art to rock-solid science. There was broad agreement that the sector shifting from very customized products to more plain vanilla solutions is overall a good development. Capital markets like boring. And herein lies a massive opportunity for intermediaries to better bridge the gap between institutional investors' demands and project developers' needs.

Risk mitigation to lever private investment

There is a large as yet untapped potential to apply more innovative financial structures and available risk mitigation measures. The latter have become an important component of new products entering the market. Structural risk mitigation approaches can change the equation if applied to mitigate the right risks and provide additionality. However, within instruments, too, there needs to be a built-in mechanism whereby risk is addressed in an efficient way by the private markets on their own. In order to get there, the experts called for more creativity and fearlessness in the market.

New tools helping the sector grow

The discussion was less focused on the roles of insurance and technology. However, financial institutions are clearly responding to technological developments and concerns about disrupted markets through market innovations.

That market-shapers such as stock exchanges are requiring enhanced information disclosure, that information providers are developing green finance indices, and that ratings agencies are building environmental risks into upgraded methodologies will only help this sector grow. Policy makers and regulators are demanding improved risk-based disclosure, assessments of the merits of associated governance developments, and the evaluation of the potential for crowding in private finance through smarter public finance measures. This will by necessity drive innovation.

As one panelist said: "On forests, on land, on water, on marine plastics, we just haven’t reached the scale. Coalition building is the key to get there."