Ecosystem Investment Partners: How Private Capital is Restoring U.S. Wetlands

In the 1970s, more than 450,000 acres of wetlands around the U.S. were disappearing each year, eliminating vibrant ecosystems that provide critical wildlife habitat, storm protection and water filtration. By 2008, fewer than 18,000 acres per year were being lost, a 96 percent decrease.
What happened?
In a phrase, the national “no net loss of wetlands” principle that grew out of Section 404 of the 1972 Clean Water Act. The landmark bill, along with subsequent legislation and increased compliance, has spurred the creation of “mitigation banks” to finance wetlands restoration. By restoring wetlands, these banks create credits that developers, private and public, can buy to offset damage to wetlands caused by their projects. Because the system speeds the approval process – and time is money — developers are willing, if not happy, to buy mitigation credits. The developer payments in turn repay the private investors who front the money for banks’ restoration work.
In the decades since the first commercial mitigation bank application in 1991, more than 1,900 mitigation banks have been established. By 2008 between $1.1 and $1.8 billion was being spent to restore functioning wetlands annually, protecting approximately 24,000 acres per year.
The success of compensatory mitigation in wetlands restoration is a prime example of the role government policy can play in catalyzing private capital markets to meet environmental and social challenges. With government funding becoming more constrained, and limited philanthropic capital available, private capital will be key to large-scale environmental protection and restoration.
Beyond wetlands, mitigation banks exist to protect other natural resources, like species habitat, known as “conservation banking.” In all, 105 banks have been created, resulting in the protection of over 90,000 acres of habitat.
Over the years, rules have been refined to better ensure ecological results. “If you’re going to allow people to buy mitigation credits to offset their impact, you better be sure that the credit they’re buying is actually making up for the impact,” says Adam Davis, a partner at Ecosystem Investment Partners, a private equity firm based in Baltimore that has raised more than $200 million and financed restoration of thousands of acres of wetlands. “However, if it is actually making up for the impact, then, it’s a great solution, because it allows predictability for developers and it also allows for predictability for restoration and conservation professionals.”
In 2012, EIP closed its second fund, raising $181 million from pension funds and endowments and high-net-worth family offices.. Significantly, few were “impact” investors; instead, they were attracted to the consistent demand for mitigation credits from energy, infrastructure and other developers, including government agencies required to offset impacts from highways, interchanges and other projects.
EIP’s pitch combined conservation with market rate return expectations; another attraction is EIP’s “noncorrelation” with most other investments, making it a hedge against market volatility.
Mitigation banking still takes more time to explain than traditional timber or agriculture investments, says Howard Kaplan, who advises institutional investors on real assets opportunities as president of Farmvest Inc. When Kaplan brought EIP to the manager of the New Mexico Educational Retirement Board Pension Fund, the first reaction was, “You want us to buy swampland?” In 2010, the New Mexico fund invested $30 million in EIP.
“We need more success stories in the ecosystem markets space,” Kaplan says. “EIP is a prime case of how a fund can raise $181 million, demonstrate how it can be deployed, and also show how the types of risks and returns private investors are looking for are possible.”
The increasing flow of capital means more, and increasingly large-scale projects. EIP’s first four projects restored a total of 8,000 acres of wetlands. Its most recent four projects, in Minnesota, West Virginia, Louisiana and Kentucky, will restore 40,000 acres and 100 miles of streams, including the largest stream restoration project in the country to-date. ­
Wetland mitigation represents perhaps the most mature of the ecosystem markets, and holds lessons for how policy can be a tool to enlist private capital to drive broader conservation and restoration results. In essence, policy has created a way to internalize what previously were considered economic “externalities.” Wetlands provide society with a wide range of critical ecosystem services, like water filtration; however, before the passage of the CWA, they were being degraded because there was no standard way to price them into the cost of development.
“It’s the rules of the game that need to change, ” Davis says. “But that cannot change until regulators realize capital can really flow to solve these problems.”
The CWA and several pieces of subsequent legislation charged the US Army Corps of Engineers with monitoring discharges, dredging and filling; leading to the adoption of the “no net loss” of wetlands policy in 1988. The Corps has a mandate to approve and oversee wetland mitigation bank projects.
Essentially, developers may impact wetlands in a number of different ways, including the construction of roads and bridges, residential communities, retail stores, utility lines, and gas pipelines. When a developer’s project plan includes impacts that result in a loss of aquatic resource functions and services, the Corps requires the developer to prove that these impacts cannot be avoided, or at least minimized. If the developer proves that impacts have been avoided and minimized as much as possible, then the Corps quantifies the remaining impact, and decides on a course of action that results in the lowest overall environmental loss.
A 2008 rule makes mitigation bank credits the preferred option. A “credit” equates to a unit of functioning wetland, to be determined by the area, the functional value, and the location of the wetland. To earn a credit to offset mitigation, these entities must provide permanent protection, for example through a conservation easement; financial assurance, via a bond or letter of credit; and, most importantly, clear ecological success criteria and measurement.
Such requirements may be tougher to meet in other ecosystem markets, such as habitat protection or nutrient trading. For instance, it is difficult to assess a farm’s reduction in “units” of nitrogen or phosphorous, which cause algal blooms and other problems. Even wetlands restoration, the most mature of the ecosystem markets, hasn’t “gone to scale.”Individual transactions remain small and often complex. More investment options that meet the needs of Wall Street for quality management and deal size need to be developed.
Still, EIP’s success at fundraising indicates that institutional investors can participate as regulatory predictability improves. Experience and scale are critical to understanding the monetary value of a particular wetland mitigation project, which can be difficult for both entrepreneurs and their investors as they seek to perform assessments on individual projects. This means there are certain fixed costs involved in assessment and modeling for every deal. There are thousands of local “markets,” watersheds of different sizes with independent regulators acting under different rules. Buyers and sellers can only exchange credits within defined watersheds, and credit prices cannot really be compared across these regions.
Those markets have gotten considerably more businesslike in the last two decades, Davis says. Going forward, there is an opportunity to pilot more sophisticated methods of understanding, managing, and valuing risks. If outsourced compliance can be shown to be as effective in other areas, more private investors can be attracted to nascent ecosystem markets, such as conservation banking or nutrient trading.
“Policy makers must be engaged to internalize externalities,” Davis says, “and to allow a level playing field for investors that actually delivers the kinds of ecosystem conservation and restoration results society desires.”

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