NRCS and Investment Capital: Investing in America Together
SEPTEMBER 2017 FOREWORD
In 2016, USDA’s Natural Resources I want to personally thank Encourage increases, both in the number of NRCS Conservation Service (NRCS) entered into Capital for undertaking this analysis. Their Farm Bill programs and in the financial an agreement with Encourage Capital understanding of financial approaches assistance we are able to provide to to explore how NRCS might better and their willingness to take a deep dive private landowners. use Farm Bill conservation funding to into NRCS Farm Bill programs resulted leverage private capital. This report is the in a cornucopia of interesting ideas— As NRCS has changed, so has agriculture. culmination of many months of interviews, some of these are things that NRCS and The availability of precision agriculture and discussions and analyses that involved our partners can examine immediately terabytes of data, the growth in absentee NRCS staff as well as external partners under current authorities. Others may be landowners, the rising average age of the and stakeholders. a bit more out there and be on a longer Nation’s farmers and ranchers, and the time frame. There are examples of NRCS emergence of great interest in corporate We stand at an interesting time in the projects and programs that currently supply chain sustainability are just four history of private lands conservation in leverage private capital in ways that are examples of recent trends that provide the United States. With all the successes quite familiar to NRCS employees and both challenges and opportunities. As the that NRCS has helped achieve over many partners are familiar with. There are other Nation’s largest private lands conservation decades—substantial reductions in soil ideas in the report that will make NRCS organization, NRCS must be aware of erosion, increases in no-till agriculture, employees and some of our partners these challenges and opportunities to be de-listings and avoided listings of and stakeholders scratch their heads and able to meet the needs of our customers. endangered and threatened species—we raise their eyebrows – a hallmark of any recognize that the agency does not have forward-looking thinking. Thanks to the All of this is to say that while some of the resources to help all of the private team at Encourage Capital for helping the ideas in this report may strike some farm, ranch and forest landowners that us gaze into the future and visualize a as perplexing or fanciful, we need to be need assistance. new conservation paradigm, one that has thinking carefully about the future of the potential to scale natural resource private lands conservation. What NRCS At the same time, we know that there is conservation to heretofore unseen levels. does and how its Farm Bill programs work increasing interest in finding new sources in 2017 does not necessarily presage how of funding for private and working lands I’ve been around NRCS for over 40 years, the agency and its programs will operate conservation. At NRCS, we support and one of the only constants I have in the 2020s or 2030s. In NRCS’s view, this interest insofar as it focuses on experienced is change. Since its inception, private capital has a big role to play in the uncovering resources that can extend NRCS has been helping the Nation’s future of private lands conservation. To our mission of helping people help the farmers, ranchers and forest landowners the extent that we can leverage our Farm land. At NRCS we take a broad view of manage their natural resources in harmony Bill funding with private capital interested the term conservation finance—we are with agricultural production. How the in having a positive impact on private interested in uncovering non-Federal agency has gone about implementing lands and rural communities, we need to resources that can be deployed on private this conservation mission has changed be exploring those opportunities. I look lands to benefit rural economies and substantially since 1935. For many forward to digging into this report and I the environment. Impact investment, decades, NRCS worked primarily through encourage you to do the same. corporate investment, philanthropy, green technical assistance, helping producers bonds, municipal funding—all of these develop conservation plans and designing Leonard Jordan funding sources are welcome and needed science-based practices that agricultural Acting Chief to address the Nation’s natural resource producers could implement on the lands Natural Resources Conservation Service challenges on private lands. This report that they own or manage. The 1950s and focuses on private capital and impact subsequent decades saw NRCS build over investment, but many of its findings apply 11,000 small watershed structures. The to other funding sources, as well. late 1990s and 2000s saw remarkable
II III ACKNOWLEDGEMENTS
NRCS and the report’s authors would Carl Palmer, LegacyWorks Group like to thank everyone who shared their Peter Stein, Lyme Timber time and ideas to ensure this report was a Chris Adamo, National robust representation of the best thinking Wildlife Federation in the sector at this time. Tom Hodgman, NatureVest Ben Hayes, Pinchot Institute This report has been produced by for Conservation Encourage Capital who takes full Brian Kittler, Pinchot Institute responsibility for the report’s contents and for Conservation conclusions. While the many organizations Bruce Knight, Strategic consulted have greatly informed the Conservation Solutions content of this report, their participation Emily McGlynn, The Earth Partners LP does not necessarily imply endorsement of Jenny Connor, The Nature Conservancy the report’s contents or its conclusions. We Aaron Derwingson, The are very thankful for their contributions. Nature Conservancy Ariel Wiegard, Theodore Roosevelt Partners and Stakeholders: Conservation Partnership Patrick Holmes, Natural Resources Policy Mely Whiting, Trout Unlimited Advisor to Governor Steve Bullock, Drew Peternell, Trout Unlimited State of Montana Sean Penrith, The Climate Trust Michelle Perez, American Peter Weisberg, The Climate Trust Farmland Trust David Primozich, The Freshwater Trust Roger Williams, BlueSource Peter Stangel, US Endowment for Forestry Alex Murdoch, Chesapeake and Communities Bay Foundation Dave Groves, formerly with the White Leigh Whelpton, Conservation House Council on Environmental Finance Roundtable Quality Andrea Ferri, Conservation Bobby Cochran, Willamette Partnership Finance Roundtable Todd Gartner, World Resources Institute David LeZaks, Delta Institute Ryan Smith, Delta Institute Thanks also to the members of the Jacob Israelow, Dirt Capital Conservation Finance Network and Bettina von Hagen, Ecotrust to those who attended the investor Forest Management discussion in New York City in April 2017 Callie Eideberg, Environmental for sharing their ideas to inform the Defense Fund content of this report. Tim Male, Environmental Policy Innovation Center This report was prepared under a Jessica Fox, Electric Power cooperative agreement between Research Institute NRCS and Encourage Capital. NRCS’s Lloyd Piercy, Farmer Conservation Innovations Team was Craig Wichner, Farmland LP responsible for managing this agreement. Tina May, Land O’Lakes You can reach Kari Cohen, Director of the Russ Shay, Land Trust Alliance Conservation Innovations Team at [email protected]. IVi V SUMMARY OF FINDINGS
Established as the Soil Conservation Taken together, these facts invite the efficient irrigation improvements, nutrient Service in 1935, the United States question: could NRCS use a portion of management, transitioning to organic Department of Agriculture’s (USDA) its funds to leverage private capital (and systems, and implementation of anaerobic Natural Resources Conservation Service impact investment capital in particular) digesters. Conservation practices (NRCS) has in recent decades become the in order to achieve more conservation which provide a private financial return Nation’s largest funder of conservation on on the ground for each dollar the on investment can – and should – be private lands, which collectively represent government spends? This report argues financed at least in part by private capital, 70% of our nation’s land area and provide that the answer is a resounding yes. to allow more public funding to focus on food and fiber for hundreds of millions of projects with limited financial return that Americans and people all over the world. A review of the impact investment would not otherwise happen. The conservation practices supported landscape and NRCS programs and by NRCS not only protect our natural authorities, as well as other government While projects that generate a financial resources, but they are an investment in programs, has revealed that there is return should be attractive to investors, rural American economies, in healthy soils, significant potential for NRCS to leverage there are barriers to investment today and in the future of our country. The bulk private capital to drive more conservation that effectively discourage them from of NRCS’s financial assistance to farmers, on the ground and spur greater investment happening. Taking steps to create the ranchers and forest landowners derives in rural America. Some opportunities exist conditions for greater participation by from mandatory funding re-authorized under current statutes and authorities; third-party investors, particularly impact every five years in the Farm Bill. As others would require statutory changes. investors, would go a long way toward substantial as these Farm Bill dollars have Overall, however, much can be achieved by attracting private capital to private become, NRCS’s funding alone will never simply changing the way these programs working lands conservation, and allow be sufficient to address the persistent are conceived and implemented and by for a greater number of conservation natural resource challenges that affect encouraging program staff to think about projects by combining private investment private lands, and each year the backlog how government money could best be with public funding. Leveraging private of interest in NRCS programs grows. used to leverage private capital – all for capital, however, will in most cases require the ultimate objective of more and better changes to the culture at NRCS, and may At the same time, interest in impact conservation on the ground. also require certain pre-conditions. investment – investments intended to return principal or generate profit while The first step in thinking about how to Here are five such conditions for NRCS, also resulting in a positive impact on best leverage private capital is to consider Congress, and agency stakeholders social and environmental issues – is that conservation activities that provide a to consider: surging, bringing billions of new dollars financial return on investment – and many into conservation investment. However, do – present an opportunity for private 1. Help facilitate collection of reports by Encourage Capital, JP Morgan investment to help finance these activities. economic data on implementation and other financial institutions have Of course, not all conservation activities of conservation practices so that found that a lack of accessible, investable will lead to financial returns on investment, investable opportunities can be projects is a limiting factor in realizing and it makes sense to use public funds identified. Having a significant the potential of this new source of and philanthropy to support the creation quantity of high-quality data on the conservation funding. of societal goods where there is no other economics of conservation practice financial incentive to do so. However,there implementation could greatly facilitate is a subset of conservation practices the identification of investable projects that have the potential to generate a and practices and enable more efficient private financial return on investment, allocation of public money. These practices such as water and energy- data do not need to be collected or
VI VII SUMMARY OF FINDINGS
managed by NRCS, but where possible engagement with investors. Perhaps 4. Provide risk mitigation to bring the Additionally, many NRCS conservation NRCS may be able to play a role in most importantly, this requires a risk-adjusted returns to an investable projects are, on their own, too small encouraging and facilitating collection cultural shift at NRCS to begin seeing level. In some cases, projects are to be worth implementing for private by appropriate parties (USDA’s third-party investment as an accelerator perceived (rightly or wrongly) to investors, even when returns are high, Agricultural Research Service (ARS) or of private lands conservation and a have too great a risk for a given given the high transaction costs. To Economic Research Service (ERS) or force that can complement and extend level of return. As in other sectors facilitate greater private investment, academic researchers, to name a few). the agency’s mission of helping people with similar conditions, there are a NRCS must find ways to aggregate Where such data may be sensitive, they help the land. Producers across the US number of ways that government projects to an investable scale. may still be collected in aggregate to are already accustomed to working can reduce the risk of investments protect privacy or intellectual property. with third-party investors either in to enable investors to participate Where opportunities to simplify and the form of loan providers or equity where they otherwise would not. streamline are limited, more help 2. Shift from investing in conservation investors. NRCS can encourage these This is beneficial to government, as it may be required to overcome these practices to investing, and enabling relationships by allowing these parties allows for an outsized impact relative barriers. NRCS should consider others to invest, in conservation to participate in NRCS programs to actual spending, and it benefits subsidizing project development, outcomes. Impact investors (and many alongside landowners. This is not a investors and landowners because perhaps through its Conservation philanthropists) prefer to invest in zero-sum game between investors it makes deploying and receiving Innovation Grant program. outcomes rather than practices. They and producers. In fact, engaging investment capital less risky. While want to see results on the ground and investors will not necessarily reduce some conservation opportunities may are less interested in how these results the producers’ benefits, and it could not require this intervention, there are are achieved. This is seen not only as provide additional benefit to producers many that likely do, representing a a way to increase the efficiency of by reducing their exposure to risk and significant untapped opportunity. the investments, but also as a way to allowing them to undertake even more increase innovation and help ensure improvements. Investors, however, 5. Reduce transaction costs, e.g. by conservation outcomes. Already, require a return on investment, so being aggregating small projects. Investors following various changes in policy comfortable with that return (while are easily deterred by high transaction and Presidential memoranda, the US also ensuring sufficient safeguards costs, and NRCS should work to government has begun exploring for producers) is part of the cultural reduce such costs where possible. this concept of “Pay for Success.” shift that needs to happen if more These may include slow or time- Additionally, to the extent that NRCS conservation is going to be achieved consuming processes, challenges funding is used to address natural for each dollar spent. It must be of coordination or lack of process resources concerns, the agency’s acknowledged that there are real risks alignment within and across different spending is already leading to direct and challenges to engaging large government agencies, uncertainty outcome generation. NRCS should investors and landowners in this way around timing of payment, and other continue to pursue this approach since (risks that unscrupulous actors will friction in the process. All of this can it could encourage greater private take advantage of producers, among make project development costs investment in conservation. others); however, if done correctly prohibitively high. To address these this represents an opportunity to challenges, NRCS must streamline both 3. Allow third-party investors to share strengthen and expand the its own processes and collaboration in the return on investment from agricultural job market and rural with other government agencies that NRCS programs along with traditional communities in addition to are performing related grant-making in program beneficiaries. In order to supporting more conservation. working lands conservation and rural leverage investment capital, NRCS development. should allow and encourage direct
VIII IX SUMMARY OF FINDINGS
Each of the programs examined in ACEP is already successful in (for example, by MillerCoors focused however, as ideas supported by CIG this report – Environmental Quality attracting investment capital for on water), by impact investors, and spur the development of investment Incentives Program (EQIP), Regional conservation, and there is potential by conservation groups organizing models and credit generating protocols Conservation Partnerships Program to expand opportunities both with landowners and others for large-scale that can attract significant private (RCPP), Agricultural Conservation and without statutory changes. projects. Potential RCPP models to capital into conservation. CIG has the Easements Program (ACEP) and Three model concepts already in use explore include: 1) aggregation of potential to be used more effectively Conservation Innovation Grants (CIG) were identified: 1) project developers small projects to investment-scale as an incubator and accelerator of – offer opportunities to better leverage combining revenue from environmental deals, 2) facilitating agreements for new financing models as well as new private capital without any statutory credits, easement payments and upstream conservation activity funded businesses, and it could even create a changes. Additionally, there are a number undeveloped recreation (e.g. private by downstream beneficiaries, 3) enable self-sustaining fund to provide ongoing of statutory changes that could open hunting land) to provide a sufficient producers using conservation practices support to successful CIG projects. This up additional potential for leveraging financial incentive to put the land under to unlock a higher return on their could help fund interesting ideas that investment capital through existing NRCS easement; 2) NRCS using increased products through investment in mid- are incubated within the CIG. programs. The Conservation Stewardship transparency on easement eligibility stream infrastructure (e.g. processing Program was considered out of scope for to reduce uncertainty and incentivize and transport for organic commodity this report but may hold further potential greater investment in conservation crops), 4) monetization of underutilized for leveraging investment capital and easements; and 3) investors acting co-products of conservation (e.g. merits future analysis. as intermediaries to quickly secure taking biomass that would otherwise available land for conservation and be burned and using it to generate A subset of EQIP projects are believed making it more affordable to farmers. electricity), and 5) engaging insurers to to generate financial value currently, These models could be expanded on help fund projects such as watershed which means that, with statutory today for greater impact, for example restoration that ultimately reduce their As impact investors are changes, they could be carved out using credit aggregation for avoided claim costs. currently limited by a and aggregated for funding by private conversion of grasslands. With statutory “ investors in the form of revolving loan changes, investors could be certified CIG currently functions as an incubator shortage of investable funds or other investment vehicles. as partners and program participants for conservation finance and credit projects, NRCS has the
Under current statutes, a similar for the ultimate benefit of the farmers trading concepts and has been used to potential to create more approach is likely possible using EQIP that both they and NRCS serve and the fund work developing new standards practices aggregated under RCPP. Adjusted Gross Income (AGI) limitation for carbon credits via agriculture and opportunities for investors
could be waived when it would achieve grasslands, new credit mechanisms to engage in conservation compelling conservation benefits. for river nutrient and temperature projects while continuing controls, and innovative financing “ RCPP already allows private entities solutions that value ecosystem to prioritize the needs to partner with agricultural producers services. It is, in a sense, the Research of traditional program and conservation partners to achieve and Development arm of NRCS’s participants. conservation on a landscape scale, conservation programs. The funding though funding recipients must still reduces the risk for businesses to meet all eligibility criteria for the explore different types of conservation programs providing the funds (EQIP, investments and instruments. In and of ACEP, Healthy Forest Reserve Program itself, CIG leverages private investment (HFRP)) or seek a waiver, which can only in the sense that organizations still be restrictive. To date, RCPP has that apply for grants must also invest been used successfully by corporate their own resources for their projects. actors seeking to improve conservation The long-term impact of CIG on private practices within their supply chains capital may be much larger over time, X XI SUMMARY OF FINDINGS
New authorities for NRCS could create Participation in NRCS programs is This report concludes that there more opportunities for investment capital impacted by exogenous factors such is significant near- and long-term to fund conservation work through new as tax policy, easement valuation potential for NRCS to leverage investment instruments, lowering risk for protocols determined by Treasury, and by private capital to accomplish more investors, and exploring new roles for regulations defining commodities. conservation on private lands. NRCS. Farm Bill discussions should examine opportunities to adjust these outside As impact investors are currently Producers, landowners, and supply factors to increase NRCS’s long- limited by a shortage of investable chain actors interested in conservation term impact and to enable expanded projects, NRCS has the potential often need access to more and participation in NRCS programs. to create more opportunities for lower-cost capital, as well as ways to Further, NRCS has opportunities to investors to engage in conservation reduce their risk exposure. As many collaborate with other agencies within projects while at the same time conservation practices offer unproven USDA such as the Farm Service Agency addressing needs of traditional financial benefits, traditional lenders (FSA) and the Risk Management program participants. While many may not be well-suited to offer Agency (RMA). of the ideas explored in this analysis financing, which offers opportunities require statutory changes, there is a for impact investors to enter the Research for this report also identified a robust list of opportunities that have market. NRCS could consider creating set of other improvements and enablers, the potential for significant increases new kinds of investable vehicles which are provided as inspiration in achieved conservation that could which would channel available funds for further improvements to the be implemented immediately. to conservation projects (everything administration of NRCS programs. Allowing these changes would from farm-level to landscape scale), Specifically, two ideas came up again benefit farmers, natural resources, using direct loans or loan guarantees, and again in interviews: better support and investors, as they would promote issuing conservation bonds or using matchmaking between potential a larger number of conservation Pay for Success models. Within these program participants and raising the projects that generate financial vehicles, to better align risk with reward profile of NRCS programs through more returns. for investors, NRCS could offer various outreach and marketing. kinds of credit enhancement.
Given the statutory authority, NRCS could play a number of new roles that it currently cannot. NRCS could better support producers by helping with marketing, providing income recovery from conservation-driven losses, and by creating Individual Development Accounts targeting conservation. NRCS could also do more to support environmental markets and businesses innovating in conservation technology and services.
XII XIII CONTENTS
II FOREWORD IV ACKNOWLEDGEMENTS
VI SUMMARY OF FINDINGS
1 CONTEXT AND PURPOSE OF THIS REPORT
5 DEFINITIONS
7 THE NATURAL RESOURCES CONSERVATION SERVICE
11 WAYS TO WORK WITH PRIVATE CAPITAL
12 PUBLIC CAPITAL FOR PUBLIC RETURNS, PRIVATE CAPITAL FOR PRIVATE RETURNS
25 CREATING THE CONDITIONS FOR ENGAGING INVESTMENT CAPITAL IN NRCS PROGRAMS
29 OPPORTUNITIES TO LEVERAGE INVESTMENT CAPITAL THROUGH
EQIP, ACEP, RCPP AND CIG
30 A NOTE ON ENVIRONMENTAL MARKETS
30 ENVIRONMENTAL QUALITY INCENTIVES PROGRAM (EQIP)
35 AGRICULTURAL CONSERVATION EASEMENTS PROGRAM (ACEP)
41 REGIONAL CONSERVATION PARTNERSHIP PROGRAM (RCPP)
51 CONSERVATION INNOVATION GRANTS (CIG)
55 CONCEPTS FOR NEW AUTHORITIES AND HOW THEY MIGHT BE USED
58 CREATE NEW INVESTMENT STRUCTURES, WITH RISK MITIGATION
67 EXPLORE NEW ROLES FOR NRCS
71 OTHER FARM BILL OPPORTUNITIES
75 ENABLERS: IDEAS TO DRIVE MORE AND HIGHER QUALITY PARTICIPATION
IN NRCS GRANT PROGRAMS
XV There is more money in private sector As the number of impact investors CONTEXT AND PURPOSE OF REPORT investment than philanthropy and focused on conservation opportunities government funding combined. And the grows, so too does demand for attractive difference is not minor: private capital is and appropriate investments. In fact, bigger than other types of funding by conservation-focused investors reported several orders of magnitude. The total that they had already raised $3.1 billion value of financial assets worldwide was in private capital that they intend to around $294 trillion in 2014 and is likely deploy between 2016 and 2018. The considerably more than $300 trillion biggest barrier to more investment in today (this includes the value of major conservation cited by investors is the stock exchanges, as well as the value of lack of accessible projects, specifically loans and bonds outstanding),1 compared “high-quality investment opportunities with the United States government’s 2016 (fund or direct) with track record.”7 budget of $3.9 trillion2 and $390 billion of philanthropic capital (mission-driven, or On the flip side, NRCS is currently non-financial-return-seeking capital) for all one of the largest single “buyers” of causes.3 conservation, with capital outlays each year of approximately $4 billion, Looking at funding specifically for including both financial assistance and conservation, around $40 billion came from technical assistance. And yet, each government budgets and philanthropy year the demand for NRCS programs worldwide in 2016.4 Investors committed $2 far outstrips the available funding. billion to conservation in 2015.5 For example, only about 30% of EQIP
Within the category of impact investment capital, one analysis showed a cumulative total of $8.2 billion between 2004 and 2015 committed to conservation, and the level of impact investment is growing rapidly: in just two years, the total private capital committed to conservation investments jumped by 62%.6
1 “Here’s what the $294 trillion market of global financial assets looks like,” last updated February 12, 2015, http://www. businessinsider.com/global-financial-assets-2015-2. 2 “The Federal Budget in 2016,” last updated February 8, 2017, https://www.cbo.gov/publication/52408. 3 “Giving USA 2017 Infographic,” last updated June 12, 2017, https://givingusa.org/see-the-numbers-giving-usa-2017- infographic/. 4 “Conservation Bonds Take Green Financing to the Next Level,” last updated December 4, 2014, http://impactalpha.com/ conservation-bonds-take-green-financing-to-the-next-level/. 5 Kelley Hamrick, State of Private Investment in Conservation 2016: A Landscape Assessment of an Emerging Market, (Washington DC: Ecosystem Marketplace, 2016), http://forest-trends.org/releases/p/sopic2016. 6 Kelley Hamrick, State of Private Investment in Conservation. 7 Abhilash Mudaliar, Hannah Schiff, Rachel Bass, Annual Impact Investor Survey, (New York: Global Impact Investing 1 Network, 2016), https://thegiin.org/knowledge/publication/annualsurvey2016. 2 CONTEXT AND PURPOSE OF THIS REPORT
applications have been funded on This report focuses on four NRCS average in recent years and the CIG programs, chosen for their likely relevance program has a much lower funding rate to the central question of the project: closer to 10 percent. Environmental Quality Incentives This means that on the one hand, Program (EQIP), Regional Conservation there is a growing interest from Partnership Program (RCPP), Agricultural Figure 1: Farm Bill Funding for Title 2 Conservation Programs private capital in funding investment Conservation Easement Program (ACEP) Figure 1: Farm Bill Funding for Title 2 Conservation Programs through NRCS through NRCS opportunities in conservation, but they and Conservation Innovation Grants (CIG). Title 1: Commodity Programs face a challenge finding good projects. CIG is authorized in the Farm Bill as a Title 2: Conservation And on the other hand, NRCS is component of EQIP, but for all intents and Title 3: Trade finding that the supply of conservation purposes, is managed as a distinct program Title 4: Nutrition projects (a portion of which might be and is treated as such in this report. Beyond Title 5: Credit Title 2: Conservation Title 6: Rural Development “investable”) on private lands seems these, this report explores the potential for Title 7: Research, Extension & inexhaustible, given the shifting mosaic new authorities that might be established Related Matters of land conditions, weather variability to further leverage private capital outside Title 8: Forestry Healthy Forests Title 9: Energy and ownership changes, and the of these four programs. The Conservation Reserve Program continuous need for maintenance and Stewardship Program (CSP) and other Title 10: Horticulture and Specialty Crops rehabilitation. Today though, much NRCS programs were considered out of Watershed Title 11: Crop Insurance of this need remains disconnected scope for this report but may warrant future Rehabilitation Title 12: Miscellaneous from interested third-party investors, analysis. See Figure 1 for further context on even as their demand for investable the programs in and out of scope. In Scope of Report Agricultural Out of Scope of Report conservation projects is growing. Management Assistance This report is informed by over 60 The purpose of this report is to explore interviews with current and former NRCS Conservation the opportunity at the crux of this leadership and staff (national and state Reserve Program paradox: how might NRCS leverage level), program participants including (FA by FSA, TA by NRCS) a growing pool of impact investment producers and partner organizations, Agricultural Conservation capital to increase the scale of private program watchers, National Association Environmental Quality Conservation Easement Program lands conservation? If NRCS programs of Conservation Districts staff, traditional Incentives Program Stewardship Program $1.35-1.75B (2014-2018) $250-500M (2014-2018) were designed to better engage with investors, impact investors, and staff from (WREP, ALE) impact investment capital, would it be other government agencies. Research and possible to achieve more conservation analysis of past projects and applications on the ground per dollar of NRCS were also conducted. Conservation Innovation Grants Regional Conservation spending? Could it be possible for one $20M Partnership Program or more NRCS programs to become $100M + 7% of EQIP, ACEP self-sustaining over time, and no longer & CSP (TOTAL $250M/YR) be dependent on continued federal appropriations? And by engaging outcome-oriented investors, might the overall impact of these conservation investments exceed the current level achieved through practice-based payments?
3 4 DEFINITIONS
In this report, private capital is defined making), and charitable giving from as any non-governmental funds. corporations and NGOs. The difference between philanthropic capital and Investment capital refers exclusively investment capital is that investment to financial-return-seeking private capital expects (though does not always capital. Investments are neither grants get) a return on its investment whereas nor philanthropy, but rather capital philanthropic capital never expects outlays that will be repaid with a profit. repayment (it is, in effect, a guaranteed Providers of investment capital include 100% loss of the capital). investors, foundations (through mission- related investments or program-related While the term “impact investment” is investments, not grants), banks, and sometimes used very broadly, for this money provided by corporations paper, conservation impact investments seeking some form of return (either are defined as “investments intended financial, strategic, or reputational). The to return principal or generate profit capital that landowners and producers while also resulting in a positive impact put into NRCS projects can also be on natural resources and ecosystems. In considered investment capital. For this addition, conservation impacts must be report, however, we distinguish between the intended motivation for making the investments made by the landowners investment; they cannot be simply a by- themselves and those made by anyone product of an investment made solely for else. “Third-party” investors are the financial return.”8 focus of this report as they represent the largest untapped source of capital. Working lands conservation is the use of conservation tools and practices on The term investable projects refers to working agricultural, silvicultural and projects that can expect repayment ranch lands in a way that maintains them within three to ten years, are large as productive working lands; in other enough in size to warrant the transaction words, it does not seek to retire lands from costs financiers face, and can be production as a means of conservation, replicated with relative ease. We use but rather modify the way the land is this term to distinguish between the worked to achieve combined conservation conservation projects that can, under the and productivity goals. right circumstances, be profitable versus those that might never be profitable. Producers refers to agricultural producers, ranchers, and private forest landowners. At the other end of the spectrum is philanthropic capital, which is non- financial-return-seeking and may be provided by land trusts, individual donors, foundations (through grant-
58 Kelley Hamrick, State of Private Investment in Conservation. 6 THE NATURAL RESOURCES Since 1935, NRCS, previously known Water bodies in Oklahoma have been CONSERVATION SERVICE (NRCS) as the Soil Conservation Service, has removed from the impaired 303(d) list been working with farmers, ranchers under the Clean Water Act. Coastal and forest landowners across the communities ravaged by Hurricane Sandy country to help them boost agricultural have received over $120 million in NRCS productivity and protect natural resources funding for floodplain easements. through conservation. NRCS provides a combination of financial assistance NRCS funding for conservation is not and technical assistance to program only good for the environment, but it participants, who, in almost all cases, must has proven to be of critical value to rural also provide a financial contribution to American economies. A 2012 report by their projects. NRCS’s annual budget is the Outdoor Industry Association found approximately $4 billion, making it one of that the outdoor recreation economy, the largest single buyers of conservation including hunting, fishing, rafting and in the world. NRCS projects are not other activities directly impacted by only conservation efforts to help solve conservation efforts, generated $646 natural resource challenges—they are billion in economic activity annually also investments in rural America and the and directly supported 6.1 million jobs.9 economic well-being of American farmers, As a point of comparison, on-farm ranchers and forest landowners. labor employs 2.6 million individuals and contributes $137 billion to US NRCS leaders and staff are deeply GDP annually.10 The annual economic committed to the agency’s mission contribution of restoration is estimated to support and partner with farmers, at roughly $9.5 billion, including the ranchers and forest landowners to drive direct employment of more than 125,000 conservation on the ground, and the workers.11 Because on-the-ground results speak for themselves. From 2009 conservation work is often labor intensive, through 2015, NRCS invested more than investment in this work in rural areas has $29 billion to help private landowners a significant impact on job creation, and communities make conservation more so than other forms of improvements, touching over 400 million infrastructure investment.12 acres nationwide. With NRCS’s help, the New England Cottontail and Louisiana Without disregarding these and other Black Bear were removed from the conservation successes, NRCS’s annual Endangered Species list, and a listing of budgets are insufficient to help solve the Greater sage-grouse was avoided. the nation’s persistent natural resource
9 Outdoor Industry Association, “The Outdoor Recreation Economy” (Boulder, CO: Outdoor Industry Association, 2012), https://outdoorindustry.org/images/researchfiles/OIA_OutdoorRecEconomyReport2012.pdf. 10 Economic Research Service of the USDA, “Ag and Food Sectors in the Economy” (Washington DC: United States Department of Agriculture, 2017), https://www.ers.usda.gov/data-products/ag-and-food-statistics-charting-the-essentials/ ag-and-food-sectors-and-the-economy.aspx. 11 Todd BenDor and others, “Estimating the Size and Impact of the Ecological Restoration Economy,” PLOS ONE 10 (2015): 1–15, http://journals.plos.org/plosone/article/asset?id=10.1371%2Fjournal.pone.0128339.PDF. 12 Ryan Richards, “Green Is Good: How Smart Policy Can Sustain Growth of Private Investment in Conservation,” (Washington DC: Center for American Progress, 2017), https://www.cbd.int/financial/2017docs/smartpolicy-private.pdf. 7 8 THE NATURAL RESOURCES CONSERVATION SERVICE
challenges—soil erosion and degradation, has been used to fund the development between these efforts and the potential eutrophication in many significant water of innovative conservation finance for NRCS’s Farm Bill programs to leverage bodies, groundwater depletions, drought, approaches, as well as the Conservation private investment. And the difference flooding, and the spread of invasive Finance Practitioners Roundatble, a in scale is substantial: whereas the CIG species, to name but a few. A growing forum in which practitioners can share program awards approximately $20 body of research shows that conserving insights about these approaches and million in grants every year, the other farmland is critical to stabilizing carbon how they are using them. conservation programs of NRCS provide emissions (because emissions from urban nearly $3 billion on an annual basis. land are as many as 58 times higher To support the establishment of than emissions from ag land),13 however environmental markets, NRCS and Most NRCS conservation programs stretch over 6.6 million acres of farmland were Colorado State University have Federal support by engaging a range of lost to development between 2009 and developed credible software tools to different players who provide non-Federal 2016, with one million or more acres enable outcomes-based conservation. capital for NRCS projects. The bulk of this lost each year for the last four years.14 For example, Monsanto, Ben & Jerry’s, private capital comes directly from private Further, forests and grasslands, which are and other organizations are using the landowners in the form of matching funds also important carbon stores as well as COMET greenhouse gas suite of tools. for Farm Bill conservation projects (for providing other critical ecosystem services, A similar conservation evaluation tool instance, participation in EQIP, which is are also declining, with 13% of American for water quality is under development. voluntary, requires matching cash and grasslands lost to conversion since 2009.15 These tools estimate the impacts of non-cash funding from producers). Other (Farmland is being converted for real working lands conservation practices, non-Federal funders including land trusts estate development and grassland is being allowing users to better estimate the and foundations are partners in NRCS converted to farmland. In both cases, this outcomes of conservation actions. In the easement projects. Recent years have seen represents significant negative carbon and proper context, the tools can be used increased involvement by corporations, like environmental impacts.) to estimate credit generation in various MillerCoors and Ben & Jerry’s, in supply environmental markets. The development chain sustainability efforts. With the realization that federal funding and continued refinement of such tools alone is insufficient, NRCS has, over the are critical for impact investing, both This report includes examples of projects past decade, supported environmental for credit trading purposes and to help that use NRCS Farm Bill funding to markets and conservation finance estimate the environmental impact of leverage some type of private capital approaches to attract non-Federal funding conservation investments. investment, but again, these projects are to private working lands conservation. generally single instances or the result Largely through its Conservation These efforts are substantial, but CIG of ad hoc partnerships rather than an Innovation Grants (CIG) program, the funding is limited and focused on intentional effort by the agency to engage agency has been a leader in supporting providing opportunities to external with sources of private capital. Much more the development of water quality, partners to develop innovative financial could be done to increase the amount of greenhouse gas and wildlife habitat approaches. Other than in a few private investment leveraged by NRCS markets. More recently, the CIG program instances, there is limited connection program funding.
13 American Farmland Trust, “A New Comparison of Greenhouse Gas Emissions from California Agricultural and Land Use,” (Washington DC: American Farmland Trust, 2015), https://4aa2dc132bb150caf1aa-7bb737f4349b47aa42dce777a72d5264. ssl.cf5.rackcdn.com/AFTCrop-UrbanGreenhouseGasReport-Feburary2015.Edited-May2015.pdf. 14 National Agricultural Statistics Service, “Farms and Land in Farms: 2016 Summary,” (Washington DC: United States Department of Agriculture, 2017), http://usda.mannlib.cornell.edu/usda/current/FarmLandIn/FarmLandIn-02-17-2017.pdf. 15 World Wildlife Fund, “2016 Plowprint Report,” (Bozeman, MT: World Wildlife Fund, 2016), https://c402277.ssl.cf1.rackcdn. com/publications/946/files/original/plowprint_AnnualReport_2016_GenInfo_FINAL_112016.pdf.
9 10 Given that there is interest in finding ways Public Capital For Public WAYS TO WORK WITH PRIVATE CAPITAL for NRCS to leverage private capital, and since there is a growing amount of private Returns, Private Capital capital interested in impact investments for Private Returns that both produce a return and achieve conservation, there would seem to be a To provide incentives for investment, the remarkable opportunity for the interests of first step is to begin to think about what NRCS and impact investors to overlap. The types of conservation projects might question is how best to take advantage of provide financial returns on investment. this alignment of interests. The reality is that implementation of conservation practices is often a “net cost.” At the highest level, there are a number Installing a saturated buffer or grassed of different types of opportunities to use waterway, adopting a no-till approach, and NRCS money to leverage private capital. improving manure handling, for example, These include: all create public conservation value but likely will not provide any significant • Allowing greater participation from monetizable financial return on investment. investors in NRCS programs, through In part, this is because many of the changes to eligibility requirements benefits of conservation are not properly (including waivers of AGI limitations) accounted for in our economic system. and by creating new roles for investors They are, to use the economic term, within these programs (as recipients of “positive externalities.” It therefore makes funds as well as providers of funds). sense, and is likely necessary, to use public • Encouraging and enabling private money to pay producers and landowners capital to invest in conservation a portion of the cost of these practices as projects that provide a financial return. an incentive for them to generate public This may include boosting returns or goods. decreasing risk (or both), connecting investors with projects, and providing data to inform potential investments. • Creating and facilitating markets for ecosystem services that enable the monetization of environmental benefits (e.g. carbon markets, mitigation banking markets, etc.), thereby attracting private capital investment.
These three categories of opportunity underlie, individually and in combination, all of the specific opportunities identified throughout this report.
11 12 WAYS TO WORK WITH PRIVATE CAPITAL
There are, however, conservation practices conditions,17 though in some cases the projects create, ensuring it is a win- that have a high potential for creating the payback period may be closer to win-win for producers, investors and monetizable financial value in addition to ten years.18 society. public conservation value. For example: • Finally, environmental markets make it possible to monetize value from The advantage of deploying private • Implementing water and energy- improvements in water quality and capital to working lands projects that efficient irrigation practices can reduce quantity, nitrogen reductions, air provide a private financial return is that operating costs for the producer, quality and more, depending on the a significant amount of public money which can be significant over time. location and available programs. is then available for investments where In Arkansas, savings from reduced the public value outstrips the private water usage ranged from $3 to 4 per In short, there are many conservation value that producers and investors are acre per year for basic irrigation water practices that have the potential unlikely to implement without financial management practices but went all to provide an economic return on incentives, such as riparian buffers and the way up to $33 per acre per year investment. denitrifying bioreactors. for storage reservoirs and tailwater recovery ditches, and that does not NRCS currently awards the same type of Figure 2 shows an illustrative example of even take into account additional financial assistance and support to both how this might work. Currently, available energy savings that are possible as those activities that generate financial funds are spread across all qualified well. (See case study below.) return and those that do not. This is an conservation practices or funding pools, • In the right setting, nutrient inefficient use of government resources, leaving worthy projects unfunded every management efforts can lower as, from a purely economic perspective, year. On average in recent years, only a producer’s input costs without producers should not need any external about 30% of the roughly 135,000 sacrificing yield, which improves a financial incentives to implement applications have received funding, farmer’s bottom line while providing practices that pay for themselves within though this can vary significantly over environmental benefits and minimizing reasonable time-frames. time. If private investment capital could legal exposure. (See case study below.) be engaged to provide low-cost loans • Another profitable EQIP practice is However, some producers are capital- (for example) for projects that have a transitioning to organic agriculture. constrained and may lack the available financial return on investment, it would Producers of organic crops can expect funds to finance a project’s up-front allow funds that would otherwise to be 22 to 35% more profitable than costs. This is where private funding can have gone to these projects to be they were as conventional farmers at play a role: projects at the right scale targeted instead toward “net cost” current premium price levels.16 (See that generate a risk-adjusted financial conservation projects. The net result is case study below.) return on investment over three to ten more conservation and more producers • Implementation of anaerobic digesters years are projects that private investors receiving support. to convert animal waste into energy should be willing to take on. Further, can pay for their initial investment deals can be structured so that farmers within five to seven years under good still retain a portion of the financial value
16 David W. Crowder and John P. Reganold, “Financial competitiveness of organic agriculture on a global scale,” PNAS 112 (24) (2015): 7611-7616. 17 “A guide to financial incentives for AD,” last updated August 25, 2015, http://www.letsrecycle.com/news/latest-news/the- financial-case-for-anaerobic-digestion/. 18 “Funding On-Farm Anaerobic Digestion,” last updated September 2012, https://www.epa.gov/sites/production/ files/2014-12/documents/funding_digestion.pdf.
13 14 FigureFigure 2: Illustrative 2: Illustrative Example Example of How of EngagingHow Engaging Private Private Capital Capital Expands ConservationExpands ConservationAchieved Achieved
Funding for EQIP Conservation Practices - Public Funding
No potential for private return Potential for private return
Fences No till Cover Manure Irrigation Nutrient Transition Anaerobic crops waste mgmt to Organic Digesters Farmer contribution structures NRCS funding Unfunded need
Funding for EQIP Conservation Practices - Public and Private Funding
No potential for private return Potential for private return
Fences No till Cover Manure Irrigation Nutrient Transition Anaerobic crops waste mgmt to Organic Digesters Farmer contribution structures NRCS funding Private capital Interest expense for farmer
Note: Total NRCS funding (orange) is equal between these two graphics. The dark gray in the top graph is more than the sum of the dark and light gray in the bottom graph because the interest expense paid by farmers is expected to be less than what producers would have paid for their contribution in a traditional NRCS project. The overall amount of conservation achieved is 15 higher in the bottom graphic, with unfunded needs met. 16 WAYS TO WORK WITH PRIVATE CAPITAL FigureFigure 3: Economic 3: Economic Viability Viability of Alternate of Alternate Wetting Wetting and Drying and Dryingin forthe RiceMid-South Cultivation in the Mid-South
Profitability of AWD with Carbon Payments vs Flooding Case Studies: Conservation for the methane reductions, this further Rice Price ($/bu) 2.50 3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.50 Practices That Provide a Return improves the economics of AWD, seen in Diesel Price ($/gallon) the expansion of the profitable range to on Investment $3.20 5.22 -0.82 -6.93 -13.01 -19.09 -25.16 -31.24 -37.32 -43.40 -49.47 include the red cells in Figure 3. If water $3.50 8.56 2.48 -3.59 -9.67 -15.75 -21.83 -27.90 -33.98 -40.06 -46.13 were priced at the ‘social cost of water,’ Water- and Energy-Efficient Irrigation $3.70 10.79 4.71 -1.37 -7.45 -13.52 -19.60 -25.68 -31.75 -37.83 -43.91 then this would improve the comparative In Arkansas, Alternate Wetting and Drying $3.90 13.01 6.94 0.89 -5.22 -11.30 -17.37 -23.45 -29.53 -31.61 -41.68 profitability of AWD even further given (AWD) irrigation methods are one way $4.10 15.54 9.16 3.08 -2.99 -9.07 -15.15 -21.23 -27.30 -33.38 -39.46 its reduced reliance on water, seen in that rice farmers can reduce unsustainable $4.20 16.35 10.27 4.20 -1.88 -7.96 -14.04 -20.11 -26.19 -32.27 -38.35 the expansion of the profitable range to draws on aquifers, while also reducing include the green cells.20 Both a carbon $4.40 18.58 12.50 6.42 0.34 -5.73 -11.81 -17.89 -23.96 -30.04 -36.12 greenhouse gas emissions and even saving offset credit and a social cost of water farmers money. “[AWD] can save up to expand the profitable conditions even $50 an acre on production costs that can Profitability of AWD with Social Cost of Water vs Flooding further, as seen in Figure 3. Rice Price ($/bu) reach $1,000 an acre—important savings in 2.50 3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.50 a low-margin industry that’s seeing harder Diesel Price ($/gallon) times,” according to Dennis Carman, an $3.20 5.22 -0.82 -6.93 -13.01 -19.09 -25.16 -31.24 -37.32 -43.40 -49.47 adviser who is chief engineer and director $3.50 8.56 2.48 -3.59 -9.67 -15.75 -21.83 -27.90 -33.98 -40.06 -46.13 of the White River Irrigation District in $3.70 10.79 4.71 -1.37 -7.45 -13.52 -19.60 -25.68 -31.75 -37.83 -43.91 19 Hazen, Arkansas. $3.90 13.01 6.94 0.89 -5.22 -11.30 -17.37 -23.45 -29.53 -31.61 -41.68
$4.10 15.54 9.16 3.08 -2.99 -9.07 -15.15 -21.23 -27.30 -33.38 -39.46
Implementation of AWD is an eligible $4.20 16.35 10.27 4.20 -1.88 -7.96 -14.04 -20.11 -26.19 -32.27 -38.35
EQIP practice, so rice farmers can apply $4.40 18.58 12.50 6.42 0.34 -5.73 -11.81 -17.89 -23.96 -30.04 -36.12 to NRCS for financial assistance to make the shift. But, as illustrated in the charts below, under certain conditions Profitability of AWD with both Carbon Payments and Social Cost of Water vs Flooding AWD is also more profitable than flood- Rice Price ($/bu) 2.50 3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.50 irrigation methods for growing rice. For Diesel Price ($/gallon) example, when the cost of rice is at the $3.20 5.22 -0.82 -6.93 -13.01 -19.09 -25.16 -31.24 -37.32 -43.40 -49.47 lower end of the range, and the cost of $3.50 8.56 2.48 -3.59 -9.67 -15.75 -21.83 -27.90 -33.98 -40.06 -46.13 diesel fuel is at the higher end of the $3.70 10.79 4.71 -1.37 -7.45 -13.52 -19.60 -25.68 -31.75 -37.83 -43.91
range, then AWD’s reduced yield is less $3.90 13.01 6.94 0.89 -5.22 -11.30 -17.37 -23.45 -29.53 -31.61 -41.68
of an economic hit, while its lower energy $4.10 15.54 9.16 3.08 -2.99 -9.07 -15.15 -21.23 -27.30 -33.38 -39.46
use becomes a meaningful economic $4.20 16.35 10.27 4.20 -1.88 -7.96 -14.04 -20.11 -26.19 -32.27 -38.35
advantage (see Figure 3). If rice farmers $4.40 18.58 12.50 6.42 0.34 -5.73 -11.81 -17.89 -23.96 -30.04 -36.12 are able to generate carbon offset credits
Note: Cell values indicate the dierence between AWD profits and traditional flooding profits. *Carbon payment is based on the amount of CO2e mitigated by switching from traditional flooding to alternative AWDS methods *Social Cost of water is based on the amount of water (ac/in) saved by switching from traditional flooding to alternative AWD methods The social cost of water was estimated to be $0.472 per acre inch.
White cells denote those price combinations (diesel and rice) for which AWD irrigation was more profitable than traditional flooding
Orange shaded cells denote the price combinations (diesel and rice) for which the addition of carbon payments makes AWD irrigation more profitable than traditional flooding
Blue shaded cells denote the price combinations (diesel and rice) for which the addition of the social cost of water makes AWD irrigation more profitable than traditional flooding 19 “How U.S. Rice Farmers Could Slash Their Emissions (and Costs),” last updated April 26, 2017, https://www.bloomberg. Red shaded cells denote the price combinations (diesel and rice) for which the addition of both carbon payments and com/news/features/2017-04-26/rice-farming-is-a-big-polluter-in-arkansas-farmers-test-a-cleaner-way. the social cost of water makes AWD irrigation more profitable than traditional flooding 20 Lanier Nalley, Merle Anders, Kent Kovacs and Bruce Lindquist, The Economic Viability of Alternative Wet Dry (AWD) Source: 21 Irrigation in Rice Production in the Mid-South, (Dallas TX: Working Paper Prepared for the Southern Agricultural Economics Association, 46th Annual Meeting Program, 2014). 21 Lanier Nalley, Merle Anders, Kent Kovacs and Bruce Lindquist, “The Economic Viability of Alternative Wet Dry 17 (AWD) Irrigation in Rice Production in the Mid-South.” 18 WAYS TO WORK WITH PRIVATE CAPITAL
Case Studies: Conservation Further, research has shown that there are and technologies make it easier and Practices That Provide a Return times when the nutrient payoff function is more affordable for farmers to be more on Investment flat, meaning that the farmer can vary the data-driven in their nutrient planning and amount of a nutrient applied quite a bit applications. Nutrient management can with a negligible impact on productivity.22 help farmers lower input costs (nutrients, Nutrient Management Practices Determination of the optimal rate of energy/fuel, labor) without sacrificing Crop yield-nutrient rate response curves some nutrients, such as nitrogen, can be yields, providing both economic and can be used to determine the point difficult due to many factors. Due to this conservation benefits (water quality, at which adding more of that nutrient challenge, farmers do not want to chance air quality). For a sense of scale, a very actually decreases the economic return under-applying nutrients and missing rough estimate of the economic benefits on investment (nutrient application). yield potential, so some farmers over- puts the potential savings per year from This is illustrated for nitrogen in Figure 4, apply nutrients as an “insurance policy” nutrient management practices at $10 to and similar curves apply for phosphorus. to maximize yield. Improved data, tools, $75 per acre. NRCS currently provides technical and financial assistance for the FigureEconomic 4: Example Optimum Economic N Rate Optimum N Rate for Corn implementation of improved nutrient management, which helps farmers find Economic Optimum N Rate the balance that maximizes the value of 250 25 their applied nutrients. Further, farmers can generate nitrogen credits based on their reductions in nitrogen usage, which might one day have value in environmental 20 200 markets and further enhance the value of hitting the optimal nitrogen usage.
150 15 Transition to Organic Crops The EQIP program covers practices that are part of a producer’s transition to organic farming. Organic standards 100 10 Nitrate-N (mg/L) Nitrate-N emphasize a number of conservation-
Net Return to N ($/acre) to Net Return focused practices, such as building soil health, enhancing nutrient retention 50 5 (to minimize water quality issues), and prohibiting the use of synthetic fertilizers and pesticides.24 Further, studies have 0 0 shown that organic farming produces 0 50 100 150 200 250 more biodiversity than other methods of farming.25 N Rate (Ib/acre) Net Return to N Nitrate-N Source: 23
24 “Organic Agriculture,” last update date not noted, 22 David Pannell, “Economic perspectives on nitrogen in farming systems: managing trade-offs between http://www.fao.org/organicag/oa-faq/oa-faq6/en/ production, risk and the environment,” (Melbourne, Australia: Proceedings of the 2016 International Nitrogen 25 Gerold Rahmann, “Biodiversity and Organic farming: Initiative Conference, 2016) http://www.ini2016.com/pdf-papers/INI2016_Pannell_David.pdf. What do we know?” vTI Agriculture and Forestry 23 NRCS, NRCS Nutrient Stewardship, Chapter 10: Economics & Environmental Issues Module Background, Research 3 (61) (2011), http://www.fao.org/fileadmin/ (Washington DC: United States Department of Agriculture) http://www.nutrientstewardship.com/chapter-10- user_upload/suistainability/pdf/11_11_28_OA_ 19 economics-environmental-issues-module-background/. biodiversity_Rahmann.pdf. 20 WAYS TO WORK WITH PRIVATE CAPITAL Figure 5: Returns During Five Year Transition to Organic vs FigureConventional 5: Organic Returns Transition Rotational Returns vs Conventional Returns
Annual Return By Crop $1,444 ($/acre) Case Studies: Conservation $1,400 $1,300
Practices That Provide a Return $1,200
on Investment $1,100
$1,000
A report from Iowa State Extension $900 $848 showed that organic farmers on a four- $800 $720 $717 $684 crop rotation generate $200 to $300 $700 $665
$596 more per acre than conventional corn- $600 $580
$502 soybean farmers. From an economic $500 $460 $468 $463 $487 $438 $438 perspective, the higher organic prices and $400
$291 lower production costs more than make $300 $233 $200 up for the decrease in yield that farmers $142 often face during the three-year transition $100 $30 26 ($52) ($42) to organic farming. This is not unique to 0 Iowa: the results were borne out in a meta- -$100 study that showed that organic agriculture Receipts Total Costs Returns to Management was 22 to 35% more profitable than Conventional Corn Organic Corn Alfalfa (conv, then org) conventional agriculture.27 The transition Conventional Soybeans Organic Soybeans to organic agriculture takes three years Transitional Oats Organic Oats and requires meticulous planning and record keeping. Costs associated with the Transition Rotational and Conventional Returns ($/acre) transition include certification, nutrient and $1,400 pest management, and reduced yields with no price premium.28 An example developed $1,200 by Iowa State University Extension recommended a four-crop rotational plan $1,000
$857 that allows a farm to transition one field $824 $829 $800 at a time and attain organic certification $720 on all four fields by year six. The returns $593 $610 $600 $560 to management (net of costs incurred) $565 $563 $527 $496 $526 are positive even in year one at $61.72 $482 $496 $400 $378 per acre, and they climb steadily to reach $350 $521.01 by year five, with a five-year $265 average of $303.53. $200 $201
$45 ($29) ($47) 26 Ag Decision Maker, “Making the Transition from 0 Conventional to Organic,” (Ames IA: Iowa State University Extension, 2009), https://www.extension. -$200 iastate.edu/agdm/crops/pdf/a1-26.pdf. Revenue Total Costs Returns to Management 27 David W. Crowder and John P. Reganold, “Financial competitiveness of organic agriculture on a global scale.” Transitional Year 1 Transitional Year 4 Conventional 5-Year Average 28 Craig Chase, et al. “Making the Transition from Transitional Year 2 Transitional Year 5 Transitional Year 3 Transitional 5-Year Average Conventional to Organic,” (Ames IA: Iowa State University Extension, 2008), https://www.extension. Source: 29 iastate.edu/agdm/crops/html/a1-26.html.
21 29 Craig Chase, “Making the Transition from Conventional to Organic.” 22 BETTER ALIGNING INCENTIVES FOR INVESTING IN SOIL HEALTH
The importance of soil health for both benefits of conservation cropping plants a cover crop one year will see his productive agriculture and conservation is systems.33 This means that farmers who or her premiums rise due to a dip in yield well-established. USDA itself has said that, invest in building healthy soil will not even though he or she has effectively been “Improving the health of our Nation’s soil be able to realize the full benefits of investing in soil capacity. Critics argue is one of the most important conservation that investment if they need to sell the that the FCIP is essentially subsidizing endeavors of our time.”30 land for some reason. If land assessors poor farming practices and discouraging were to begin to take current soil health responsible ones. If FCIP took conservation While improving soil health typically into account when appraising the value principles and practices into account in requires an up-front investment from of the land, it would provide both a how it determined premiums and payouts, producers, healthier soils have been shown greater incentive to farmers to invest in it could align incentives for conservation to both reduce economic risk and enhance soil health and a clearer mechanism for and responsible production — with an productivity, while also resulting in monetizing the financial value of healthy impact at a massive scale.34 environmental improvements. For example, soil. There are a few new land valuation no-till planting requires new equipment, methodologies being developed but but also typically results in lower fuel additional research and modeling is still costs. Similarly, the seeds for cover crops needed. Pioneering investors are already represent a cost to farmers, but greater taking advantage of this market failure nutrient retention through the cover crop by buying farms with healthier soil at can improve yields while reducing input ‘artificially’ low prices and benefitting costs.31 Improving soil health may also from their superior production as open up additional revenue streams: for well as environmental market credits example, farmers who have planted cover generated from their conservation value. crops could have contracts to allow other Addressing this market gap by assessing farmers to graze their animals on this land, land value based on its current soil which further boosts the health of the soil, health could better align conservation while generating a profit.32 and economic value for all farmers.
There are two ways that current soil health The US Federal Crop Insurance Program incentives are not currently working to (FCIP) provides financial support to optimize investment in soil health. One farmers who suffer losses from severe is through the assessment of agricultural weather and bad years of production. land value and the other is through the The FCIP is extremely complex, and a 30 “Want Healthier Soil? Link it to Crop Insurance,” last crop insurance program. detailed analysis is beyond the scope of updated May 2, 2017, http://civileats.com/2017/05/02/ this report. That said, one concern that want-healthier-soil-link-it-to-crop-insurance/. 31 “Soil Health Institute Newsletter,” last updated Spring Soil health is not currently taken into surfaced a number of times during the 2017, http://soilhealthinstitute.org/soil-health-institute- account when determining the value of research for this report is that the FCIP newsletter-spring-2017/. agricultural land. In fact, many of the tools does not currently take into account the 32 “Why It’s Time to Stop Punishing Our Soils with Fertilizers,” last updated May 3, 2017, http://e360.yale. currently used to value agricultural land, use of conservation practices, which can edu/features/why-its-time-to-stop-punishing-our-soils- such as the Corn Suitability Rating 2 in end up effectively penalizing farmers with-fertilizers-and-chemicals. Iowa or the high-tech Acrevalue tool from who use them and rewarding farmers 33 Delta Institute, “Market Drivers for the Illinois Nutrient Loss Reduction Strategy,”(Chicago IL: Delta Institute, Granular, discount the internal and external who do not. For example, a farmer who 2017) 34 “Want Healthier Soil? Link it to Crop Insurance.”
23 24 WAYS TO WORK WITH PRIVATE CAPITAL
Creating the Conditions for Indeed, outcome-based investment is now portion of the environmental credits have a range of expectations on the level considered a ‘best practice.’ The Gates generated through a project that they of return they hope to realize, the most Engaging Investment Capital Foundation, the Hewlett Foundation, and help fund, while the producer, rancher, or common level of return expected by not- in NRCS Programs other notable providers of philanthropic landowner retains some of the credits or for-profit impact investors, as reported capital, focus on the results rather than the other conservation benefits such as in a recent survey, was 0 to 4.9% Internal In order to take advantage of the the process: “From the outset of the reduced costs or improved yield. Once Rate of Return.36 Among for-profit impact momentum on impact investing, NRCS grantmaking process, we work with there is flexibility in the statutes, it will investors, the bulk of capital – 64% – was and the Senators and Representatives partners to define the overall results we not be difficult to structure investment committed with an expected a return of 5 that authorize the agency’s programs, hope to achieve and the data needed agreements that are beneficial to both to 9.9% Internal Rate of Return (IRR).37 This must be conscious of the ways that NRCS to measure those results. We call this landowners and investors. Indeed, farmers, is not particularly onerous and could still facilitates, or discourages, investment approach outcome investing.”35 ranchers, and forest owners are used to allow for substantial benefits to accrue to capital from participating in its programs. working with third-party investors or loan producers. It should be noted that banks, This report identifies five “conditions” that, Third, to engage investment capital at providers for operating capital—sharing not included in the numbers above, may while not strictly required for success, scale, investors must be able to make profits and returns with investors is not have different criteria and expectations. It have a significant impact on the ability a financial return on investment, which a foreign concept to producers, but it should also be noted that those IRR rates and willingness of investors to help may seem, in many ways, at odds with is to NRCS. were largely for real estate transactions complement NRCS funding. NRCS tradition. Despite this, we believe which are inherently less risky than other that allowing such investment is in line Socializing NRCS staff to this new way of types of transactions. Expected IRR will First, investors need more and better with the heart of NRCS’s mission: helping working is a key component of success. likely go up as the perceived level data on the economics of conservation people help the land. This change simply It would be necessary to reinforce that, of risk increases. practices. Some of this information exists, recognizes that the type of help that by allowing investors to profit from but more extensive, higher-quality data people need varies based on the individual NRCS projects, NRCS is able to achieve Even with clear alignment on mission on the economic realities of implementing project. conservation results at scale and bring and investment goals, allowing investors these practices across different agricultural vastly greater sums of money into to make a profit on capital invested to sectors and geographies would allow for For the subset of projects that have the conservation than would otherwise leverage NRCS programs may still create better informed decisions about which potential to generate financial returns, be possible. some cultural discomfort with NRCS practices would be good candidates for the required shifts are to allow investors staff and among Congressional staff alternative financing mechanisms. to participate in creating those returns The investors who would be interested and authorizers. This dynamic must be and to enable revenue sharing among in working with NRCS are individuals or recognized and addressed if NRCS Second, NRCS should consider enabling appropriate parties. For example, third- groups based all over the country, who are is going to effectively leverage investment in outcomes in addition to party investors could be awarded a often focused on their local communities, investment capital. practices. Investors like buying outcomes, ecosystems, or watersheds. These rather than prescriptive practices, potential investors typically have a deep because this allows for those outcomes commitment to this country’s agricultural to be achieved in the most efficient way heritage and natural resources and are possible. This gives investors, as well as the motivated to use their investment capital producers doing the work, the best “bang to protect and support them, often but for buck.” not always at the expense of some level of financial return. While impact investors
36 Internal Rate of Return (IRR) is a metric that measures the profitability of a project. The IRR is the rate at which the 35 “How We Work,” accessed June 23, 2017, http://www.gatesfoundation.org/How-We-Work. project breaks even. 37 Kelley Hamrick, State of Private Investment in Conservation. 25 26 WAYS TO WORK WITH PRIVATE CAPITAL
Fourth, when there are higher levels applications if it were easier for landowners Summary:Table 1: Summary:Creating Creatingthe Conditions the Conditions for Increasing for Increasing Private Private of uncertainty around investment to understand the conservation investment InvestmentInvestment in inConservation Conservation opportunities, investors either require potential of their land and operations. greater returns, or else they shy away NRCS could go as far as to provide How it facilitates Implications for producers and unless there are tools that they can use funding or technical assistance support for Recommendation to mitigate these risks. Mitigating risk is a potential program applicants to subsidize investment landowners familiar role for the Federal government. and support project development. At some 1) Collect, analyze and Provides insight into actual This increase reporting requirements (even Federal agencies frequently take on the point, this would no longer be necessary publish essential data economics of each conservation though the data requested should already practice as implemented. be getting collected) minimizing the burden role of reducing risk in order to entice but it is likely needed at this stage of on farmers wherever possible. Ensure that investors into new opportunities. The maturity. It might even make sense to use producers are comfortable sharing these same mechanisms used elsewhere by CIG dollars to subsidize deal development. data. Overseas Private Investment Corporation 2) Focus on Enables ecient investment Emphasizing outcomes rather than (OPIC), US Agency for International Two other potential resources to support conservation approaches, using the least practices allows farmers to choose the most Development (USAID), and the project development are soil and water outcomes amount of capital to achieve the ecient method of achieving the desired Department of Energy (DOE), are needed conservation districts and Resource desired conservation outcomes. outcome, which should be viewed favorably. to bring more investment capital into Conservation and Development Councils. Measurement of outcomes can add cost conservation. Credit enhancements, loan Conservation districts possess the local and complexity, however, which must be managed. NRCS and government-supported guarantees, buyer-of-last-resort for credits insight and leadership to help design quantification tools provide a standardized or products, insurance products, and investment opportunities. A number set of ecosystem service calculation other risk mitigation tools hold promise of districts are already engaged in methodologies. for expanding the investable pool of environmental credit projects, and the 3) Allow a return on Investors require the ability (not While farmers would almost certainly prefer conservation opportunities. National Association of Conservation investment the guarantee) to earn a return grants to loans, the alternate investment Districts is interested in increasing capital on invested capital. approaches proposed in this paper should Finally, investors have a low tolerance for flows to districts to support conservation ensure that farmers still benefit from the high “transaction costs,” or other friction in and local economic development. implementation of conservation practices. the process of getting a project developed and launched. Project participants Resource Conservation and Development 4) Mitigate risk Where data are limited and Risk management support from NRCS should there is significant uncertainty, make more projects and practices viable, interviewed described a number of Councils (RC&Ds) work at the intersection risk management tools enable allowing more producers and landowners to specific transaction costs of working with of natural resource conservation and investors to engage where they benefit from these programs. NRCS including cumbersome application community development. RC&Ds are otherwise would not. processes, uncertainty around timing of composed of local leaders and often play payments, lack of harmonization with a financial role in communities through 5) Reduce transaction Transcation costs erode Simplifying and streamlining application other government agencies on related the provision of grants or loans to small costs financial returns, dimishing the and implementation processes should also attractiveness of otherwise viable reduce the amount of time and eort that processes, and the reality of needing businesses. This financial role projects. Reducing transaction producers and landowners must contribute, to put in quite a bit of time and energy and understanding highlights the costs makes more conservation benefiting them as well. The judicious use before it is possible to get any sense of the function that RC&Ds could play as projects investable for private of technology to handle easy or repetitive chances of success. potential conservation finance project capital. tasks, or to aggregate information, can also Program participants – investors and development intermediaries. help lower transaction costs. others – find it challenging to navigate the various programs, benefits and requirements and to develop potential projects through the application process. NRCS would likely see more and better
27 28 OPPORTUNITIES TO LEVERAGE INVESTMENT CAPITAL THROUGH This section looks at each of the four happening and they have the potential EQIP, ACEP, RCPP, AND CIG programs that are the emphasis of this to play an even greater role in driving report (EQIP, ACEP, RCPP, and CIG) and conservation on the ground as they get identifies opportunities for investment stronger. capital to participate today. This analysis includes successful project models While the carbon market faces an that could be replicated and explores uncertain future and other environmental potential new ways to use these programs. markets have struggled to gain traction, Opportunities for statutory changes that this paper presumes for now that markets would allow increased leveraging of private will continue to exist and function at capital also are identified. current levels. From this foundation, this paper aims to highlight opportunities for A Note on Environmental Markets supporting these markets in conjunction with NRCS conservation programs. Government plays a key role in creating the conditions for market development Environmental Quality Incentives and maturity. This includes establishing Program (EQIP) rules and rights (and enforcing them), providing standards, and sometimes SUMMARY OF FINDINGS: A subset of managing the new environmental currency EQIP projects are believed to generate (e.g. carbon credits). Government plays a financial value, which means that, with unique and necessary role in the creation statutory changes, they could be carved of new markets, which may require even out and aggregated for funding by further intervention in their early stages. private investors in the form of revolving To launch new markets, government often loan funds or other investment vehicles. provides risk mitigation mechanisms and Under current statutes, a similar approach may take on “excess” risk in the market is likely possible using EQIP practices until enough historical data can allow for aggregated under RCPP. risk-adjusted returns. This can include taking “first-loss” positions, providing a EQIP was first authorized in the 1996 Farm price floor for a certain commodity, or Bill and has been reauthorized in each acting as a buyer (or insurer) of last resort. successive Farm Bill, eventually growing into NRCS’s largest financial assistance Environmental markets are designed to program. Through EQIP, producers provide a mechanism for monetizing and compete for funding to implement transferring the value of conservation conservation practices on farms, ranches and other environmental benefits. and forestlands. Payments are made Markets exist or are being developed for wetland mitigation, water quality and quantity, water temperature, nitrogen, wildlife habitat, carbon and more. Most environmental markets are not yet fully mature or robust, but they have on many occasions made the difference between a conservation project happening or not 29 30 OPPORTUNITIES TO LEVERAGE INVESTMENT CAPITAL THROUGH EQIP, ACEP, RCPP, AND CIG according to regionally adjusted payment The Farm Service Agency provides With Statutory Changes investors, or else could serve to lower the schedules, which are designed to cover microloans of $50,000 through its risk or increase the returns of the projects, anywhere from 50 to 90 percent of the regular loan program, which may be Investment Concept: EQIP Revolving thus providing a further incentive to cost of practice implementation, with used by producers to cover some or all Loan Fund participate). Instead of the usual producer payments that are usually between 50 to of the up-front costs of EQIP project NRCS would work with private investors contribution to the costs of the project, 75% of the cost. Producers are responsible implementation, however FSA does not to carve out and aggregate a group producers would be expected to pay back for covering any remaining costs. currently monitor the extent to which of projects employing practices with the loan principal plus interest, ideally set microloans are being used for EQIP. It is potential for financial return. Instead of at a level where they retain some value There are approximately 175 conservation likely, though NRCS does not track it, that receiving reimbursements from NRCS, after their financial obligations to investors practices that are eligible for EQIP funding. some producers today receive third-party these producers would receive loans are satisfied. This means a producer could Many of these practices represent a net loans from private sources for the same (potentially below market rate) to cover finance the entire cost of the project and cost to producers and are less likely to purpose. the costs of implementing the practices. still get a share of the benefits. It may be implemented without some form of While landowners would almost certainly be necessary for NRCS to provide some incentive or financial support. Examples Opportunities to Leverage prefer grants to loans, they would still be form of risk mitigation to farmers and/or of such practices include riparian buffers, Investment Capital able to benefit financially from these loans, investors during the initial period of the edge-of-field water quality practices, and given that the loans would exclusively fund to address the uncertainty and lack of cover crops. No Statutory Changes fund profitable conservation practices. historical data for these kinds of projects. The loans would be funded primarily with This could be through loan guarantees or There is a subset of EQIP-eligible Aggregate high-return EQIP projects capital from third-party investors, but other mechanisms. practices, however, that are likely to create using RCPP – see RCPP section for details could also include some level of NRCS financial value either by reducing input funding or even philanthropic capital as or management costs or by increasing Process Change: Adjust the relative well. (Layering in NRCS and philanthropic productivity. These include practices that weight of criteria in the ranking process capital could provide a first-loss reserve for increase water efficiency, improve nutrient or create a national pool of EQIP funds management, support the transition to to ensure that the funds are going to organic crops, or promote implementation support the greatest conservation “bang of anaerobic digesters, or that result in for buck” NRCS State Conservationists often feel the generation of credits with value in FigureFigure 6:6: EQIPEQIP-Backed Revolving LoanLoan FundFund environmental markets. an obligation to spread funds around and to touch as many landowners as possible. This is a worthy intention, but it creates a 5. NRCS as first-loss investor may Projects that provide a financial return not recieve full payback; could leave on investment open up potential tension since it biases EQIP money away funds in to further revolve Producer Producer NRCS opportunities for leveraging private from larger projects that would consume a large share of available resources. A 2. Loans to EQIP-eligible producers investment through a variety of different 1. NRCS and Investor provide Revolving to implement conservation national pool, or an adjustment of the funds arrangements, discussed below. Loan Producer Producer ranking criteria, could help provide a way Fund to help manage this tension and ensure Participation by Investment Capital Impact the best conservation outcomes. 4. Investor receives payback at 3. Loan repayments, including in EQIP today Investor some level over time interest, fund new loans Producer Producer
Investors are not eligible participants in EQIP today, either as funders (providing funds to NRCS for co-investment) or as recipients.
31 32 OPPORTUNITIES TO LEVERAGE INVESTMENT CAPITAL THROUGH EQIP, ACEP, RCPP, AND CIG
As a revolving loan fund, this program This revolving loan concept is also • Allow for a waiver of the AGI limitation could become self-sustaining over time if scalable to the extent that there are for participation in the program so that successful, as the money repaid by previous profitable practices to be funded, enabling larger organizations and/or more and recipients could then be re-loaned out a significant expansion of program higher quality projects may be included, to new ones. This would also reduce the beneficiaries and conservation outcomes when appropriate. dependence of this program on future over time. • For a variety of reasons (including federal budget allocations and would allow not wanting to compete with other that money to be directed exclusively In a variation of this model, this program private lenders), it may be preferable to projects that require greater financial could be set up to provide loan guarantees for NRCS to provide loan guarantees incentives for producers to implement. rather than loans. In this case, NRCS would or other credit enhancements instead supply loan guarantees or some form of direct loans. However, if NRCS were The regular FSA loan program may already of risk mitigation while the loan capital to be the lead lender and to simplify be used by producers to cover up-front would come from third-party commercial the flow of funds, thenthe agency costs associated with EQIP projects but, providers, as in the farm credit system. needs to be able to receive funds from according to FSA, this is not tracked. This would allow NRCS to leverage its investors for the purpose of being capital even further since the amount paid loaned out. (If the model were for Other federal agencies such as the out (as in the case of a default) is typically investors and NRCS to make parallel Department of Energy, OPIC, and USAID far less than the amount guaranteed. In investments into a common revolving use similar models, taking advantage of other words, one dollar of guarantees fund, then this would not be required.) existing legislation (the Federal Credit leverages a multiple of that dollar in terms Without statutory changes, NRCS Reporting Act of 1990) as well as specific of loans. Structured correctly, the leverage could also play the role of encouraging enabling legislation for each of their ratio of these types of guarantees could be landowners to seek out RD loans that loan programs. significant. For an example of how these achieve the same goal. types of guarantees work, see the detail • Further, NRCS needs to be able to While Rural Development (RD) and FSA boxes on OPIC and USAID guarantee receive funds back when loans are already have lending authority, conservation programs. repaid. This is not allowable under is just one of many objectives for them. current authorities. However, there Establishing lending authority for NRCS There are several statutory changes are other government programs that would provide a source of loan funding required for this investment concept to provide loans or guarantees that can which is laser-focused on conservation be possible: accept repayment (see boxes on and, as a result, would prioritize a different OPIC and USAID below). The idea of set of projects and likely result in greater • Carve out a portion of EQIP money to establishing a loan guarantee program conservation. Further, loans that fund be provided as loans or guarantees. under a similar authority should conservation practices (rather than large This would allow for a pilot of this be explored. equipment purchases, for example) are a approach, with the potential to scale up better mechanism for ensuring that farmers over time based on results. Over time, it are the ultimate beneficiaries of such a may make sense to test the viability of program because they are less capital- only providing loans to projects which intensive and do not become obsolete. At generate a financial return, instead of a minimum, greater collaboration between direct financial assistance. For projects NRCS, RD and FSA could improve the use that generate marginal financial of farm lending to support conservation benefits a mix of loans and financial on the ground. assistance could be used.
33 34 OPPORTUNITIES TO LEVERAGE INVESTMENT CAPITAL THROUGH EQIP, ACEP, RCPP, AND CIG
Agricultural Conservation portion of the land’s total market value. agricultural production, ranching, and While NRCS has administered easement undeveloped recreation such as private Easements Program (ACEP) programs under a variety of names and hunting or fishing, all of which allow for authorities for decades, the Agricultural additional revenue streams on SUMMARY OF FINDINGS: ACEP is already Conservation Easements Program was conserved lands. successful in attracting investment capital first authorized in the 2014 Farm Bill to for conservation, and there is potential provide between $250 and $500 million One of the biggest constraints on to expand opportunities both with and from 2014 through 2018. ACEP – which is leveraging investment capital through without statutory changes. Three model composed of a working agricultural lands ACEP today is the AGI limitation, a concepts already in use were identified: preservation component (Agricultural provision of the Farm Bill that limits the 1) project developers combining revenue Land Easements, or ALE) and a wetlands amount of some USDA program payments from environmental credits, easement component (Wetland Reserve Easements, (including all conservation payments) payments and undeveloped recreation or WRE) – uses conservation easements that can be provided to individuals (e.g. private hunting land) to provide a to protect agricultural lands and restore, whose prior three-year average income sufficient financial incentive to put the protect, and enhance wetlands. Under exceeds $900,000. The AGI limitation land under easement; 2) NRCS using ALE, NRCS pays up to 50% of the fair effectively prohibits wealthy landowners increased transparency on easement market value for agricultural easements and landowning entities from participating, eligibility to reduce uncertainty and and up to 75% for grasslands of special though AGI waivers may be requested incentivize greater investment in significance. For WRE, permanent under RCPP, see below. Because wealthy conservation easements; and 3) investors easements receive 100% of easement value landowners and landowning entities own acting as intermediaries to quickly secure and 75 to 100% of restoration costs, while a lot of private land, this AGI limitation available land for conservation and make 30-year easements receive 50 to 75% of puts large amounts of land with relatively it more affordable to farmers. These both easement value and restoration costs. high environmental value out of reach of models could be expanded on today for In each case, the landowner is effectively conservation through NRCS easements. greater impact, for example using credit making a co-investment with NRCS in Additionally, it excludes certain third-party aggregation for avoided conversion conserving the land. In this way, easements investors who might otherwise use the of grasslands. With statutory changes, can also be a vehicle for engaging program to leverage their capital investors could be certified as partners investment capital. for conservation. and program participants for the ultimate benefit of the farmers that both they and Easement programs like ACEP are Even with the AGI challenge, investors NRCS serve and the AGI limitation could attractive to conservation-minded are already working with ACEP today in be waived when there are compelling investors because the easement payment a range of ways to conserve land, and conservation benefits. lowers the investment required (if the several successful models are described land is already encumbered) or provides below that involve credit generation and Conservation easements are cash payments immediate and substantial returns, helping reduced land purchase prices. There to landowners to compensate them for boost the return on capital. For example, may be opportunities to further leverage the portion of the market value of their Dirt Capital, an agricultural investment private investment through ACEP that do land forgone when the land is put under firm, has purchased two properties that not require statutory changes, described in an easement that restricts some activities it co-manages with farmers that had the next section. Additional opportunities (often development actions) on the previously been encumbered with NRCS that could be opened up through statutory property. This provides a financial incentive easements. Easements do restrict some changes are also explored further below. to landowners to conserve their land, and forms of use, but many forms remain enables easement purchasers to conserve viable, such as managed timber harvesting, private lands while only effectively paying a
35 36 OPPORTUNITIES TO LEVERAGE INVESTMENT CAPITAL THROUGH EQIP, ACEP, RCPP, AND CIG
Finally, there are other opportunities to unique carbon offset value, making this The opportunity highlighted by these of the map where the criteria lined up with drive increased use of the program in project particularly financially attractive. projects is to identify properties that eligibility requirements were colored red, general, such as raising awareness of This project also had the co-benefit of simultaneously fulfill three criteria: the land which ended up identifying eligible land the program with potential participants, supporting duck habitat, which helped is uniquely important for conservation with about 90% accuracy. This map was facilitating matchmaking between make it more compelling. At least one (and would qualify for an easement), the distributed to the district conservationists interested partners and supporting project similar WRP carbon credit project was natural characteristics of the land make for them to have on hand when they met development. These are detailed in the completed in South Carolina, which also it particularly valuable from a carbon with producers as an easy, visual way to section on Enablers at the end of benefits from the deep organic soils of the sequestration perspective (to a standard spur landowners to apply who might not the report. region. acceptable to carbon registries), and have thought to do so otherwise. Once credit generation is a compatible use with such a map is created, it does not need Participation by Investment Capital WRP/WRE can be challenging to use to recommended land management plans to be updated as the underlying data do in ACEP today generate verified carbon credits because (such that NRCS would be comfortable not change very often. The map is not the WRE statute retains substantial writing a compatible use letter). When used to exclude anyone from applying; Selected Projects rights for the federal government. This these conditions converge, the revenue applications from non-red areas are still means that, to maintain optimal wetlands stream (from the easement and carbon accepted and reviewed as normal. Creating Alligator River Avoided Conversion functions and values, NRCS has the right credits) on some plots of land is typically this sort of map for each state would Forestry Project to undertake activities on the property sufficient to interest landowners and be relatively easy and a national version This project combined easement that may not be consistent with the conservation-minded investors and can could be possible as well. From an investor payments with carbon offset credit permanent maintenance of soil or forest drive increased investment in conservation. perspective, this information provides generation to enhance the financial value carbon. In the Alligator River project, the greater certainty on which pieces of land to the landowner, thus making it a viable landowner obtained a compatible use There are opportunities that use a similar may qualify, which reduces risk to investors alternative to converting the land for letter stating that, while NRCS retained model, such as Avoided Conversion of and can spur greater investment. cultivation. In this project, 2,372 acres in the timber rights, it had no intention to Grasslands, described below, and similar Hyde County, North Carolina, were put harvest or manipulate the timber. This mechanisms could be explored elsewhere. under permanent easement through was acceptable to NRCS because the the Wetland Reserve Program (now bottomland hardwood ecosystem present Arkansas Easement Qualification known as the Wetland Reserve Easement on the property was consistent with the Transparency component of ACEP), which provided a optimal wetland functions and values NRCS in Arkansas has provided additional critical characteristic (permanence) for the desired by the agency. transparency on easement eligibility as generation of carbon credits. Blue Source a way to encourage more landowners originated the carbon credits, Goldman to explore enrolling their lands in Sachs provided the financial backing conservation easement programs. After and transaction expertise, the Climate a rule change cleared their queue of Action Reserve verified the credits, and potential projects, the WRP team wanted an unspecified private firm purchased to muster up interest in wetland easements the entire bundle of avoided forestry and in a way that was likely to increase the methane credits for $12 million in July quality of easement applications. Their 2011. The private landowners involved solution was to release a map of Arkansas in the project chose to forego future that overlaid two key easement criteria: hardwood harvests and draining of the soil type, which shows whether the land previously harvested coastal plains in was originally a wetland, and cropping exchange for an NRCS WRP easement history, which shows whether the land is and the carbon offset revenue stream. The currently under cultivation. The portions deep organic soils of this region provide
37 38 OPPORTUNITIES TO LEVERAGE INVESTMENT CAPITAL THROUGH EQIP, ACEP, RCPP, AND CIG
to seek easements who would not easement funding for this type of carbon Investors as Conservation-Focused Opportunities to Leverage otherwise have considered doing so. credit transaction. Project developers Intermediaries Investment Capital Investors can often act more quickly than If doing this at a national scale is not would identify one or more ranches for government agencies or large NGOs to No Statutory Changes feasible, then at a minimum NRCS could working lands easements, which would purchase land with high conservation consider doing it upon request to help provide the permanence for the credit value when it becomes available. These Process Changes: inform land purchase decisions. generation and unlock an additional investors can then do the work to secure • Build off the Arkansas Easement • Adjust the relative weight of criteria revenue stream for the landowner(s). A an easement and sell the land with a Qualification model to provide pre- in the ranking process or create a third-party investor or project developer requirement in the contract that the buyer qualification of easements: In Arkansas, national pool of easement funds to would act as an intermediary and work must purchase the easement upon closing. conservationists analyzed the eligibility ensure that the funds are going to with the landowner(s) to put together the The buyer gets a lower purchase price for of land in Arkansas for easements support the greatest conservation deal in a way that works for all involved. even if this means the land, the investor gets a modest return and then made this assessment public “bang for buck” (Eligible landowners could also pursue this choosing to acquire fewer, larger (a share of the easement funds) and the as a way of prompting greater use opportunity independently, but this would easements rather than more smaller high-value land gets conserved. Given that of easements. NRCS could consider be a heavy lift.) The investor would only be easements, if the conservation easements can take a while to come to adopting a similar approach across all a participant in the actual ACEP easement value supports this decision. State fruition, the investor may need to finance 50 states with the goal of providing transactions if he or she were also a conservationists often feel an obligation the value of the easement for a time. See more transparency on which land may landowner. All landowners involved would to spread funds around and to touch Figure 7 for an illustration of how this be considered a priority for easements. need to individually meet the eligibility as many landowners as possible. This can work. This information can shape investor requirements of ACEP. decisions in choosing land to invest in, is a worthy intention, but it creates and could prompt existing landowners a tension since it biases easement With Statutory Changes money away from very large easement Figure 7: Investors as Intermediaries in Securing opportunities that could effectively Allow selected investors / businesses to ConservationFigure 7: Investors Easements as Intermediaries on Working in Securing Lands Conservation Easements gobble up the entire budget, even be eligible participants when these may achieve greater There are a number of impact investors conservation at scale. A national pool, (e.g., Farmland LP, Iroquois Valley Farms, or an adjustment of the criteria, could Dirt Capital) whose business model is to help provide a way to help manage purchase agricultural land, lease land to
ACEP- $50 + $60 ACEP- this tension and ensure the best farmers to sustainably grow organic or eligible eligible Investor Investor Farmer Investor Farmer conservation outcomes. conventional agricultural products, and DEED then ultimately sell the land, often to DEED Investment Concept: Avoided Conversion these same farmers. During the time the of Grasslands Project with Credit investment company owns the land, it Aggregation works closely with the farmers to improve Step 1: Investor buys Step 2: Investor identifies Step 3: Investor sells land to Through CIG, NRCS has supported a the natural resource base of the land and agricultural land with unique ACEP-eligible Farmer who needs ACEP-eligible Farmer for $60, with number of projects that generate carbon operate the farm with conservation values. conservation value for $100. land and can’t aord $100 but two requirements: the Farmer must could aord $60. Process to secure secure the easement ($50) and give credits on ranchlands. The permanence This arrangement benefits not only the easement is initiated on behalf of it back to the Investor. of the carbon is assured through a landowner (investment firm), but also the Farmer. Outcomes: Farmer gets land conservation easement, the terms of farmers who ultimately end up owning (encumbered to remain agricultural land) that would otherwise have been which state that the existing soil carbon the land. There are also the usual benefits inaccessible and Investor makes $10 cannot be disturbed, in perpetuity. of conservation for society in general as a return for the risk assumed to execute the deal. These projects have used easement from enhanced ecosystem services. To funds from non-NRCS sources, but recognize the unique role these investors ACEP could be used as the source of play in supporting a common beneficiary,
39 40 OPPORTUNITIES TO LEVERAGE INVESTMENT CAPITAL THROUGH EQIP, ACEP, RCPP, AND CIG
NRCS could specifically certify groups Regional Conservation because it combines funding from other like this as “conservation finance entities” NRCS programs, such as EQIP, ACEP, which would allow them to participate Partnership Program (RCPP) the Conservation Stewardship Program, in NRCS programs (regardless of AGI) and others. Congress also imbued RCPP on behalf of their farmers prior to (and SUMMARY OF FINDINGS: RCPP already with more flexibility with regards to its perhaps contingent on) the farmers allows private entities to partner with participants and procedures, providing actually owning the land. There is agricultural producers and conservation more opportunity for participation precedent for this kind of designation from partners to achieve conservation on from investment capital. A range of the Rural Business Investment Program a landscape scale, though funding different kinds of organizations, including (RBIP), which can designate a company recipients must still meet all eligibility as a Rural Business Investment Company criteria for the programs providing (RBIC). the funds (EQIP, ACEP, HFRP) or seek a waiver, which can sometimes be For consideration... restrictive. To date, RCPP has been used Allow waivers for the AGI limitation Consider Raising RCPP Maximum It had previously been possible for successfully by corporate actors seeking Award Back to $20 Million program participants to seek waivers to improve conservation practices within for the AGI limitation for protection of their supply chains (for example, by environmentally sensitive land of special MillerCoors focused on water), by impact Because it targets landscape-scale significance, but this provision was investors, and by conservation groups projects, the RCPP team originally set removed in the 2014 Farm Bill. However, organizing landowners and others for the maximum award at $20 million NRCS may still waive the AGI requirement large-scale projects. Potential RCPP per project. However, the team has for participants of RCPP (who may be models to explore include: 1) aggregation since lowered the ceiling to $10 accessing ACEP easements) when it of small projects to investment-scale million based on the observation would further the purpose of the project. deals, 2) facilitating agreements for that there were very few high-quality While working through RCPP may make upstream conservation activity funded projects coming in at the higher sense for some situations, it would greatly by downstream beneficiaries, 3) enable funding levels. As RCPP becomes facilitate the participation of investment producers using conservation practices better known and the challenges capital in conservation easements if to unlock a higher return on their with program implementation are waivers were possible within ACEP as well. products through investment in mid- overcome, and assuming application stream infrastructure (e.g. processing quality continues to improve, NRCS and transport for organic commodity should consider raising the maximum crops), 4) monetization of underutilized award back to $20 million. The larger co-products of conservation (e.g. taking project size reduces the transaction biomass that would otherwise be burned costs of applying relative to the total and using it to generate electricity), and award and allows for projects at a 5) engaging insurers to help fund projects large enough scale to attract private such as watershed restoration that and philanthropic investment capital. ultimately reduce their claim costs. Further, this higher cap may allow for projects that otherwise would not RCPP is unique among NRCS’s portfolio apply to be considered, leading to of Farm Bill programs in that it is partner- better overall conservation outcomes. driven: third parties apply for RCPP funding for projects in a given geographic area. RCPP funding is also unusual
41 42 OPPORTUNITIES TO LEVERAGE INVESTMENT CAPITAL THROUGH EQIP, ACEP, RCPP, AND CIG businesses and investors, can be program Project Models Involving Private management. The Pinchot Institute first participants and the AGI limitation can be Capital (not Investment Capital) For consideration... completed a CIG project to pilot the waived to enable their participation under approach before applying to RCPP to The Role of Commodity certain circumstances. Corporate Supply Chain attempt to replicate the project model at a Sustainability Projects: and Trade Groups larger scale. The carbon credit verification The RCPP projects highlighted below The Yellowstone Region Agricultural costs on small plots are prohibitive, but demonstrate the program’s potential for Sustainability Project, led by MillerCoors, Commodity and trade groups (or through aggregation and the use of leveraging private investment through seeks to define best management even co-ops) can play a helpful emerging technologies, the project leaders supply chain sustainability projects, timber practices for irrigated agricultural intermediary role, acting as a liaison hope to develop a workable carbon credit management investment projects, and producers in Southern Montana that would and aggregator for their members model for small private landowners. For projects based on environmental credit lower natural resource consumption and and enabling them to collectively example, forest inventories have typically markets. In addition, a number of new degradation. Over the five-year timeline, access otherwise unattainable cost from $40,000 to $100,000 depending project models that may warrant further the project teams will work to lower resources. For example, in 2016, NRCS on the amount of land, but may now be exploration by future program participants the consumption of natural resources awarded a $1 million Conservation completed much more cheaply and quickly are listed below. through the use of added incentives Innovation Grant to the National with a modified mobile phone, greatly that would allow producers to mitigate Corn Growers Association (NCGA) reducing the cost of credit generation for While RCPP is an effective vehicle financial risks while transitioning to adopt and its Soil Health Partnership landowners. This project and others that for aggregating smaller projects into the practices. While MillerCoors does (SHP) to better understand and use low-cost (and technology-enabled) landscape-scale efforts, it is funded at a not receive any direct financial benefit adopt farming practices that reduce aggregation of small-holder landowners to much lower level than EQIP on its own. As from the project, the project provides the impacts of climate change. enable the monetization of conservation discussed in the section on EQIP, addition benefits that positively impact their Monsanto contributed an additional outcomes holds great promise that of a project aggregation and funding business, such as a healthier and more $1.6 million to support this effort. warrants further exploration (see Potential mechanism within EQIP (which is funded resilient watershed from which they can The NCGA will work with a range Project Models below for related ideas). by itself at a much higher level than RCPP) source clean water. RCPP provides a of project partners to help farmers would maximize the ability of third parties useful platform for companies seeking to implement practices that are to leverage investment capital for larger- engage upstream actors in their supply believed to reduce climate change scale projects. chains for mutual benefit in addition to impacts and then use emerging driving conservation outcomes. This model technologies such as satellite data to RCPP is still quite new, having first been (which relies on RCPP’s AGI waiver) could take measurements to validate these authorized in the 2014 Farm Bill, and it is enable other large food and beverage reductions. As in this example, where not yet well known or well understood by companies to tap into RCPP funding there are opportunities that rely on many impact investors. Those who have on behalf of their suppliers to fund aggregation for scale, commodity participated have reported frustrations conservation improvements that help to and trade groups can be useful and challenges typical of the initial rollout achieve sustainability goals or other public channels through which to work.38 phase of a program. Other participants corporate social responsibility (CSR) have complained about the lack of commitments. transparency on project competitiveness and the need for high levels of matching Aggregation Projects: support. The program staff members Unlocking Carbon Markets for Non- have been receptive to partner feedback Industrial Private Forest Landowners and have worked to revise and adapt the in the Pacific Northwest, led by the application and implementation processes Pinchot Institute, is designed to aggregate 38 “Monsanto Announces $1.6 Million Investment in to make them less burdensome. small, private forest plots and facilitate Developing System to Help Agriculture Quantify landowner participation in carbon credit Greenhouse Gas Reductions,” last updated September 23, 2016, http://news.monsanto.com/press-release/ markets, providing new income streams climate/monsanto-announces-16-million-investment- and incentivizing sustainable forest developing-system-help-agriculture-qu. 43 44 OPPORTUNITIES TO LEVERAGE INVESTMENT CAPITAL THROUGH EQIP, ACEP, RCPP, AND CIG
Market-based solutions: investors. The company was founded in conservation outcomes of improved water investors acting as intermediaries for The Teton Valley Soil, Water, and Wildlife 1976 and currently manages a portfolio of quality and quantity, enhanced wildlife NRCS programs, resulting in an Initiative, led by Friends of the Teton River, over 610,000 acres of forestland. habitat, and improved air quality. (HFRP expansion in the number of uses a new partnership in the Teton Basin does not have an AGI limitation, which potential program beneficiaries. to address growing concerns related to the Returns depend on the type of land and allows Lyme Timber to participate directly.) loss of agriculture in Teton Valley, as well they may come from a range of sources, In addition to NRCS easement funds, Opportunities to Leverage as the related loss of wildlife habitat. The including: sale of conservation easements landowners in this project were also able Investment Capital to secure state and local easements to partners will implement a “groundwater or fee interests to public agencies, sale of No Statutory Changes bank” to recharge the local aquifer, which development rights, sale of sustainably further leverage federal funding. It should will address water quality and quantity harvested timber, sale of carbon credits, be noted that, while private landowners are The following five project models issues that are impacting farmers and alternative energy supply agreements, and the intended beneficiaries of the ACEP and illustrate opportunities for RCPP to wildlife populations. The partners also sale of mitigation banking credits. In this HFRP programs, the complexity and time leverage investment from private, third- propose to explore new conservation case, the project uses a combination of required to go through the process can be party capital that are possible today. funding streams and develop new markets easement and restoration cost payments a barrier to participation for many forest for agricultural products. This project through the Healthy Forests Reserve landowners. Project developers, such as Aggregation projects leverages private capital from irrigators Program to private working forest owners Lyme Timber and the Conservation Fund, As seen in the small landowner example, and philanthropic capital to make needed and to Lyme Timber to complete the increasingly play a critical role in helping aggregation models hold promise. A improvements as well as support adoption restoration plan and achieve the desired landowners access these benefits. This modified iteration of the Pinchot Institute of new practices. It provides a model for suggests that there could be a multiplier project could provide investors the using market mechanisms to align the effect from engaging more impact incentives of a range of actors to drive For consideration... attainment of conservation outcomes. Improve Application Quality with FigureFigure 8:8: AggregationAggregation Model Model with with Investment Investment Capital Capital Participation by Investment Capital Project Development Grants in RCPP today Many of the groups interviewed for Funding to complete The Gulf of Mexico Forest-to-Sea Project this report emphasized that due to the NRCS project (includes multi-stakeholder approach of RCPP improvements, conserves Florida’s pristine “Big Bend” 1 area along the northeastern Gulf through projects, the up-front investment of inventories, credit generation) a Healthy Forests Reserve Program time and resources required just to get Impact (HFRP) easement/restoration plan. The to the point of being ready to apply Investor 2 project, led by the Conservation Fund, is significant. One way to increase the quality of RCPP project applications brings together 12 partners and the 3 Value Generated By Project would be to provide grants in the Small Small conservation-minded private timberland Environmental Credits Landowners Landowners investment management organization range of $50,000 to $250,000 to 5. Investor recieves a 4. Value accrues to portion of the project’s landowners / Cost Reduction Lyme Timber. Lyme Timber, a large support the project development benefits per additional project beneficiaries Increases in Income investor with $650 million in assets under costs. Grants could be awarded to agreement with the Small Small group of landowners management, focuses on the acquisition the most promising applicants at the Landowners Landowners and sustainable management of lands pre-application stage to support the with unique conservation values. As an development of the full application. It might even be possible to use some Small Small impact investor, Lyme Timber seeks to Landowners Landowners achieve conservation outcomes while also portion of CIG funding, if expanded, providing a return on investment to its for this purpose. Notes: 1) This diagram shows the process without a landowner financial contribution, however in some cases landowners may be expected to provide a financial contribution to the project up front as well, which would slightly change this structure. 2) It is likely that a project developer or intermediary would 45 do the aggregation and liaison function between the investors and the farmers. 46 OPPORTUNITIES TO LEVERAGE INVESTMENT CAPITAL THROUGH EQIP, ACEP, RCPP, AND CIG opportunity to co-invest alongside NRCS, for the ecosystem services provided by to switch to a less water-intensive crop providing the upfront capital for project grass buffers alongside waterways that in a water-sensitive region may be origination and verification costs. The fed their municipal supply. This reduced restricted by the lack of processing and investors would then take a cut of the the incidence of E. coli in the water transportation options in the local area. carbon credit sale at the project’s end, reaching the city. In a different structure, RCPP could be used as a platform to while still providing sufficient financial Denver Water partnered with the US bring individual producers facing these incentives to landowners to participate. Forest Service to pay for improved forest challenges together with private investors Nitrogen stewardship projects are one management in order to reduce the risk of and NRCS to identify projects that would example where this co-investment model fire and sediment runoff. RCPP could be both support the transition processes for would make sense. used as a platform to scale either of these producers and develop the infrastructure structures on a landscape level. An RCPP to help them reap the full benefits of their For example, as part of an RCPP project, project that is designed to bring these new products. The value generated by the NRCS funding could be used to implement actors together for mutual benefit could project would accrue to both producers nitrogen management practices that have a range of positive outcomes, either and private investment partners through reduce the amount of nitrogen fertilizer in water quality, sedimentation, or quantity. a predetermined arrangement consistent applied to crop fields. The private with NRCS policies. Ideally, NRCS could investors could provide funding for project Enable Producers Using Conservation partner Rural Development, the agency certification and verification. The resulting Practices to Unlock a Higher Return on who has traditionally focused on this kind nitrous oxide/carbon credits could be their Products: Co-invest RCPP funds of infrastructure work, to bring a stronger aggregated and sold into the voluntary with private funds for infrastructure focus on infrastructure that specifically carbon market. Lessons learned from the improvements on mid-stream assets supports conservation efforts. clean energy technology sector, where Farmers, ranchers, and landowners who a variety of project aggregation models have adopted conservation practices face Monetize Products and Co-Products of have been explored and used, may also be a range of obstacles to capturing the full Conservation instructive here. financial return on investment for their There are times when the implementation products. These barriers can be related of conservation activities generates an Facilitate Investment in Upstream to lack of infrastructure (addressed here), additional “product” that has value in the Improvements by Downstream limits of environmental credit markets (not marketplace and results in an additional Beneficiaries addressed in detail in this report, though revenue stream. For example, projects People and organizations are impacted by innovations are addressed in the CIG that require the removal of invasive the conservation choices, or lack thereof, section), or lack of ability to sufficiently species may generate red cedar timber of the people and organizations who market and differentiate their products that can be sold. Projects that require the reside further upstream. For example, with buyers or consumers (addressed removal of large amounts of vegetation municipal water authorities face significant under New Authorities). The infrastructure produce a significant amount of biomass costs in water treatment when upstream challenge faced by individual producers that has value to energy producers farms and concentrated animal feeding in their transition to organic or alternative who use biomass as an input (and that operations (CAFOs) impair the water crops is that most often there is a lack would otherwise simply be piled up and that reaches the treatment site. Would of differentiated organic infrastructure burned). Projects like these are attractive these utilities be willing to invest in the to get their products to market. For to investment capital as they have an implementation of buffer strips on farms example, an organic corn farmer may additional source of financial return. RCPP along the watershed? In several cases, have no affordable way to bring organic can be a platform for these niche projects this answer has already been yes. The corn to market if all of the available that combine traditional natural resource city of Sioux Falls, South Dakota used infrastructure in the area is for commodity conservation with emerging byproduct the CIG program to pay upstream farms corn. Similarly, an alfalfa grower seeking markets, and could better facilitate
47 48 OPPORTUNITIES TO LEVERAGE INVESTMENT CAPITAL THROUGH EQIP, ACEP, RCPP, AND CIG their implementation with scoring that prioritizes products that can be sold onto For consideration... a viable market. Alternative Funding Arrangements Engage insurers to help fund conservation When an organization develops its that reduces their risk exposure application for an RCPP award, it has Many conservation practices can reduce the option to request the use of an risk for landowners, and subsequently, Alternative Funding Arrangement. This for the insurance providers that cover designation has created some confusion them. Reducing risk, and as a result, as organizations thought that this expected payouts or costs, has real would give them the ability to act as financial value for insurers, utilities and the distributor for the funding. In reality, emergency management agencies. Given potential program beneficiaries still have this, NRCS could explore whether there to apply through the full ACEP process are organizations who would be willing to in order to receive easements and fund or co-invest in “green infrastructure” funding. This creates an administrative conservation efforts that have been shown challenge for both the organizations to decrease the costs of natural disasters and for NRCS. It would streamline the such as flooding, extreme weather, and process if the organizations received the wildfires. Flood prevention is already funds as block grants and had the ability one of the considerations in the WRE to distribute the funds themselves, within application process and there are case the agreed upon criteria and consistent examples of how this has translated into with statutes. significant savings for stakeholders. For instance, NRCS has a long history of funding wetland restoration and wetland easements in Vermont and after Hurricane Irene, it was clear that areas that had benefitted from substantial wetland and floodplain restoration fared better than areas without the same level of investment. In the restored areas, insurers and emergency management agencies faced reduced claims and payments. RCPP could serve as a platform for engaging these parties to design shared solutions around a landscape known to face significant risks. Given that the private companies participating have a clear financial incentive to support improvements, NRCS may be able to provide a smaller amount of the funding needed, resulting in greater leverage for the government funds.
49 50 OPPORTUNITIES TO LEVERAGE INVESTMENT CAPITAL THROUGH EQIP, ACEP, RCPP, AND CIG
leadership to support the development of and meet the needs of farmers struggling Environmental Defense Fund’s experience Conservation Innovation Grants environmental credit markets, including through the three-year transition period. developing offset protocols for the (CIG) water quality, carbon and wildlife habitat Soil Restoration Notes can serve as an compliance market and relationships with markets. Conservation finance has investment model for other entities producers, professional organizations, and SUMMARY OF FINDINGS: CIG currently been a priority in recent grant cycles: engaged in organic farming. supply chain partners. functions as an incubator for conservation awarded projects are piloting innovative finance and credit trading concepts and conservation finance vehicles and building Demonstration of a Scalable Nutrient Unlocking Green Bonds for Natural has been used to fund work developing a community of conservation finance Management Project to Reduce Nitrous Infrastructure in the United States new standards for carbon credits via practitioners. Oxide Emissions and Generate Voluntary Water Sector agriculture and grasslands, new credit or Compliance Carbon Credits WRI and partners are working on a mechanisms for river nutrient and CIG is the most flexible of the four in- The goal of this CIG is to create a large- CIG that seeks to use the “green bond” temperature controls, and innovative scope programs—anyone or any entity in scale nitrogen fertilizer management structure to increase investment in financing solutions that value ecosystem the United States is eligible to apply, the project that increases access to working lands conservation. This project services. It is, in a sense, the Research and funds can be used in a variety of ways, and environmental markets by reducing is aiming to connect investors, utilities, Development arm of NRCS’s conservation the NRCS Chief has broad discretion over barriers for growers to participate. programs. The funding reduces the funding levels. This CIG will catalyze the market for risk for businesses to explore different agricultural offsets from nitrogen fertilizer types of conservation investments and While NRCS has used CIG to become a optimization, providing conservation instruments. In and of itself, CIG leverages Federal leader in supporting market-based finance professionals with new private investment only in the sense that mechanisms and conservation finance, investments that make good business companies that apply for grants must the flexibility of the CIG statute allows for sense. By removing barriers in agricultural also invest their own resources for their further innovation that could allow NRCS information technology and carbon market projects. The long-term impact of CIG on to invest in market-based approaches at a education highlighted by previous nitrogen private capital may be much larger over larger scale. management CIGs, this project will time, however, as ideas supported by minimize currently prohibitive agricultural CIG spur the development of investment Selected Projects Creating project costs and risks and increase models and credit generating protocols Opportunities for Participation from engagement. Reducing these costs will that can attract significant private Investment Capital prime the market by demonstrating capital into conservation. CIG has the project viability and driving down costs potential to be used more effectively in order to attract the capital needed to as an incubator and accelerator of Innovative Financing to Help Farmers Restore Soil Health: Iroquois Valley jumpstart a virtuous cycle of investment new financing models as well as new and return. The project leverages the businesses, and it could even create a Farms’ Soil Restoration Notes Iroquois Valley Farms is using CIG funding self-sustaining fund to provide ongoing to develop and offer Soil Restoration support to successful CIG projects. This Notes, an innovative investment vehicle could help fund interesting ideas that are that finances Iroquois Valley’s partner incubated within the CIG. farmers’ transition from conventional to Conservation Innovation Grants, first organic production. Soil Restoration Notes authorized in the 2002 Farm Bill, stimulate will cover the costs of the transition by the development of innovative approaches lowering lease rates for tenant farmers and technologies for conservation on and decreasing their borrowing costs. agricultural and forestlands. Since its This will allow farmers to transition their inception, CIG has been used by NRCS land to organic production more easily
51 52 OPPORTUNITIES TO LEVERAGE INVESTMENT CAPITAL THROUGH EQIP, ACEP, RCPP, AND CIG water-dependent companies, project teams that have a plan to expand Diversify CIG topics through the America COMPETES Act, municipalities, EQIP eligible landowners, and scale, prioritizing building businesses CIG could be strengthened by diversifying Farm Bill program funding may not be and environmental groups to build that leverage private capital. Recipients the topics for exploration that can be used for an America COMPETES project, replicable templates and processes could include successful CIG projects funded with its support, and this would effectively putting this idea out of reach that unlock private sector financing for that are ready for a mezzanine stage of expand possibilities for investment capital based on current statutes. conservation, restoration and enhanced funding as well as projects and entities to participate in NRCS programs. For stewardship on America’s farms, forests, that have yet to participate in CIG. As the example, consider exploring tradable and ranches. The planned green bond selected project teams achieve greater tax credit programs, guarantee or credit structure will allow investors to pay the success, they would return an agreed-upon enhancement vehicles, deploying insurance upfront costs of restoration on upstream portion of the funds to the partner for vehicles, supply chain investments, or For consideration... land (EQIP eligible farms, forest, and continual re-investment in future projects. even investing equity in conservation CIG as a VC Incubator ranches) that can save downstream (Alternatively, NRCS could explore technology companies. payers (utilities and municipalities) the potential of using its contribution There are a range of existing and money by improving water quality. account policy to act as the recipient of Make “Investment Capital Opportunities” potential start-up businesses today Natural infrastructure on EQIP eligible returned funds.) Over time, NRCS could a designated funding priority for CIG that provide products or services properties will therefore serve as vital cease providing additional funding, and Create a dedicated funding pool to that support conservation, such infrastructure for the downstream users the program would be financially self- explicitly support the development as water-efficiency technology or and enable scaling of natural infrastructure sufficient, or very close to it. The net result: of Investment Capital Opportunities. nutrient reclamation. These services stewardship for enhanced water security. a larger pool of self-sustaining funding Designating funding in this way would and products have the potential to As a result of this project, new financing supporting generation after generation of send a clear signal to applicants about hugely accelerate implementation of will flow to agriculture and forestry CIG projects achieving conservation. the program’s areas of priority and conservation practices, but they may producers, boosting environmental and would ensure that a certain minimum of not be commercial enough to attract economic resilience of the rural Structure CIG more like an incubator and innovative investment capital projects typical venture capital investors. There economy while simultaneously accelerator receive funding each year. is an opportunity to use CIG funding, safeguarding communities, utilities If CIG is intended to catalyze and promote potentially co-invested with impact and companies against intensifying innovation, the program could do With Statutory Changes investment capital, as seed funding to climate and water risks. much more to support and develop the support early stage companies with participants and their ideas. For example, Use an “X-prize” or other a conservation focus. Under current each approved CIG project could have a competition format Opportunities with CIG statutes, these would simply be dedicated advisor who coaches them and Where specific goals or outcomes No Statutory Changes grants. With statutory changes, these helps them navigate within USDA and have been identified, CIG could fund a could be structured as debt or equity beyond. This approach could build on the competition in which the project team(s) Create a CIG Accelerator Program to investments and could use other tools work of the Conservation Finance Network who accomplishes them wins a larger Advance Successful CIG Projects such as guarantees or a range of exit to foster more collaboration and sharing amount of money. This format is meant CIG funding could be leveraged by options to recover and reinvest the of learning between CIG project teams as to stimulate break-through thinking on a combination of investment and funds over time. well. Also, if the idea is to use a track of the intractable problems in conservation in a philanthropic capital to further test and CIG to incubate projects and companies capital-efficient way. This could also be an scale new investment concepts beyond that might eventually become investable, opportunity to partner with investment the current scope of CIG today. For there could be ways to select CIG projects capital to fund the prize and/or work with example, NRCS could partner with a based on potential investability, or at least the winner and other applicants to further foundation to create a pool of funding scalability, down the line. scale their ideas. Groups like Y Combinator for a “CIG Accelerator” that then funds have employed this approach to drive new creativity and innovation. While USDA has authorization for this kind of program
53 54 CONCEPTS FOR NEW AUTHORITIES AND HOW THEY MIGHT BE USED This section explores the potential for Create New Investment new authorities to expand opportunities for both increasing the amount of Structures and Mitigate Risk funding available for conservation and for To make more low-cost capital available attracting additional investment capital and help producers mitigate risk, NRCS to working lands conservation. Some of could be authorized by Congress to create these new authorities build off existing new kinds of investable vehicles that would NRCS programs; others are entirely channel available funds to conservation new concepts. Where relevant, analogs projects (everything from farm-level to are included from other government landscape-scale), using direct loans or programs or other organizations that have loan guarantees, issuing conservation demonstrated similar approaches. bonds or using Pay for Success models. To better align risk with reward for investors, Producers and landowners interested in NRCS could offer various kinds of credit conservation often need access to more enhancement as part of each of these and lower-cost capital, as well as ways vehicles. Risk mitigation is an important to reduce their risk exposure – both of role for government to play when seeking which point to opportunities for impact to facilitate greater levels of investment in investors to offer solutions. Given that markets that are less well known or that impact investors are currently limited by a face high levels of uncertainty. One key shortage of investable projects, additional approach to mitigating risk for investors is authorities would give NRCS the ability to through credit enhancement tools create more opportunities for investors to engage in natural resource conservation while at the same time addressing capital and risk mitigation needs of private landowners. NRCS could also carve out new roles as an investor in stimulating innovation in conservation technology and services.
55 56 CONCEPTS FOR NEW AUTHORITIES AND HOW THEY MIGHT BE USED
1. Create Investable Vehicles: Make would be particularly well-suited to this The economics may work out for it easier for private investors to co- model. Assuming robust environmental individual projects on the larger end invest with landowners and NRCS markets, credit generation projects of the spectrum, but it is likely that for a share of the value created by are also a good fit with this approach. for most projects, aggregation will be structuring a subset of NRCS projects The execution of the projects could required to get to an investable scale as investment vehicles (e.g. LLC, joint be managed by NRCS or by outside and to cover the transaction costs. ventures, etc.). Projects that focus on technical experts, execution partners, conservation practices which typically and even producers themselves. This model could also be executed provide a return on investment, such Returns from the projects would without third-party investors to as transitioning to organic production be shared between the producer/ provide NRCS with a way to do more and implementation of efficiency landowner and the investor or with existing resources. NRCS would measures (energy, water, nutrient), other partners. effectively take an equity stake in the conservation improvements their investment is supporting, and then the producer would use the value created to “buy out” NRCS over time. Figure 9: Illustrative Model for an LLC Investment Vehicle Supporting Figure 9: Illustrative Model for an LLC Investment Vehicle Supporting Conservation Projects To further extend this idea, the Conservation Projects investment vehicle could act as the issuer for conservation bonds, as described below, sidestepping the need 5. Payouts NRCS “Excess” Value Generated for NRCS to secure bonding authority. 4. “Excess” value Create & Conservation LLC 1. accrues to the LLC, By Project fund LLC and can either be Analog: In the early 2000s, there were paid out to NRCS and Environmental Credits a large number of energy efficiency Impact 2. LLC uses debt Investors or reinvested and/or equity to in additional projects projects with positive returns on Investor fund conservation projects Cost Reduction investment that were not being pursued due to lack of available capital, Portfolio of Projects risk aversion, and agency issues. One (may be executed by LLC or by Increases in Income executing partner) 3. Projects create solution that emerged was the use of “excess” value Energy Service Companies (ESCOs), (beyond what project Large conservation project owner retains) which effectively acted as project developers and implementers that Medium Medium provided the funding to complete conservation conservation project project the projects and then also took a share of the returns. ESCOs were Small Small Small conservation conservation conservation typically initiated by the private sector, project project project though they worked closely with the Department of Energy to “develop, design, build, and fund projects that save energy, reduce energy costs, and decrease operations and maintenance costs at their customers’ facilities.” The results were quite positive: in addition 57 58 CONCEPTS FOR NEW AUTHORITIES AND HOW THEY MIGHT BE USED
to the environmental benefits of the infrastructure (both “gray” and “green” covered below under Risk Mitigation). sanitary waste disposal. Conservation reductions in energy usage, the most as long as there was clear conservation Loan guarantees are a more capital- in the context of agricultural cultivation recent report indicates that, on average, value). States, municipalities, utilities, effective way of spurring investment is one of many objectives considered projects reported achieving 102% of the and environmental credit developers in conservation than using direct loans as part of the technical assistance estimated cost savings and 105% of the or other intermediaries or aggregators and they allow people who would provided to producers.42 guaranteed cost savings.39 Could there could access the Fund. The funds would not otherwise qualify for a loan to be a way to seed “AgSCOs,” Agricultural be lent out and then as they were be eligible for one. A bank or private Analog 2: The Farm Service Agency’s Service Companies, that do the same repaid, those funds could be lent out investor provides the loan and the Guaranteed Farm Loan Program helps for water efficiency or nutrient/input again, creating a self-sustaining funding government provides an assurance of farmers who are otherwise unable to efficiency? vehicle over time that would not be payment should the initial recipient be access financing to tap into funding dependent upon continued federal unable to fulfill his or her obligations from USDA-approved commercial 2. Use Direct Loans to Fund appropriations. The fund could be on the loan. Loan guarantees could be lenders to buy farmland or finance Conservation: As discussed in the themed around particular conservation used to support either of the direct loan agricultural operations. FSA guarantees EQIP section earlier in this report, issues or geographies, or maintain a programs described above, if private up to 95% of the value of the loan, EQIP-eligible practices that provide a broad focus. capital were engaged to provide the reducing the risk for the lenders financial return on investment could loans themselves. This can be seen as and keeping the cost down for the be funded through direct loans or loan Analog: Since 1987, the EPA has a win-win as it both mobilizes more borrowers. A smaller, simplified version guarantees rather than EQIP funding, partnered with states on Clean Water private capital resources and reduces of the program, called EZ Guarantee which would free up EQIP funding to Revolving Funds. “The Clean Water the funds required from government. Program, is available for loans up to focus on projects with no financial State Revolving Fund (CWSRF) $100,000. Beyond that, applicants must return. While there are programs today program is a federal-state partnership Analog 1: USDA’s Rural Development go through the full approval process. that provide agricultural and rural that provides communities a Agency (RD) has a loan portfolio There are four types of loans: Farm development loans, these programs permanent, independent source of low- of more than $216 billion “to bring Ownership, Farm Operating, Land are not exclusively focused on cost financing for a wide range of water enhanced economic opportunity to Contract Guarantee and Conservation conservation. Collaboration between quality infrastructure projects.”40 As of the Nation’s rural communities.” These Loans (though these have been sparely NRCS and these agencies to prioritize midyear 2014, the funds had served 278 loans are provided to businesses used, to date, as noted previously).43 investments with high conservation million people, invested $105 billion, through banks, credit unions, and value should be explored. treated 856 billion gallons of water community-managed lending pools Analog 3: Through its Renewable per day, and saved communities $18.8 to support economic development Energy Loans from the Loan Programs A larger-scale option for using direct billion.41 and rural infrastructure, including Office, the Department of Energy loans would be to create a national housing and energy infrastructure. (DOE) issues loan guarantees44 for Conservation Revolving Loan Fund 3. Provide Loan Guarantees: There are RD also offers technical assistance roughly 50 to 70% of a project’s cost. dedicated to using direct loans to reasons why NRCS might not want and support to agricultural producers The project developer then uses this support landscape-scale conservation to be the ultimate lender itself (e.g., and their cooperatives to enhance guarantee to secure a loan from either activities. These funds could be to not compete with other lenders). their operations and effectiveness. the U.S. Treasury or a private lender. integrated with other NRCS project Given this, NRCS might want to provide RD’s environmental objectives include Many see the program as successful at funds to provide support for both loan guarantees instead. (Subsidies energy conservation and ensuring the driving investment: “The loan guarantee on-farm projects and for related and other credit enhancements are provision of safe drinking water and program has been successful in
39 “Federal Energy Savings Performance Contract Project Performance Reports,” last update date not noted, https:// 42 Rural Development,” accessed June 23, 2017, https://www.rd.usda.gov/. energy.gov/eere/femp/federal-energy-savings-performance-contract-project-performance-reports. 43 “Guaranteed Farm Loans,” accessed June 23, 2017, https://www.fsa.usda.gov/programs-and-services/farm-loan- 40 “Clean Water State Revolving Fund (CWSRF),” accessed June 23, 2017, https://www.epa.gov/cwsrf. programs/guaranteed-farm-loans/index. 41 Clean Water State Revolving Fund, “Clean Water State Revolving Fund Fiscal Year 2014 Environmental Benefits,” 44 “Controversial U.S. energy loan program has wiped out losses,” last updated November 13, 2014, http://www.reuters. (Washington DC: Clean Water State Revolving Fund, 2014), https://www.epa.gov/sites/production/files/2015-04/ com/article/us-doe-loans-idUSKCN0IX0A120141113. documents/cwsrf_2014_environmental_benefits_report.pdf.
59 60 CONCEPTS FOR NEW AUTHORITIES AND HOW THEY MIGHT BE USED
bringing to market good projects with through 2016, DCA made available good credit support that absolutely $4.8 billion in credit in 76 countries. would not have been built,” said a DCA uses four standard guarantee spokesman for NRG Energy Inc, an products, as seen in Figure 10. Further, energy company that owns three solar guarantees may be paired with USAID power plants that received DOE loan or other technical assistance projects guarantees. Additionally, the program that can strengthen the borrower’s has made money (despite some well- ability to repay or support the financial publicized losses) and has catalyzed institution’s lending capacity in a new billions of dollars in clean technology sector. investments. Could a similar program work for the types of projects that 4. Issue Conservation Bonds: Another NRCS funds? opportunity is for NRCS to partner with investors to issue a bond to support a Analog 4: USAID’s Development Credit landscape-scale conservation effort, Authority was created to enable more ideally a treasury-rate bond like those lending to underserved markets by used for infrastructure projects.45 reducing risks, while also demonstrating the long-term commercial viability of “Green Bonds” are bonds that provide lending in developing markets. The funds for projects with environmental impact has been significant: from 1999 benefits. Green Bond issuance was $11 Figure 10: USAID Development Credit Authoritybillion in 2013, Standard reached $42 billion by Guarantee Products Figure 10: USAID Development Credit Authority Standard Guarantee Products
LOAN GUARANTEE LOAN PORTFOLIO PORTABLE BOND GUARANTEE GUARANTEE GUARANTEE G B T B L B L G L B
Portable Guarantee L B Commitment Agreement L Identified Lender L Identified Lender L Unidentified Lender L Investors B Identified Borrower B Borrower in an Identified Sector B Identified Borrower B Institution Issuing Bonds G Guarantee G Guarantee G Guarantee T Trustee Loans/Funds Loans/Funds Loans/Funds G Guarantee Repayment Repayment Repayment Loans/Funds Repayment
45 “Explaining Green Bonds,” accessed June 23, 2017, https://www.climatebonds.net/market/explaining-green-bonds.
61 62 CONCEPTS FOR NEW AUTHORITIES AND HOW THEY MIGHT BE USED
2015 and surpassed $100 billion in 2016. flows over time based on the sale Analog: The Climate Bonds Initiative (CBI) In 2017, Green Bonds are expected of sustainably produced products, is “the only organization working solely on to exceed $200 billion in issuance. monetized value of ecosystem services, mobilizing the $100 trillion bond market The bulk of these funds is going to and reductions of costs incurred for climate change solutions.”46 CBI is renewable energy and energy efficiency previously (as in the energy efficiency working to build the foundational elements projects, with a small portion going to model). Pay for Success models can required to enable the issuance of climate conservation-oriented projects. also be used here to provide tiered bonds, including developing standards payouts based on actual outcomes and a certification scheme, developing There is a strong case for Conservation (see below for detail on Pay for demonstration projects, tracking and Bonds to provide funding to accelerate Success models). sizing the market and providing policy conservation efforts. Many conservation models and advice. The Climate Bond projects, if structured correctly, can Certified Standard is a label that indicates provide reliable, consistent cash that the funds for the bond are being used to deliver climate change solutions. There are over 40 bonds that have received this certification so far, including bonds issued by the Metropolitan Transit Authority, The FigureFigure 11: 11: HowHow Funds Funds Would Would Flow in ConservationFlow in Conservation Bond Bond San Francisco Public Utilities Commission and the New York State Housing Finance Agency. This model could easily be 1. NRCS creates bond, with promise adapted to a “conservation bond” of repayment model. In fact, many of the standards
NRCS (as bond issuer) 2. Investor provides funds Investor and approaches already used by Climate Bonds and Green Bonds could simply be 5. NRCS repays investor with interest applied to conservation projects as long as these projects produced a financial return.
3. NRCS uses 4. Conservation 5. Employ Pay for Success Models: In funds to execute projects provide conservation a return on a Pay for Success model, investors projects investment provide the capital to implement a project and the repayment level is contingent upon the actual outcomes achieved by the projects. In this way, Conservation projects Pay for Success models are also a form with potential for of risk management, as they reduce the financial return performance risk for the government or ultimate payer. Figure 12 provides an overview of how the funding would flow. Pay for Success models can be used as part of a bond or they can be used as part of another financial vehicle.
46 “Climate Bonds Initiative,” accessed June 23, 2017, 63 https://www.climatebonds.net. 64 CONCEPTS FOR NEW AUTHORITIES AND HOW THEY MIGHT BE USED
FigureFigure 12: 12:Pay Pay for for Success Success Model Model
During this five year construction and monitoring phase, the bond will pay 1. Investors provide investors a 3.43% interest rate, which is up-front funds for equivalent to DC Water’s 30-year cost Investors conservation projects Project Implementer of capital. After the results of the green infrastructure are measured, the bond will be bought back by DC Water at a rate that 2. Project implementer depends on the project’s success. If the 4. Government executes projects and project is able to capture an agreed upon reimburses investors achieves outcomes benchmark of stormwater, the bond will be based on level of bought at par value. If the project fails to outcomes achieved capture the benchmark of stormwater, the 3. Evaluator assesses investors will receive 87 cents on the dollar, outcomes and informs and if the project exceeds the benchmark, government what level NRCS of repayment is due Evaluator investors will receive $1.13 per dollar invested.47
Figure 13: DC Water Environmental Impact Bond Structure If NRCS were going to use a Pay for Analog: DC Water and Sewer Authority Figure 13: DC Water Environmental Impact Bond Structure Success model, it could make sense to and its investors Goldman Sachs and use a third-party trust to facilitate the Calvert Foundation created the nation’s 2. Funds upfront capital costs repayment transactions. NRCS would first Environmental Impact Bond (EIB)
provide funding to the third-party trust, “to fund the construction of green 6. Variable payment based on outcomes which would then be responsible for infrastructure to manage stormwater payments and re-contracting. In part, this runoff and improve the District’s water 1. Negotiate deal Impact metrics 1. Negotiate deal Lender* Borrower approach would provide a way to get quality.” The $25 million bond is part of and terms (Investors) around government contracting rules that DC Water’s $2.6 billion DC Clean Rivers 3. Builds Project
make it difficult to pay for results in the Project to remediate stormwater and put **In other EIBs, the lender may contract out future. NRCS has funded a small number the District back into compliance with the 5. Delivers report the building to a private of Pay for Success pilots through CIG. Clean Water Act. The project will fund company. DC Water Independent chose to construct the Deliver project itself. green infrastructure in the Rock Creek Monitor project/service watershed and, if successful, allow DC Water to forego the cost of a tunnel to cash flow capture stormwater in that watershed. Monitors outcome 4. contractual The financing structure is unique in that the performance risks are offloaded to the investors: the payments will vary based on the actual outcomes. The project’s success will be measured rigorously by an independent third party after five years. 47 “Fact Sheet: DC Water Environmental Impact Bond,” accessed June 23, 2017, http://www.goldmansachs.com/media- relations/press-releases/current/dc-water-environmental-impact-bond-fact-sheet.pdf. 65 66 CONCEPTS FOR NEW AUTHORITIES AND HOW THEY MIGHT BE USED
Explore New Roles for NRCS for their conservation work. As 2. Income Recovery from Conservation- resulting from adoption of any one of producers see that they can receive Driven Losses: Some conservation three best management practices: no- NRCS also has the opportunity to try a premium for conservation-aligned practices have a real or perceived risk of till agriculture, nutrient management out new roles itself. NRCS could better products, more will consider making lowering yield or income for producers, and planned nitrogen reduction. The support producers by helping with these changes. The value generated creating a significant disincentive to conservation results were successful: marketing, providing income recovery through this work has the potential giving them a try. NRCS could partner “Participating farmers have reduced from conservation-driven losses, and to provide a return on investment to with investors to offer compensation nitrogen applications by 377,563 lbs, creating Individual Development Accounts invested capital deployed to support for foregone income to mitigate the resulting in a reduction of 7,119 lbs. of targeting conservation. NRCS can also do these projects. risk to producers of adopting critical NO2, a potent greenhouse gas. Further, more to support environmental markets conservation practices. One example reductions of 3,078 tons of sediment and businesses innovating in conservation Analog: One example of this kind of of this comes from the nutrient and 4,103 lbs. of phosphorus have been technology and services. approach is the nascent Xerces Bee management side. It has been shown achieved by farmers participating in Better Label, which distinguishes that some farmers apply more than the the Reduced Tillage BMP CHALLENGE New Ways to Support Producers certain products as pollinator- necessary amount of fertilizer on their program.” However, on average friendly. The Xerces Society is working land as a sort of “insurance” against farmers experienced negative net in partnership with major food weather-related risks to their yield. But returns, which was anticipated in some 1. Provide non-infrastructure go-to- companies, agricultural investors, what if there were a more conventional cases but not in others, where the market support (e.g. certifications or and conservation-minded farmers, to insurance product that provided that BMPs may have been outdated. While labels) for ag/forest/ranch products develop and launch a first-of-its-kind same benefit? Could farmers then this pilot did not achieve its desired generated using conservation certification program that incentivizes be convinced to apply less fertilizer? outcomes, the lessons learned could practices: Producers that have embraced conservation can struggle to the large-scale adoption of pollinator Could such a program lead to increased be used to inform future iterations of realize a return on investment for their conservation through a marketing- profitability over time via decreased this model, which holds great promise. products due to lack of mechanisms to driven platform. This program, known costs of inputs? NRCS might explore In addition, the growth of precision sufficiently and credibly differentiate as Bee Better Farming, will certify how private insurance companies agriculture technologies in recent years them. One way that NRCS can provide producers who practice pollinator could play a role in managing such a likely means that producers would a collective benefit to producers conservation, as measured with clearly system. It would be logical to house have enhanced capabilities to reduce embracing conservation practices is defined metrics. The private sector will this with other risk management fertilizer inputs while maintaining yields. by providing marketing support or provide investment to support practice mechanisms like crop insurance as tools to help them differentiate their implementation. Other similar examples part of RMA, but there is also a case 3. Individual Development Accounts products. Certifications, or labels, are include the Field Stewards effort in to be made for NRCS incorporating for Farmers to Support Conservation a logical way to do this. Producers Minnesota (CIG 2015) and a CIG 2017 this as an integrated component with Projects: One way to support farmers that have adopted a certain critical project focused on bird-friendly beef its programs. Another option would who want to embrace conservation mass of conservation practices could through Audubon. be to integrate conservation practice practices is to provide Individual be eligible to mark their products requirements with all crop insurance, to Development Accounts targeted with a symbol certifying them as align incentives. at conservation. The basic model is conservation-focused. One way NRCS that farmers put a certain amount could do this is by partnering with Analog: In 2006, NRCS awarded a CIG of savings into their accounts on a trade groups or farmer collectives to grant to AgFlex, American Farmland monthly basis and it gets matched more effectively market these products. Trust and the IPM Institute of America (typically 1:1) by government money. By supporting the creation of these to pilot a Best Management Practices However, they are not able to take kinds of mechanisms, NRCS and private (BMP) Challenge. The Challenge was money out of the accounts for at investors can create more “pull” for effectively a conservation insurance least three years, or until the accounts conservation practices by making it project designed to compensate reach a certain amount. Some IDA easier for producers to be compensated producers for any reduced yields programs have a required educational 67 68 CONCEPTS FOR NEW AUTHORITIES AND HOW THEY MIGHT BE USED
component to them as well, which refundable tax credits. AFI was alternative energy production as well as greater investment in the market, could be considered for conservation appropriated $18.95 million each year in other conservation technologies such the agency is considering ways it IDAs. After three years, the farmers can FY 2015 and FY 2016. In 2015, 50 grants as advanced irrigation and nutrient can use its own green infrastructure access their money and the matching were awarded totaling $13.7 million, management technology. spending to purchase credits from funds. Farmers would be required to with awards ranging from $18,824 to $1 the market. The agency is considering use the funds for conservation practice million. The USDA Small Business Innovation entering either as a buyer of last implementation. There have been Research Program, administered by resort via a price floor purchase discussions of these kinds of accounts New Ways to Support the National Institute of Food and guarantee or by purchasing credits with a broader focus over the years as a Conservation Businesses Agriculture (NIFA), may also be used to complement its own green way of supporting beginning producers to support this type of innovation as infrastructure development. Either type and Markets or other groups that need extra help. part of its broad mandate. If the goal is of involvement will increase certainty in Philanthropic capital often provides to prioritize innovation in conservation, the market and lead to greater external 4. Accelerate Innovation in Conservation some of the match funding, and, a dedicated program targeting investment in green infrastructure Technology and Services: NRCS because donations of matching funds conservation may be needed. has a clear interest in the successful are tax deductible, private companies development and commercialization have an incentive to contribute as well. Analog: See above Analog for of new technologies that support The role for investment capital could Department of Energy Renewable conservation practices, such as be as the administrator of the actual Energy loans and guarantees precision technologies that allow for accounts, for a modest management more efficient irrigation or nutrient fee and the use of the capital while it 5. Provide More Support for management. If NRCS were able to cannot be touched. Environmental Markets: NRCS already deploy some amount of funding to has been a leader in supporting invest in conservation technology Analog: The Assets for Independence environmental markets, playing a key companies, this would stimulate the use (AFI) program managed by the role at times in their early days. If NRCS of new technologies and, if successful, Department of Health & Human wants to go further in this area, there could provide NRCS with a return on Services provides grants to is a need and there are opportunities investment over time (which could organizations that run Individual to build off of initial successes. If NRCS then be channeled back into more Development Account programs for had the authority to buy credits, be a investments). Investments could be eligible low-income people and families. buyer of last resort (potentially even debt, guarantees, or some combination The grantee must secure non-federal have a public auction facility), and of the two. There are restrictions funds for the project equal to the grant generally be a source of demand, this on government agencies investing amount and 85% of the grant amount could go a long way toward supporting in company equity, but programs must be used to match participant the agency’s big picture conservation within the DOEE have provided loan savings, while the rest may be used objectives, especially when it comes guarantees that effectively function for administration. The funds saved in to an increased focus on outcomes, as equity. an IDA must be used for one of three as markets provide a mechanism for purposes: to purchase a first home, quantifying and monetizing outcomes. NRCS does some similar work capitalize a business, or fund post- today through CIG, supporting secondary education or training. AFI Analog: Washington DC’s Department the development of animal waste grantees also provide training and of Energy and Environment has management technologies, for example, support services to participants, such recently established an innovative credit and demonstrating that they are as financial education, credit counseling trading market for stormwater retention economically viable for producers. This and repair, and guidance in obtaining within the District. In order to stimulate could be broadened to other forms of
69 70 Research for this report uncovered several Easement Valuation: OTHER FARM BILL OPPORTUNITIES ideas relevant to discussions about the Farm Bill that relate to NRCS programs but • Assess Easements Based on which would not be implementable solely Ecosystem Service Worth Rather within NRCS. These are captured here to than Development Value: Currently, inform future collaborative discussions the valuation on which the easement during the Farm Bill development process price is determined is the development and beyond. rather than the environmental value of the land, which creates an incentive Tax Implications: to place easements on green belt land where development value is high rather • Expand Tax-Free Status to Rebates than on headwaters land where the for Water Conservation: Currently, ecosystem services value is high and energy efficiency rebates are not the development value is low. Ideally, counted towards gross income, and the easement valuation process could are effectively tax free. However, incorporate both forms of value to water conservation rebates are taxed, ensure it is being allocated to the providing a significant disincentive for highest priority lands. pursuing them compared to energy • Make the Appraisal Process for efficiency projects. Easements More Affordable: Currently, • Make Tax Credits Tradable: While the process for getting appraisals for outside of NRCS scope, tax treatment easements is prohibitively expensive, of conservation investments is a creating a disincentive for producers to significant driver of conservation pursue them. Reducing this cost could funding and activities. For example, the enable more producers to participate in state of Virginia’s Land Preservation the easement programs. Tax Credit provides a tax credit worth 40% of the value of the land located in Virginia which is conserved in perpetuity consistent with their regulations. Further, this tax credit may be transferred to another Virginia taxpayer for a transfer fee of 2% of the value of the donated interest. Research suggests that states with conservation tax credits, and in particular those that are tradable, demonstrate higher levels of private land conservation. Allowing tax credits generated by easement investments to be tradable would provide landowners another mechanism for accruing value through easements and allow investors to use easements to generate tax credits with versatile value. 71 72 OTHER FARM BILL OPPORTUNITIES
Environmental Credits: Inter-Agency Collaboration: • Explicitly define environmental credits, • Identify and Pursue Opportunities RINs, and RECs as a “commodity”: The to Work More Closely with RMA and Commodity Credit Corporation (CCC) FSA: NRCS, RMA, and FSA are all supports commodities such as corn working with and for producers on and soy to ensure farmers receive fair different aspects of the same problems. prices for these products. The CCC Additionally, USDA already has an could further play a very valuable role Agriculture Marketing Service. One in supporting a new form of agricultural way to provide a more seamless and commodity: environmental credits. If integrated experience for producers these can be defined as commodities, and to improve the agencies’ ability the CCC could be required to provide to serve their participants would be to the same price support to them, identify opportunities to work more benefitting producers, rural economies closely together. and conservation simultaneously.
73 74 ENABLERS: IDEAS TO DRIVE MORE AND HIGHER In interviews with NRCS staff and program QUALITY PARTICIPATION IN NRCS PROGRAMS participants, these suggestions were offered to further improve the quality and quantity of participation in NRCS programs from both philanthropic and investment capital.
Help Connect Potential Program Participants and Supporters Many people mentioned that it can be challenging for potential participant partners to connect with one another. More intentional match-making could help improve the quality and quantity of NRCS applications by connecting relevant players with each other, e.g. landowners with land trusts or with other third parties such as providers of low-cost capital or debt. Another idea put forth in this vein was to publicly showcase CIG and other success stories with funders or others who have potential to support expansion and scale (e.g. “CIG Shark Tank”).
Expand Marketing and Outreach Many of the investors interviewed for this report were not familiar with NRCS or with the full range of programs offered. NRCS could consider expanding its promotion of its programs to relevant audiences to raise awareness of programs overall, and in particular to help investors understand RCPP, its newest program.
Further, many of those who have heard about the programs often do not fully understand their potential benefits, such as the indirect but real financial returns, tax benefits, and environmental markets credits. Potential participants may also need support to better understand how to layer different programs together for maximum benefit.
75 76 For more information encouragecapital.com 212.974.0111 [email protected]