This past spring, David Brand went on a property-scouting trip to Malaysian Borneo. Deep in the rain forest, Brand — founder and director of a forestry investment business — met locals who just couldn’t grasp what this Westerner was doing there. They were mystified he did not want to build an illegal logging mill. One of them put his arm around Brand’s shoulder. “No one can see what we do here, my friend,” he said. “We can cut it all down for you.”Brand sighed. He wasn’t there to clear-cut the rain forest. In fact, soon after scoping out that land, he hopped on a plane to London where, in a matter of weeks, he raised $200 million to buy tracts of forest like the one in Borneo — and he’s not going to raze those, either. They’re investments. The return will come from deals with companies shopping for pollution offsets or with NGOs and governments that will pay to protect the planet’s wild places — not because they’re pretty, but because they perform a service.
The eco-capitalists are coming, and they aren’t wielding Thoreauvian platitudes about the sanctity of nature. Their jargon is far less lyrical: ecological assets, environmental markets, ecosystem services, natural capital. For these guys, biofuels and long-lasting lightbulbs are fine but they’re nothing more than a short-term play. The real money is in nascent markets indexed to the health of Mother Nature.
People understand the economic value of nature’s goods because we constantly pay for them: seafood, timber, copper, cut flowers, natural gas. But nature also provides services that stabilize spaceship Earth. Insects pollinate crops, wooded hillsides purify water, trees sequester CO2, and wetlands buffer cities against storm surges. How much are those services worth? Who knows. They’ve always been free, or treated as such. Nature has never submitted an invoice.
But they’re not free, of course. We can tell by the enormous price we pay when they decline or disappear. Think Hurricane Katrina, unpollinated crops, and deadly mudslides caused by deforestation. As the new age of environmental awareness dawns, people and governments are starting to put a dollar value on these services. In practice, that means paying to protect the land where services are most concentrated. And whoever owns the land can reap the profits.
It’s a twist on carbon cap-and-trade systems. In Europe, governments force companies that emit too much carbon to buy credits from those with excess credits (because they’ve cut back their own emissions). As the economy expands, the demand for — and thus the price of — carbon credits increases. Despite its growing pains, the European Emissions Trading Scheme has created a $4 billion-a-year carbon market, and no amount of cynicism about its efficacy can change the fact that skyrocketing public interest in carbon neutrality equals big money for carbon traders.
A similar setup in the US is wetland banking. Thanks to the Clean Water Act of 1972, developers must compensate the state for wetlands they pave over. Specialized businesses from Florida to California now buy up wetland areas and sell mitigation credits to developers.
Brand and others are betting that successful trading of carbon will kick-start the creation of other cap-and-trade systems for ecological services like watershed protection, biodiversity, and erosion control. But it’s more complicated than it sounds. Carbon disperses and has a global impact. A Latin American butterfly or a Myanmar riverbank? Not so much. “Those are local assets,” explains Jesse Fink, a cofounder of Priceline.com and a prominent eco- capitalist. The challenge is connecting global capital markets so that a butterfly matters as much, financially, to an investor in Chicago as it does to a farmer in Costa Rica. That will require the creation of a whole new financial transaction infrastructure, combining local businesses that can authenticate commodities on the ground with international registries, remote sensing, canopy monitoring, and other mechanisms to monitor and standardize trades.
Tough? Sure. But many experts see these kinds of deals as inevitable. When carbon cap-and-trade comes online in the US, there will be no shortage of demand, because most of corporate America will be shopping for mitigation credits. Build a cap-and-trade framework for other eco-assets and firms will profit not just from the sale of carbon offsets but from quantifiable gains in soil conservation, biodiversity, and watershed protection.
Still, the world’s investment institutions haven’t bought in just yet. As one former Goldman Sachs strategist explains: “First there needs to be 50 or 100 funds out there like Brand’s. People need to invest in it to make it real.” The big banks “are on board conceptually,” Fink adds, “but they’re not going to be first in line to make this investment. The first people in are people like me. I’m willing to take a chance that I will get the return, but I’m also trying to get the market started.” In emerging markets, the first investors reap the benefits. And in an eco-market, you reap what you don’t sow.
