Investing in Forest Health

Controlled burn operations, like this one near Yosemite National Park in July 2017, help manage fuel loads and decrease the severity of wildfires. (Photo courtesy of the US Forest Service)

As the wildfire dubbed “Camp Fire” scorched Northern California’s Butte County last fall, creating tragedy in the town of Paradise and canceling school throughout the San Francisco Bay Area, one amazing claim stood out: This was the deadliest fire in the state’s history. We may be accustomed to superlatives in the reporting of disasters, but most recent record-breakers center around damage, not deaths. Disasters tend to cost more as time goes on, because everything costs more. But human lives are a different measuring stick. The nation’s deadliest hurricane came in 1900; its deadliest earthquake in 1906; and the deadliest tornado in 1925. Even as climate change strengthens the power and frequency of some of these natural disasters, improvements in communications, transportation, and medical treatment have greatly reduced the death toll. The fact that California’s deadliest fire comes in 2018 underscores the magnitude of the wildfire problem.

Unfortunately, Camp Fire was not an anomaly; rather, it was only the latest and most deadly in a recent series of destructive California wildfires. In 2013, the Yosemite Rim Fire burned more than 250,000 acres. In 2016, the Soberanes Fire in the Los Padres National Forest became the most expensive fire in history, costing $236 million to suppress and causing $2 billion in damages. That was quickly surpassed in 2017 by the Sonoma fires and the Thomas Fire, which totaled more than $6 billion in damages.

California wildfires have become more frequent, more severe, and spread over a longer season, despite significant increases in expenditure and attention focused on the problem. They have devastating social and environmental impact, and have proven extremely difficult to solve.

One point of hope, however, is a startup conservation enterprise that addresses one of the main causes of severe fires. In November 2018, Blue Forest Conservation launched its first Forest Resilience Bond (FRB), which raises private investor capital to fund the upfront costs of forest restoration, with multiple beneficiaries sharing the cost of reimbursing investors over time. The FRB is based on the idea that the value of the ecosystem services that restored, healthy forests provide—such as decreasing the severity of wildfires—exceeds the cost of restoration. While it is way too early to claim victory, there are many reasons to believe that the FRB may hold a key to reversing the trend of more harmful wildfires.

A Multifaceted Problem

As an impact investor and funder focused on environmental conservation, this trend of more frequent and destructive fires posed two questions: What is the root cause of this fire outbreak, and how can we help address it? The answers to the first question came quickly and authoritatively: climate change, drought, arson, power lines, forest management practices, increasing fire-suppression costs cannibalizing fire prevention funding, and encroachment of houses on land historically susceptible to wildfire. Indeed, the wildfire problem is not just one problem, but half a dozen problems, all conspiring together to produce more frequent and deadlier fires.

As for the second question, even as one of the largest private funders of conservation, my employer, the Gordon and Betty Moore Foundation, must be extremely selective about which interventions it supports out of the vast universe of potential projects. After talking to many organizations and thinkers who address the fire problem in some way, Blue Forest Conservation seemed to offer the most innovative, scalable, and impactful path forward.

Blue Forest’s Approach

Environmental conservation is not a field that traditionally attracts innovative startups. Instead, established nonprofits and land trusts leverage connections and experience to make change. There are exceptions, but most of the conservation organizations doing good work today are the same ones that led the field 20 years ago. So when a friend from Encourage Capital first suggested I talk to some recent business school grads focused on fighting fire with finance, I did not have high expectations.  

It was soon clear, however, that the FRB had tremendous potential. Blue Forest had won the Morgan Stanley Sustainable Investing Challenge in 2015. It had already begun to form an extensive network of partners, including not only Encourage but also World Resources Institute, the Sierra Nevada Research Institute, the Rockefeller Foundation, and the Natural Capital Project. Most importantly, the FRB was a concept too compelling to ignore.

Like many others, Blue Forest focuses on dealing with overgrown forests. Historically, recurring wildfire helped maintain a natural density of forest vegetation. In the Sierra Nevada mixed-conifer forests, for example, fire would naturally occur every 12 to 17 years, clearing out underbrush that would otherwise contribute to intense, fast-moving fires. However, as a result of aggressive historical logging and the government’s policy of total fire suppression, forest land has become overgrown. Absent proactive intervention, the ecosystem cannot return to its natural and resilient state in any reasonable timeframe. While climate change, insect infestation, and drought certainly exacerbate wildfire risk, Blue Forest and its partners have found that overgrowth is the most significant, influenceable variable.

The Forest Resilience Bond is structured so that capital from investors funds upfront forest restoration through the bond, which beneficiaries then repay over time.

As it refined this focus, Blue Forest realized the underlying problem was financial rather than technical. In general, the ecological thinning and restoration protocols to manage forests with respect to fire are well-known but require substantial resources to implement effectively. It wasn’t a question of what to do; it was a question of how to pay for it. “We are following the science, not proposing a new solution,” says Zach Knight, Blue Forest’s managing director. “We realized that the main innovation needed to come on the finance side.”

Blue Forest also realized that the same restoration work that decreased fire risk had significant water co-benefits. Restored forests can increase water quantity and protect water quality through decreasing sedimentation and debris flow. Blue Forest’s research partners collected the data to prove this and created models that assigned monetary value to these enhanced ecosystem services.

The Forest Resilience Bond

As innovators from a variety of fields already know, it is one thing to assign theoretical value to social or public goods (in this case, fire mitigation and water benefits) and quite another to negotiate agreements that monetize these services. To bring the FRB to life, Blue Forest needed to find two groups of partners: 1) investors who could provide the upfront capital to finance restoration, and 2) beneficiaries who had a financial interest in the water and fire benefits of forest restoration, and who would share in the cost of reimbursing investors over time. I felt confident that finding investors would not be a problem. Multiple studies on conservation investing, including our “State of Private Investment in Conservation” assessment, indicate there are not enough investment-ready projects with acceptable financial risk-return profiles to meet investor demand. If Blue Forest could secure contracts with beneficiaries, the FRB could offer a solid return with minimal risk.

The FRB entails a series of partnerships with private investors, beneficiaries such as the USFS and water agencies, implementation partners, and independent evaluators.

Securing those contracts would prove more difficult. The FRB made economic sense for the United States Forest Service (USFS) and the California Department of Forestry and Fire Protection (Cal Fire), since decreasing future fire severity through forest restoration is significantly more cost-effective than suppressing those severe fires. However, the initial FRB design featured a pay-for-performance component—that is, beneficiaries’ payment amounts would depend on the actual ecosystem outcomes attained by the forest restoration. While such a pay-for-performance arrangement could theoretically reduce risk for beneficiaries, the complexity of incorporating it into contracts was a non-starter.

Blue Forest revisited many of its initial assumptions about how the FRB would work, tapping into significant pro bono legal support from Orrick, Herrington & Sutcliffe and Brownstein Hyatt Farber Schreck. Together with its partners, Blue Forest did research on USFS authorities, contracting rules, and cooperative agreements. The breakthrough came in the form of a partnership with the National Forest Foundation (NFF). NFF could enter into agreements with the Forest Service that Blue Forest could not, and it could shrink the implementation period from 10 to 4 years. After three years and dozens of meetings with Forest Service personnel, Blue Forest and the USFS signed a memorandum of understanding (MOU) to advance conservation finance opportunities on National Forest System land—the first of its kind for USFS.

The last challenge was finding a forward-thinking water agency that recognized the water benefits forest restoration could provide, was willing to spend significant time to evaluate a pilot of the FRB, and could make a substantial financial commitment. Blue Forest eventually found the right partner in the Yuba Water Agency. Several internal champions at the agency helped Blue Forest develop a cost-benefit analysis that effectively communicated the value of the project to the utility board.  

The inaugural launch of the FRB in Northern California’s North Yuba River watershed funds a $4.6 million project to restore forest health across 15,000 acres in and around Tahoe National Forest. The stakeholders that directly benefit from restoration activities (Yuba Water Agency, State of California, and USFS) have signed contracts agreeing to share the cost of reimbursing investors (Rockefeller Foundation, Calvert Impact Capital, CSAA Insurance Group, and the Moore Foundation) over time, and the first contract thinning work is already underway.

Future Growth

Early-stage predictions of success can be foolish—especially in the case of novel, complex projects. Already the FRB looks markedly different than its original pay-for-performance concept, and it will undoubtedly continue to evolve as the scale expands. The Blue Forest team plans to grow the FRB to fund projects in the $25-$50 million range. Working at this scale has advantages for the business model, such as reducing transaction cost rates, allowing for larger institutional investors, and funding more acres of restoration. Blue Forest envisions these future projects as market-rate transactions along the lines of infrastructure project financing.

But there is good reason to think the FRB can be successful. The ecological need is huge: The USFS has identified more than 7 million acres that need restoration in California alone. And unlike conservation efforts financed by limited grant funding, the FRB makes use of private investment capital—a funding pool limited only by its ability to deliver the returns the model predicts.

While the FRB checks all of the standard boxes that we all look for in an investment—clear impact, strong economics, dedicated management team, reliance on private investment as opposed to grant funding—another aspect stood out the most during my due diligence. The large network of partners not only supported the FRB, but also enthusiastically owned and championed it. During meetings and site visits, the level of excitement and use of the word “we” often made it difficult to tell whether I was talking to a Blue Forest team member, USFS staffer, World Resources Institute employee, or NFF representative. They felt like they were a part of the effort, because they genuinely helped create and refine it.

The youthful startup nature of Blue Forest that initially concerned me may end up being one of its greatest assets. As opposed to a large organization that could conceivably have developed the FRB in-house, Blue Forest had no choice but to create many real partnerships and listen seriously to those partners. Now there are a great number and variety of organizations with a vested interest in seeing the FRB become successful—something that, given the severity of the wildfire problem, we all want to see.

Read more stories by Dan Winterson.