Are there unavoidable tradeoffs between human economic development and environmental conservation? Long before there were carbon offsets to help address climate change, there were environmental offsets – or projects undertaken to counterbalance significant but unavoidable negative impacts to wetlands, streams, and other important natural resources caused by infrastructure, commercial, industrial, or residential development. In the U.S., these sorts of projects are actually mandated by various state and federal environmental permitting regulations. But many of us – including many environmentalists – are completely unaware of the environmental offset market and how it works. In this episode, Chad Reed sits down with Nick Dilks, Managing Partner at Ecosystem Investment Partners (or EIP). EIP acquires, restores, and permanently protects conservation properties and sells the mitigation credits generated by the projects to a diverse group of customers who must offset their unavoidable environmental impacts. Nick discusses EIP’s role in the environmental offset and mitigation banking markets in support of environmental restoration at scale. Note that EIP is a client of Hannon Armstrong. We also note and celebrate today the one year anniversary of the launch of the Climate Positive Podcast. With support from Hannon Armstrong, Chad, Hilary, and Gil started this podcast to delve into both the personal stories of the leaders, innovators, and changemakers driving our climate positive future and the sometimes wonky details of the wide array of climate positive topics and initiatives these leaders are engaged with. We encourage you to check out each of our first year’s 20 episodes, and we thank you for listening.
Are there unavoidable tradeoffs between human economic development and environmental conservation? Long before there were carbon offsets to help address climate change, there were environmental offsets – or projects undertaken to counterbalance significant but unavoidable negative impacts to wetlands, streams, and other important natural resources caused by infrastructure, commercial, industrial, or residential development. In the U.S., these sorts of projects are actually mandated by various state and federal environmental permitting regulations. But many of us – including many environmentalists – are completely unaware of the environmental offset market and how it works.
In this episode, Chad Reed sits down with Nick Dilks, Managing Partner at Ecosystem Investment Partners (or EIP). EIP acquires, restores, and permanently protects conservation properties and sells the mitigation credits generated by the projects to a diverse group of customers who must offset their unavoidable environmental impacts. Nick discusses EIP’s role in the environmental offset and mitigation banking markets in support of environmental restoration at scale. Note that EIP is a client of Hannon Armstrong.
We also note and celebrate today the one year anniversary of the launch of the Climate Positive Podcast. With support from Hannon Armstrong, Chad, Hilary, and Gil started this podcast to delve into both the personal stories of the leaders, innovators, and changemakers driving our climate positive future and the sometimes wonky details of the wide array of climate positive topics and initiatives these leaders are engaged with. We encourage you to check out each of our first year’s 20 episodes, and we thank you for listening.
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Episode recorded March 10, 2022
Chad Reed: This is Climate Positive – a show featuring candid conversations with the leaders, innovators, and changemakers driving our climate positive future. I’m Chad Reed.
Hilary Langer: I’m Hilary Langer.
Gil Jenkins: I’m Gil Jenkins.
Nick Dilks: Private companies or landowners could come in and do largescale restoration with their own money or their own resources in advance of any known impact and effectively bank the credit for that. It was a way to have development that's necessary move forward, but at the same time make sure that the environment and the public was not being harmed.
Chad: Are there unavoidable tradeoffs between human economic development and environmental conservation? Long before there were carbon offsets to help address climate change, there were environmental offsets – or projects undertaken to counterbalance significant but unavoidable negative impacts to wetlands, streams, and other important natural resources caused by infrastructure, commercial, industrial, or residential development. In the U.S., these sorts of projects are actually mandated by various state and federal environmental permitting regulations. But many of us – including many environmentalists – are completely unaware of the environmental offset market and how it works.
In this episode, I sit down with Nick Dilks, co-founder and Managing Partner at Ecosystem Investment Partners (or EIP). EIP acquires, restores, and permanently protects conservation properties and sells the mitigation credits generated by the projects to a diverse group of customers who must offset their unavoidable environmental impacts. Nick discusses EIP’s role in the environmental offset and mitigation banking markets in support of environmental restoration at scale. Note that EIP is a client of Hannon Armstrong.
We also note and celebrate today the one year anniversary of the launch of the Climate Positive Podcast. Gil, Hilary, and I started this podcast to delve into both the personal stories of the leaders, innovators, and changemakers driving our climate positive future and the sometimes wonky details of the wide array of climate positive topics and initiatives these leaders are engaged with. We encourage you to check out each of our first year’s 20 episodes, and we thank you for listening.
Gil: Climate Positive is produced by Hannon Armstrong, a leading investor in climate solutions for over 30 years. To learn more about our climate positive journey, please visit hannonarmstrong.com.
Chad: Nick, thanks for joining us today here in Climate Positive.
Nick: Great to be here. Thanks for having me.
Chad: You're a Philadelphia native, but you spent much of your childhood on your family's fifth-generation farm in the Chesapeake Bay. How did your childhood experiences inspire your passion for land and water conservation work?
Nick: I grew up in the city of Philadelphia, but we were lucky enough to have a wonderful place at the very head of the Chesapeake Bay in Cecil County. We spent most of the summers there, hunting and fishing in the fall or winter, and so forth, and just really got to experience nature walking through the marsh and enjoying the forest and understanding farming, all that kind of stuff.
Where I think I really picked it up was this time went on in that area watching farms turn into subdivisions and the loss of a lot of open space. Frankly, watching a lot of the fisheries in the Chesapeake Bay decline, the water quality go down and so sadly, a lot of people of our generation, it instilled a sense of loss, but also, more importantly, a sense of wonder from the things around us. That really, probably was where my beginnings in this whole area came from.
Chad: After you got your Bachelor's in Environmental Science and Policy, you went to work for The Conservation Fund, or TCF, which is a top environmental NGO that has a dual charter to both support environmental preservation and economic development, and you just touched on some of the trade-offs that are sometimes present when there is economic development in environmentally rich areas. What drew you to that organization to start your career?
Nick: Where I really got interested in the environmental arena, there's lots of ways that people can contribute, whether it's policy or advocacy or business and lots of things. Well, I really got focused through some work that family members had done was in the land conservation business, particularly land trusts, which are groups that buy land for conservation, or put land in conservation easements to protect private properties from development.
What I really loved about that was that, while it was a nonprofit structure and really had a great environmental conservation outcome, it was very transactional by nature. I've just always loved both business and the environment. Back in the '80s, and '90s, when I was first getting involved in this, there weren't a lot of places in the environmental and conservation movement where you could feature both a business person as well as a conservation or environmental person.
Land conservation really was the place where that was happening. I had volunteered for and worked for various land trusts including the Maryland Environmental Trust here in Maryland, doing those types of projects. The Conservation Fund, really, which was a outgrowth of the Nature Conservancy, which many people are familiar with, was founded by a guy named Pat Noonan, who was the president of the Nature Conservancy back in the '70s, early '80s.
As you correctly pointed out, Pat was quite visionary in creating this dual-purpose charter at The Conservation Fund, which allowed The Conservation Fund to do both conservation but also get involved with and promote economic development. In many ways, that's the crux of conservation versus preservation, which is the idea that business and the environment can go together. In fact, they, we'll talk about later I think, are inextricably intertwined in many ways.
I started working for The Conservation Fund right out of college. I spent about 10 years there doing land conservation projects all over the country and it was a fantastic experience and really where I cut my teeth on the idea of doing the business of conservation.
Chad: In my experience, many environmentalists and folks, in general, can be NIMBYs, or Not In My Backyard folks, and they're very skeptical of economic development, especially in their local communities. Why do you think that is and what do you think they're potentially getting wrong?
Nick: Well, as I said before, it's a sense of loss. A lot of these impacts are permanent. When there's a beautiful field or a view or habitat that is developed or impacted, it's gone forever in many people's minds, and in fact, is. I think that's a very human emotional reaction to have, and to not want that to happen where you are.
I think when you take a step back, however, if you have the luxury of looking at a larger landscape, whether it's across the state or the US or even around the world, one of the things that many people don't realize if you go back in the history of conservation is that most successful conservation in this country has actually been paid for by resource extraction.
Early on, it was duck hunters who decided to tax themselves by having to buy duck stamps that paid for buying national wildlife refuges. The Land and Water Conservation Fund, which is the $900 million a year federal program that buys land for open space and conservation is paid for by offshore oil drilling receipts. That's actually been the way conservation's been achieved and actually is a fairly elegant way to tie the two together. I guess, over time, one of the things that I realized and has become very much part of our business is the notion that that's not a bad thing to have economic drivers be the enabling thing for conservation. In fact, it really was what allows both to happen at scale.
I guess as we'll talk about this later, is you think about the notion of mitigation and the idea that offsetting those impacts directly, not all economic development is bad. We want things like schools and roads and reservoirs and things that the society needs and the idea that those would also then pay for conservation is a really important concept to understand.
Chad: Absolutely. Then after 10 years with The Conservation Fund, you teamed up with two colleagues, Adam Davis, Fred Danforth, to co-found Ecosystem Investment Partners, your for-profit private environmental conservation focused investment manager. What was your thesis for starting the firm?
Nick: The challenge we had back then was that most of the capital that was available for large-scale conservation restoration, if you go back to the late 1990s, early 2000s, really was coming from both philanthropic and government sources. There was not really much private capital investment capital in the conservation and restoration world.
Adam Davis and Fred Danforth who had actually met before I knew either of them had stumbled across this world of mitigation banking, which was a place where really through a couple of decades of activity that required compliance for unavoidable impacts and things like wetlands and streams, had actually inadvertently made a business that had the availability to be profitable by delivering large scale environmental offsets or restoration.
I think our goal from the beginning was to try to find ways to bring private investment capital into conservation to grow the scale and the opportunity set. It just so happened that this world of mitigation banking was the place where this had already been happening and been happening for some time. We got focused on very early in our business, but we've always had a very big focus on the notion of how to engage private sector capital into conservation because otherwise the scale of the need really could never be addressed.
Chad: Let's dive into mitigation banking, specifically the land-based environmental offsets. Can you explain to us what those are and how do they really work?
Nick: Bear with me, this gets a little geeky, but I'll try to keep it straightforward. There are various federal and state local environmental laws like the Clean Water Act or the Endangered Species Act, which were passed back in the early 1970s, let's say. Those laws, for starters, basically said, it's illegal to destroy the environment. It's illegal to fill a wetland or dump pollution into a river or kill endangered species or their habitat.
What's really visionary in the US is that we also recognize, as I said earlier, we wanted things like development that is unavoidable or necessary. What those laws allowed for was that if you could demonstrate through the resource agency to the federal government, let's say, that it was impossible to avoid or completely minimize a proposed impact to a wetland-- Let's say, there's a wetland at the end of the Philadelphia Airport runway, and they need to extend the runway by 100 feet, but you can't go around that wetland, you're going to have to go through it.
You can get a permit from the federal government, the US Army Corps of Engineers. The requirement of that permit is that you offset your environmental impact at least one-to-one so there's "No net loss of wetlands." That's the ultimate compromise.
It was a way to have development that's necessary move forward, but at the same time make sure that the environment and the public was not being harmed. That's really what set-- This is really in the early 1980s, where this construct really came into play. In the early days, you had the developers trying to do that offset themselves. You had a pipeline company, let's say, trying to figure out how to restore a wetland or a stream, and they didn't like doing it themselves, they often weren't very good at it. The law was altered to enable what we do, which is that private companies or landowners could come in and do largescale restoration with their own money or their own resources in advance of any known impact and effectively bank the credit for that. It created an inventory of pre-restoration, if you will. When along comes the pipeline or the airport runway expansion, instead of doing a new project, you simply would just buy credits or buy inventory out of the pre-restored project. That's mitigation banking in a nutshell, is the idea that you would pre-build these banks' full credits and then sell them over time.
If you can sell the credits for more than it cost, it's a business. It's a way to make a return while meeting the needs of the regulated public. It really caught on in the '90s, and now we've got almost 2,000 mitigation banks across the United States and every state servicing the needs of various unavoidable impacts across the country.
Chad: What environmental outcomes generate these credits, specifically? You mentioned wetland and stream restoration. I know there's also endangered species, restoration efforts, and nutrient and sediment-water quality. Can you talk specifically about a specific example of an environmental outcome that is a result of the restoration work that your firm does? Then how is that outcome verified, and then a credit is generated? How did that whole process work?
Nick: One of the really important concepts in the mitigation procedure is that, to truly offset an impact, you can't simply preserve an equal resource, that results in net loss. You have to create environmental or ecological uplift through your mitigation project. In the case of wetlands and streams, that means restoring something that's been degraded.
Generally, these are physical impacts to landscapes. A farm that used to be a wetland, but was ditched to drain 150 years ago, or a drainage ditch that used to be a stream, but was straightened in order to divert water away from a farmer's field or another resource.
Most, if not all, mitigation banks are going in restoring a feature that's been degraded and then quantifying the ecological uplift that comes from that work. That's where it can get quite technical, the ecological uplift is really a series of measurements of the chemical, biological, and physical benefit of that restoration. Those different benefits then roll up into the quantification of a credit.
The impact side is also measuring the loss of the biological, physical, and chemical benefits of the resources being impacted. The mitigation basically is where those two things match up. Those benefits are verified by the federal and state and local regulatory agencies. The US Army Corps of Engineers, US EPA, Fish and Wildlife Service, here in Maryland, it'd be the Maryland Department of Environment. Very strictly regulated, very heavily monitored.
You don't get credits released to us to be able to sell them to permittees, unless those benefits have been verified, and actually have been realized on the ground. If you think you've restored a stream, but the bugs don't return, and the water quality doesn't improve, you don't get the credits that you think you otherwise might get. That's the risk. The reward is, if you can demonstrate that benefit, then you can provide those benefits to a third party that needs to offset.
Chad: That's a very helpful explanation. How do they determine the price of the credits? Once the credits are generated, they're verified, the government says, "Hey, these are real environmental uplift outcomes," what determines the price of the credit that you will receive and then ended up selling to the developer that's trying to develop another piece of land?
Nick: The beauty, maybe by accident, of that market, at least, we call that Clean Water Act, Section 404 Market, which is the offsetting or fill of wetlands and streams, is that the regulatory agencies, all they say is, "If you're going to impact something, you need to provide an equal or better offset, and we're going to measure it and verify it." That's it.
Whatever transaction the impact you or the mitigation provider want to do, is between them, it doesn't matter. That's up to you. We as their regulator, we're just not going to issue you a permit to fill a wetland until you show up with credits that someone else generated. It's a market transaction, it's arm's length. We can ask whatever we want for our credits, and a customer can bid whatever they want.
If there are multiple credits available from different banks in the same watershed, there can be a competitive situation. It's an open market in that sense. The government agencies do not track the price of credits, they don't regulate it, and that's the way it should be.
One of the aspects that gets me back to a bit more a policy standpoint is that, in terms of valuing the impacted resource, the wetland or the stream, this, in fact, is one of the best ways to do that, because it puts a value on the resource being impacted, and the proposed development can simply not happen if they believe that it's costing too much to buy credits. It's a true market indicator of the value of those things.
Chad: Let's talk through your firm's role in developing the projects that generate these credits. First, I assume you have to go out there potentially acquire land. Can you talk us through this process so we know what criteria you use to select the sorts of properties that you restore?
Nick: Yes. First, like any good business, you start with demand. Where do the customers have a need and where can we satisfy that need? There are endless amounts of wonderful restoration projects in the United States and very needy ones, but at least in the mitigation world and environmental offset world, you need a buyer of that mitigation.
We look across the country, you look in locations where there are impacts that are going on that require mitigation, and then where there may be a lack of supply of mitigation would be a place where firms like ours would go look to do a project.
Once you determine that, then you're looking for properties that are highly restorable, that you have a high level of certainty will be successfully restored. Generally. where we come in, and I think it's happened over the past decade or more as we've been able to source capital, is that larger projects generally are better than smaller ones. It's a basic tenet of ecological restoration. They produce better results, they generally drive down costs, they're less risky from a success standpoint.
One of the innovations that we and our partners have been able to engage in is the idea that, by having larger sources of capital available, which EIP does, and I know Hannon has been a player of that as well, it's resulted in larger mitigation projects which have generally been more successful and more cost-effective over time.
Chad: When you then restore the projects, how long does that process typically take?
Nick: We joke in the restoration world it often takes longer to permit a restoration project than to permanent an impact. Generally, it takes us a couple of years to basically permit or get permission to go do a restoration project. We go through a very rigorous process with those same agencies to get not only the crediting of what the project should be but actually the right to go into a degraded stream and restore it, let's say.
Then the credits are released to the bank over generally a 5 to 10-year period after you've done the restoration. Again, the credits are a recognition of the actual success of the restoration, and that ecological healing and improvement occurs over time and has to be measured. These are long-lived projects. They generally are a decade or more in terms of the overall life from, let's say, buying the land and getting it restored to when the last credit may be sold off, and then putting that land into permanent conservation so it'll never go back to being degraded again.
Chad: It might be helpful if we talk through a specific project. I know there's several examples that you provide publicly. One that was most intriguing to me was the Copperas Stream Restoration Project in West Virginia. Can you talk a bit about that project, what exactly it entailed, and just walk us through it a bit?
Nick: Yes, it's a great project. We're very proud of that. This was down in the southern coalfields of West Virginia in Logan County. As your listeners may know, that's a geography that's been impacted a lot over the years, whether it was surface mining, or industrial logging, or other activities that had a pretty major impact on the landscape. There continue to be development projects today that impact things like wetlands and streams.
Mining has tailed off, in all honesty, over the past decade, but things like road construction and infrastructure and pipelines continue to crisscross that geography. Stream mitigation credits are a thing of need in that geography. One of the challenges is a lot of stream mitigation in the United States was generated through restoring what we would call the "duh" restoration. It's a very degraded ditch running through a farm field where you can restore the meandering and the trees around the stream.
In Southern West Virginia, there's a lot of farm fields. You're dealing with a environment that has been impacted and streams that are degraded, but maybe for other reasons, pre-law mining or logging practices from the late 1800s that may have straightened or changed streams. We acquired about 10,000 acres in Southern West Virginia again, and had to innovate how to fix the problems with these streams. They were forested, but they were having a lot of erosion issues because of activities that happened over 100 years ago.
Working with, again, the Army Corps of Engineers, the West Virginia DEP, conservation agencies that really help us understand what the problems were and then how to fix them. We've restored, I think, over 17 miles of streams in Logan County to generate the stream credits.
The success has been quite something. In that district of the Army Corps of Engineers, which is the Huntington District, it's a very, very rigorous measurement system of what success is in streams. Particularly, it measures the return of macroinvertebrates to streams that are basically devoid of them when we started and things like bank stability to stop erosion. We've had some really good success down there in terms of restoring the streams, and the credits have been needed. There's some particularly highway construction projects as that area opens up has been a big need for credits. It's very difficult for road projects to avoid stream impacts. They generally have to go straight as possible and they are wanting to mitigate what their impacts are.
Chad: Can we talk a little bit about the social benefits of these sorts of projects? Your projects, obviously, as you noted, enable infrastructure development in this case which likely has job creation and other benefits. What about the direct social benefits of the projects that you restore? Could you speak about the benefits to the community socially as a result?
Nick: Actually, that project is a good example. Actually, most of that land is now owned by the state of West Virginia as wildlife management area. There's new public land available. Actually, the first elk reintroduction in West Virginia ended up on part of our property there. They're great environmental resources. My favorite story down there actually was that at the bottom of one of our valleys, there was a public school that had been flooding about every three or four years from rainfall that would come down in this Valley, and because the streams were degraded, they get these flood events that would rip through their school.
They were obviously quite nervous when we moved in to start restoring the stream, thinking that maybe that would exacerbate the problem. In about eight months after we finished our restoration, there was a major downpour rain event and there was almost no flooding that came out of our property. It was because good stream restoration actually restores the flood plane, allows the property and the streams to hold flooding back to basically dampen the hydroperiod they call it.
I remember talking to the school superintendent. He called us up and he said, "Man, this mitigation stuff really works." He said, "It didn't flood this time. I couldn't believe it." It's just a small one little story, but they were just really pleased. It was something that we had done that they saw the direct benefit of that.
One of things we haven’t really talked a lot about and I know Hannon has been very involved with is stormwater abatement and dealing with those resiliency issues through stream restoration, the ability to benefit the public not just through restoring ecological function, but actual flooding and resilience benefits.
Chad: Now let's move to the pay for success transactions that you're involved with. This means different things to different folks in different contexts. Could you tell us a little bit about what pay for success means in this context and how these sorts of projects typically come together?
Nick: When we were just describing in the mitigation banking context where we only get credits after we've demonstrated the success of the restoration and then have to go sell those credits to people that need them, that is pay for success. It's not a direct payment for the successful outcome, but it really set the whole idea which is, hey, there are investors and companies like EIP that are willing to be held accountable and only be compensated if we can successfully deliver a project.
Oftentimes that means you've got to front the capital to build the project, which is how investing works. You do something and, if I'm going to sell toasters, I have to go invest the capital to build toasters that work and then I get paid for them when they actually get bought.
The notion of that could be applied to any number of environmental problems across the United States whether it's compliance-driven like an offset or not is really where we move to this idea for pay for success. For instance, here in the Chesapeake Bay, where there are really, really critical goals to restore the bay, and unfortunately, over the past couple of decades, we've spent a lot of money, but haven't necessarily seen the results of what we intended to see.
Working with our partners, we turned it around and said, "Hey, we're used to restoring streams with our own capital and only getting paid if they actually demonstrate success. In Chesapeake Bay water quality restoration efforts, for instance, why don't we just do the same thing? We'll go spend the money, we'll go secure the land and restore the streams and use our own capital and we'll set a metric as to what success is."
In many cases, for instance, it's pounds of nitrogen or phosphorous reduction that come out of these degraded streams and we'll be paid for the pounds of nitrogen that we can reduce going in the Chesapeake Bay.
Lo and behold, it works really well. It allows us to be doing projects at scale, to deploy investment capital up front, to accelerate restoration, and again, for the public, only be paid for that if we're successful.
One of the really important things that's come out of that is, for the most part, we found that the price per unit restored, the public pays in these pay for success programs actually comes in lower than what the traditional pay-as-you-go or design-bid-build programs have been. There's been this really interesting win-win develop where we're accelerating restoration, we're doing large-scale projects, and we're actually getting the public and the taxpayers a better deal. They're getting more bang for their buck on the restoration side.
Chad: That sounds amazing. Let's talk about the marketingin the mitigation space, the spaces in which you invest. How has this grown over the last decade or so? How do you see this market growing going forward?
Nick: In the traditional mitigation markets, which is the wetland stream and endangered species, we estimate it's about $3 to $3.5 billion dollars a year spent across the United States mitigating those types of impacts, whether they're buying mitigation bank credits, or permittees still doing it themselves, that's the level of activity. That doesn't change a whole lot year to year, frankly.
What has changed in that business is the amount of mitigation that's being provided by third parties. If you went back 15 years ago, probably 90% of stream mitigation in the US was being done by the permittee themselves. Now it's over half has been delivered by companies and the expert groups like EIP. In the pay for success markets, which address a whole myriad of other things, including, as you talked about, water quality, stormwater issues, resilience, those markets have the potential to be even larger.
We estimate, for instance, about $6 billion is spent every year across the United States addressing nonpoint source water pollution issues. Things like degraded streams or runoff affecting places like Chesapeake Bay or the Great Lakes. You get into things like climate change resiliency, which includes things like coastal flooding and restoring those types of habitats, it gets into the tens of billions a year.
Lots of money being spent in these places, I think the focus like in the mitigation banking learning is, can the private sector become a bigger, bigger part of the solution set by delivering outcomes through pay for success strategies or things like that?
Chad: Great. Well, let's turn to the geographies that are of interest and the policies. This is a very policy-driven marketplace. Right here in Maryland, the Comprehensive Conservation Finance Act is a very hot topic. Could you talk a little bit about that act in particular, and policies like that, and how they can help accelerate the restoration work that you all develop?
Nick: You make a great point. One is that most of these markets originally are a product of regulation. They're a product of society saying, "We want an offset for these impacts if we're going to allow them to happen." If those rules and laws didn't exist, then the demand for our products may not be what it is. The good news is those laws are quite robust and durable. The Clean Water Act has only really strengthened over the past 40 years.
I think we're not going to just let clean water go away as our priority. What things like the Comprehensive Conservation Finance Act do is have taken it a step further. It goes from just saying, "If you want to comply with the law, here's a market-based way to do it."
The Conservation Finance Act says, actually, the market-based ways of doing these things almost work better. We want to actively encourage those types of solutions because the challenges are so large. We need private capital to be a part of the solution. Maryland has had a really leadership role in that, even before the Act. Things like I was talking about with the nutrient reduction projects.
It really codifies that and explains how that can be done and how it can be expanded in lots of things, not just water quality, but also things like carbon offsets and other markets like that.
Chad: I want to go down the topic of carbon. We've talked a lot about the other environmental impacts your restoration projects help to provide. How do you assess the carbon impact of your investments? Do you think there's a role for carbon credits to be utilized in the projects in the future?
Nick: The projects we do are undeniably carbon beneficial. When we restore land, we plant millions of trees and those restored landscapes sequester carbon. In the case of a project we have in northern Minnesota, we restored a 25,000-acre peat bog that had been severely degraded by ditching and raining back 100 years ago. Degrading peat bog soils actually give off methane. Not only are you are sequestering carbon by restoring it, we're actually preventing emissions from those types of landscapes.
We've begun to quantify that. In the mitigation hierarchy, stripping out the carbon benefit and then selling it is not possible. There's a whole issue of we call stacking credits. One of the chemical benefits, I was talking about the measurements, includes carbon offset. It's effectively packed into the mitigation credit. Going back to my previous career at the Conservation Fund, and really where I cut my teeth in restoration, we did about 30,000 acres of restoration bottom at hardwoods mostly in the Lower Mississippi Valley, that goes as back in the late '90s or late 2000s to generate carbon offsets for various utilities and other companies. I think there's going to be an increasing role for that type of restoration as the source of carbon offsets in the US-- That was how it started out. It shifted to some other things over time. I think that's a role where firms like EIP that have experience in restoring landscapes, quantifying the benefit, whether it's carbon or water quality, verifying it, that has a great potential if not a huge need, as we think about the mix of things that are going to address the climate issue, for sure.
Chad: Are there any other firms out there that are doing similar work? How do you think about your competitive advantages in the spaces in which you operate?
Nick: The great news is there's lots of firms doing what we do. We are by far not the only one. Large and small, regional, local. We have a trade association, the Ecological Restoration Business Association, which has hundreds of members. One of the really exciting parts about all this is, we haven’t even talked about it, is the job side of this business growth is that the hundreds of thousands of jobs across the United States that are now directly engaged in restoration and conservation.
It's a huge opportunity. Again, we're just one of many, many firms doing this. Look, it's healthy to compete. We do compete to deliver these projects. It means the pricing is good for our customers, it's good for the taxpayers, and that's a good thing. It drives the market, and is only, we think, beneficial in the long term.
Chad: Now I'm going to move to the capital side. You've raised four funds to date, totaling about $1 billion, most recently a $450-million fund that closed a couple of years ago. What LPs or limited partners do you partner with? Do you think it's easier to raise capital today, given the influx of capital searching for environmental impact, positive ESG, marketing, et cetera, for the investments that you put together?
Nick: We're a fairly typical private equity fund structure. We have a fairly diverse set of limited partners, investors, we call them, including pension funds, endowments, families, and so forth. There's a mix of motives, but really, primary amongst them is fiduciary, it's financial return. I'll give a great example, one of our lead investors and really, at the beginning, was the State of New Mexico Educational Retirement Board, which is the pension fund for the teachers in New Mexico.
The guy that manages that program, a guy named Mark Canavan, after having probably a hundred meetings with potential investors, and most people said, "We have no idea what you're talking about in environmental offsets," we got to his office, and he said, "Actually, we've already allocated to mitigation banking as an investing strategy. We'd love to talk to you as a manager."
They've been a great investor ever since. He actually gets this question a lot, and as he says, over and over again, "My job is to generate return for my beneficiaries in New Mexico." That's the primary goal, and EIP shares that. It doesn't mean that the environmental benefit the EIP does, sacrifices on their return.
In fact, what we're really doing is delivering on what society and these laws have said you have to do, or in a non-compliance market, we want. If you can deliver that really efficiently and effectively, then it should drive good returns for the investors while doing some really good things in the landscape. They were way ahead of their time, as an investor, thinking about that.
I think that's how most of our investors probably think about it today, is that they are driven first by their responsibility to generate return. In this situation, that does not conflict with good things coming out of it on the ground.
Chad: EIP is a 15-year-old firm. I'm sure you experienced some ups and downs along the way. Are there any particularly challenging turning points or moments in your company's history that you'd like to highlight?
Nick: I think the most challenging time was one of the most also exciting and inspiring times. We did raise our first fund right after the recession, in 2009, 2010. As I said before, very few people had ever heard of this, certainly hadn't heard about it as an asset class, and we took hundreds of meetings. We had many investors that took five meetings for them to say no.
That was, at times, very daunting, but we got through it. It allowed us to demonstrate the success of this, and really set the tone. Through that adversity and that challenge came some really wonderful outcomes, both on the ground and as a business.
Chad: What are your ambitions over the next five or so years?
Nick: We're really driven by our projects. That's where the passion comes from, the things we're doing on the ground. We just want to do more of it. As I always quipped, just when I think I know where we're going to be doing projects across the United States, up pops an opportunity in a geography that we never even thought of before. If you think about the unbelievable amount and number of environmental challenges in the restoration and conservation side, they're all over the country. This model can be applied to many, many, many of them. We just want to keep doing more projects. We will require more capital and more partners, and that's what makes it fun.
Chad: Excellent. Nick, we're almost done. First, we have the hot seat. We ask for your immediate, quick thoughts to the following statements. I changed my mind on?
Nick: Preservation as being the way to save the environment. I started, as a lot of people do, thinking that just preserving what was left was the way to do that, and getting involved in restoration and conservation has really opened my eyes to that being the way we're going to solve these problems.
Chad: The person I've learned the most from is?
Nick: Patrick F. Noonan, the other guy I mentioned before, who ran the Nature Conservancy and was my mentor at The Conservation Fund for many years.
Chad: The world needs more?
Nick: I think it needs more business people who are focused on conservation. That is a rare commodity. It's growing and it's been really exciting to see young people coming up through this world. Duke has a wonderful joint environment and MBA program. That's a wonderful skill set and will only help the things we're trying to do get better and better over time.
Chad: You should also look at Berkeley Haas graduates as well, which is where I--
Nick: Okay, will do.
Chad: I connect to nature by?
Nick: Fishing. I love to get out and fly fish. It's my other addiction, I would say, after land conservation.
Chad: The most insightful book or article I read recently is?
Nick: It's funny, this is one that you all probably know very well. I actually just finished reading Russell Gold's book called Superpower, which is the history of wind power development. While we're not in that business, I really resonate with the challenges of doing large-scale projects to try to benefit the environment and how incredibly hard it can be to get those things on the ground, given the realities of permitting, and the landscape, and competition. It's a very good book and I really enjoyed that aspect of it.
Chad: Do you ever have renewable energy developers that are looking for credits to purchase or does that not happen?
Nick: We do, yes. That's one of the ironies of this, that while that's a important part of our energy mix, things like solar farms in the Mojave Desert and wind farms in Appalachia, they have impacts that are unavoidable. They do require mitigation and we do service that.
Chad: Very cool. Aside from Climate Positive, my favorite podcast is.
Nick: The recent one I've gotten hooked on is Ologies. It's a great series of vignettes about biology and myrmecology and all that kind of stuff. It's very well done.
Chad: Excellent, I'll have to check that one out. The most underrated tourist spot to visit in the Chesapeake is?
Nick: I'm biased. Our family farm is up on the Elk Neck, which is on the Elk River in very, very northern Chesapeake Bay. It's not the first place people's minds go to but it's a beautiful place. Go check out Elk Neck State Park. It's a magical place, and right in the Chesapeake Bay.
Chad: Then finally, to me, climate positive means?
Nick: I think it means doing things that are additional to benefit climate issues. Obviously, getting to a place where we have a low zero carbon footprint is important but the bridge of doing environmental offset projects is going to be really important. Again, the positive means, I think, we need to be doing things like restoration, to do something that's additional for the environment, maybe versus some things that aren't necessarily doing something new on the landscape.
Chad: Awesome. Thank you so much, Nick. It has been a really fascinating discussion. We learned a lot and enjoyed a lot too. We appreciate your time.
Nick: It's been my pleasure. Thank you for putting this on.
Chad: Climate Positive is produced by Hannon Armstrong. If you enjoyed this week’s podcast, please leave us a leave a rating and review on Apple and Spotify, which really helps us reach more listeners.
You can also let us know what you thought via Twitter @ClimatePosiPod or email us at climatepositive@hannonarmstrong.com.
I'm Chad Reed.
And this is Climate Positive.