Financing Restoration: How Ecosystem Investment Partners Turns Environmental Law into Real Assets

Well, thank you so much, Nick, for joining me today. Really excited to talk about your journey and everything ecosystem investment partners is doing. Stumbled upon you guys a few months ago, it was just like, you know, enamored and kind of read through a lot of the site and just wanted to try to get you on and talk about everything you and the team are up to and the new fund and what that's gonna entail. But before we get into everything, EIP is and why you and the team started it. Talk a little bit about your journey before then. What got you into the environment and sort of looking at it as an investment class? Great. Well, I'm really pleased to be here. And I'm glad you found us, not always easy, but it's great to share a little bit of what we're doing. So yeah, quick background on myself. I grew up in Philadelphia and spent a lot of time on a family farm in the Chesapeake Bay. And so from a very young age, always had a real interest in the outdoors and conservation and restoration of ecosystems. I spent about 10 years with a group called the Conservation Fund, which is very much like the Nature Conservancy or groups you've heard of that engage in land conservation through the acquisition and protection of properties across the US. And I really gravitated towards that organization having worked for land trusts and volunteered for land trusts with kind of the idea that even then that conservation also had really important outcomes to protect and restore the environment. But also that it was sort of transactional in nature. I've always loved the idea of business and how money works and how, again, transactional abilities can accomplish things. And so laying conservation in the US, I think has a great mix of that. For young people wanting to get into this is that you can learn not only about how to conserve the natural environment, but do it through doing land transactions or financing things. And so the Conservation Fund is a real leader in that. And I kind of cut my teeth there doing land deals. And again, it's been about 10 years there and had a wonderful time. It's a great organization. Talk a little bit about what EIP is and maybe why you wanted to start it and maybe what you saw in the overall conservation landscape that it was time. It looks like it was 2006 when you and the team started it. What was it about that moment in time that really, you wanted to take the leap and start it and what sort of the overall mission envisioned for those who don't know? - Yeah, I mean, I really had the benefit of some really wonderful people, mentors that I learned from people at the Conservation Fund. I got in Pat Newton who started it again, Larry Selzer who runs it today. My business partner at EIP are going to Fred Danforth who had really, frankly been leading the charge in innovative ways to finance and fund large-scale land conservation and restoration. - At that time, probably the biggest challenge or one of them was there just wasn't enough capital available in the philanthropic and government sectors to do all of the large-scale conservation restoration that either happened. And so we were looking for a business model where you could attract for-profit investment capital from investors who may or may not even have an impact or environmental focus, but rather looking to generate financial returns on that capital and somehow find a way to integrate that into land conservation and restoration. That had been happening back then a little bit in the timber investment world. Some really innovative timber investment groups had realized that they could generate strong investment for their investors by doing things like selling conservation easements on timberland property. We kind of picked up on that model and said, hey, could we do this in some other areas? At the time, the whole world of environmental markets, particularly what we call mitigation and mitigation banking was kind of coming in the forefront. And so we focused on that as an area where we thought that the balance of both generating financial returns that could be attractive to investors but also accomplishing conservation and restoration at scale could be blended together. That was really the vision for what has become EIP and we're now almost 20 years old. So it's been doing it for a while. - If you don't mind, I'd like to dig a little deeper into the business model 'cause I think this is what sort of fascinates me the most is usually we think of environmental work as very nonprofity, very, you know, government led and there's, it then, you know, environment, then it becomes political. And I think that's what happened maybe the last 10 years or so is that anything to do with environment, he became one side was for it, one side it was against it in some way. But I think what you guys have built and maybe this trying to create this asset class around the environment in a lot of different ways is really interesting to me because it sort of brings both sides together on the political aisle in a way that is very unique and I think has positives on both sides. I guess talk a little bit about the business model and maybe some projects I like to use use cases as a way to describe of what's happening. - Maybe going back a little bit of context. You know, the environment is not a model of, right? There are so many aspects to how you can get involved in this really important part of the world, whether it's policy or law or research, science, where I focused my life is in conservation, which really connotes the idea that you have both the protection and restoration of environmental features but also the use, the wise use of those features and that development, sustainable development and conservation, restoration kind of go hand in hand. In fact, if you go back and look at most of the major conservation programs in the United States, they've been funded by things that involve the use of natural resources, duck hunters paying for duck stamps that pay for wetland restoration or the Land of Water Conservation Fund, which is used for federal land acquisition is funded by offshore oil drilling receipts. So that's always been connected. What we love about the work we do in the mitigation world is that we are helping projects, whether they're reservoirs or new highways or solar farms that inevitably have an impact on the environment that they can't avoid, but under federal law and many state laws, they have to offset that impact to get a permit to do those things. And what we do is we deliver the projects, the large scale restoration projects that provide that offset. So in our, through the corner of the world of conservation, we sort of live right at that nexus of both enabling good, smart, and needed development activity in places like Ryan today in West Virginia, Western Maryland, but also making sure that the environment is restored and that those development activities can help fund really, really important at scale restoration and conservation of aquatic resources or endangered species habitat. And so that's where we mentioned sort of the, sometimes polarizing aspects of the environment and there are really important debates and battles that go on over that, where we like to see as sort of finding that common ground where you say, like we need development, but we also need a good healthy environment, we need clean air and clean water, and you can get both, actually, you don't, it doesn't have to be an either or. So maybe while I'm out here in Appalachia, a bit, you know, an area we've done a lot of work is in Eastern Kentucky. And I didn't know this until we got involved there, I believe Eastern Kentucky has the second highest density of streams in America after Alaska, which is interesting, has to do with the topography of the state and sort of the aquatic resources. It's also a state that is looking to grow, it's looking to develop. A lot of that area has been lacking in transportation access and resources, there's a history of mining and other activities. So for instance, the highway department that can't, the Kentucky Transportation Cabinet, you know, is actively expanding transportation resources in Kentucky, and it's very, very hard for them to avoid impacting streams. Typically in the development world, you know, linear things like roads or high speed rail, you know, you can't go around everything, you've got to sort of build through some things. And so they have a very large need in Kentucky to do stream restoration, stream mitigation. And so we sort of answered that call about 15 years ago and began investing our investors money in acquiring properties throughout Kentucky. They were very degraded, you know, from historical land use, just, you know, logging, mining, maybe overgrazing, where the streams were very degraded and where we could invest capital in restoring those streams back to, you know, hopefully something near high quality. And you get credit for that under the Federal Clean Water Act, you obtain credit for that uplift. And that's the credit that then the highway department of Kentucky can use to offset their unavoidable permanent impacts from things like road construction. And so what, you know, a lot of exciting aspects of that, we've done a lot of great conservation. Thousands of acres of land have gone into permanent conservation. They've been restored, improved water quality. We help to actually expand the habitat for an endangered fish. You know, all the while one really important aspect of our business is that also supporting jobs. Some of our partners that helped to construct the stream restoration projects were, you know, for coal mining, earth-moving contractors, that industry has been, obviously, tailing off somewhat, and they were able to find new opportunities using a lot of the same skills to do stream restoration and, you know, building jobs in some communities where, you know, jobs have been hard to find. And so helping to employ some of those folks around restoration was pretty exciting as well. So there is one example, you know, a much many that is a geography we were very proud of and had a lot of success, and hopefully in helping to. of investing. So the customers would be state governments, federal governments, does it ever extend to commercial developers who are perhaps doing something that aren't, that is not a road, but some type of commercial property or residential property. I guess just talk about, I guess who the clients are, where the sort of the business model extends to. Yeah, I probably should have started there at the beginning. So a little more than half of all of the mitigation buyers, the United States are actually our private entities. So the highway departments and port authorities and airports, you know, they impact wetlands or streams unavoidably. They have to mitigate, but so does a housing development or a new data center or a solar farm going in. It's under the Federal Clean Water Act, which has been around since 1972. You have to do everything you can to avoid and minimize impacting a wetland or a stream on your site. But if you can't avoid it, you just simply cannot move the road or your projects in northern Minnesota. You know, the iron deposits under the iron mines there, they're under wetlands that that's where they are. They're not going to go somewhere else. You have to apply for a permit from the federal government and your state government. You cannot impact those wetlands or streams until you get that permit. An explicit requirement of the permit is that you do a project in the same watershed, restoring or improving the same type of resource. So restoring a forested wetland if you're impacting a forested wetland that replaces the biological, chemical, physical attributes of the thing you're impacting. And so again, it doesn't matter whether you're private or public or what type of development you're doing. If you have to get a permit and you have to mitigate, then you're looking at, you know, doing an environmental offset. And the preferred way to get that now is to buy credits from third parties like our firm. We're one of many that do this rather than trying to do it yourself. And it's a logical kind of outsourcing of compliance, right? Rather than a shopping mall developer trying to figure out how to restore wetland. Sure. Let us do that. Like that's all EIP does. And then, you know, they can do their good work to build their development and we'll focus on restoring the environment in that same watershed. Does that make sense? Yep. Yep. Absolutely. I want to talk a little bit about the new fund that was raised a $400 million fund. Is that going to go to similar projects that you've fixed historically done? Talk about the latest fund and what that's going to go towards? Yeah. So absolutely, the focus of our new fund will continue the work we've always done focused on delivering large-scale high-quality environmental restoration for mitigation or, you know, programs that need to restore the environment. We are always moving into new geographies. So there are areas around the country that we have done projects in the past that we will likely do projects in this fund. There are markets in the US where, you know, there may have been a previous mitigation bank that was selling credits that sold out, right? The credits get used up. They're not -- it's a one-time use. If there's new development or new projects coming in that need mitigation, you can restore or re-supply that market. But, you know, the need for mitigation, the need for credits that can allow really important development to proceed infrastructure is, you know, I would say, as needed as ever. And we're really excited to help to, you know, provide that resource so that those things can meet their obligations under US environmental laws, but at the same time, efficiently and effectively, you know, move forward once they have their permit. So who creates like the credit price? Is that based on the work that you guys obviously go in and you do the hard work and the long work of restoring everything? And then you just price time, labor, everything goes into some sort of algorithm that comes out with an overall price. Yeah, great question. So one thing important to understand is that the pricing of mitigation credits in the US is entirely market-driven. So there's no government price setting and for good reason. The regulations that require, let's say, a new iron mine to offset their impacts, all the regulations are saying is that you need to mitigate those impacts in the same watershed, and you can either buy credits from a bank or you can do a project yourself, but you're not going to get a permit until you've done that. After that, the regulators basically say, like, we don't really care what it costs you, but you're going to be held to the same standards as everybody else in terms of the biological, physical, chemical work you do. As an investor, what we've focused on is, can I deliver a project or credits to my customer at a reasonable multiple of my cost that accounts for the cost, the time I hold the credits, reasonable return on our capital to make our investors a return on their investment? We price our credits at a place where, and we're again, we own 92 mitigation banks. There are over 3,000 in the United States, so this is going on all over the place, believe it or not. But most, I would say mitigation banking firms like us will price their credits just like any product where you're, you know, you want to sell to your customers at a price that they will assume, and you also need to achieve a reasonable return on your investment, and where those things hopefully balance is where your price comes out. But it's entirely an arms length negotiated market-based transaction, the sale of credits. Which is a good thing. It means it's an efficient market that, you know, both parties are getting what they need. And this doesn't have anything to do with maybe the new credits coming online, such as carbon credits or nature-based solution credits, you know, nature credits, whatever it might be, water credits, there's all these different things sort of coming out, which are super interesting. Is that another revenue model that you and a team think about, or that's just something that's not quite a mature market yet for you guys to jump into? Well, I think a lot of what you're speaking about are really important potential innovations. I would say, sort of like carbon is one that, you know, it is an offset credit, right? You're basically saying, if you're a utility, let's say, and you can't reduce your emissions to zero, then the way to get to net zero is to buy credits from some activity that is providing that offset. The major difference we have with that is that most of those markets are not regulated yet. They're not compulsory. So in the US, the mitigation markets for wetlands and streams, endangered species and war quality, those are not voluntary. Those are required. They're highly regulated. So the standards and the requirements for those are very rigorous and set. Some of the new recruiting methodologies around other things, I think, have great potential, but until they are probably regulatory and compulsory in nature, there may be some uncertainty around them that it's not something that our business has been very focused on historically. We've really focused on the more established markets. Hey, you know, diving into a lot of the stuff and obviously there's a, there's a, there's a housing sort of issue in, in our country with sort of real estate prices being high and not access to housing. You know, the one thing I hear from developers, right, is that, you know, it costs. So the incentive to build is not sort of quite there anymore because they have to deal with, like you said, local regulations or state regulations around maybe environmental policy or climate stuff that they have to deal with when building. What are conversations like with builders? No, that's a really important conversation going right now. And I probably focus on just our small sliver of it. As I said, you know, I think where we focus is that, you know, that a lot of the environmental laws that have now been around for 50 plus years, like the Clean Water Act or Nature Species Act, you know, those are important laws that we rely on for clean water and good habitat and so forth. But they don't need to be a complete hindrance to development, right? As you said, we, we want things like new housing and new schools and reservoirs. And so the real genius of those laws, I think, if you look across the world, is that there's an explicit ability under the Clean Water Act or the Nature Species Act to allow development to proceed. We're not saying no to everything. We're just saying, please find a way to make sure that the environment is addressed when you're building a new housing development. What we come in is that, as I said, if a permanent development is going in, they've gotten their permits, they've gone through a public process. The most efficient way for them to deal with the mitigation is to buy a credit from a third-party private entity like us, where it gets really complicated for developers like that is if they have to then go do their own mitigation project and they can face delay, cost overruns, complexities, frustration. If they buy a credit, it's literally it takes a couple hours to buy a credit and they're done. They can then go build their project. With the knowledge that the source of the credit is from a very high quality, fully permitted mitigation project that actually was done years in advance. The public also knows that the project is being used to mitigate the impact has already been successful. I think is a good example of how what we do is actually part of the efficiency story. It's not against development. It's not necessarily enabling old development, but it's saying when development proceeds that we want, it's the best way to make sure that the environment is addressed and compensated. It's an interesting balance. It really is a really interesting, is there international policies like this or is this as unique to America? America really was in the forefront and these markets were not originally designed to be an investable market. They were designed as a way to address the need for a balance between development and environmental and conservation things. But I think the other nations are taking notice that it is a very efficient way to achieve compromise. I actually met a minister from an EU country years ago and he was saying, "We are, if someone wants to build a development, at the end of the permitting process, we either get the development and no restoration of the environment or the development is killed and yes, we preserve the environment, but we don't get both. You guys get both. You get development, which you need and rural communities, let's say like here West Virginia. And then it also pays for large-scale stream restoration. Like that's the thing that I think people are focusing on is you can have both just need to be either or. I love that. That's a unique thing about America is our ability to create markets where there wasn't intended to be one. Right? But that's how we create one that has these these domino effects of positivity that that occur along the path. A couple more questions here. The first would be we mentioned early on and there's there's not really you know you mentioned sort of young people and I'm thinking of like how do more people get into this this ecosystem that has been created because I'm thinking about college and universities offering degrees around this in some way I know friends who went to school got like sort of conservation degrees but it's more a really animal based and studying animals and there's not to me my knowledge of anything like an environmental finance degree where you can use you know a you know an NBA or something with a with a discipline in environmental finance or something like that. Do you see anything like that popping up where you can have younger people who are more passionate about the environment look at through look at it maybe through a different lens of of not being just a nonprofit oriented or some type of political you know ambition that they might have to focus on the environment like we said it's just this huge sector in one way there is an alternative way to maybe look at it that that can really involve everybody and be positive in a lot of ways. Do you see I guess any type of education or college in university kind of looking at building curriculum around this. Well you're raising a great point. I actually think that there's been a lot of change. I mean I was funny my my daughter is a sophomore college now is looking at taking. Yeah I wish I was young. Yeah I know she's looking at taking an environmental economics course next semester like that didn't exist while I was in college and I won't tell you when that was but you know so I think it is changing I think there's a recognition explicitly that blending business in the environment actually is where a lot of the action is it doesn't mean that you know the really important work around environmental policy science research those things are all still really fundamental but the idea that there is a business around conservation and the environment I do think educational institutions are realizing that that being said even if it's not sort of explicit I always thought you know there still aren't enough business people in the in the environmental sector and I think that that's an area if people are interested you know maybe making the time or pursuing opportunities to learn finance you know economics statistics have to how dollars work and then applying that to conservation and the environment there's all sorts of opportunities and I think we've just really scratched the surface in the work we're doing you're mentioning other crediting programs and a lot of innovation just the need for creative solutions and the need for finding ways to deploy capital into this giant challenge of restoring and conserving our environment is out there so yeah I talked a lot of young people that want to get into this and if they like business and they like the idea of transactions I think that's a great place to focus you mentioned like the the fund obviously and a big fund right I mean did you have to educate investors or did they come to you and say they propose you with an opportunity I guess you have to educate you know investors to raise this latest fund or they were already partners before and maybe a previous fund and they they knew they knew the sort of economics of it and the mission of it or did you have to educate like sort of LPs and your your investors about how that all this works it's a mix we've had some wonderful investors that have been with us now for you know 15 plus years who now know these markets really well even some European investors who have people are surprised they they understand what we do really really well but we're always educating new LPs as well who have not heard of this and frankly it's one of the best parts of my job I love educating people about this thing that you know it's kind of going all around us but may not be aware to folks especially in the investment world but so it's a real mix but generally we're you know making the case that there's an investable opportunity here good is as we now have a track record that goes back yeah almost 20 years so people can look back and see you know our successes and mistakes and what was learned from and how to make it better and all that means that it's easier to explain over time so my apologies one last quick question so when a project's done right and the credits are bought what happens to the land or the restoration project that has been done is that still cared for by EIP is that sort of left where it is sort of a natural ecosystem it has this biodiversity I can sort of just replenish itself and it's sort of safe to kind of move on from I guess what happens after you come into you do do your work and you sort of move on yeah really important aspect of this so in all these regulations the mitigation projects like we do obviously we have to restore the environment you only have credit if you restore or enhance something that is degraded but those areas need to be permanently protected so in all cases they are put under a conservation easement or a deed restriction that they are forever protected many times those properties end up afraid that we're in sort of public ownership so we we have a lot of properties that we restored that are now a wildlife management areas land trust properties where the public can enjoy yeah you know these beautifully restored areas but they are they all have to be protected in perpetuity that's what that's a really fundamental piece of the mitigation gotcha well Nick thank you so much really appreciate your time I know you're in the road doing a project right now so very grateful that you took some time away to chat and best of luck to you and the team for the next decade my pleasure thanks for your interest