How might the Natural Resources Conservation Service (NRCS) better leverage private capital to support its mission? Could certain conservation practices generate financial returns and attract investment? In this interview, Ricardo Bayon and Alex Eidson, a partner and an analyst at Encourage Capital, share insight and ideas from their new report, “NRCS and Investment Capital: Investing in America Together.”
This is the first article in a two-part series.
CFN: To start, can you tell me a bit about the impetus for this new report? What were you hoping to find out?
Bayon: In a discussion with the Conservation Finance team at the United States Department of Agriculture’s (USDA) Natural Resources Conservation Service (NRCS), it became clear that it would be helpful to have a report that summarizes the major ideas around how NRCS might work with investors to better deliver conservation on the ground.
The report comes out of a recognition that NRCS will never have enough money to achieve all the conservation that is needed. NRCS plays a big role and puts out a lot of money, but even that will not be enough to make the changes that are needed.
There are two glaring facts here. Even though NRCS puts out billions of dollars a year for conservation, it can never fund the many requests it receives. At the same time, there’s this growing movement of impact investors with a tremendous amount of capital who are looking for investments that deliver a return alongside social and conservation outcomes.
Back in 2014, we authored a report, “Investing in Conservation,” with JPMorgan Chase & Co., The Nature Conservancy’s NatureVest, The David and Lucile Packard Foundation, and Gordon and Betty Moore Foundation. The biggest finding was that investors could not find investable projects. We have money, but we are not investing it because we are not finding adequate investment opportunities.
It seems like these two trends could be mutually reinforcing. But how do we do that? What does it mean to put these two things together? That was the impetus for the report.
For NRCS, the biggest programs for this are Environmental Quality Incentives Program (EQIP), Agricultural Conservation Easement Program (ACEP), Regional Conservation Partnership Program (RCPP), and Conservation Innovation Grants (CIG), so those were the programs we looked at.
There was a lot of discussion as to what should or should not be included. But we needed to set the boundaries somewhere. The things that are not included are the Healthy Forests Reserve Program, Watershed Rehabilitation, Agricultural Management Assistance, some of the Conservation Reserve Program, and the Conservation Stewardship Program. These were excluded because our task was to focus on the programs that had the greatest potential to leverage private capital.
The first part of the report is about a different way to think about how the conservation money is spent so that you can maximize investment capital. The second part is about the possibilities and ideas opened up by that different thinking. We separated the things you could do right now that would not require statutory change vs. those things that would require a heavier lift and a change to laws and regulations. There are some things that could have big impact, but would require big changes and rethinking things at a deeper level.
CFN: In the broadest terms, how might you summarize the main findings?
Bayon: The report shows that there is a tremendous opportunity to leverage NRCS funding to attract private capital to conservation and in the process, to do more conservation and support more producers on the ground. And while some of those opportunities would require new statutes, there is a whole lot that can be done without statutory change.
As our new report says, if you look at the things NRCS funds, there are a lot of things that do not provide a return on investment and will never attract investment capital. What are the types of activities that NRCS is currently funding that do or could provide a return on investment?
If we could leverage investment capital for those, then perhaps some of the money NRCS saves there could be reallocated to the activities that do not provide a return. This is really about making the best use of public funds. Public funds are rare and extremely important. They should be used to achieve the highest conservation output. But what does that mean? And how do you achieve the best rate of output per dollar spent?
Step one is to think about it differently. What are the practices NRCS funds that might have a return on investment? When a practice reduces water or energy inputs on working lands, it saves money over time. Those savings could provide an opportunity for a return on investment. Nutrient management, organic transitions, anaerobic digesters — NRCS puts money toward all of these things that could have a return on investment.
One of the [recommendations] of the report is for NRCS to start tracking the things it funds to understand whether a certain practice might have a return on investment. That information will help NRCS figure out where to leverage private capital. If it were made public, it could also help investors see where a return on investment may be possible, which would allow them to channel money toward those practices.
CFN: Were there other aspects of the findings that you want to draw attention to?
Bayon: Another hugely important finding is the idea of data collection on costs and benefits. USDA has a ton of data. It provides incredible data services on soil and forests across the United States.
If NRCS was collecting data on costs and benefits of different activities and projects, like conserving energy and water through irrigation or better nutrient management, an investor could use these data to make decisions on what to invest in — or what not to invest in.
NRCS does not collect this data partly because of privacy concerns. There are also producers who do not want to share these data. But a judicious data aggregation process could manage those concerns. That type of data would be an incredible asset for investors.
The other issue I would highlight to anyone who will listen is that if the government wants to work with the private sector, it needs to turn the nobs of risk and reward — better known as fear and greed.
We focus a lot on increasing returns. There is a lot more we could try in terms of decreasing risk. The use of guarantee mechanisms, the use of insurance mechanisms — those are incredible tools that have yet to be properly explored.
The report includes examples of how the government is already doing this across different agencies, from DOE loan guarantees to USAID programs. There is no legal reason that USDA could not be doing more of this.
Eidson: I would agree with that observation. This also ties back to what you spoke about earlier with the attitudes of NRCS and the need for NRCS to understand that this is possible well-charted territory for the federal government. When you think about spreading case studies of success, it is encouraging to help NRCS see itself as a different kind of agency than it has been in regard to some parts of its work.
Bayon: The easement program has been the most surprising to learn about. It also has tremendous opportunity for investors. When you buy land, an easement lowers your cost basis.
We have seen huge investors work with easements as part of their business strategy. The Lyme Timber Company uses easements to lower the cost basis of timberland and to achieve permanent conservation while providing a return to its investors. The easement program within NRCS is huge, but it is a bit hamstrung in how it can work with investors, partly because of the AGI limitations. There could be a huge opportunity if certain aspects of the program were changed.
In the report, we talk about the need for transparency of easement eligibility. If NRCS could make it easier for investors to know the likelihood of obtaining an easement upfront, it would have a big impact. That could channel money from investors to conservation in an interesting way. We point to an example in Arkansas where NRCS is already providing transparency on easement qualifications, so this could be done today.
Note: Conservation Finance Network receives funding from the USDA, The Nature Conservancy, and The Lucile and David Packard Foundation.