Interview: The Conservation Fund’s Green Bond for American Forests

In September, The Conservation Fund announced the closing of its $150 million green bond. The environmental nonprofit offered the 10-year notes in order to expand its Working Forest Fund, a program that aims to place permanent conservation easements on private, sustainably harvested timberlands. The bond was underwritten by Goldman Sachs.

CFN spoke to Conservation Fund CEO Larry Selzer about how the organization will use bond funds, the experience of offering a bond as a nonprofit, and the significance of the project for the conservation finance field.

Note: CFN’s operations are based out of The Conservation Fund. This transcript has been lightly edited.

CFN: What was The Conservation Fund’s motivation for pursuing green bonds? What issues will the organization use them to address?

Selzer: The Conservation Fund has been the nation's leader in acquiring land for conservation for more than three decades. Over the last 34 years we've conserved more than eight and a half million acres on behalf of public agencies at the federal, state and local level. They approach us and let us know which lands they want to buy, we acquire those lands and hold them until the public agencies can buy them from us, and they go into permanent conservation and stewardship with the public agencies. 

That model was severely stressed beginning about 15 years ago, when the big integrated pulp and paper companies began to sell their land. More than 90 million acres of land were sold over a relatively short period of time, and the speed and scale of those divestitures completely overwhelmed our existing business model — using our balance sheet to buy land, hold it and sell it to the public agencies. When that first tidal wave of forestland came on the market, more than 20 million acres were lost right off the top for development. 

Interestingly, 70 million acres were acquired by a new class of owner that didn't exist prior to that period. These were investor owners who aggregated pension fund money, university endowments, foundation endowments, and acquired timber as an asset class. Mostly they didn't have manufacturing facilities but they bought the timber as an asset. The good news is that 70 million acres were still intact in large, forested landscapes. The bad news is these investor owners generally are 10-year funds, and at the end of those funds when they had to return capital back to the investors many of these lands were fragmented and converted to development.

Over the next 10-year period another 20 million acres of land was lost. Now we have 50 million acres left in institutional ownership. All of it ultimately may be exposed to the marketplace and suffer the same fragmentation and conversion to non-forest use. The U.S. Forest Service estimates that 10% of that land is of high conservation value — that's 5 million acres, and at roughly an average price of $1,000 an acre nationwide that’s a $5 billion bogey to conserve these lands. 

CFN: What advantages do green bonds offer in that conservation effort?

Selzer: There was nothing that existed that could come close to moving at the speed and the scale needed when these properties come up for auction that could get us toward that 5-million-acre goal. So we had to come up with a new model where we could intervene when these properties come up for auction — we call it our Working Forest Fund. We could acquire them, take them on to our balance sheet, establish sustainable harvest plans to cover the cost of carrying these properties, sell a conservation easement to a public agency, and then resell the property back into the private market as a sustainable working forest. 

We’ve spent the last years pilot-testing this model. We raised $200 million dollars — a third of that was grants, two-thirds was low- or no-interest loans from foundations and state agencies — and with that money we acquired about 650,000 acres of timberland. All of it is on the tax rolls, all of it is being managed for sustainable harvest, and ultimately all of it will be conserved with a conservation easement and the land and the timber rights sold back into the private market.

But 650,000 acres is a long way from 5 million. As we thought about how to scale up, we realized that we had the opportunity to tap the public debt markets. So we targeted the next million acres. We worked with Goldman Sachs to issue the very first green bond for conservation, which we just completed, at $150 million. That money, coupled with new philanthropic capital and public funding, will allow us to seek to acquire the next million acres of working forests. From there, we can have a direct sight line to the 5-million-acre mark. 

CFN: Compared to other conservation nonprofits, is there anything about The Conservation Fund’s history, development or current position that makes it uniquely suited to issue this bond?

Selzer: We believe that The Conservation Fund is the only nonprofit in the country that is chartered for both conservation and economic development, trying to balance environmental protection with economic return. Working at the interface of business and the environment is where we like to play, and obviously working forests fall directly into that sweet spot.

These forests not only protect wildlife and water quality, they are a critical part of our strategy to address climate change. But they also support more than eight and a half million jobs in the forest products industry and the outdoor recreation economy. These are communities that otherwise would not have an economic base — many of these communities exist because of the forest products industry. Our dual-purpose mission uniquely positions us to work at that interface, and not only protect all of the forest attributes that we care about but also make sure that these communities have economic vitality in the future. 

In addition, because we are a transaction expert — having completed more than 3,200 transactions, with more than $6.7 billion worth of land conserved — we understand how to acquire land, how to manage it, and how to exit these properties in a way that achieves permanent conservation outcomes. For those reasons, we felt comfortable tapping the public debt markets, combining that with strong philanthropic support and public support to move in this direction.

CFN: What was it like offering a bond as an NGO? Did anything surprise you about the process?

Well, this was my first time going through the public debt process, and I would say it was a fascinating and exciting process. Every step of the way was a learning opportunity for me. Probably the most encouraging aspect for me was the eagerness with which our underwriter, Goldman Sachs, embraced our vision of conservation and economic development and worked hard to get us a superior outcome. The institutional buyers of the bond are clearly looking for a product that falls in the environment/social/governance (ESG) bucket, and there has never been a green bond where 100% of the proceeds are used for this impact, for conservation. There's a direct sight line between our use of proceeds and the mission, the ESG impact. We were overwhelmed with the support from investors.

CFN: How did different types of investors react to the bond offering?

Selzer: The fact that 100% of the proceeds of these bonds would be used directly for mission impact was an important factor. As institutional investors are sorting through the hundreds if not thousands of bond offerings that may have a green label, they could easily pick up on this and dig deeper to find out exactly what we were doing with the proceeds, and why. And that was very attractive to the investors in the institutional sector, especially those that are targeting ESG product.

Family offices, which you would expect would be much closer aligned with the mission impact, were fascinated with our new business model, which for the first time was embracing the capital markets to achieve a conservation outcome. We had a very positive response across the spectrum. The institutional investors wanted the ESG label, they wanted to know that this was an ESG product through and through. The family offices and impact investors really wanted to understand the conservation impact, the rural economic development impact — because those are the most meaningful aspects of this as they pursue this balance between return on investment and mission impact. 

CFN: Who are the holders of the bond now? How much was taken up by various classes of investors?

Selzer: The majority of the bonds were purchased by institutional investors who are aggressively moving into the ESG space. These are the big institutional investors who are really leading the charge for ESG investing, especially in the fixed-income space. So we had a broad set of buyers of the bond; we had approximately 30 different institutions buy parts of it. It was a broad distribution that was very attractive to us as we think about building on this first inaugural debt offering and scaling the program in the future.

CFN: How will bond proceeds be allocated? What is the Fund’s process for finding lands to target for purchase?

Selzer: When we launched this program eight or nine years ago, we had to build the Working Forest Fund as an operating company inside The Conservation Fund. It's as sophisticated and capable as any timber investment group in the country, and that has allowed us to not only identify the key pieces of land that the public agencies want to see conserved as working forests, but also to evaluate the economic potential and the environmental importance of those lands.  That prepares us to make an appropriate bid when these properties come up for auction. For those which we’re the successful bidder for, we have all the capabilities we need to establish a sustainable harvest plan and then work toward a conservation outcome by selling the easement or sometimes a fee interest to a public agency. 

So, the process is to work with our public agency partners to understand what their priorities are, which forests are the most important to them, and establish a bid value that we’re comfortable with, compete at auction for these properties, then take them on our balance sheet and develop a sustainable harvest plan and work toward a permanent conservation outcome. 

CFN: Now that the offering is closed, what will success look like for the effort going forward? What are the biggest challenges that still lie ahead?

Selzer: We targeted the next million acres of forest as our goal with this first debt offering. But of course, $150 million will not get you to $1 billion of purchasing power. So now we are pivoting to move aggressively to work with family offices, corporations and high-net-worth individuals to raise $350 million of philanthropic support to match up with the bond. Our experience shows us that our average hold time for a Working Forest Fund purchase is between five and seven years. That means over the 10-year life of this bond we aim to get one-and-a-half to two bites at the apple with the capital that we have.

Our feeling is that if we can raise $500 million of new capital, including that $150 million from the bond, we will be able to reach our million-acre goal over the 10-year period. There's tremendous leverage because we're getting public dollars in as well, and so for every dollar of philanthropic support we expect to be able to acquire $4 of forest. Now, 1 million acres is still far away from 5 million, and so as we build the philanthropic support, as we maintain our investment-grade rating with our balance sheet, then we may be able to go back to the debt markets and scale up from there, and that’s our plan. 

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