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Future We Want: Ecosystem investment funds

Ecotrust Forests is the world’s first ecosystem investment fund.

The following is excerpted from Cache: Creating Natural Economies by Spencer Beebe (Ecotrust, 2010)

In 2004, Ecotrust created Ecotrust Forests, LLC, a for-profit private forest investment fund. It embodies the “radical” idea of going back to a centuries-old model of natural forest management, one still dominant in parts of Europe, and indeed still practiced sporadically in some of the public forests in the West, as well as in many hardwood forests back East. The capital structure of the fund is designed to match the particular nature of the forest itself—not just any forest, but the distinctive qualities of the coastal temperate rain forests of North America—rather than forcing the forest to serve the interests of investors looking for short-term gain.

Ecotrust Forests is the world’s first ecosystem investment fund— which is to say, a fund that would restore forests while intending to pay the owners. It produces traditional forest products like saw logs for lumber and pulp logs for paper, while also producing forest ecosystem services like clean water, habitat for fish and wildlife, soil-building and carbon storage, as well as recreational opportunities.

The Fund now owns 12,000 acres of highly productive second-growth forestland in coastal Oregon and Washington, four tracts upon which Ecotrust is harvesting wood, but also producing ecosystem services while restoring the natural ecosystem.

On these lands, we extend the average age of rotation—the age at which trees are generally harvested—which increases the volume and quality of wood, the amount of carbon stored, and the quality of habitat for native species. We restore the natural mix of species and age classes. For example, we cut more of the planted Douglas firs in order to get the species mix back to its natural diversity—Sitka spruce, red alder, and red cedar—which improves habitat and also increases opportunity for high-value wood products. (Asian markets were paying three times more for alder wood than Douglas fir in recent years).

We leave snags and large trees for endangered spotted owls and nesting marbled murrelets, a diminutive sea bird that nests on the mossy limbs of large old-growth trees near the coast, and make sure that there are large conifer trees like Sitka spruce and red cedar adjacent to rivers. When they fall in, they create long-lasting pools, which are good for the fish. When we cut, we try to mimic the natural disturbances of the ecosystem—small patches usually caused by blowdowns or avalanches.

The economy of the Northwest is shifting from natural resource products to services such as tourism, hotels, restaurants, and entertainment. By layering revenues from sales of ecosystem services on top of sales of forest products, the combined long-term revenues of Ecotrust Forests are projected to be greater than traditional forest management. For example, Ecotrust Forests is selling conservation easements to protect streamside habitat and, in early 2010, closed the first substantial sale of forest carbon in the Pacific Northwest — a mechanism for capturing carbon from atmospheric CO2 into the wood of trees. As the economy shifts from goods to services, so goes Ecotrust Forests.

Using this model—essentially, nature’s model—we expect to produce competitive long-range investment returns from the full range of products and services that this forest is uniquely capable of producing, while restoring native forest characteristics and employing local people. Clearly, it’s long term rather than short term.

Ecotrust Forests is an “evergreen” fund—perpetual in duration like the forest itself, constantly taking in new investments and retiring others—rather than a fixed-term fund of 10 to 12 years like that of most timberland investment management organizations, known as “TIMOs.” (As a result of the fixed terms, TIMOs are under pressure to log or sell land in that 10-12 year time frame as well) Ours is a “FIMO,” a forestland rather than a timberland investment management organization. It’s specifically designed for long-term investors interested in capital appreciation and environmental as well as social returns.

Not surprisingly, some investors have a problem with this “slow money” model. When I sent the Ecotrust Forests offering documents to Warren Buffett, the investment “Sage of Omaha,” and father of one of Ecotrust’s early board members, he sent the material back to me with a note: “Trees grow slow.” Nevertheless, in the first two years, Ecotrust Forests attracted 35 investors willing to commit nearly $30 million to acquire and manage the land.

We cut about 25 percent of annual growth by thinning individual trees and cutting small variable density patches of a few acres in size, taking out the poorer quality individuals and trying each time to improve the health, diversity, and value of the remaining forest. In the first four years of the Fund, we purchased five million board feet of merchantable volume, logged over six million board feet, and now have 102 million board feet of standing volume.

In 2009, a year in which we did no logging and the forest products industry tanked, the net asset value of the Fund grew seven percent against the TIMO benchmark, which was down about five percent. Since the fund is 100 percent equity and carries no debt, we aren’t forced to log to generate cash to pay interest expenses when log prices are low, as they have been from 2008 to 2010, when U.S. housing starts went from almost two million annually to fewer than 600,000 and log prices tanked. We’ll let the trees grow and log some fraction of annual growth when prices are high for the particular species and logs over time. While global markets in stocks crashed in 2008–2009 by 40 percent, Ecotrust Forests’ stock of trees continued to grow 7.1 percent per year.

Where does this lead us? To more ecosystem investment funds. We’re exploring an Ocean’s Fund, which would invest in ecosystem services, restoration and ecologically-minded economic development in highly productive coastal zones around the world. This is just the beginning of creatively leveraging capital to bolster resilience everywhere.