Episode 13

This Is Blue Forest Conservation SHOW NOTES


Chad Reed of Blue Forest Conservation

Website: https://www.blueforestconservation.com/

Recommended Further Reading:

Sustainable Innovation and Impact, edited by Cary Krosinsky and Todd Cort, provides a diverse range of case studies on business model innovation in the energy, transportation, and conservation spaces.

Habit Change:

Turning off social media. Whether Twitter, Instagram, Facebook, or whatever else is out there, it’s easy to spend too much of your time consumed in the thoughts, experiences, and outward portrayals of others. Being more intentional about how you leverage and consume social media to improve your own well being and advance your own career seems to me to be a habit change nearly all of us could benefit from.

Episode Summary by the Minute:

Minute 01:00: Welcome to Chad Reed of Blue Forest Conservation. The last few weeks have been dominated by the news of the wildfires in California, which seem to be getting more and more destructive every year.  But Chad gives us an overview of forest fires and how they are trying to address it. Over the last several decades, wildfires have increased in number, scale and intensity throughout the United States. In 2015, wildfires burned over 10 million acres of land across the United States for the first time in recorded history. This was no anomaly: It happened again in 2017. In fact, 9 of the 10 worst fire seasons have all occurred since 2000. These fires are incredibly devastating to communities and natural habitat and expensive for public authorities. In October of last year (2017), the Northern California wildfires burned approximately 250,000 acres (which is 7x the area of San Francisco). These fires were the costliest group of wildfires on record, causing over $14 billion in damages and $1.5 billion in fire suppression costs. And this wildfire risk is only getting worse - especially given a hotter and drier climate in certain regions going forward.  In fact, 1 of out every 3 homes across the US are currently at high or extreme risk of wildfire. As a result, we have witnessed concerned stakeholders including the US Forest Service, state agencies, community groups, water and electric utilities, water-dependent companies wondering what they can do to reduce wildfire risk in fire-prone areas.

Minute 5:00: Today an insurance company announced they were going bankrupt because of the recent Camp fires.

Minute 6:00: The good news is that there is a tried and true solution - supported by decades of academic research. Before widespread human settlements in what scientists call the wildland urban interface, brush buildup in forests would be naturally reduced by frequent, low-intensity fires every 10 or 20 years. However, over the last century, these low-level fires have been suppressed leaving forests unnaturally dense. So it has actually been human intervention – more specifically, a century of putting out every small fire as soon as is starts - that has disrupted the normal fire cycle, which is nature’s way of burning off excess vegetation and maintaining a healthy density. The result is that many forests are now drastically overgrown, with up to 10x as many trees as nature intended. As an environmentalist myself, it may seem counterintuitive, but more vegetation is NOT always a good thing. In fact, overgrown forests allow fires to spread more easily, which makes the fires themselves much more severe and harder to control.  Add in drought, climate change, and increasingly tree mortality and you have the perfect storm. In California alone, we have 129 million dead trees – that’s enough to stretch from here to the moon and back…not once, not twice, but 5 times. That’s a lot of fuel ready to go up in flames.

Minute 7:15: How do we address this, if we ideally would need natural small fires to occur, but now we can’t have those because they will quickly get out of control?

Minute 8:00:  So the solution is called forest restoration. It’s a simple concept meaning restoring forests to healthy and more natural states. More specifically, this involves removing small diameter excess trees and shrubs and other dying vegetation using hand thinning techniques and/or heavy machinery or prescribed burns and also managing invasive species - all in an effort to improve the forest’s resilience to catastrophic wildfire. We aren’t trying to avoid fire completely – that’s what got us in this situation in the first place – we are just trying to avoid catastrophic fire. It’s important to note that this restoration is not all comparable to logging or clearcutting, which can have very negative environmental consequences. Restoration is supported by the Forest Service, countless researchers, and established environmental NGOs as a proven approach to not only decrease the risk of severe fire, but also to protect air quality, habitat, communities, and water resources.

Minute 9:45: Unfortunately, just because we know what needs to be done doesn’t mean we’re doing it. The Forest Service manages almost 200 million acres of land in the US. This is a LOT of land. In fact, if all the federal forest land were combined into one state, it would be larger than Texas. Almost half of that land is in need of restoration, which would easily cost over $100 billion.

Minute10: 15: At the same time, more and more of the Forest Service’s budget is being spent on fire suppression - putting out fires - rather than forest restoration  In fact, fire suppression costs as a percentage of the Forest Service budget have increased from around 15% in 1995 to over 50% last year (2017), engulfing $2.7 billion of the Forest Service budget last year alone. This creates a vicious cycle in which Forest Service is forced to pay for today’s fires out of the funds designed to prevent tomorrow’s. So at the current restoration spending level, it would take the Forest Service over 200 years to complete all needed restoration work currently identified. And given the risks we face with the climate increasingly becoming hotter and drier, we don’t have 200 years to wait.

Minute 12:15: The Forest Service can’t just pull more capital out of the bank to fund this finance restoration because they are limited by the Congressional budget. Given this challenge is related to funding shortfalls - not whether the science is proven, we at Blue Forest along with our partners have created a new type of financial instrument called the Forest Resilience Bond. At a high level, here’s how the Forest Resilience Bond works.

Minute 13:15: Let’s say a land manager, like the Forest Service, has identified a needed forest restoration project. The project may include mechanical thinning, prescribed burns and other activities specially designed to restore health to an overgrown forest and reduce wildfire risk. The Forest Service has already completed the required plans, approvals, and environmental permitting. Unfortunately, with the small budget the Forest Service has for this project, it could take years to complete, if at all! - and the forest is at immediate risk for severe and destructive wildfire! The worry is that a wildfire might occur at any moment, damaging the forest, water supply, and surrounding communities, long before the project can be completed.

Minute 13:45: Enter Blue Forest. My co-founders and I are a team of financial and scientific experts focused on scaling investment in forest restoration through the Forest Resilience Bond. Working with the Forest Service and the World Resources Institute, Blue Forest helps to identify potential project stakeholders - utilities, private companies, and other organizations that could realize value from the restoration project. For this example, let’s say that in addition to the Forest Service, a water utility, the state government, and a beverage company are also very interested in seeing this project completed. Each also has some available funding, but not nearly enough to complete the entire task on its own. We work with each contributing beneficiary to set up contracts that pay for a portion of restoration costs over time that together, cover all the funds needed for the project plus a modest return for investors.

Minute 15:45: We also identify an Implementation Partner. This organization will be the one responsible for contracting the restoration work on the ground. We look for an experienced and knowledgeable non-profit that knows this forest and has relationships with the Forest Service and community stakeholders. Then, Blue Forest packages these contracts together to establish a Forest Resilience Bond (or FRB), which is made available to private investors. These investors can include large pension funds or insurance companies, or mission-driven groups like foundations and impact investors that want to invest in local communities while diversifying their portfolios. And in order to avoid any potential conflicts of interest, investors don’t have any say on the what, how, or where the restoration work being completed.

Minute 16:30: Chad describes what the potential conflict of interest could look like.

Minute 17:15: At the stage Blue Forest gets involved, the environmental review process has laready been completed.  Private investment funds the FRB, and the FRB funds are spent through the Implementation Partner to complete the restoration project! Over time, the contributing beneficiaries repay the FRB based on the value they’ve received from the restoration project, as agreed to in their contracts with Blue Forest. Third party monitoring and verification occurs throughout the life of the project to ensure the work has been completed and to measure the benefits.
Minute 18:00: As we know, bonds are already being used to finance infrastructure like bridges and roads. And the FRB is not all that different – instead, it uses bonds to finance GREEN infrastructure like forests with comparable returns for investors. In the end, wildfire risk is reduced now, not later, the contributing beneficiaries have achieved their goals and we all enjoy the benefits of a healthy forest; clean air to breathe and water to drink, places to recreate and habitat for wildlife.

Minute 19:45: And we are able to do this because the FRB redefines forest restoration as a valuable investment, rather than an environmental cost.

Minute 20:00: Chad explains where the return comes from. The FRB is a public-private partnership that enables private capital to finance forest restoration. Beneficiaries of the restoration work such as the US Forest Service, state governments, water and electric utilities, and/or other sorts of water dependent companies make cost-share payments over time (5-10 years) to repay investors competitive returns based on a project’s successful implementation.

Very simply, let me give you an example. Let’s say some restoration project costs $100 (obviously, not realistic, but stick with me). We work with our partners like the World Resources Institute to determine who the beneficiaries are of that project - often the Forest Service, state governments, and utilities (sometimes others). So we go to the Forest Service and say would you contribute $50 to this $100 restoration project. Then we go to the state government and say can you chip in $40 for this $100 restoration project. Then we go to a utility and ask them to pay let’s say $25 for this $100 restoration project. Each beneficiary can set up their own timeline for repayment, but no one beneficiary is paying even close to the full amount as they would if they were to fund this project on their own. But we’ve just taken $100 and turned it into $115, which is enough to repay investor principal plus what would equate to a 4-5% percent annual return.

Minute 22:30: Chad explains how they fund this and how they foresee their business model changing over time.

Minute 23:00: What this demonstrates is that what differentiates the FRB from other approaches to forest restoration is not only the use of investor capital to finance upfront treatments but also the cost sharing among beneficiaries. By bringing together multiple payors to share the financial burden of forest restoration, the FRB creates compelling economics for beneficiaries while diversifying cash flows and providing a return for investors. In addition, using investor capital can shift upfront funding responsibilities from the Forest Service to private investors, relieving strains on near-term appropriations.

Minute 25:00: This is similar to developing a solar project.

Minute 27:00: BFC just reached a big milestone with the bond recently. With the funds and partnerships in place in October, BFC and our partners launched the first $4.0 million FRB pilot project in the North Yuba watershed of the Tahoe National Forest. Investments in the Yuba pilot come from the four investors (including a couple foundations, an impact investor, and an insurance company) each of which is investing for its own objectives. The two beneficiaries — Yuba Water Agency (YWA) and the State of California — will reimburse private investors over time. YWA has committed $1.5 million, and the State will provide over $2.5 million in reimbursable grant funding. The Tahoe National Forest will provide in-kind support and services and has provided all the resources associated with planning and permitting the project. Given that the Forest Service too often lacks sufficient human resources to identify, develop, and implement multi-stakeholder restoration projects, the Blue Forest team has tapped the National Forest Foundation (NFF) to serve as one of the project’s primary implementation partners. They’ll be leading the vast majority of the forest restoration work on the ground. The innovation of the FRB has been well received by the USFS, which has embraced this new paradigm of shared stewardship, allowing partners to both financially and operationally support National Forest System lands.
But we hope the implementation of the Yuba pilot project can demonstrate proof of concept for (1) implementation of treatments, (2) mechanisms for contracting with beneficiaries, and (3) measurement of ecosystem services.

Minute 31:30: We plan to replicate the FRB in the same watershed with fully market-rate capital but on a much larger scale, building upon the successful implementation of the initial pilot.
Through an extensive analysis, we have determined that nearly 8 million acres of forest land managed by the Forest Service are in need of high priority restoration, implying an $8 billion total addressable market (assuming a representative average cost of $1,000/acre). Given this vast need, we have set a target of deploying a cumulative $1 billion in private investment through FRB-like investments over the next decade. To reach this (somewhat ambitious) goal, we and our partners must develop a pipeline of market-ready investments in forest restoration as well as match such investments with the appropriate types of capital.

Minute 32:30: BCF is currently targeting foundations, endowments, insurance companies, and impact investors. But we ask for no financial commitments from these investors until projects are shovel ready (meaning that all environmental permitting is complete). It’s important to note that investors are not dictating any of the locations of the restoration work on the ground. This is done by the Forest Service and its partners very early in the process.

Minute 34:00: For the first Forest Resilience Bond pilot in the Yuba (which is about a $4 million deal), we received $1M from each of four investors. Two are foundations -  the Rockefeller and Moore foundations. They invest by way of program-related investments (or PRIs). These investments require returns that are below market but that count toward their 5% grant making requirement. Both also provided grant dollars to support upfront development work over the last 3.5 years it took us to bring this product to market. In addition to the promise of a return, these mission-focused foundations are investing with the knowledge that this project will boost public and forest health. Our third investor Calvert, an impact investing leader focused on triple bottom line returns, is drawn to the joint promise of a competitive return and positive social and environmental impact. As a AAA-rated insurer offering insurance to members in Northern California, CSAA (the insurance and fourth investor in the deal) sees investing in the FRB as a way to earn competitive returns while also diversifying its portfolio and reducing fire risk and supporting the communities in which it operates.

Minute 35:00: Going forward, we’ve also already connected with a number of institutional investors - including pension funds - that are interested in natural infrastructure investments like the Forest Resilience Bond, but there is a dearth a supply of sizeable deals. We hope that as we scale subsequent FRB deals across multiple landscapes and increase the required check size of individual or portfolio investments, we’ll be able to attract these more traditional institutional investors.

Minute 36:00: Well, our first pilot is located in the North Yuba watershed of the Tahoe National Forest. Restoration activities, which are just now getting underway, will include  mechanical and hand thinning, prescribed burns, aspen regeneration, and meadow restoration. Considering this project size, the availability of crews, prescription of treatments, and expected site accessibility, NFF and the Forest Service expect the full project to take 3 seasons (i.e., completed by year-end 2020).

Minute 38:00: Trump recently tweeted about Finland’s practice of sweeping the forest floor to prevent forest fires. Chad explains how the experience working with the administration has been between different leadership.

Minute 39:50: So the Yuba Pilot Project will treat areas that have not experienced fire in over a century, which is an alarming departure from the area’s natural fire interval of let’s say 10-40 years. Our team FRB development team has conducted preliminary analysis on the reduction in fire risk, water quality benefits, reduction in flood risk and infrastructure damage and community development benefits that are expected as a result of the restoration treatments.

So first, the planned restoration treatments for the Yuba Project will increase the resilience of the landscape to the risk of fire and decrease the 3% annual probability of high-severity wildfire. But reductions in catastrophic fire risk also has positive repercussions for water quality, existing infrastructure, and community development.

Let’s start with water quality and sedimentation. By reducing the risk of high-severity fire, forest restoration also helps protect water quality and prevents sedimentation and woody debris from accumulating in water supplies.

Minute 41:00: Next, there’s flood risk and damage to infrastructure. High severity wildfire increases flood and landslide risk for a number of reasons. Severe fire burns leave forests bare from the ground to the canopy. In addition, compared to a smaller more natural fire, a high-severity fire burns much hotter and scorches soil. The burned soil is less permeable and repels water rather than absorbs it (hydrophobicity). The combination of a lack of vegetation on the floor and hydrophobic soil results in a heightened risk of flooding and landslides.  Exacerbating the problem, the lack of a forest canopy, which otherwise would provide shade cover of snowpack, increases snowmelt rates and contributes to a heightened flood risk. Research indicates that after high-severity fire, peak streamflow can reach 2,000 times pre-fire conditions.

Minute 42:20: Finally, the economic impacts from restoration, namely direct restoration jobs and indirect support jobs, can be estimated from the restoration work itself. These jobs can be sourced from within the region and support the local economy. With long-term restoration planning, restoration could be a source of stable and safe employment that contributes to economic resilience for local (often rural) communities.

And then in our annual Implementation reports to our investors and stakeholders, we plan to detail the specific impacts and relevant scientific data resulting from the restoration work.

Minute 44:30: What about carbon? How are wildfires linked to climate change? Do they release a lot of carbon when they burn? Great question. First, it’s important to note that wildfires account for 1/5 of manmade carbon emissions - which is really a staggering amount when you think about it. And according to the EPA, net CO2 emissions from forest land recently jumped to third highest on a host of key emissions sources - more than natural gas and just behind coal emissions and those emissions road transportation. So preventing catastrophic wildfire could certainly have a sizeable impact on reducing aggregate CO2 and other GHG emissions.

Minute 45:30: Could there be carbon credits generated from something like the Forest Resilience Bond?   Do any of the carbon registry programs have a methodology yet for the carbon benefits that are associated with forest conservation?  

Minute 46:00: Methodologies for calculating Emission Reduction Tons (ERTs) have been proposed for California and Colorado by the environmental think tank Spatial Informatics Group (SIG) and produced for Arizona and New Mexico by the nonprofit American Carbon Registry (ACR). Their general approach of the calculations is to model carbon stocks under baseline conditions and under restoration treatment conditions. Both methodologies are currently being evaluated through the peer review process to determine if they are eligible for accreditation, which is the highest standard whereby carbon credits generated could then be sold in compliance carbon markets. Our Blue Forest team has recently engaged both SIG and ACR on integrating their approaches into a Forest Resilience Bond framework, but this process will likely take some time.

However, if we just look at the inaugural FRB project in the Yuba watershed of Northern California, approximately 15,000 acres are being restored. Relying on SIG’s carbon offset methodology, this restoration project can reasonably be expected to generate approximately 51,000 MT CO2e (15,000 acres x 3.4 MT CO2e/acre) of carbon offsets. At a current CA carbon compliance market value of $15/MT CO2e, these offsets can be valued at nearly $800,000 in today’s dollars. Note that this valuation does not include measurement and verification costs. But it demonstrates the potential power of the FRB model not only to generate significant carbon emissions reductions and but also carbon credit value.

Minute 50:00: Looking at Northern California specifically, we’ve initiated engagement with the Tahoe-Central Sierra Initiative (TCSI), which is a part of the Sierra Nevada Watershed Improvement Program (WIP), and includes the watersheds of the Central Sierra Nevada and Lake Tahoe areas. These forested watersheds - a focal point for both federal and state governments - provide critical waterflow to the Sacramento-San Joaquin Delta as well as to northern Nevada communities. They also contain large amounts of carbon, produce substantial amounts of wood products and clean energy, provide significant fish and wildlife habitat, and serve as a recreational playground for millions of visitors year round. But at the same time, this area is at significant risk of large severe wildfire and unnatural levels of tree mortality, given the overgrown, unhealthy forest conditions that exist here.

It’s also important to note that Blue Forest’s MOU with the Forest Service extends across all regions, so our model could be replicated in any at risk region or state. Specifically, we’ve spoken with other stakeholders in Southern CA, OR, WA, AZ, and CO.

Minute 52:00:  BFC is starting to see more and more demand, especially in Sacramento and San Joaquin Delta.

Minute 53:15: Blue Forest Conservation was founded by four UC Berkeley Haas alums. We like to tell our founding story as kind of like the beginning of a bad joke. Two Wall Street bankers, a Peace Corps volunteer, and an intelligence officer walk into a bar … So we came to understand this problem as part of a business school competition - the Sustainable Investing Challenge hosted by Kellogg and Morgan Stanley. Drawing on the Peace Corps volunteer’s water engineering background, the bankers’ finance skills, and my interdisciplinary skills, we came up with this novel funding approach - at that time we called this Blue Forest Conservation Notes - to address this wicked environmental problem of catastrophic wildfire. After we won the competition, spoke at a few conferences, and engaged with potential investors, we decided that there was sufficient interest to launch the company.

As a co-founder of a small mission-driven enterprise, you tend to get roped into any and all roles. Specifically, my recent background in renewable energy structured finance and investor relations coupled with my previous experience in the intelligence world has given me a wide breadth of experience to draw from. So my co-founders sometimes refer to me as the Chief Strategy Officer. I tend to focus on special long-term strategic projects - like the carbon offset monetization efforts we just touched on - or strategic investor proposals and engagement.

Minute 55:40:  Chad’s advice for people who want to get into this space: his background and that of the co-founders demonstrate that there is no single path to environmental impact investment. Develop your quantitative skills - whether in the sciences, engineering, or finance. These skills are invaluable to becoming successful in the environmental investment space. Secondly: Engage intensely with the community. Follow current leaders on Twitter, attend events and conferences, build relationships with industry professionals.

Finally: Think about attending an educational program focused on this space. There are a lot of good ones out there. But I will plug two that I attended - the Johns Hopkins School of Advanced International Studies (SAIS) and the UC Berkeley Haas School of Business. These sorts of institutions provide you the opportunity to take coursework in and work on  projects for real companies in this field and also facilitate connections with professionals (often alumni) who are already working in the field. Bottom line, there’s no single path but there are an increasing amount of opportunities for those who are ambitious and motivated.

Minute 57:00: Online, you can follow our work through following our Twitter account (blueforestconsv), keep up to date on our website, like our FB page, and subscribe to our newsletter (through our website). We’d also encourage supporters - especially those in high wildfire risk areas - to support local community groups and utilities in their efforts to accelerate the pace of restoration and protect local habitat.

Minute 58:30: Sustainable Innovation and Impact, edited by Cary Krosinsky and Todd Cort, provides a diverse range of case studies on business model innovation in the energy, transportation, and conservation spaces.

Minute 59:00: Turning off social media. Whether Twitter, Instagram, Facebook, or whatever else is out there, it’s easy to spend too much of your time consumed in the thoughts, experiences, and outward portrayals of others. Being more intentional about how you leverage and consume social media to improve your own wellbeing and advance your own career seems to me to be a habit change nearly all of us could benefit from.

Erin Delawalla