There’s a new way for investors to turn a profit while helping California prevent fires

Real Estate

As wildfires rage through western California, a new way to help prevent them is now being tested in nearby Tahoe National Forest. It is a first-of-its-kind financial tool, designed to help investors fund forest restoration in overgrown, highly combustible areas, which are becoming ever more dangerous due to climate change.

The Forest Resilience Bond was developed by the non-profit investment firm Blue Forest Conservation, a Sacramento, CA-based start-up, in partnership with World Resources Institute. It seeks to lower the risk of dangerous and destructive wildfires by shifting the heavy costs of forest restoration from the state’s forest service to private investors.

“It is really a public/private partnership where we’ve engaged investors like pension plans, insurance companies, even impact investors like foundations, to help cover the upfront costs of doing this much-needed forest restoration work, with the primary goal of reducing the risk of catastrophic wildfire,” said Zach Knight, co-founder and managing partner of Blue Forest.

The bond deal was finalized late last year, and forest thinning work has been underway over 15,000 acres of forestland in the North Yuba River watershed for several months. The restoration should not only reduce the risk of catastrophic wildfires, but also protect water resources, avoid carbon emissions and even create rural jobs.

Trees with blue lines will be taken down as part of the forest restoration.

Diana Olick | CNBC

Here’s how it works: Investors buy into the bond, and the money is drawn as needed for forest restoration work. This includes thinning, strategic backfires, and other rehabilitation. In this first case, it was a $4 million bond with money from CSAA Insurance, a Maryland-based investment firm Calvert Impact Capital, the Rockefeller Foundation and the Gordon and Betty Moore Foundation.

“There is overwhelming need for cost-effective climate solutions to help communities dealing with the dual threats of mega-fires and droughts,” said Saadia Madsbjerg,” managing director at The Rockefeller Foundation in a release.

The investors are paid back over 5 years, with 4% interest, by those who benefit from the work and have contracted with Blue Forest, like the U.S. Forest Service and state agencies. In this case, payments will come from the Yuba Water Agency, whose reservoirs receive water from the forest and the California Department of Forestry and Fire Protection (CalFire).

“There are about 300,000 acres upstream of our reservoir here that our water comes from, and we care about the quality and quantity of that water from the forest,” said Willie Whittlesey, assistant general manager at the Yuba Water Agency. “The need for funds is immediate. We have the effects of climate change, and we have a longer summer season, or a shorter wet season. We have significant north winds that are an effect of climate change. We need to do something now.”

Yuba Water Authority operates this dam, which receives water from the Tahoe National Forest.

Diana Olick | CNBC

Yuba is putting $1.5 million into the bond because the forest work can actually help it save money. A healthier forest will result in less sediment and debris running into the reservoirs. Yuba Water spends millions of dollars cleaning its reservoirs of that debris, and those costs have been rising recently.

Yuba can no longer rely on funds directly from the U.S. Forest Service, because the Service is now spending more than half its budget fighting fires. Last year was the deadliest and most destructive fire season in California history. More than 8500 hundred fires burned nearly 2 million acres, according to CalFire, and insurance claims surpassed $12 billion. Twenty-five years ago the forest service spent just 15% of its budget on firefighting.

“It creates this vicious cycle where we’re spending all this money to fight fires, and that takes money away from the preventative work that could stop those fires in the first place,” said Knight. “I think it really is the overgrowth of the forest which had to do with some of the management activities, combined with that increasingly hotter and dryer climate that’s creating the fire conditions today.”

The effects of climate change will push the cost of firefighting even higher, as warmer temperatures and dryer weather cause more flare-ups. 2017 was also one of the worst on record for wildfires in California, and it was also the second-hottest year on record for the state, according to the National Oceanic and Atmospheric Administration.

As the current California fires push the issue back into the headlines, calls for forest restoration are getting louder.

“We need to invest more in forest management,” said Rep. Ro Khanna (D-CA) in an interview on CNBC’s Squawkbox Tuesday. “We did not have the prescribed fires that were necessary. We did not have the brush clearing that was necessary. This has been a decades-of-neglect process that has led to this crisis.”

And the bond couldn’t come at a better time in the investor community, as an increasingly popular trend of socially conscious investing is taking off. It’s called E.S.G, which stands for environmental, social and corporate governance. It focuses on investing for the greater good; in this case, buying into the health of the forest but still making money.

It is exactly the kind of investment Jennifer Pryce, CEO of Calvert Impact Capital, says her clients want.

“Our investors are looking for an impact and a financial return, and this is off the charts when you look at what it’s giving back,” said Pryce, who polls investors each year to see how they want to align their capital with their values. “Fighting climate change is number one.”

She admits this one was a difficult sell because it is designed to prevent fires, rather than fight them. Still, once the possibilities and savings were made clear, the investors were in.

“It was interesting because it was a first-of-a-kind,” said Pryce. “Because of that we felt like we wanted to understand what was being envisioned as a solution to what is a huge problem, but we also saw it could be replicated.”

And that was an integral part of Blue Forest’s plan from the start, to create an investment vehicle that could help all kinds of projects to protect public land and real estate from the effects of climate change.

“This was really the first private investment that supports the management of our public lands,” said Knight. “And we were well oversubscribed from investors for this first project. Luckily, now we can put a few more of them together and help the Forest Service achieve more of their goals.”

The next project, which will launch in the second quarter of 2020, will likely be $6-8 million in financing, according to Knight.

“But the need from the Forest Service is in the tens of billions of dollars, so we’ve been really intentional making sure it works, changing what we need to for the next project, making sure the next one works, and really building up a program,” he added.

The larger the bonds get, the cheaper it will be for those downstream beneficiaries, like Yuba Water, because more agencies like them will be paying investors back. Knight is hoping to add others like farms, breweries or power companies to future bond projects. The more bonds they can do, the faster the work can get done. That is not lost on investors.

“If this transaction isn’t replicated, or there aren’t other funds allocated to do the forest clearing, the forest fires can still rage, and this will be an island within a large ocean of challenge,” said Pryce.

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