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Conservation Finance Can Mean Cleaner Air and Water and Healthier Soil

A Montana ranch crew examines the effects of timber encroachment on grazing and riparian areas1A Montana ranch crew examines the effects of timber encroachment on grazing and riparian areas. (Taken pre-pandemic)

For decades, the U.S. Department of Agriculture’s Natural Resources Conservation Service (NRCS) has been the largest funder of conservation on private land in the United States, providing billions of dollars annually to both protect natural resources and invest in America’s rural economies. NRCS’ mission is broad, providing technical assistance and funding to support farmers and ranchers’ innovative farming and ranching techniques. This  helps address natural resource problems and assist with the transition to sustainable land management practices. Often these transitions require an upfront cost, but by investing in both producers and the natural environment, NRCS programs also often lead to longer-term financial rewards: for example, healthy and resilient soils, rich with organic material, may lead to more productive crops with less fertilizer inputs; watersheds protected by forests and riverbanks with riparian habitat mean cleaner water for downstream users; pollinators can prop up entire ecosystems. Increasingly, governments and private organizations alike have come to realize that ecosystem services have real monetary value and can bring monetary returns. The result is that billions in new funding has gone towards conservation investment projects over the past few years.

In response to this newfound interest, NRCS established an intentional conservation finance funding source through its Conservation Innovation Grants (CIG) program. Starting in 2015, CIG, which aims to stimulate development and adoption of innovative conservation technologies and approaches, has funded projects led by over 35 conservation finance entities. These sector leaders have used the funding to explore new ways to attract non-Federal investment to private and working lands conservation.

CIG’s conservation finance projects have invested approximately $25 million into market-based projects, from pay-for-success programs that aim to reduce water usage or nutrient pollution, to crafting new loan mechanisms that support farmers as they transition to organic agriculture systems. Moreover, because the CIG program requires projects to match NRCS’ investment dollar-for-dollar, the program provides a smooth entry point for private funds to enter the conservation finance sector. While the natural resource challenges that this cohort of projects tackles vary from air to water to soil, the goal is often the same: find a way to direct new revenue streams and sources of private capital towards agricultural producers and rural economies while improving the Nation’s natural resource base. These projects ultimately translate to valuable resources flowing to America’s farmers and ranchers as they try to both keep the country fed and healthy, creating triple wins for producers, investors, and nature.

“NRCS has an 85-year history of helping farmers and ranchers feed the country while maintaining and even improving their natural resource base,” says Kari Cohen, Projects Branch Chief at NRCS. “Conservation finance can help by better integrating conservation practices and systems into producers’ business plans.”

TU Volunteers build a beaver dam analog structure in Utah.

Trout Unlimited volunteers build a beaver dam analog structure in Utah. This technique is working well across the West to help reconnect streams to their floodplains. (photo credit: Trout Unlimited, taken pre-pandemic)

Water in the West: Liquid Assets Project

Mark Twain famously said, “Whiskey is for drinking; water is for fighting.” Indeed, farmers and cities in the parched West have long looked at each other’s water needs with suspicion. One of the reasons for this wariness is that farmers and ranchers control the lion’s share of the water rights in the West, and cities have, in the past, purchased land purely for the water rights tied to them. A 2017 CIG-funded project, headed by Trout Unlimited (TU), aimed to help change the nature of this relationship: “The Liquid Assets project set out to pioneer some conservation finance mechanisms that might improve drought resiliency for Western Landscapes,” explains Laura Ziemer, Senior Counsel and Water Policy Advisor for TU. “In particular, the CIG funding was important because it allowed so much of the behind-the-scenes work that allows for private capital to flow to on-the-ground projects.”

The Liquid Assets project, which received $1.4 million in CIG-funding (and received another $1.4 million in matching funds from non-profit and private funding), allowed TU and its partners to explore a number of potential water conservation projects that could be viable for the injection of private capital. “What we’re trying to do isn’t easy,” said Laura. “We’re in the business of telling investors ‘Hey we’re going to try this new thing that’s never been done before and the return may be lower and there’s a risk of drought or hail, but if we succeed it will be good for producers and investors.’”

Among the projects that TU explored, a few have proved successful enough to attract more private and public funding and now have the potential to scale up and benefit producers on the ground. One project aimed to help reduce water pressure for farmers in Central Arizona, one of the most water stressed regions in the West. The project explored ways that conservation finance might benefit farmers in Pinal County, a region where farmers are increasingly vulnerable to drought. The pilot project explored whether providing technical advice and financial support could help farmers switch to less water-intensive crops. If successful, the project could increase financial returns for these farmers while also increasing environmental benefits to the region by avoiding groundwater overdraft and subsidence, and improving soil health and riparian habitat.

TU and their partners pinpointed Guayule, a rubber substitute, as a viable crop for farmers in Central Arizona. Guayule is a very low water use crop, and Bridgestone, the tire manufacturer, is potentially willing to purchase large quantities of Guayule from the region’s farmers. Thanks in large part to the proof-of-concept work completed under the CIG grant, this project is slated to receive additional funding as part of a larger Regional Conservation Partnership Program (RCPP) project. RCPP is a partner-driven program administered by NRCS.

The Central Arizona Regional Irrigation Efficiency project, headed by the Arizona Department of Water Resources, received $10 million in RCPP funding and has ambitious goals as a water conservation project for the Central Arizona region. Through a combination of new and improved wells and pipelines, more efficient on-farm irrigation systems and transitioning 6,000 acres of farmland to low water use crop systems, the project aims to conserve 70,000 acre-feet of water annually for the Colorado River.

Another project developed through TU’s Liquid Assets CIG is the Beaver Power restoration project. As the name suggests, TU is working to bring back the hydrologic functions fulfilled by beaver dams with the idea that this could help producers. Periodic flooding of the historic flood plain could lead to a more consistent supply of water throughout the dry season and ultimately lead to increased productivity on farm and ranch land. Through the CIG, TU completed several demonstration projects that showed how this “process-based restoration” model could work for both producers and investors in Eastern Montana’s Tongue River basin. TU and its partners are now seeking more funding to expand its project to a larger number of producers in the West. “If we can pull off this restoration, it is a triple bottom line: we get a restored hydrologic process for increased drought and wildfire risk reduction, increased aquatic and wildlife habitat, and better productivity for ranchlands,” says Laura.

Healthier Soils: Transition to Organic

Conservation finance hinges in part on the idea that ecosystem services can translate to real monetary value for society, and that land holders can and should be compensated for these services when the correct market mechanisms are in place. In the case of organic agriculture, much of this legwork has already been accomplished--the market for organic food is thriving, with organic producers receiving a sizable premium for USDA certified organic products. Moreover, organic agriculture production systems often yield environmental benefits, including cleaner water for downstream users and increased carbon sequestered in the soil. The challenge is that the transition to certified organic can be costly and risky, with producers having to go through a three-year transition period during which many incur additional costs associated with equipment, labor, and soil building costs. Several CIG-funded conservation finance projects are aiming to address this challenge.

In 2016 Iroquois Valley received a CIG award to explore how private capital might be harnessed to help farmers transition to organic agriculture. The idea manifested in the creation of Soil Restoration Notes (SRN). Impact investors would purchase SRNs, allowing Iroquois Valley to create a pool of funds that farmers and ranchers could then draw on to help secure viable farmland and receive subsidized loans to make the transition to certified organic. Farmers would pay Iroquois Valley back over time after their transition to organic, and ultimately investors would make a modest return of about 2.25%. Additionally, Iroquois Valley separated 0.5% from every dollar invested in the SRNs and placed those funds into an Organic Transition Pool. These funds were distributed on an annual basis as direct payments to farmers to further help with the costs of transitioning to organic agriculture.

Iroquois Valley received an initial grant of just under $1 million from the CIG to fund the development of the SRNs. Since then about $8.5 million has been raised from over 120 investors, with 25 farmers working 5,000 acres receiving funding to facilitate the transition to organic agriculture. “The CIG grant paid for the staff time that allowed Iroquois Valley to dig in and develop the concept and model behind the SRN,” explains Anna Jones-Crabtree, owner of Vilicus Farms and manager of the grant for Iroquois Valley. “Looking ahead, it won’t just be about the transition to organic but about maintaining the farm viability,” she says, emphasizing the importance of developing financing mechanisms to help keep organic agricultural producers afloat as climate change increases the risk of drought and temperature fluctuations.

The idea of increasing farm resiliency led Iroquois Valley to apply for and receive another CIG in 2019.  With seed funding of $700,000 from the CIG, their goal this time around is to develop a mechanism to provide long-term, consistent working capital to organic practices. The newly dubbed Subordinated Operating Notes (SON) aim is to provide up to $25 million in new operating credit for up to 10,000 acres under organic and conservation farming management practices. Similar to SRNs, investors can purchase SONs and receive an interest payment of 3.5%-4.5%. Farmers in turn can draw on a subsidized line of credit from the SON pool, increasing their ability to scale conservation practices and ensure their long-term farm business sustainability. In addition to developing and running the loan mechanism, Iroquois Valley helps its partner farmers and ranchers find ways to monetize the ecosystem services benefits that stem from better farming practices, such as linking producers with carbon credit payments or pay-for-performance nutrient management programs. “One of the things we learned from the SRN project is that the transition to organic agriculture is greater in scope and duration than just three years,” says John Steven Bianucci, Director of Conservation at Iroquois Valley. “For these reasons, we are bringing in conservation finance elements into the development of the Subordinated Operating Notes, to help producers stay resilient long into the future.”

Notably, Iroquois Valley is not the only CIG-funded conservation finance project that aims to help farmers transition to organic agriculture. In 2019, Mad Agriculture received about $800,000 to set up a 10-year organic transition loan program (and raised a 1:1 match from outside organizations, including Patagonia, Inc.). Similar to SRNs, Mad Agriculture will provide farmers with subsidized loans to make this transition, while impacted investors can still make a modest return. The project is slated to make its first loans in February of 2021. “Giving farmers a path towards a switch to organic and organic practices is vitally important for our health, the health of farm workers, and the health of our planet,” said Birgit Cameron, head of Patagonia Provisions, in a USDA blogpost from November.

Analyzing NRCS’s Role in Conservation Finance

The role of the Conservation Innovation Grant program is akin to that of a Research and Development arm within a large organization, funneling NRCS funding to individuals and institutions that evaluate, improve and innovate methods of production and technologies. In addition to providing valuable funding, CIG serves as a valuable knowledge hub for both interagency agendas and the general public. Results, and the occasional failure, from two decades of innovation in working lands conservation provide valuable signposts for future projects. With this in mind, a project funded by Walton Family Foundation and led by The Conservation Finance Network and Gordian Knot Strategies is evaluating the NRCS’s cohort of CIG-funded conservation finance projects. The report is slated to come out in March 2021 and is designed to help guide the ongoing conservation finance landscape. “Conservation finance is a vital tool as long as ecosystem services are largely undervalued,” says Sean Penrith, CEO of Gordian Knot Strategies and one of the lead authors of the forthcoming report. “We need to continue to find ways to mobilize third party capital to put a price on the priceless.”