The Conservation Fund Green Bonds

Summary

In 2019, The Conservation Fund (TCF) issued a USD 150 million Green Bond, underwritten by Goldman Sachs, becoming the first U.S. nonprofit to issue a green bond. Bond proceeds are used to purchase working forests and other high conservation-value lands. The interest and principal are repaid from revenue made when reselling forests, the sale of sustainable timber, fishing and hunting permits, and carbon credits. Since the issuance of the bond, TCF has reinvested USD 79 million into additional projects, bringing the total area of forests impacted through the Green Bond proceeds to over 475,000 acres.

Background

Protecting at-risk working forests, which supply timber, while providing jobs and community benefits, is a significant challenge in the United States. According to The Conservation Fund (TCF), 37 million acres of privately held forests in the United States is at high risk of fragmentation and development over the next 30 years as they are sold. Some five million acres of those forests have exceptional conservation value.

The TCF has been tackling this issue through its Working Forest Fund® (WFF), dedicated to the permanent conservation of working forests. As of 2024, the WFF and its affiliates have successfully acquired over 1,000,000 acres of critical working forests, mitigating climate change, strengthening rural economies and protecting natural ecosystems [1].

TCF partners with other organisations that have an interest in the permanent conservation of these landscapes, such as state and federal conservation agencies. TCF acts as an interim owner until conservation easements or land sales have taken place to protect the working forest.

Initially, the WFF was funded with USD 200 million of grants and low-interest loans from foundations and state agencies, but TCF needed to tap private capital to obtain enough financing to conserve the five million acres of forest with exceptional conservation value coming up for sale over the next 10 years [2].

TCF considered raising a private equity fund, which would provide the long-term funding it needed, but it could not meet the market return requirements of private equity investors. It also considered new program-related loans from foundations, which typically have very low return expectations, but found that the pool of available capital was still small at that time.

A revolving credit facility, private debt placement and private syndicated loans were also considered but would have lower returns than a private equity fund. It would also involve a small number of investors and require limited marketing, whereas TCF wanted to use its fundraising opportunity to share the WFF’s mission.

The First Green Bond of its Kind

Instead, TCF decided to issue a green bond, the first to conserve working forests in the United States. A public debt offering would allow TCF to attract many more investors and use its bond prospectus to explain its economic sustainability and its conservation goals across the financial community.

John Gilbert, executive vice president and chief financial officer of The Conservation Fund

To ensure the interest rate would be affordable, TCF hired a rating agency to assign a confidential preliminary credit rating. With no comparable issuers and credit rating methodology, the outcome was uncertain, but John Gilbert, Executive Vice President and Chief Financial Officer of TCF, had previously managed dozens of debut bond offerings while working at JPMorgan. He says that making a strong management team presentation to the rating agency was critical to explain the TCF’s unique business model. The strategy paid off, and armed with a strong confidential preliminary rating, TCF selected Goldman Sachs to run the bond offering. TCF eventually settled for a USD150 million ten-year bond offering, which could be adapted based on market conditions.

On August 21, 2019, Moody’s assigned The Conservation Fund’s USD 150 million bond offering with an A3 rating, based on TCF’s strong governance and management, non-profit and private sector relationships, its forest assets, and its rigorous review process for land acquisition.

Funding New Conservation Projects

During its investor roadshow, impact and ESG fund managers were enthusiastic about the tangible economic and conservation benefits the bond’s proceeds would create.

The bond’s proceeds are used to directly fund conservation projects. TCF’s sustainable conservation model, pays the interest and principal on the bond directly from the revenue it makes when reselling forests, and from the sale of sustainable timber, fishing and hunting permits, and carbon credits from forests that it owns. The final USD150 million, 10-year bond offering was oversubscribed 2.5 times and priced at 3.47%.

At the end of 2021, USD150 million was raised and deployed across 13 forest projects. The forests that were acquired totalled 350,640 acres, created or maintained 2,310 jobs, included 694 miles of streams and rivers, and stored over 88.3 million tons of carbon.

In May 2021, for example, TCF used its bond proceeds to purchase 6,154 acres of land along the Altamaha River in Georgia, known as Beards Creek Forest. The bond proceeds were used to restore wildlife habitats for rare and endangered species, including the gopher tortoise, help to mitigate climate change, and preserve the forest’s working timberlands.

TCF’s ability to blend bond proceeds with other sources of capital has enabled it to leverage more capital to protect more forests. In October 2021, for example, TCF used bond proceeds and a loan from the Richard King Mellon Foundation to purchase 70,000 acres of forestland in northern Wisconsin, the largest privately owned, unprotected block of forest remaining in the state. As of 2022, the Green Bond has leveraged and secured forestland valued at three times the original bond offering, at over USD 453 million in 11 states [3].

The TCF also tries to reinvest all of the bond’s proceeds more than once, before the bond’s maturity. As of 2023, the bond reinvested USD 79 million into additional projects, bringing the total area of forests impacted through the Green Bond proceeds to over 475,000 acres.

TCF’s bond has created a model for the forest conservation industry and other environmental non-profits to come to the market, but there are still barriers to overcome. The impact metrics data that investors require can be difficult to identify and expensive to collect. Unlike TCF, many non-profits have no capital markets experience.

Gilberts note that only investment-grade-rated bond entities issuing bonds of USD 500 million and above have access to the cheapest, most flexible funds in the institutional bond market, when most non-profits need far less funding and don’t have high ratings. “If you are below investment grade, the cost of capital and the scrutiny the market puts you under is really tough,” says Gilbert. “We certainly hope our bond will serve as a good precedent for others, but the institutional market currently cannot cater for organisations much smaller than ours.”

Updated as of October 2024

Sources:

1. The Conservation Fund (2024) The Conservation Fund
2. Baxter, Andrew and Cash, Connor and Lerner, Josh and Prasad, Ratnika, Two Case Studies on the Financing of Forest Conservation (2021) Two Case Studies on the Financing of Forest Conservation
3. The Conservation Fund (2022) 2022 Impact Report
4. Interview with John Gilbert, Executive Vice President and Chief Financial Officer of The Conservation Fund