The following open letter is a part of the Presidio Graduate School’s Capital Markets course. For one of the course assignments, students write a letter to an oversight body, government entity or other appropriate institution. The topic: changing the sector of capital markets that relates to their chosen topic so it reinforces principles of sustainability. Follow along here.
An open letter to Tom Steinbach, William and Flora Hewlett Foundation
As you may recall, I am working on an MBA at Presidio Graduate School. This semester I am working with a colleague, Lindsey Herrema, to analyze the Wetland Mitigation Banking industry. In our study, we identified a barrier to effective Mitigation Banking that we believe an innovative foundation like Hewlett could help address.
Mitigation Banks are restored and preserved wetland ecosystems that are assigned credits by a regulating agency such as the Army Corps of Engineers or the Environmental Protection Agency. Developers may purchase these credits to offset the permitted impacts their development projects have on other wetlands within the same geographic watershed. Mitigation Banks are typically able to preserve larger areas of land with higher quality ecological outcomes than project-specific compensatory mitigation carried out by developers. Mitigation Banks are more likely to have the technical and scientific expertise to manage the complex process of restoration, and, because their profits are dependent on the credits the bank produces, bank owners have an incentive to maintain quality.
Mitigation Banking has enabled such an improvement in wetland protection and mitigation practices that it has grown substantially, and as of January 2010, over 960,000 acres of wetlands have been restored and protected (NMBA). The Army Corps of Engineers is now stipulating Mitigation Banks be used for all its development projects, if there are banks available. Unfortunately, as you know, each year development and construction projects continue to damage thousands of acres of American wetlands, and there are too few mitigation banks to cover all the impacts. To ensure that wetland mitigation is effective and ecologically productive, the acreage of established Mitigation Banks available on the market needs to be increased. We cannot allow development to further reduce important wetland ecosystem services such as water filtration, flood control, and migratory bird habitat.
We have identified a major barrier to the Mitigation Banking market as being the time lag between when upfront capital is needed to restore a wetland, and when the credits can be sold to developers. Forming a new mitigation bank is risky, just like any business startup. Restoring a wetland can take years, and the resulting credits must be sold to a developer working within the same watershed, limiting available buyers. This risk and upfront capital investment is a significant barrier to a landowner looking to preserve their wetland habitat by entering the Mitigation Banking market.
Tom, this is where Lindsey and I believe seed capital from the Hewlett Foundation could make a difference; by covering a Mitigation Bank’s initial costs of wetland restoration, Hewlett would be investing in work that is consistent with its past funding and current goals. The financial risks to the landowner would be reduced, and the market could work in favor of, instead of against, the environment. We realize you don’t normally make grants to for-profit businesses, but Hewlett is an innovator and thought leader in the philanthropic world, and Lindsey and I are confident you could capitalize on the best practices emerging from venture philanthropy and impact investing to craft a combination grant-loan-investment that could bring financial wherewithal to this undercapitalized environmentally-friendly industry. We hope you will take these thoughts, and Mitigation Banks, into consideration when you next revisit your program’s strategy and logic model. If you have any questions or would like to talk further about this issue, please contact me at the address below.
Gretchen Anderson Cummings & Lindsey Herrema
Presidio MBA Candidates, 2011