Company pushes for forest fire bonds
In a remote corner of the Sierra Nevada, a financial experiment is about to begin.
Once this winter’s snow melts, workers will cut down small trees and burn undergrowth across 5,000 acres of the Tahoe National Forest. But those workers won’t be paid by the U.S. Forest Service or any other public agency that typically funds forestry projects.
Instead, the roughly $4 million will come from two foundations, an investment firm and an insurance company — which hope to make money on the deal.
The forestry project, set to begin next summer, is the first financed by a forest resilience bond created by the nonprofit World Resources Institute and startup Blue Forest Conservation. The San Francisco firm was founded by a group of UC Berkeley business school graduates with the goal of persuading profit-seeking investors to pay for work that reduces the risk of costly wildfires and potentially eases the risk of drought.
The Tahoe project is a big deal for Blue Forest and is the culmination of more than three years of work. But it’s also a first step, one that the company’s founders hope will lead to much larger projects costing tens of millions of dollars and covering vast parts of overgrown, fire-prone forests in Western states.
“Just signing the contract is already a success,” said Leigh Madeira, a Blue Forest founder. “But we don’t want to be doing just one project. We want to be doing this on a bigger scale in multiple watersheds in multiple states.”
The forest resilience bond works like this:
Investors put up the cash to pay for forest thinning. They’ll be repaid over time, with interest, by public agencies or other entities that want the work done but can’t pay for it all at once.
In this case, the roughly $4 million comes from CSAA Insurance Group — part of AAA — and investment firm Calvert Impact Capital, the Rockefeller Foundation and Palo Alto’s Gordon and Betty Moore Foundation. They will lend that money to the National Forest Foundation, which will hire the contractors and
manage the forestry work. CSAA and Calvert will earn 4 percent on their money — more than the 3 percent they might earn on government bonds — while the foundations will earn 1 percent.
The money to repay the bonds will come from annual payments from the Yuba Water Agency, a public water utility, and a grant from the California Department of Forestry and Fire Protection, known as Cal Fire.
For the investors, the appeal of the fire bond is more than just the return on investment. Linc Walworth, vice president of investments for CSAA, said the insurance company last year alone had 5,000 wildfire-related insurance claims. Investing in a healthier forest could mean having to pay fewer claims.
“To the extent we can reduce the risk of wildfire in California, that’s good business for us,” he said.
For Calvert, a Maryland firm that specializes in what it calls impact investments — ones that earn financial returns but also promote environmental stewardship, community development or other social benefits — the bond fits with its goals.
“There are air quality benefits, water quality benefits, job creation,” said Jacqueline Westley, a senior investment officer at Calvert. “It’s exactly the sort of thing we want to invest in.”
Just as important, though, money is lined up to repay the investors.
“They’ve built something we can channel capital to,” Westley said. “We see a lot of programs come across our desk that are not investable — they’re entirely too risky or there’s no source of repayment.”
A key benefit of the bond program is that, by using private financing on the front end, it allows work to happen now instead of waiting for public resources to become available. The U.S. Forest Service, which maintains the health of national forest land, has a backlog of tens of millions of acres’ worth of forest rehabilitation work that could cost billions of dollars to complete.
Jason Ko, a Forest Service program manager, said if it were left to his agency alone, the project being financed through Blue Forest would take seven to 10 years. With Blue Forest, it should be done in less than four.
“This would have waited until we had more money,” Ko said. “This allows us to do it now.”
Yuba Water, which has pledged $1.5 million over five years to help repay the bonds, is spending an unprecedented amount for a utility on a project of this type, said Sherry Reckler, a spokeswoman for the U.S. Forest Service’s California operations.
“This is the first time we’ve had a water agency willing to invest such a large sum,” she said.
The water agency hopes to get benefits from the project that could more than offset its financial contribution.
Less debris and sediment can translate into big savings for Yuba Water. After heavy rains in the spring of 2017, the agency spent more than $5 million removing debris and sediment from its reservoirs.
Cal Fire already pays for forest thinning through grant programs aimed at reducing fire risk and protecting watersheds. But those grants are not paid until work is completed, so the agency or nonprofit doing the work usually has to front the money itself, said Marcus Selig of the National Forest Foundation. That limits the amount of work the foundation and others can do.
On this project, a Cal Fire grant will ultimately cover much of the cost of the work, but it will be private investors, not the National Forest Foundation, that will pay for the work up front.
“That frees up our resources so we can get more work done,” Selig said. “We do around $15 million to $20 million of work a year, and it’s not uncommon for us to get pretty strained.”
Yuba Water is willing to pay into the program because it wants the fire bond idea to take off. If more utilities, other public agencies or companies that benefit from healthy forests pay for forestry work, it could defray the cost for all parties and lead to more work being done in less time.
Blue Forest hopes the Tahoe pilot project will help show that thinner forests use less water and allow more water to flow downstream. With enough data, co-founder Zach Knight said, Blue Forest may be able to persuade big water users — such as farms, breweries and beverage bottling companies — and power companies that generate electricity with hydroelectric dams to pay into future bond projects.
The company may even be able to sell carbon credits if it can measure the carbon benefit of a forest that is less prone to burn.
“There is just so much interest from investors,” Madeira said. “Investors want to be funding things like this, but they don’t exist.”