investing in conservation · 1. sustainable real assets, specifically sustainable timberland, green...

An Assessment of an Emerging Market to Help Save the Planet

Investing in Conservation

Investing in Conservation

2 SONEN CAPITAL: INVESTING IN CONSERVATION

DearReaders,Wearepleased toprovideyouwith these introductory readingmaterials in advanceof yourparticipationin“InvestinginConservation:anassessmentofanemergingmarkettohelpsavetheplanet”takingplaceonApril27,2016inMexicoCity.WearepleasedtosupporttheworkofFondoMexicanoparalaConservacióndelaNaturaleza,A.C.andConfluencePhilanthropy,inintroducing Mexico’s banking and investment community to the compelling opportunity todeploy investment capital at scale, while driving critical environmental and conservationbenefits.Ourintentwiththisreportistoprovideabriefoverviewintokeysectorsoftheglobaleconomyinwhichaconservationandsustainabilityorientedinvestmentapproachescanprovidemarketbasedinvestmentreturnsandpositiveenvironmentalandconservationbenefits.Inproducingthisreport,wehavecuratedcontentfromanumberofSonen’s industry leadingpublications.For those interested in the complete versions of the contributing reports and additionalinformation,wehaveincludedalistofrelevantpublicationsattheendofthispresentation.Thisreportfocusesonthreeareas:

1. Sustainable real assets, specifically sustainable timberland, green real estate,sustainableecosystemsandgreeninfrastructure.

2. The United Nations Sustainable Development Goals, and how they can be used as a

frameworktotargetandevaluatetheimpactofinvestments.

3. TheDivest/Investmovementaroundfossilfuels.We trust you will find this report helpful in preparation for the engaging conversations theConference will stimulate and the inspirational message from Dr. Jane Goodall’s keynoteaddress.Bestregards,RaulPomaresFounder,SonenCapitalLLCMemberofConfluencePhilanthropy

Sonen Capital LLC 456 Montgomery St, Suite 400 San Francisco, CA 94104 Email: [email protected] Office: +1-415-534-4444


Introduction to Sustainable Real Assets

Sustainable real assetsare defined as real assets that incorporate social and environmentalsustainability as a way to maximize potential returns. They relate largely to environmentalthemes including sustainable timberland, agriculture, real estate, land andwater ecosystemsandinfrastructure.Sincethefinancialcrisisin2008,therehasbeenagrowthininterestinrealassetsinvesting-inparticular,thosethatgenerateannualincome,asawaytodiversifyandstrengthenportfolios.1AccordingtoCreditSuisse,thecontributiontoglobalwealthfromrealassetshasincreased23%(4.8% per annum) since 2008 and is expected to continue to increase at a rate of 5% perannum.2Inourview,thetangibilityandlong-termnatureofrealassetsinvestments,togetherwith corresponding current income generation are the underlying value drivers of this assetclass,andtheyarethefoundationalcharacteristicsonwhichmanyoftheperceivedbenefitsofrealassetsinvestingarebased.As the investment sector looks to capture the potential benefits offered by real assets, theinvestable universe – including both investable deals and other sophisticated strategies – islarge and growing. Not only has there been an increase in real assets investors, but newstrategies continue to emerge, including those that incorporate social and environmentalsustainabilityasameanstogenerate“alpha”3(alphaistheexcessreturnsofafundrelativetothereturnofabenchmarkindex.Analphaof29basispoints,forexample,meansthatthefundreturned0.29%morethantheindex)andenhancereturnsfromrealassets.Sustainablerealassetsstrategiessharetheconventionalviewthatalong-termapproachiskeyto fully realizing the underlying value of real assetswhile also delivering environmental andsocial benefits associated with these assets, which we believe can further enhance values.Sustainablerealassetsstrategiesareparticularlywell-suitedforinvestmentopportunitiesthatdealinorrelyonresourcescarcityandthedeteriorationofvitaleco-systems,forbothhumansand wildlife, as they are intrinsically tied to environmental health. In addition to the aboveconventionaladvantagesofrealassets, investmentactivity insustainablerealassets isdrivenby the realization that sustainable management practices are critical to both economic andenvironmentalsurvivalandvaluecreation.Thisrealizationisunderpinnedbyanumberofdeep-rooted, global secular trends related to resource scarcity which, when combined with1Travato,Elisa(2012).“Marketmonitor:Assetallocationtrends-Financialcrisiscatalystforchangeinassetallocation.”ProfessionalWealthManagement.2CreditSuisse,2013.CreditSuisse:ResearchInstituteThoughtLeadershipfromCreditSuisseResearch3http://www.investopedia.com/terms/a/alpha.asp?o=40186&l=dir&qsrc=999&qo=investopediaSiteSearch&ad=SEO&ap=google.com&an=SEO


increasingresourcedemand–frompopulationgrowth,urbanizationandanexpandingmiddle-class,particularly inheavilypopulatedemergingeconomies throughoutAsia,AfricaandLatinAmerica–drivesfundamentalmarket-drivenopportunitiestoincorporatesustainablepracticesintothenaturalresourceandbuiltenvironmentalsectors.Webelievereturnsfrominvestinginrealassetscanbeaugmentedasaresultofthefollowingfactors:

» Industriesaroundtheworld–particularlythosedependentonnaturalresources–arefacedwiththechallengeofreconcilingresourcescarcitywiththegrowingdemandthatcomeswithincreasingpopulations;

» Across industries, environmentally and socially responsible resource managementpracticescanreducecosts,increaseproductivity,andimprovetheavailability,longevityandqualityofnatural resource systemswell into the future, therebyboostingworkerhealthandproductivity;

» There is strong and growing consumer and investor demand for products that areproducedsustainablyand/orcertified;

» Infrastructure needs – particularly related to renewable energy and natural resourcemanagement–continuetooutpacethepublicsector’sabilitytosatisfythem;

» Thedemandforenergysourcedfromrenewablepowerisgrowingandwillcontinuetokeeppacewithpopulationgrowth,whilepublicpolicy(includingsubsidies,taxcredits,etc.) and the regulatory landscape continue to establish increasingly stringent targetsforthecreationofrenewableenergyandemissionsstandards;and

» Publicsupportandcorrespondingfundsforsustainablenaturalresourcemanagementisgrowing along with market mechanisms through which sustainable investors canmonetize the environmental benefits created through long-term conservation andrestorationefforts.

Many real assets sectorsutilizeor relyonawide varietyof natural resources,which createscritical linkage to the broader environmental health and quality of larger eco-systems. Forexample, productive cropland and subsequent agriculture investments, rely heavily on soilhealth,qualityandconservationaswellastheavailabilityofcleanwateramongotherfactors.Sustainableinvestingstressestheimportanceofincorporatingsustainablepracticestoenhancethefundamentalvalueoftheunderlying investableasset.Becauseofthe long-termnatureofmanyrealassetsinvestments,theymayprovideawell-matchedvehicleforinterestedinvestorsto convertenvironmentally and socially sustainablepractices – the successofwhich typicallydependsonpatientcapital–intofinancialreturns.


Sustainabletimberlandincludesinvestmentinforestryoperationsthatsustainablygrow,harvest,processand/ordistributetimberproducts,suchaslogs,lumber,pellets,etc.foruseincommercialandresidentialconstruction,manufacturingandenergyproduction.

Sustainable Real Assets: A Closer Look

Thereareamyriadofattractiveinvestmentopportunitiesforinvestorstogenerateincrementalfinancial, environmental and social returns when sustainable practices are applied. For thepurposesof this reportwewillexplore realassets investment themesof: sustainable timber,greenrealestate,sustainableecosystemsandgreeninfrastructure.Thissectiontakesacloserlook at the investing landscapewhere the inclusion of sustainability could serve to improvefinancial returns and provide long-lasting sustainable attributes for an increasingly resource-constrainedglobe.Althoughtheyaredescribedseparately,thesethemesarehighlyinterrelatedand investments have cross-cutting thematic relevance. For each theme, we define theinvestment opportunity, briefly discuss the market and provide an overview of how asustainable approach can generate both competitive and augmented financial returns. Thetableprovidedattheendofeachsubsectionservestosummarizewhatmightbeincludedinatypical investment, theoverarching investmentcase,possible investmentstages,primaryandsecondary revenue sources, potential exit strategies and measurable impact outcomes. Thetables aremeant to provide a starting point to educate the reader; an investment in any ofthesethemescanbehighlycomplex.

Sustainable Timberland

Traditionaltimberlandvaluesaredependentonacombinationofthevalueofharvestabletreesinadditiontootherunderlyingvaluegenerators,suchasdevelopmentandmineralrights,rightsofaccessandrecreationalactivitiesandthevalueofunderlyingecosystemservices.Thevalueof the harvestable tree stock is highly dependent on the species, quality and size of thisinventory.High value hardwoods (e.g.,maple, cherry andwalnut) destined for furniture andotherhigh-quality, value-addedproductsare typicallygrown innaturally regenerating forestswhereassoftwoodsspecies(e.g.,pine,firandspruce)areoftengrownonre-plantedplantations,whichserveasthecore wood for biomass energy pellets and buildingmaterials, such as structural lumber, among other uses.Historically, core timber producing areas have includedNorth America – in particular Canada and the PacificNorthwest,Northeast andSouthernUS–Australia,NewZealand, Scandinavia, Chile and Brazil. Sustainableinvestmentsintimberlandseektocapturevaluebasedontraditional timbermarket dynamics – characterizedby arelatively fixed supply of timberland combined withincreasing demand from timber hungry and supply-


constrainedmarkets, such as Europe (a region lacking adequate timber resources to be self-sufficient), IndiaandChina(countrieswhereforestsupplyandproductionisnotkeepingpacewith demand) – while also capturing additional value through the implementation ofsustainableforestrymanagementpractices[SeeFigure1].Institutional investors have historically invested in timberland resources based on attractiverealized returns from the current cash flows generated from forest product sales (e.g., logs,lumber,pellets,etc.)combinedwiththesaleofsubdivisionsandnon-corepropertiesforhigherandbetteruse(“HBU”)buyers(suchaspropertydevelopers),whoarewillingtopaypremiumprices forsuchproperties. Corevaluedrivers for timberproduct revenuesare timberprices,species and product mix, biological growth and forest management, which can potentially,either add or detract value. Such practices seek tomaximize economic value, by optimizingnear-term harvestable timber stock, while still maintaining or enhancing the long-termsustainability of these forests and their ecological value. Rather than managing forests tomaximize short-term returns, managers employ good silvicutural practices, such as pre-commercial thinningandselectiveharvests, tooptimize long-termvalue.Bydoingthis, forestmanagersmoveawayfromproducingapreponderanceofsmalltreesinlieuofproducingfewerlarge trees,which commandgreater value [see Figure2].Additionally, forests that are third-partycertifiedas“sustainably-managed”canpotentiallyrealizepricepremiumsand/orensurehigher market interest. Non-timber forest products including the sale of non-timber forestproducts,huntingandrecreationfees,conservationcredits,andwaterandmineralrightscanalsoenhancerevenuestreams.Furthermore,sustainabletimberlandinvestorscansellworkingforestland conservation easements,which allow timberland owners to continue sustainablyharvesting timber, while monetizing their land values (and preserving the sanctity of thesetimberlands in perpetuity) through the public values inherent in their newly conserved landbase.Timberhas longbeenanattractivediversificationvehicledue tohighhistorical Sharpe ratiosthat are indicative of strong risk-adjusted returns, low correlation to equity markets,opportunitiestoprovideearly leverageonupfront investments, favorabletaxbenefitsand/orsubsidies,inflationprotectionandmarkettrendsthattendstobemorestableandlonger-lived,aswellascounter-cyclical,toatraditionalstockandbondportfolio.4Webelievethissectorisparticularlyattractiveforinvestorswithlong-terminvestmenthorizons,asitcantakedecadesfor trees togrowtoanoptimallyharvestable size.Asof roughly20-30yearsago, timberlandinvestingbegantogainmoretractionamongstinstitutionalinvestors,andeventuallyattractedhighnetworthindividuals,pensionfunds,endowmentsandotherinterestedparties,thatmakethesectortodayawidelyacceptedanddesirableassetclassandportfoliodiversifier.Estimates

4 Weyerhaeuser,Rick.(2005).AnIntroductiontoTimberlandInvestment.


of the total investible timberlanduniverseareapproximately$160billionworldwide.5Of the$75billionworthof investable timberland in theUS6, roughly$7-8billionwould fall into thesustainabilityinvestmentniche.7Table1summarizesthepotentialstrategiesthatareavailableandtherationalebehindsustainabletimberinvesting.

Table 1: Investment Opportunity Summary – Sustainable Timber

TypeofInvestment

› SustainabilityInvestmentCase

› InvestmentStages › RevenueSources › ExitPotentials

› MeasurableImpact

› Investment in a TIMO8 or other entity that would purchase plantation or naturally forested land and/or facilities for growing, processing, or distributing timber products

› Growing demand for timber products (i.e., from rebounding building markets and biofuels) within which the demand for responsible products is high

› Environmentally-sound management can maintain and/or enhance timber resources for future use

› Sourcing › Planting › Harvesting › Processing › Distribution

› Primary

› Timber product sales › Sale of assets › Secondary

› Hunting and recreation fees

› Conservation credits › Non-timber forest

product sales

› Sale to other forestry investors

› Sale to forestry companies

› Sale to developers

› Acres under conservation easement

› Jobs maintained and supported › Number of ecosystem services

provided › Certification

› Forestry Stewardship Certified (FSC)

› Sustainable Forestry Initiative (SFI) › American Tree Farm Systems

Green Real EstateInvestment opportunities for green real estate are largely driven by global trends inurbanization and redevelopment, as well as regulatory requirements around increasinglystringentenergyefficiencystandards,andincreasedconsumerdemandforsustainablebuildingattributes.Greenrealestateinvestmentsprimarilygeneratevaluethroughthecostsavingsand

5NewForests,2012.ResponsibleInvestmentintheForestSector:RecommendationsforInstitutionalInvestorshttp://www.newforests.com.au/news/pdf/articles/Responsible_Investment_in_Forestry.pdf6Ibid.7BasedoninformationpresentedinLymeTimber,2013.RISIForestProductsandTimberlandInvestmentConferenceProceedings.8TIMO:TimberInvestmentManagementOrganization

Figure 1: Global Timber Market Trade Flows8

Figure 2: Forest Product Values


energy efficiency of heating and cooling systems, lighting,insulation, windows and appliances, solar energy etc. forbothrenovatedandnewlyconstructedbuildings.Through the incorporation of sustainable practices, “greenbuilding” investors generate higher returns by loweringlong-term operating costs and/or charging rental or saleprice premiums associated with growing interest insustainable buildings. As one of the greatest consumers ofenergyandcontributorofdirtyemissions,thebuildingsectorholdssignificantopportunityforimprovement,which the IEA estimateswill require at leastUSD$12 trillion of investment by2050,9,10indicatingthattherearesubstantialinvestmentopportunitiesinthesector.Furthermore,in2013,themarketvalueforallLeadershipinEnergyandEnvironmentalDesign(LEED)andEnergyStarproperties–twooftheleadinggreenbuildingcertificationsintheUS–exceeded $128 billion.11 According to a study produced by Maastricht University and theUniversityofCalifornia,Berkeley,LEEDorEnergyStarcertifiedpropertiescommandsalepricepremiumsofabout13%(accountingforpropertydifferencesandtemporalpricedynamics).12Investments in green real estate may be attractive due to the depth and breadth ofopportunities that exist to meet the global needs of future development and growth byincorporatingsustainabilityintothebuildingsector.Realestateinvesting,althoughcapitalintensive,offersthepotentialforattractivereturnsfromnetcashflowsgeneratedduringthelifeoftheinvestment,e.g.,fromloweroperatingexpenses,rental premiums aswell as potential upside fromproperty sales.Green real estate operatessimilarlyexceptthatsustainabilityprinciplesare incorporated intothevaluepropositionfromwhich investors can access premiums and other favorable incentives associated withsustainable real estate practices. Based on many factors including the risk-return profile atvariousstagesof therealestatedevelopmentprocess, investorscandecidewhereandwhentheychoosetoinvest.Whenitcomestogreenrealestateinvesting,thisdecisionwilldependupon whether the investments are targeting retrofits or undertaking new ground-upconstructionactivities,amongotherfactors.Table3summarizesthevariousoptionsavailableto investorsalongwith the rationale forexecuting sustainablepracticesaspartofgreen realestatesector.

9IPCC2007asquotedinUNEP,2011.http://www.unep.org/greeneconomy/Portals/88/documents/ger/9.0_Buildings.pdf10IEA,2013.Transitiontosustainablebuildings:strategiesandopportunitiesto205011NCREIF,2014.SustainableSummaryReport:2013.https://www.ncreif.org/public_files/SustainableSummaryReport_2013.pdf12Eichholtz,P.Kok,N.andJ.Quigley,2013.Theeconomicsofgreenbuilding.TheReviewofEconomicsandStatistics.March2013,95(1):50–63.

Greenrealestateinvestingfocusesonactivitiesincludingtheconstruction,retrofittingandmanagementofenergyefficient,lowGHGemissions,sustainablydesignedbuildingsandproperties.


Table 3: Investment Opportunity Summary – Green Real Estate TypesofInvestments

SustainabilityInvestmentCase

InvestmentStages

RevenueSources

ExitPotentials MeasurableImpact

› Investment to construct and/or retrofit sustainable commercial and/or residential buildings and properties

› Green real estate accesses growing markets while offering sale price premiums

› Increased efficiencies reduce operating/maintenance costs and may generate rent premiums

› Planning › Construction › Retrofitting › Operations &

Management

› Primary

› Rental rates › Sale of property › Secondary

› Cost savings › Price premiums

› Sales to individuals › Sale to commercial

property buyers › Sale to REITs or

other institutional investors

› Energy saved/conserved

› Square footage retrofitted with energy efficiency improvements

› Percent of properties located in low-income geographies/census tracts or providing services to disadvantaged populations

› Certification

› LEED, Energy Star, National Green Building Standard, BREEAM

Sustainable EcosystemsHealthy,functioningecosystemscanimproveresilienceto climate change and are the basis for sustainablewater resources and food security.13When preservedor sustainably managed, landscapes can providevaluableecosystems thatmay reduceoreliminate thecommunity’s need to build costly infrastructure andwater treatment facilities, for example. Investmentsthatconservehighconservationvaluelandscapes,suchas wetlands, and/or promote water and landmanagement practices that seek to maintain or enhance ecosystem services can generatefinancial valueasa resultof increasedproductionquality and/orquantity,pricingpremiums,operating cost reductions and the incremental payment for ecosystem services (PES).Furthermore, such investments can generate tremendous value through significant andmeasurableimprovementstotheenvironmentalhealth,andqualityoflifeonalocalandglobalscale.

13UNEP,2013.BUILDINGTHEECOLOGICALFOUNDATIONOFFOODSECURITYTheCaseforSustainableandResilientEcologicalFoodsystemsinagriculturedominatedlandscapesinAfricaandhttp://www.unep.org/themes/freshwater/pdf/the_critical_connection.pdf

Sustainableecosysteminvestmentstargetlandscapeswithhighconservationvalueandhaveobjectivesto:1)protectecosystemswithhighconservationvalue,and

2)maintainand/orenhanceecosystemservices.


Regionallandandwaterconservationmarketsareexpectedtogrowsubstantiallyoverthenextseveraldecades,driveninlargepartbyeconomicgrowth,changingdemographicandconsumerdemands, environmental stress and increasing natural resource scarcity. Exacerbating theseissues, water and land resources are becoming increasingly divided amongst multiplecompeting end-users including industry, agriculture, mining, power generators, domesticconsumersandrecreationalusersallofwhomarevyingforanincreasinglyscarceresource.Itisestimated that, by 2030, 47% of the global population will be living in areas of high waterstress.14Landuseapproachesthatservetoregenerateresourceavailability,andsettingasidekeyproperties to facilitategroundwaterrecharge,canofferonepotentialsolutiontoaddressandlimittheeffectsofresourcescarcity.Globally,theprivatewatermarketisestimatedtobeabout$220billion,withanannualgrowthrateof4-5%15.PESmarketscontinuetodevelopandmature,creatingmassiveopportunitiesforinvestment. The water-focused PES market alone is estimated at just over $8 billion andexpected to grow to over $11 billion by 2020.16When combined with other PESmarkets –focusedoncarbon,biodiversity,marine,etc.–totalPESmarketestimatesexceed$190billion(see Figure 3).17 It seems increasingly likely that policymakerswill continue to attach highervaluetotheservicesthatecosystemsprovide,includingfloodprotection,carbonsequestrationandairqualitymaintenanceencouraging furthergrowthofPESmarkets.Table4 summarizestheoptionsavailableandrationalebehindsustainableecosystem-focusedinvesting.

Figure 3: PES Market Size Estimates18

14WorldWaterDevelopmentReport2012.15S-NetworkGlobalWaterIndices.16EcosystemMarketplace,2013.17EcosystemMarketplace,2013.18DatasourcedfromEcosystemMarketplace,2013

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

$10,000

2013marketsize poten�alsizeby2015 poten�alsizeby2020

$milloin

TotalCarbon-Focused TotalWater-Focused TotalBiodiversity-Focused


Table 4: Investment Opportunity Summary – Sustainable Ecosystems › Typesof

Investments› Sustainability

InvestmentCase› Investment

Stages› Revenue Sources › ExitPotentials › Measurable

Impact

› Investments in high conservation value landscapes to protect, maintain or enhance ecosystem services

› PES markets are growing and becoming more sophisticated thereby offering stable revenue streams

› Resource scarcity is driving the increase in conservation land value

› Sourcing and feasibility

› Acquisition › Restoration/

Conservation › Operations and

management

› Primary

› Sale of conservation credits

› Sale of assets › Secondary

› Conservation easements

› Hunting and recreation fees

› Sale to individuals

› Sale to other institutional investors

› Sale to public entity

› Area of land restored › Ecosystem services

provided or maintained

› Area of land under conservation easement

Green Infrastructure

Themarket for green infrastructure is experiencing strong growthdrivenby both public andprivatesectordemand for renewableenergy (e.g.,wind,water, solar,biomass,biofuels,etc.)improved energy efficiency, waste-to-energy (WTE), waste management and recycling andwater infrastructure. In addition, without improvements in energy efficiency and thecorresponding rehabilitation of existing infrastructure assets, preferably through renewablesources,neitherpublicnorprivatefinancecanaddressresourcescarcityatthelevelsneededtokeep pacewith projected global population growth.19 TheWorld Economic Forum estimatesthat infrastructure investmentswill need to exceed at least $5 trillion annually tomeet thedemands of a growing global population by 2030.20 Additional annual investments of $0.7trillionwouldbeneededfortheinvestmentactivitytohelpthattransitiontoa“greengrowth”scenario.21Market demand for power sourced from renewable resources continues to grow globally,particularly in emerging economies, creating what we believe are attractive long-termopportunitiesforinvestorsaroundtheworld.TheInternationalEnergyAgency(IEA)estimatesthat renewable generation alone would require $6 trillion of investment to keep pace withcurrentenergydemandprojectedto2035.22Thisislikelyanunderestimateasitdoesnottakeintoaccountthegrowingappetiteforrenewablesandassociatedinvestmentrequiredtomeetincreasingly stringent regulatory requirements and still maintain and expand the necessaryenergy infrastructure to keep pace with population growth. The European Commission

19McKinseyGlobalInstitute,2011.ResourceRevolution:Meetingtheworld’senergy,materials,foodandwaterneeds.20WorldEconomicForum,2013.TheGreenInvestmentReport:Thewaysandmeanstounlockprivatefinanceforgreengrowth.http://www3.weforum.org/docs/WEF_GreenInvestment_Report_2013.pdf21Ibid.22IEA,2014.http://www.iea.org/newsroomandevents/pressreleases/2014/june/name,72035,en.html


estimated that Europe’s energy infrastructure alone would require €1 trillion worth ofinvestmentfor2011-2020.23ThediversionofwastefromlandfillstoWTEandrecyclingfacilitiesisalsoexpandingaroundtheworld representing additional opportunities for green infrastructure investors. ThemunicipalsolidWTEmarketaloneiscurrentlyestimatedtoreach$29billionby2016,driveninlargepartbytheneedtoupgradeexistingandestablishedWTEplants.24Aslandfillsreachcapacityandasenergy needs increase in stepwith population growth, there are increasing opportunities tosatisfyneedswithalternativeenergyproductionfromwaste. Water infrastructure isanotherarea where significant investment is needed. Driven by the constraints on water resourcespreviouslydescribed,growingwaterdemandisexpectedtostimulateanestimated$22trillionin global water infrastructure investment over the next few decades25 while the globaldesalinationmarketisexpectedtomorethandoublebetween2011and2025.26

FFiigguurree 44:: IInndduussttrr iiaall DDeessaall iinnaatt iioonn aanndd WWaatteerr RReeuussee MMaarrkkeett;; GGlloobbaall IInndduussttrr iiaall WWaassttee

RReeccyyccll iinngg aanndd SSeerrvviicceess MMaarrkkeett 2277

Source:GlobalWaterIntelligence

Privatesector investorshavetheopportunityto investatvariousphasesofthe infrastructureproject lifecycle, all ofwhichhave theirown risk/rewardprofiles. Investorsmustassess theiroptimal opportunity based on many factors, including risk-reward preferences. Those whoprovide development equity and enter at the project concept/feasibility stage, will have adifferentriskprofilethanthosewhochooseto investata laterstage,oncethefacility isfully

23OfficeoftheEuropeanUnion,2011.EnergyInfrastructure.http://ec.europa.eu/energy/publications/doc/2011_energy_infrastructure_en.pdf24Frost&Sullivan,2013.http://www.frost.com/prod/servlet/press-release.pag?docid=28766562325KBI,2013.ReferencingJacobsSecurities,GlobalWaterPrimer,April2011,referencingBoozAllenHamilton26GlobalWaterIntelligence2012.27Source:Frost&Sullivan,TEKESGrowthWorkshopinHelsinkion2ndOctober2012.


operationalandgeneratingcurrentincome.Figure5providesanexampleofhowprivatecapitalcanfinanceinfrastructureprojectsatvariouspointsalongthelife-cycleofanenergygenerationproject.

Figure 5: Energy Project Development Process28

In recognition of the critical role private capital can play in meeting infrastructure needs,governments are developing favorable regulatory frameworks and policy environments toattractprivate-sectorinvestorsandmakesuchopportunitiesparticularlylucrative.Theessentialnatureoftheservicesprovidedby infrastructureassets,thescaleof investmentrequiredandthe fundamental improvements in regulatory environments offer a diversity of attractiveinvestmentopportunities.Through the incorporationofa sustainabilityperspective, investorscan access growing infrastructure needs to facilitate the generation and use of renewableresources and reduceoperating and futuremaintenance costs, thereby generatingenhancedreturnsbasedonoperatingcashflowsand/orassetsales.Table5providesasummaryof theoptions available and the rationale for investors interested in capitalizing on the greeninfrastructureinvestmentopportunity.

28http://www1.eere.energy.gov/femp/pdfs/largereguide.pdf


Table 5: Investment Opportunity Summary – Green Infrastructure TypesofInvestment SustainabilityInvestment

CaseInvestmentStages RevenueSources Exit MeasurableImpact

› Investments in construction and/or operation and management of infrastructure needed to generate and/or facilitate transmission and distribution of renewable and recycled resources, including energy, waste, and water

› Strong and growing political support, regulatory requirements, and consumer demand for recycling programs and clean power, particularly in emerging markets where power can be generated for local consumption

› There are extreme infrastructure challenges to meeting the demand for renewable energy, as well as to manage water and waste resources

› Feasibility › Permitting › Construction › Retrofitting › Storage › Operations and

management

› Primary

› Fixed payments from end user (e.g., water districts) based on contract (e.g. PPA)

› Sale of physical assets

› Secondary

› n/a

› Sale to public user (e.g. utility, water district, municipality)

› Sale to another private provider

› Sale to another institutional investor seeking current cash yield (e.g., pension funds, insurance companies)

› MWh generated through renewable sources

› GHGs offset through renewable production

› Waste and/or water recycled

› Certifications: AWS International Water Stewardship Standard, US Federal Water Efficiency Requirements, GHG Protocol Accounting Standard

A New Framework for Impact Measurement

Beyond the financial investment case laid out in the previous section, an inherently linkedobjectiveofinvestmentinsustainablerealassetsandconservationfinancearetangiblepositiveenvironmental outcomes. However, because historically the impact investment field hasstruggledtodevelopwidelyacceptedandconsistentterminologyforunderwritingcriteriaandreportingnon-financialresults,therehasbeenadegreeofambiguityaroundhowtomeasureandarticulateimpactoutcomes.WebelieveanimportantstepinhelpingclarifythisambiguityistheUnitedNationsSustainableDevelopmentGoals(SDG’s)adoptedinSeptemberof2015(weelaboratefurtherontheSDGsbelow). The SDG’s provide third party recognizable objectives that allow investors to have acommon understanding when to targeting and evaluating their impactinvestments.Additionally, the investment requirements delineated to achieve the SDG’sobjectives are on the order of several trillions of dollars per year, which we see as anopportunitytoscalecapitalforcompetitivefinancialreturnsandmeaningfulpositivesocialandenvironmentalimpact.


The 17 SDGs provide an international call to action to achieve globalsustainable development by 2030. The 2030 Agenda for SustainableDevelopment29 is intended to mobilize public and private sectorresources,callingexplicitlyonbusinessesandtheprivatesectorto:1. Apply creativity and innovation to solve the sustainabledevelopmentchallenge;

2. Decreasethenegativeimpactcorporationshaveonsustainability;and3. Increase the private sector’s positive contribution to the sustainable development

agenda.Mostsignificanttoimpactinvestors,theAgendaincludesaspecificcalltoactionfortheprivatesector to advance sustainable development by minimizing the negative impacts of businessoperations, and to increase the positive contribution that private capital can make throughgoods,servicesandresponsiblebusinesspractices.The SDGs explicitly acknowledge that the privatesectormustbeapartofthedrivetosustainability,and in our view, these same sustainabledevelopment challenges present significantmarket opportunities for companies to deliversolutions relating to climate change, energyefficiency, transportation, reducing waste, waterscarcity,resourcescarcityandreducingpoverty.30Now, more than ever, carefully tailoredinvestment strategies can play an instrumentalrole in addressing specific large-scale globalchallenges, and such investments can be measured and evaluated not just for financialperformancebutfortheircontributiontospecificimpactobjectives.

29http://sdgcompass.org30ibid

“AstheSDGsformtheglobalagendaforthedevelopmentofoursocieties,theywillallowleadingcompaniestodemonstratehowtheirbusinesshelpstoadvancesustainabledevelopment,bothbyminimizingnegativeimpactsandmaximizingpositiveimpactsonpeopleandtheplanet.”-SDGCompassGuide


Real Assets Investment for the Sustainable Development Goals

SDG15(LifeonLand)focusesonprotecting,restoring,andpromotingthesustainableuseofterrestrialecosystems,sustainablymanagingforests,combattingdesertification,andhaltingandreversinglanddegradationandbiodiversitylosses.Impacttargetsinclude:� Promotetheimplementationofsustainablemanagementofalltypesofforests,restore

degradedforestsandincreaseafforestationandreforestationglobally� Mobilizeandsignificantlyincreasefinancialresourcesfromallsourcestoconserveand

sustainablyusebiodiversityandecosystems

SDG11(SustainableCitiesandCommunities)focusesonmakingcitiesandhumansettlementsinclusive,safe,resilient,andsustainable.ImpactTargetsinclude:� Ensureaccesstoallforaffordableandsafehousing� Accesstosafe,accessibleandsustainabletransportsystems� Reduceimpactofcitiesparticularlywithwastemanagement� Buildsustainableandresilientbuildingsespeciallyindevelopingcountries

SDG7(AffordableandCleanEnergy)focusesonaccesstoaffordable,reliable,sustainable,andmodernenergyforall.ImpactTargetsinclude:� Universalaccesstoaffordable,reliableandmodernenergyservices� Increaseshareofrenewableenergyinglobalenergymix� Doublerateofimprovementinenergyefficiency� Expandinfrastructureindevelopingcountries

SDG12(SustainableConsumptionandProductionPatterns)focusesonthesustainablemanagementandefficientuseofnaturalresources.Impacttargetsinclude:� Achievetheenvironmentallysoundmanagementofchemicalsandallwastes

throughouttheirlifecycle,andsignificantlyreducetheirreleasetoair,waterandsoilinordertominimizetheiradverseimpactsonhumanhealthandtheenvironment

� Substantiallyreducewastegenerationthroughprevention,reduction,recyclingandreuse

� Encouragecompanies,especiallylargeandtransnationalcompanies,toadoptsustainablepracticesandtointegratesustainabilityinformationintotheirreportingcycle

SDG14(LifebelowWater)focusesontheconservationandsustainableuseofoceans,seasandmarineresourcesforsustainabledevelopment.Impacttargetsinclude:� Takingactionforcoastalecosystemsrestorationandconservation� Regulatingharvestingandendoverfishing� Provideaccessforsmall-scaleartisanalfisherstomarineresourcesandmarkets


Invest/Divest

TheDivest-Investinitiativeisintendedtoacceleratethetransitiontoasustainableeconomybydivesting from the fossil-fuel industry and investing in socially, environmentally andeconomicallyresponsiblecompanies.Byfocusingonclimatesolutionsandtheneedformassivelow-carboninvestmentsacrossindustriesandbusinesssectors,investorscanplayakeyroleinleadingthisglobalenergytransition.Thetransitiontoacleanenergyeconomyrequiresawiderangeof industrialandcommercialsolutionsacrossallsectorsandindustries.Thecleanenergyeconomyincludesmultiplebusinesssectors, including power, electricity, waste management, energy efficiency, transportation,manufacturing,aswellasfoodandagriculture.31Todate theDivest-Investmovementhaspledgesofover500organizationsworthmore than$3.4 trillion pledging. This campaign is calling on investors of every stripe - from sovereignwealth funds to institutional endowments and retirement fund holders - to divest from thefossilfuelindustriesdeepeningtheclimatecrisisandinvestinsteadinclimatesolutions.Formoreinformationpleasevisit:http://divestinvest.orgSSttrraannddeedd AAsssseettss

Concerns over climate change focus attention on a possible “carbon asset bubble” inwhichbillionsofdollarsworthoffossilfuelreserves(drivingenergycompanies’marketvaluation)maybeprecludedfromextractionandthusbecome“stranded”.Investorswithexposuretoenergycompaniesarethusexposedtoconsiderableportfolioriskshouldtheirreservesnolongerformthebasisfortheirfinancialvaluation.ThetotalCO2potentialoftheearth’sprovenreservesisnearly3000GtCO2.65%ofthistotalisfromcoal22%fromcoaland13%fromgas. Iftheworldistoremainbelow2°Cwarmingandavoid catastrophic climate change (i.e. the "global carbon budget”), only one-fifth of theseprovenreservescanbeusedby2050(SeeFigure6).

31Divestinvest.org


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Investorsmay consider reducingexposure to thepotential carbonassetbubble anddistanceportfoliosfromadditionalexposuretorelatedenergyactivities.Asacomplementtodivestingfrom fossil fuels, investors also can consider investing in the clean energy economy. Thetransition to a clean energy economy requires a wide range of industrial and commercialsolutionsacrossallsectorsandindustries.Thecleanenergyeconomyincludesmultiplebusinesssectors, including power, electricity, waste management, energy efficiency, transportation,manufacturing,aswellasfoodandagriculture.Asanexampleofthiswork,Sonen’sdisciplinedinvestmentprocesssupportsthetransitiontoalow-carboneconomy.As a result, companies that arepart of the fossil-fuel industry and arecurrentlytargetedbyFossilFuelIndexes’33fordivestmentwillnotbeheldinourglobalequitystrategy. Consistent with the Divest-Invest Philanthropy34 campaign, Sonen’s public equitypositions include explicit exposures to themes in renewable energy, resource and energyefficiency,andlow-carboninfrastructureandwater(SeeFigure7&8).

32UnburnableCarbon,TheCarbonTrackerInitiative.P6.33FossilFreeIndexes.com34DivestInvest.org.DivestInvestPhilanthropyisaplatformforinstitutionsthatcallsforfossilfueldivestmentandnewenergyeconomyreinvestment.SeveralofSonen’sprivatefoundationclientsaresignatoriestotheDivestInvestcampaign.


Figure 7: Thematic Impact Breakdown in Sonen’s Global Equity Strategy

(As of 12/31/2015)

Figure 8: Weighted Total Carbon Emissions FY 2014

(As of 12/31/2015)35

35SourceData:MSCIESGResearch12/31/2015.Atthetimeofpublishing,FY2014representsthelatestavailableyearofdatafromMSCIESGResearch.Note:ThechartreflectsavailabledatafortheglobalequitystrategyandtheMSCIACWIindex.Noteverycompanyincludedintheindexreportsoncarbonemissions.

Energy 9.3%

Health 13.8%

Other 0.9%

Water 7.2%

Food and Agriculture

0.2%

Waste and Pollution

6.2%

Economic Development

0.5%

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3

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Sonen Global Public Equity

MSCI ACWI IMI

MillionsTon

sC02

SONEN CAPITAL: INVESTING IN CONSERVATION

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Important Definitions & Disclosures

Confluence Philanthropy 475 Riverside Dr., Suite 900New York, NY 10115

Email: [email protected]: +1-212-812-4367

www.fmcn.org


MSCISourceData:NeitherMSCInoranyotherpartyinvolvedinorrelatedtocompiling,computingorcreatingtheMSCIdatamakesanyexpressorimpliedwarrantiesorrepresentationswithrespecttosuchdata(ortheresultstobeobtainedbytheusethereof),andallsuchpartiesherebyexpresslydisclaimallwarranties of originality, accuracy, completeness, merchantability or fitness for a particular purposewithrespecttoanyofsuchdata.Withoutlimitinganyoftheforegoing,innoeventshallMSCI,anyofitsaffiliatesoranythird-partyinvolvedinorrelatedtocompiling,computingorcreatingthedatahavetheliability for any direct, indirect, special, punitive, consequential or any other damages (including lostprofits)even ifnotifiedof thepossibilityof suchdamages.No furtherdistributionordisseminationoftheMSCIdataispermittedwithoutMSCI’sexpresswrittenconsent.THEINFORMATIONPRESENTEDHEREINISSUBJECTTOCHANGEWITHOUTNOTICE,ANDSHOULDNOTBERELIED UPON OR CONSIDERED AS A SOLICITATION TO BUY OR SELL ANY SECURITY. SONEN AND ITSREPRESENTATIVES ARE IN COMPLIANCE WITH CURRENT REGISTRATION REQUIREMENTS INCUMBENTUPON REGISTERED INVESTMENT ADVISERS IN STATES WHERE SONEN MAINTAINS EMPLOYEES ANDCLIENTS.ANYDIRECTCOMMUNICATIONSUBSEQUENTTOTHEDISSEMINATIONOFTHISPRESENTATIONWITHAPROSPECTIVECLIENTSHALLBECONDUCTEDBYANAUTHORIZEDSONENREPRESENTATIVEWHOISEITHERREGISTEREDORWHOQUALIFIESFORANEXEMPTIONOREXCLUSIONFROMREGISTRATIONINTHESTATEINWHICHTHECLIENTRESIDES.FORINFORMATIONRELATINGTOTHEREGISTRATIONSTATUSOF SONEN, PLEASE CONTACT US AT [email protected] OR REFER TO THE INVESTMENTADVISERPUBLICDISCLOSUREWEBSITEATWWW.ADVISERINFO.SEC.GOV.NEITHER THE SEC NOR ANY OTHER STATE SECURITIES AGENCY OR OTHER REGULATORY BODY HASPASSEDUPONTHEACCURACYORADEQUACYOFTHISPRESENTATION.ANYREPRESENTATIONTOTHECONTRARYISACRIMINALOFFENSE.THEINFORMATIONSETFORTHHEREINDOESNOTPURPORTTOBECOMPLETEORUPTODATE.CERTAININFORMATION INCLUDED HEREIN IS SUBJECT TO CHANGE, WITHOUT PRIOR NOTICE. SONEN HASASSUMEDNODUTYTOUPDATETHEINFORMATION.INFORMATIONPRESENTEDISCONFIDENTIALANDFORDISCUSSIONPURPOSESONLYAND ISMADEAVAILABLE SUBJECTTORECIPIENT’SAGREEMENTTOMAINTAIN THE SAME ON A CONFIDENTIAL BASIS. CERTAIN INFORMATION CONTAINED HEREIN ISPROJECTEDANDBASEDONASSUMPTIONSANDESTIMATESASTOFUTUREEVENTSTHATMAYORMAYNOTOCCUR.ALLINVESTMENTSCARRYARISKOFLOSS,INCLUDINGLOSSOFPRINCIPAL.THECONTENTSOFTHISPRESENTATIONARENOTINTENDEDTOSERVEASLEGAL,TAX,ORINVESTMENTADVICE.RECIPIENTSOFTHISPRESENTATIONSHOULDCONSULTTHEIROWNCOUNSEL,ACCOUNTANTORFINANCIALADVISERASTOLEGAL,TAX,ANDRELATEDMATTERSCONCERNINGANYINVESTMENT.CERTAININFORMATIONCONTAINEDINTHISPRESENTATION(INCLUDINGCERTAINFORWARD-LOOKINGSTATEMENTSANDPROJECTIONS)HASBEENOBTAINEDFROMPUBLISHEDSOURCESAND/ORPREPAREDBY PARTIES NOT AFFILIATED WITH SONEN. IN CERTAIN CASES, THIS INFORMATION HAS NOT BEENUPDATEDTHROUGHTHEDATEHEREOF.WHILESUCHSOURCESAREBELIEVEDTOBERELIABLE,SONENDOES NOT ASSUME ANY RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF SUCHINFORMATION.

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