Spotlight: Launching Climate Trust Capital

Patrick Maloney, Sean Penrith, and Peter WeisbergConservation Finance Practitioner Roundtable

Portland, ORMay 18th, 2016

Building a “Market”, Phases, Deliverables & Roles

Development Emerging MarketEarly Market

(scaling)

• Defining the market opportunity

• Developing the cash flows & benefits

flows.

• Defining returns opportunities

• Developing protocols & regulations

• Defining & negotiating the unit of

measure

• Building data and processes to support

the “unit of measure”

• Often involving regulatory

agencies

• Innovation often in an NGO

• First pilots transactions, often one-off

deals

• Modifying & testing the regulations

• Testing the “unit of measure”

• Validating the cash flows, benefits flows

and returns model

• Build market rules - TLC

• Risk assessment

• Returns models and

sources

• Pricing & valuation

• Underwriting standards

• Structures

• Stabilized regulations

• Scalable & repeatable transactions

(market size)

• Defining risk & returns expectations

• Decreased deal friction & transaction

costs

• Multiple entrants along the full value

chain

• Investor becoming educated on the

asset & strategy

• First intermediaries that monitor and

validate the strategy

• NO RETURNS • Return of capital • “Market rate” based on risk & asset

class

• Grants • Grants

• PRI’s

• Impact/mission driven investors

• Credit enhancements & guarantees

• Early adopters in mainstream

• Niche investors

Mainstream

Can you apply this

MODEL to other

examples of market

evolution?

• Micro finance

• Carbon cap-trade

• SIBs

Making a Market:

TLC

• Transparency

• Liquidity

• Consistency

Objective: Moving from emerging/early market to mainstream

3

• Risk mitigation

• Pilot Auction Facility

• Buyer of last resorts/put option contracts

• Bond guarantees/credit enhancements

• Buyer commitments

• Protocol design

Source: 2016 GIIN Annual Impact Investor Survey

$15.2 billion in impact investing in 2015

4

Trading on our core competency; bullish on carbon

5

Climate Trust model: Late stage projects

Due diligence

Active project management support

Credit generation / commercialization

Special Purpose Fund via

CO2 Standard

18 years

Climate Trust Capital: Early stage projects

Due diligence

Active project management support

Credit generation / commercialization

Impact Capital Fund

2016 >>

What other models could The Climate Trust draw from as it launches a for-profit investment fund? What resources exist to help non-profits create for-profits?

6

Domestic Carbon Markets – $2.89 billion total demand through 2025

7

$0

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

$350,000,000

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Voluntary and Compliance Market Demand, 2015-2025

Voluntary Market Value Complaince Market Value

California compliance market key assumptions• California’s cap-and-trade system is extended beyond 2020. From 2021

through 2025, the California Air Resource Board continues to decline the cap at 2% per year.

• Compliance entities in California purchase offsets to cover only 5% of their annual compliance obligation (the maximum available to entities is 8%).

• Offsets are traded at an assumed minimum price, discounted 28% from the estimated regulated floor price for allowances.

Voluntary market key assumptions:• Demand for voluntary offsets grows at 5% per year.• Prices start at $5 per voluntary credit in 2015 and grow

by 2% per year to $6.09 in 2025.

California Air Resource Board Protocols:

1. Livestock digesters2. Forestry 3. Ozone depleting

substances4. Coal mine methane

capture5. Rice cultivation

Climate Action Reserve Protocols:

1. Grassland conservation2. Nutrient management3. Landfill4. Composting

Verified Carbon Standard Protocols:

1. Weatherization 2. Campus clean energy

and energy efficiency3. Wetlands4. Avoided deforestation

of tropical forests

American Carbon Registry Protocols:

1. Forestry aggregation2. Livestock management3. Compost additions to

grasslands4. Wetland restoration5. Carbon capture and

storage

California Compliance Market$2.18 billion demand through 2025

Voluntary Market$714 million demand

through 2025

Compliance and Voluntary Carbon Market Supply and Demand

8

Problem: Risk causes lenders to significantly or completely discount future carbon revenues.

Digester Offset Revenue - $2.09 million

$- $-

$156,276 $164,881 $174,041 $185,145 $198,660

$213,162 $228,723

$245,420 $263,336 $263,336

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

0 1 2 3 4 5 6 7 8 9 10 11

Car

bo

n R

even

ue

Year

Key risks:• Market risk. When delivered, what will credits be worth?• Delivery risk. Will the number of credits anticipated at the

time of investment/lender be delivered?

9

Digester Offset Revenue (CTC Financing) - $1.43 million

Digester Offset Revenue (No CTC Financing) - $2.09 million

$- $-

$156,276 $164,881 $174,041 $185,145 $198,660 $213,162 $228,723

$245,420 $263,336 $263,336

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

0 1 2 3 4 5 6 7 8 9 10 11Car

bo

n R

even

ue

Year

$771,050

$- $- $- $- $-$53,977

$106,581 $114,362 $122,710 $131,668 $131,668

$-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

0 1 2 3 4 5 6 7 8 9 10 11

Car

bo

n R

even

ue

Year 10

10

“The data is consistent with the plucking of low-hanging fruit, and also suggests starting surpluses will drop – if less dramatically – over time.”

California Carbon’s “California 2030 Offset Supply Forecast – Forest Carbon Projects.” December 2015.

Forestry: Focus on bump/flush/surplus projects due to low risk

11

Financial innovation particularly powerful with high-capital cost, long-term savings projects.

Source: Climate Bonds. Pooling EE/RE Projects. DG Clima. March 2013.

12

Market risk mitigation: Put option or buyer of last resort

13

Climate Trust Capital

(fund)

The

Climate

Trust

(NGO)

Packard

FoundationCTC receives a put-option to sell

credits at a minimum over the ten year

life of the fund.

Commitment to Purchase

AgreementLoan Agreement

Project

1

Project

2

Project

4

Project

3

Project

5

Carbon Investment Agreements

Market risk mitigation: Put option gives Climate Trust Capital the right, but not the obligation, to sell verified credits to The Climate Trust at $6/credit.

14

Fund Concept: Finance projects that will rely upon revenues from carbon markets.

Problem: Lenders are unwilling to value revenues from carbon markets (and require projects to be profitable in their absence). Forestry, biogas, and agricultural projects therefore struggle to raise the necessary capital to build and develop new projects.

Solution: Climate Trust Capital will finance projects that will depend upon revenues from carbon markets, through an upfront investment.

15

Financing Tool: Upfront investment based on anticipated carbon credit generation. • Guarantee minimum carbon value.• Revenue share rewards project developers as carbon prices increase.

Investment• Climate Trust Capital “pre-purchases” ten years of the carbon offsets a

project is anticipated to generate.

• Capital is made available upfront for the construction of new projects.

Active management

• Climate Trust Capital will work with a project to develop a carbon monitoring plan and commercialize credits.

Revenue share

• After carbon sales have repaid the pre-purchase, 50% of future carbon revenues are paid to the project and 50% are paid to Climate Trust Capital and its investors.

16

Digester Offset Revenue (CTC Financing) - $1.43 million

Digester Offset Revenue (No CTC Financing) - $2.09 million

$- $-

$156,276 $164,881 $174,041 $185,145 $198,660 $213,162 $228,723

$245,420 $263,336 $263,336

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

0 1 2 3 4 5 6 7 8 9 10 11Car

bo

n R

even

ue

Year

$771,050

$- $- $- $- $-$53,977

$106,581 $114,362 $122,710 $131,668 $131,668

$-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

0 1 2 3 4 5 6 7 8 9 10 11

Car

bo

n R

even

ue

Year 17

17

Value Proposition: Manage the long-term execution and market risks associated with nascent carbon markets.

Market Risk Mitigation. Investments guarantee a minimum value for carbon credits over the 10 year crediting period of a project.

• Allows projects to leverage The Climate Trust’s existing programs, which have $22 million under management and must purchase and retire credits regardless of what happens in emerging markets.

Execution Risk Mitigation. We develop a carbon monitoring plan that sets up the methods for data collection, data aggregation and verification. We then commercialize credits on behalf of the project in the compliance and voluntary markets.

• Monitoring plan allows projects to benefit from The Climate Trust’s 18 years of experience investing in and managing offset projects.

• Commercialization gives project developers access to The Climate Trust’s existing buyer network. Projects benefit from portfolio approach since this aggregation minimizes risks (execution & invalidation) that buyers currently face.

18

Grassland conservation: Place prairie under an imminent threat of conversion into cropland under a conservation easement.

Source: Climate Action Reserve, revised 2015. Evaluation of Avoided Grassland Conversion and Cropland Conversion to Grassland as Potential Carbon Offset Project Types.

1Assumes linear growth such that 30% of acres converted every year into cropland are instead conserved by 2025.

Climate benefit Enhanced carbon sequestration in soils.

Carbon market Voluntary market (does not yet qualify for California compliance)

Anticipated greenhouse gas reduction associated with new projects1 built between 2015 and 2025

902,564 mtCO2e

Greenhouse gas reductions purchased by The Climate Trust to date

39,384 mt CO2e

What types of forestry projects are likely to find turning long-term carbon revenues into upfront capital attractive? Should Climate Trust Capital target land acquisition, avoided conversion projects, projects that are currently at common practice values?

19

Target: Scale fund investments to be directed at identified sectors

Goals: 1. Pilot $15 million fund 2. Scale to a $100 million fund 3. Reduce 20 million tons of

greenhouse gas emissions4. Demonstrate carbon offsets are

an investible and reliable asset class

Conservation Finance Gap. Credit Suisse estimates the quantity of conservation finance must multiply by 20 to 30 times to meet global conservation needs. Source: Credit Suisse, World Wildlife Fund, McKinsey. Conservation Finance. January 2014.

20

Mitigating Delivery Risk: Protocols are public goods, and therefore require significant investment of public dollars.

21

American Carbon Registry’s “Avoided Conservation of Grasslands” relies on Denitrificiation-Decomposition Biogeochemical Process Model

Climate Action Reserve’s “Grasslands Protocol” does modeling for US, provides lookup table

(Development and implementation of both protocols supported by Conservation Innovation Grants)

Future Symbiotic Structure

The Climate Trust

Climate Trust Capital

Investments made in environmental credits

Fund 1, 2, 3 ….

Technical Assistance

Debt & equity investors

Foundation, philanthropic, grant support

Development Facility

Project 1

Project 2

Project 3

Project 4LLC

NGONew sector development

Sector 1

Sector 2….......

What division of roles have worked well/poorly between non-profits and for-profits? What financial relationships have worked well/poorly?

23

Mitigating Market Risk: Replace grant funding with market risk mitigation like buyers of last resort.

24

What opportunities exist to replicate World Bank’s Pilot Auction Facility for domestic environmental markets in the United States?

25

Expanding Voluntary Buyer Commitment: Council on Environmental Quality

26

Executive Order 13693 (March 2015):

Federal agencies must reduce GHG emissions 40% below 2008 levels by 2025.

CEQ Guidance on Federal GHG Accounting and Reporting (June 2012)

“… carbon offsets are not allowed to be applied as an adjusted against a Federal agency’s emissions... More time and deliberate focus is necessary to understand how the market for carbon offsets and use of those offsets could be applied consistently across the Federal community.”

Allowing agencies to meet 8% of the anticipated reductions using offsets (rather than just RECs) could grow the voluntary market by 15% (~1.35 million offsets per year).

Grassland conservation: Place prairie under an imminent threat of conversion into cropland under a conservation easement.

Source: Climate Action Reserve, revised 2015. Evaluation of Avoided Grassland Conversion and Cropland Conversion to Grassland as Potential Carbon Offset Project Types.

1Assumes linear growth such that 30% of acres converted every year into cropland are instead conserved by 2025.

Climate benefit Enhanced carbon sequestration in soils.

Carbon market Voluntary market (does not yet qualify for California compliance)

Anticipated greenhouse gas reduction associated with new projects1 built between 2015 and 2025

902,564 mtCO2e

Greenhouse gas reductions purchased by The Climate Trust to date

39,384 mt CO2e

If federal agencies are enabled to buy offsets to meet reduction requirements, in what way should they structure their program to

generate the largest impact? 27

Creative Instruments/approaches

28

• Green (ASB) bonds

• PRI syndicated put option/bond guarantee

• NGO cooperative bond issuance

• EPA CWA SRF guarantee facility

Carbon price is an indication of the ambition of a cap-and-trade system

29

Source: Jenkins and Karplus. “Carbon pricing under binding political constraints.” WIDER Working Paper. April 2016.

THANK YOU!Peter Weisberg

Senior Investment Manager

The Climate Trust

pweisberg@climatetrust.org

(503)238-1915 x207