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Environment & Poverty Times No. 5

Profit-seeking capitalists to save rainforests

Do you know anyone with capital? Africa needs it!

When thinking about sustainable development in Africa, what comes to many people’s mind is development aid rather than private sector investments with a desirable output. However, in developing countries both the development and investment potential in natural resources are enormous. What is needed now are good investors.

By Rhett A. Butler,

At the end of March 2008, London-based Canopy Capital, a private equity firm, announced a historic deal to preserve the rainforest of Iwokrama, a 371,000 hectare reserve in the South American country of Guyana. In exchange for funding a “significant” part of Iwokrama’s USD 1.2 million research and conservation program on an ongoing basis, Canopy Capital secured the right to develop value for environmental services provided by the reserve. Essentially the financial firm has bet that the services generated by a living rainforest – including rainfall generation, climate regulation, biodiversity maintenance and carbon storage – will eventually be valuable in international markets.

Hylton Murray-Philipson, director of Canopy Capital, says the agreement – which returns 80 per cent of the proceeds to the people of Guyana – could set the stage for an era where forest conservation is driven by the pursuit of profit rather than overt altruistic concerns.

Mongabay: What was your motivation for the Guyana deal?

Hylton Murray-Philipson: My motivation for doing any deal anywhere comes from my perception of where we are in the world. I feel we are at a crossroads. I think this is the last moment we have, as a species, to take remedial action before we are very soon on a path that is committed to significant climate change.

Looking at rainforests specifically, conservation efforts over the past two decades have basically failed to deliver for the Amazon. I’ve been reading my entire adult life about the destruction of the Amazon rainforest, yet it’s still happening. What’s the problem? Frankly, lack of money. Philanthropy is too small, governments are too slow, so it’s going to be up to the market. Our firm is bringing capital to the canopy. The only way we are going to turn this thing around is through a profit motive. This is what is needed to harness the power of markets. But it doesn’t stop with making a profit – we are also going to have to deliver a better living for local people. We need to start valuing the intrinsic parts of the forest as an intact entity rather than having to convert it for something else.

Mongabay: Why Guyana?

Hylton Murray-Philipson: I originally tried to do something in Brazil. I lived there for 5 years when I setting up an investment bank 20 years ago. I know my way around, speak the language and obviously I know that even if we won the battles in the Guyanas, Colombia, Peru, Ecuador, Bolivia, Venezuela, and we lose Brazil, essentially we lose the war. So I started out in Brazil, but the Brazilian perspective on this is very complicated. Yes, Brazil has come a long way – just two years ago they were vetoing essentially all the international debate about forests and to talk about things about forests was just not on – but even now the country is not embracing market-based solutions. They tried to do government to government payments – which didn’t win wide support – before floating their own idea of what market based solutions are, but to be honest, these don’t respond to any market that I know. At the end of the day, the lack of some sort of legal definitions at the federal level makes it very difficult.

So when I came across Iwokrama in Guyana I thought, this is the answer to all my prayers – it’s really a jewel in the crown. In Guyana we have the head of state, President Bharrat Jagdeo, openly saying, “Hey guys, please come and help me because I’m at a very interesting point in my country’s development.” Guyana was a complete financial basket-case in terms of spending with 94 per cent of government income on debt service, but now the debt has been written off and the country is wondering where it goes from here. Guyana is also not on the forefront of destruction – it’s not like trying to go into Para or Mato Grosso. My feeling is if you can’t save the low-hanging fruit, what are you going to be able to do anywhere?

When you engage people in these issues and they say “OK fine, I agree with your perspective, but now what will I invest in?” you quickly find there’s nothing you can invest in. Moving in and buying up chunks of land in these countries is the immediate reaction people tend to have but this isn’t the answer – there’s not enough money and it’s politically, socially, and morally very unacceptable.

Iwokrama presents a special opportunity. In 1996 by an act of Parliament the people of Guyana gave 371,000 hectares to be administered on their behalf, and the behalf of the wider world, by the Commonwealth. So we have already had 12 years of governance, which is key to ensuring that money is going to be handled properly. Typically once you do identify a place for investment, you run into the questions like: “What’s going to happen to the money if I do invest? Is it going to get recycled to Switzerland? Is it really going to make the difference on the ground that I would really like it to? In other words, am I really going to get what I think I’m going to be paying for?” Maybe I’m a cynic by looking at the precedent from the Pilot Program to Conserve the Brazilian Rain Forest funded by the G7 (PPG7) in Brazil – frankly most of that money never left Brasilia. It’s quite easy to come up with inspirational statements saying you are going to this, that, and the other, but to really make a difference on the ground is very difficult.

In Iwokrama you have the head of state who’s supportive, you have 12 years international governance, you have the partnership with the Commonwealth, you have the patronage of the Prince of Wales, you have the English language, you have the rule of law, and you’ve got a country basically half way between Brazil and the United States that has very dense, very rich, and very beautiful forests. If you can’t make something work in Guyana, I’m not sure you are going to ever make it work anywhere. So that’s a long-winded way of saying why it has to be Guyana.

Mongabay: Where do you see the market going? Do you expect it to move beyond carbon to value other ecosystem services like water?

Hylton Murray-Philipson: There are different ways of looking at ecosystem services. You could, for example, split up the water rights and sell them to Cargill, soy growers in Mato Grosso, residents of Lima (Peru) and whoever else is benefiting from the water generated by the Amazon rainforest. The water company in Sao Paulo or Georgia would be classic examples. Let me explain. There have been very powerful studies that link the Amazon rainforest to precipitation in North America, so the case can be made that the forest of Guyana plays a key economic role in the U.S. Similarly, last year Argentina saw power shortages and drought because rainfall from the Amazon didn’t make it as far down as usual. Meanwhile Brazil has USD 58 billion in agricultural exports last year and roughly 70 per cent of the country’s electricity generation came from hydroelectric. If you don’t have rain, it directly affects power and agricultural production, essential components of the economy. Another way of looking at it is to compare rainforests to a giant utility – if you do not pay your utility bill, your power and water are going to get cut off.

However the real value of ecosystem services is in everything bundled together. It is the sheer complexity and diversity of life that gives forests their value. So yes, I think we are moving beyond carbon. Of course, carbon is not incidental. In Guyana you do lock up upwards of 100 tons of carbon – possibly even double that or more – per hectare.

Mongabay: Your tag line is “driving capital to the canopy” – can you elaborate on your investment philosophy?

Hylton Murray-Philipson: I called the company Canopy Capital because I didn’t want to have anything to do with carbon – this is really not about carbon, it is about life. How do you put a price on life?

I personally regret that we have to do this but given that we are like locusts – consuming everything in our paths – we have to start putting a value on forests because otherwise, as President Jagdeo says, “they will get converted for something that will enable me or my successors to deliver the health, education, water, and electricity to the people of Guyana” – which is their right and aspiration. There’s no way we can sit in California or London and say to these guys in the developing world “protect your forests” while we enjoy a nice life. It’s not equitable and it’s not going to happen. So the only way that these forests are going to continue to exist and make a contribution to humanity at large is if we recognize their value through markets. There is a slight feeling of regret in my heart but I think it’s the right thing to do and also the best thing to do.

Money is the means to an end, not the end itself. I feel we’ve lost our way in a world in which over 50 per cent of people live in cities, cut off from nature.

Triodos Bank Sustainable Trade Fund

At the international organic farming trade fair in Nuerenberg, Germany, Triodos Bank launched the Triodos Sustainable Trade Fund. The fund will provide trade finance to certified organic, Fair organic and Fair Trade products in Europe and the United States, which have shown double-digit growth for many years now. This development offers excellent sales opportunities for small-scale farmers and producers in developing countries. The growth in these sales, however, is being restricted by the limited access to finance. Such finance is particularly essential at harvest time, the first phase of the production cycle, so that farmers can be paid immediately on delivery of their products. If export cooperatives are able to pay farmers immediately, they will be able to benefit from the high prices associated with organic and Fair Trade certification. It will enable cooperatives to build up a healthy, long-term relationship with their farmers, and in addition to organic farming training programs, to offer healthcare and educational services as well.’

Source: OECD DACnews 04-04-2008


Did you know?

The annual investment of a 15-year programme for reducing desertification costs between USD 16 and 36 billion. The annual on-site benefits, in the form of avoided productivity losses, runs up to USD 52.5 billion per year. This yields a benefit cost ratio in the range of 1.5 to 3.3.

In Kenya, there are more than 1.3 million people who own small-scale businesses but who have no access to banks.

Despite robust economic growth in the world economy – around 5 per cent in recent years – the number of people who must survive on less than USD 2 per day still stands at around 3 billion people, or almost half of the world’s population.

Sources: Norad. 2007. The Economic Case for Investing in Environment; UNEP FI. 2005. CEO Briefing. Sustainability banking in Africa; WBCSD. 2008.