Impact IQ – What’s good for the fish is good for the fishing communities — and for impact investors.
That’s the thesis of three new vehicles for investing in sustainable fisheries that will be tested in the Philippines, Chile, and Brazil over the next two years and then offered to investors more broadly.
Former New York City Mayor Michael Bloomberg signaled last month that Bloomberg Philanthropy’s $53 million initiative to reverse the decline of the world’s oceans would focus heavily on attracting private capital.
In a report released this week, EKO Asset Management Partners signaled how the initiative might do so. The report sketches plans for a $1 million to $5 million small-enterprise loan fund for fishermen and processors; a $20 million to $50 million public-private fisheries infrastructure fund; and, perhaps most provocatively, an impact fund to finance broad fishery improvement projects that would be repaid via long-term purchasing contracts from seafood distributors and retailers.
EKO, which has made a specialty of designing innovative impact financing mechanisms, will develop open-source “investment blueprints,” including financial models and term sheets. The tools are intended to help microfinance providers, infrastructure investors, private foundations and governments to implement similar projects in Chile, Brazil, and the Philippines as well as other countries.
EKO expects to lead by example. “We very much intend to raise money around these ideas,” said Jason Scott, EKO’s managing director. “We will try to go to the market with an investment vehicle or two sometime over the next few years.”
Rockefeller expects to support the investment vehicles, but the form of financing has not yet been determined. Rockefeller has been a major funder of efforts to build the field of impact investing, and in the past has seeded impact funds such as Acumen and E+Co through so-called program-related investments.
“We’re developing different blueprints for these funds and ground-truthing what’s viable in different geographies,” said Cristina Rumbaitis del Rio, who is spearheading Rockefeller’s emerging oceans initiative. “Once we get that, we could very well be involved in setting up such a fund.”
Bloomberg and Rockefeller are jointly backing EKO’s exploratory research and planning under a project modestly called “Save the Oceans Feed the World.” Mr. Bloomberg said in a statement, “Providing financial incentives to support sustainable fishing practices can — with changes in local communities and national governments — help reverse this trend” toward overfishing.
The proposed private-capital financing vehicles all leverage one of the most promising findings from current ocean-recovery efforts, which have been funded mostly by governments or foundations. Even sorely depleted fisheries can recover and even thrive on a sustainable basis with proper, proven fishery management.
That means the fishers, processors, and other suppliers in a recovering fishery will over time have higher revenues and greater ability to repay lenders and investors. The gap occurs in the interval between the adoption of sustainable practices and the resulting improvement, when income for fishermen and the local supply chain may fall dramatically. The financing vehicles represent several approaches to bridging that gap.
Potentially offering the highest returns is a private equity-style fisheries impact vehicle that would use long-term purchase agreements to finance fishery improvement projects, or FIPs, that would enable a long-term increase in allowable catch and thus revenues. Many seafood retailers require that their suppliers either have certification from entities such as the Marine Stewardship Council or be involved in an active FIP. A triangular financing structure would give outside investors a way to finance FIPs and recoup their capital via the cash flow from distributors and retailers who need a stable, and growing, supply of fish.
The structure is similar to so-called “social impact bonds,” or, more accurately, pay-for-success contracts. “The seafood companies don’t have to undertake the fishery improvement project, but if the fishery recovers, they commit to buy that fish,” said EKO’s Kelly Wachowicz, the former investment banker who authored the report. “For the investors, they have to pick the right improvement plan.” She suggested such a mezzanine debt fund could generate annual returns of 10 to 15 percent.
One Silicon Valley venture capitalist called the fisheries impact vehicle a potential game-changer. “You will encourage fisheries to be better managed and retailers are going to opt to secure their supply,” said Peter Shannon of Firelake Capital in Palo Alto. But he warned that such approaches will require increased levels of transparency and traceability in the notoriously opaque seafood industry.
The $1 million to $5 million small business fund would be similar to other microfinance or “SME” funds for small- and medium-sized enterprises. It would make loans and equity investments in relatively inexpensive processing improvements such as icing, packaging, and cold storage, distribution needs such as trucks and storage depots and marketing efforts to boost value and prices. Those businesses generally operate on thin margins, so such a fund would likely generate single-digit returns, but could be appealing to current microfinance investors and foundations able to make program-related investments.
The public-private partnership fund is an adaptation of a structure commonly used to finance infrastructure improvements. The government of the Philippines is particularly keen on such structures to fund highways, schools, airports and hydroelectric plants. A PPP would fund private companies for science and stock assessments, data monitoring, regulatory enforcement, ecosystem services management, quota buyback programs and subsidy payments. The government would repay investors under a long-term services contract with benchmarks and milestones.
The investor-appeal of such structures will go a long way toward determining whether private capital can play a significant role in ocean restoration. The field has been chronically under-invested and even under-appreciated, notwithstanding the critical role fishing plays in both protein production and livelihoods.
“We really got into this both from perspective of protecting marine fisheries ecosystems that are collapsing, but also understanding that millions of poor and dependent people are becoming even more disadvantaged as a function of this collapse,” said Rockefeller’s Rumbaitis del Rio.
EKO’s partners in the “Vibrant Oceans” initiative include Oceana, which will advocate for policy reforms for offshore fishing and Rare, which will work with coastal communities to change near-shore fishing practices.
“If you do policy, but you don’t have incentives for proper behavior, those reforms tend not to stay in place,” said EKO’s Scott. “We are trying to create the innovative financing that makes these reforms stick.”