New Class of Publicly Traded Securities Aims to Fund Further Sustainable Development
In September 2021, the New York Stock Exchange (NYSE) and Intrinsic Exchange Group (IEG) jointly announced the development of natural asset companies (NACs), a new class of publicly tradable securities that hold rights to, and manage the productivity and ecological benefits of, natural assets such as forests, marine areas and farmland.
NACs will attempt to assign value to services – such as carbon retention, freshwater generation, pest control, groundwater storage and erosion prevention – intrinsically provided by natural resources. To account for the ecological value of the NACs, IEG has developed an accounting methodology that will supplement GAAP financial statements. NYSE plans to file the listing standards and accounting information for NACs with the U.S. Securities and Exchange Commission (SEC) in fourth quarter 2021, setting the stage for the vehicle, if approved by the SEC, to become available as soon as next year.
Proceeds from an NAC initial public offering (IPO) will be used to manage the specific natural asset and potentially acquire additional natural assets or return value to the owners. Sovereign NAC sponsors might choose to use excess proceeds (beyond those required for management of the natural assets) to fund additional sustainable development projects.
Although NACs still are a nascent asset class, IEG has already announced that it is working alongside the investment and expertise of the Inter-American Development Bank (IDB) in cooperation with the government of Costa Rica on potential NACs. While NACs are not limited to government-owned natural resources, this new nature-based solution provides another tool for governments to work with the private sector to promote sustainability, while providing financial returns.
The NAC announcement, and IDB's involvement in this effort, are just the latest examples of development finance institutions partnering with the private sector, not-for-profits and sovereigns on sustainable development and climate finance.
For example, ahead of the 2021 United Nations Climate Change Conference (COP26), IDB released a new study on 156 nature-based solution projects in Latin America and the Caribbean (LAC). These projects span a range of activities: securing water supply and increasing water quality, restoring forests and marine environments, and encouraging sustainable farming. The report shows that many of these projects have relied on grant funding and that more work needs to be done to encourage blended finance solutions and leverage private-sector funding. IDB is partnering with the Green Climate Fund on a number of innovative transactions throughout LAC, ranging from forest restoration to climate-smart agriculture and sustainable energy.
Similarly, the U.S. International Development Finance Corporation (DFC) has entered into a master insurance contract with The Nature Conservancy (TNC) under which TNC will undertake up to 20 projects that restructure sovereign debt and redirect a portion of the loan payments to fund grants and capitalize an endowment fund for long-term funding of conservation activities. Goals of these activities are to conserve and enhance marine and coastal ecosystems, strengthen governance and management of such ecosystems, and create resilient ecological and human communities. DFC and TNC currently have projects underway in Barbados and Saint Lucia.
According to experts, the financial resources needed to protect natural ecosystems face a dramatic shortfall. With the announcement of NACs, the capital markets continue to respond in novel ways, creating financial mechanisms aimed at protecting, restoring and growing natural areas.
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