Real estate developers use species banks to offset their damage to nature by paying for newly-protected habitat. It’s the ultimate “green” industry, and one worth nearly $400 million per year, despite the lack of a centralized information hub – until now. The Ecosystem Marketplace hopes to bring the field into the 21st Century with SpeciesBanking.com.
10 December, 2008 | When Kellie Barry needs a species bank stocked with the right blend of birds and turtles to offset habitat destroyed by new development, she can usually find one more quickly than anyone else.
“I’ve been in this business for a long time, and Northern California is one of the most developed biodiversity markets in the world,” says Barry, Manager of Land & Entitlements for Pulte Homes in the US state of California. “I can usually find the right bank by making just three or four phone calls.”
But few have her background, and most buyers get lost more than once on their way to the right bank, says Craig Denisoff*, Vice President and co-founder of Westervelt Ecological Services. He believes the lack of transparency is preventing the market from delivering anywhere near the environmental benefits it’s capable of.
“Folks should be expending their resources evaluating the opportunities, and not digging around for them,” he says. “But the fact is that most folks just don’t know where to go when they need mitigation, and when they do find someone, they don’t know where to find competing providers. That has led to a bad reputation for the industry.”
“If you try to find out what all the conservation banks in the United States are doing, it’s beyond tedious,” says Ricardo Bayon**, who, as a Partner and co-founder of EKO Asset Management Partners, wants to invest in species banks across the nation. “It’s practically impossible for a single person to do it.”
Indeed, most buyers, researchers, and even regulators trying to get a grip on the state of species banking in any given part of the country spend countless hours surfing the internet or getting bounced around from one bureaucracy to another before finding someone in the right Department of Fish and Wildlife or Army Corps of Engineers branch who has an idea about which species bank might meet their needs.
Even then, they often find the bank they need has sold out or gone out of business – hardly the kind of efficiency you’d expect from a sector often touted as the ideal tool for supporting sustainable development around the world, and one with estimated turnover of $370-million-per year (or thereabouts, depending on who you talk to).
Bloomberg for Species Banking
If species banking is to deliver environmental benefits on a grand scale, it needs to be as transparent, fair, and open as the most advanced equities markets. To promote that transparency, the Ecosystem Marketplace is launching SpeciesBanking.com, an online information hub for bankers, buyers, researchers, and regulators.
The product of three years’ preparation and one year of tedious research, the site contains information and data on more than 120 US mitigation banks – including not only which species are being supported by which banks in which states, but also how much capacity the banks have and who the local regulators are. The site will even make banking documents available for download where possible.
“Think of it as a sort of Bloomberg for species banking,” says Bayon, who spearheaded the effort before leaving Ecosystem Marketplace in 2006.
“You could go out on your own and find information about every stock or every bond that you’re looking for through the SEC (Securities and Exchange Commission), but it wouldn’t be a fun process, and it wouldn’t be fast, and it wouldn’t be up-to-date, and it wouldn’t be tailored to your needs,” he says. “Bloomberg does all that for you, and presents the information in a way that makes it useful for investors and people who are actually in the business.”
If SpeciesBanking.com is analogous to Bloomberg, he says, the role of the SEC is filled by the Army Corps of Engineers, the US Fish and Wildlife Service and state or federal Environmental Protection Agencies (EPAs).
“They’ve gathered the information, or at least taken it down, but it resides in hundreds of filing cabinets spread from Sacramento to Austin to Washington, DC,” he says. “SpeciesBanking.com puts all that online for you in a way that’s useful and easy to understand.”
The bulk of the gathering and sorting was carried out by project director Nathaniel Carroll, who culled the information from filings with local regulators and calls to individual banks.
Today’s launch is the first phase in a multi-stage roll-out that will see more and more data and functionality added over time.
For now, the site includes sell-side information on banks, but no information on buyers. It lists only North American species banks, and the information in the listings can only be altered by staff of SpeciesBanking.com.
The next iteration will make it possible for listed banks to update their own entries directly. Then comes the inclusion of wetland banks, followed by the inclusion of species banks from other countries.
Value to Researchers and Regulators
Though designed with buyers and sellers in mind, SpeciesBanking.com will also benefit researchers and regulators, according to Ken Sanchez*, the US Fish and Wildlife Service’s Assistant Field Supervisor for Sacramento.
“Species banking has really taken hold in just a few states, and I’m always getting calls from regulators in other parts of the US asking if it is credible and how to implement it,” he says. “They’re struggling with the same issues we did, and a site like this means we can get some policy out there so people don’t have to reinvent the wheel.”
George Kelly*, co-founder of Environmental Banc & Exchange, agrees, and adds that regulators in other parts of the world can also use the site to learn from early movers in the United States.
“This is not just a national exercise,” he says. “It’s an international approach that can inform the world about best practices – including voluntary initiatives.”
One thing the site won’t yet be informing the world about are prices, which only three banks have so far agreed to post on SpeciesBanking.com.
“Pricing and other proprietary stuff is always going to be a sensitive issue,” says Sanchez. “We can only hope that people become more comfortable with pricing – after all, we all know what the invoice price of a new car is.”
Bayon agrees, but says banks have an incentive to withhold prices.
“The sellers want to charge what they want to charge, and they want to have the flexibility to charge different prices to different people,” he says.
“The challenge is that prices vary by location and by the amount you buy,” adds Denisoff. “We typically sell prices on a range, so if someone buys one unit, the price will be more than if someone buys 100 units – and that is the nature of any capital-based commodity.”
He and other project developers offer two other arguments for refusing to post binding bids and offers. First, they say, species offsets have not yet reached a degree of commoditization that would make such pricing practicable – and they may never do so. Second, they say that the community of buyers has not matured to the point of knowing what to look for.
“This is a customer base that doesn’t know if it’s getting a Cadillac or a Ford,” says Steve Morgan*, Chief Executive Officer and founder of habitat developer Wildlands. “Posting prices may eliminate dialogue with customers.”
Bayon, however, believes that more transparency – including pricing – will entice the buying community to evolve, perhaps by promoting the development of new intermediaries.
“It’s not a big repeat customer business,” he concedes. “But nobody knows what the dynamics are going to be – whether there are going to be aggregators or other entities entering the market whose expertise as buyers or brokers will make it worthwhile for sellers to offer as much information as they can.”
As an intermediate solution, several sellers say they’d consider posting a range of prices for various regions to entice contact from buyers. Such posting could be done individually or collectively.
“It could even be anonymous, so that you can populate the data for the price range,” says Kelly. “Or perhaps just do a poll of buyers and sellers, asking them what they see in the market.”
“If you create a mechanism where price discovery can occur, people will then be inclined to post prices even if they are just trying to test the waters,” says Michael Van Patten CEO and Founder of Mission Markets, which aims to build an electronic market for environmental products, including biodiversity offsets. “Whether or not anything trades is an entirely different matter”.
Some worry that, as the site tries to follow the markets in real time and sellers have more leeway to change their own entries, the integrity of the information provided could be compromised.
“Rogue bankers may try to sell products they don’t have,” says Denisoff. “They’d do it for the same reason anyone does: to lock in sales.”
He says that pre-selling and forward selling are legitimate business practices – especially in mitigation banking, where buyers are often required to declare ahead of time where they plan to buy their credits. He worries, however, that SpeciesBanking.com could be used by aggressive providers who either overestimate their own capacity or under-estimate demand.
“If you tell a prospective buyer, ‘Hey, I don’t have these credits yet, but plan to in six months, would you like to buy some?’ that’s legitimate,” he says. “The problem is when you think you’ll have them, but don’t yet – and tell your buyer that you do.”
Denisoff believes the only solution is to work closely with regulators.
“This isn’t Wal-Mart,” he says. “We don’t have computerized inventory mechanisms, so we’ll have to forge close relationships with government agencies, who will be responsible for compiling information, certifying information, and hopefully having a group like this – the ‘Reuters of the environmental marketplace’ – able to tie it all together in a coherent fashion.”
Sanchez agrees, and says the site fits in with other evolving tools, such as the Army Corps of Engineers’ Regional Internet Bank Information Tracking System (RIBITS), designed to act as a sort of registry for wetland offsets.
“SpeciesBanking.com will be of more help on the marketing side, while RIBITS is a tracking device for the banks that we do have open,” says Sanchez.
“RIBITS was developed by the regulators for the regulators, so it’s sophisticated and pretty technical, while SpeciesBanking.com is more user-friendly for the buyers, sellers, students, and others interested in the market,” says Carroll, adding that he is considering the possibility of tying SpeciesBanking.com into existing post-trade providers.
“A solution we are considering and could fairly quickly implement is partnering with a registry company like APX or TZ1 to set up a robust registry system to ensure that credits are above-board and no one is trying to sell the same credit twice,” he says. “This would still require working closely with regulators, but would likely take a lot of the burden off of them.”
Standardizing the Market and Building an Exchange
Carroll emphasizes that SpeciesBanking.com is not an exchange, but rather an information portal designed to support an evolving marketplace.
Van Patten, however, believes the site will create the kind of information flows that could make an electronic exchange for biodiversity markets feasible.
“The timing for Speiciesbanking.com is perfect, as many in this space will depend on this data as a key information source within the biodiversity markets,” he says.
In addition to the challenge of balancing the desire for real-time information with the need for accuracy, the site – and the team behind it – will face the challenge of scaling up when adding the larger wetlands banking sector to the mix and going global.
“I don’t think going international will be particularly difficult, because there’s not much going on globally,” says Bayon. “It’s really a data collection process – that’s where the intense labor is, and outside the US there’s just not much data to collect.”
Expanding to wetlands trading, however, is a different animal.
“Species mitigation is a $200-$300 million per year business, and there are only about 100 conservation banks,” he says. “Wetland mitigation, however, is a $3.3 billion-per-year business; the banking segment is $1 billion, and there are nearly 1,000 wetland banks, so it’s much more difficult.”
Some say it’s not just a challenge of scale, but of type.
“Of course it’s going to be very time consuming, because you have more volume,” says Kelly. “But you could also get into some issues with the Corps in terms of how they view this. Will they view this as a regulatory sanction of what’s out there, or just as generalized information coming in thru discretionary data?”
All of these are questions that will be answered in due time. For now, however, Ecosystem Marketplace invites all readers to peruse the first iteration of SpeciesBanking.com.
*Denisoff, Kelly, Sanchez, and Morgan are all members of the SpeciesBanking.com steering committee. We chose to interview them because they are among the few who have had a chance to review SpeciesBanking.com. They have no commercial interest in the Ecosystem Marketplace and have generously volunteered their time.
** Ricardo Bayon is a co-founder of the Ecosystem Marketplace and a member of the SpeciesBanking.com steering committee.
Steve Zwick is Managing Editor of the Ecosystem Marketplace. He can be reached at SZwick@nullecosystemmarketplace.com.
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