Season 2: Espisode 8 - The Forest Resilience Bond with Zach Knight of Blue Forest
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TRANSCRIPT
Linda Rogers: [00:00:00] My name is Linda Rogers and this is Investing Forward.
Linda Rogers: [00:00:31] Wildfires are getting more severe and more destructive - to the environment, to our health, and to our economy. Most of my clients live in California, where we used to live, and a good amount have seen increased insurance premiums or have been dropped altogether due to increasing wildfire risk. Beyond what the news shows us in terms of poor air quality, property destruction, and charred forests, there are perhaps less immediately visible consequences to these fires, such as a reduction in water quality and the degraded soil the wildfires leave behind that are more prone to erosion, landslides, and flooding.
Linda Rogers: [00:01:06] While of course there have always been wildfires, they're getting worse both in frequency and intensity. Forests today are overgrown and unhealthy due to climate change, but also a policy in recent decades of extinguishing virtually every fire which has disrupted the natural cycle. There are many strategies we can use to improve the resilience of forests, such as strategically removing excess vegetation, reforestation, and controlling invasive species. Even though we know which solutions are needed, the single organization responsible for implementing these measures is the US Forest Service or USFS, and they don't have enough money to be preventative. This is where Blue Forest comes in with their innovative solution, the Forest Resilience Bond. The bond provides the capital to USFS to implement projects that they've already planned and vetted, but they just don't have the money for. So today we've got the CEO for Blue Forest, Zach Knight, and he's going to walk us through all the details. Thank you for being here. Go ahead and tell us about yourself.
Zach Knight, CEO & Co-Founder at Blue Forest Conservation
Zach Knight: [00:02:07] Yeah. So my name is Zach Knight, and I'm one of the co-founders and serve as CEO for Blue Forest. And while we work in the forestry space, I actually come from a pretty different background. I grew up in Washington, D.C., on the East Coast, which put me right in the middle of politics growing up [with] those political shows on Sunday morning. And I think by the time I was in high school and college, I wanted to get as far away from D.C. as possible. And to me, that was going to work on Wall Street in New York. And I'll be honest, after reflecting on that for a while, it's not too different from D.C. I think there's definitely a lot of similarities to the finance and the political world. It would have been better if my dad had worked in finance before going to get a Wall Street job, but it was a great experience. I started my career at Merrill Lynch. I really was brought into the culture as a wonderful place to work, and I got to do really exciting work in structured finance, securitization, credit derivative trading. A lot of different access to fixed-income trading floor products and that's what I brought with me as one of the founders of Blue Forest. How can we use that skill set for something that we really care, we really care about? So that's how I got my start. It was a great time working on Wall Street. I worked as a bond trader for a handful of years as well, and that's a skill set that in the conservation space has been missing. There's definitely conservation finance professionals and a big growing climate finance space now. But as we work in pure conservation, there is a real need for finance and a real opportunity that we've sort of taken on at Blue Forest here.
Linda Rogers: [00:03:42] Great. I did not know you were from DC. I'm actually in Arlington, Virginia right now. Did I mention that?
Zach Knight: [00:03:48] I did not know that. That's so funny. I was in Alexandria for the first two years of my life and was born in the D.C., the District of Columbia Hospital for Women, which is now like a been totally redone into apartment buildings and whatnot. So I bond with other DC folks over that. You get a lot of people born in the same place that can't believe it doesn't exist anymore. You know.
Linda Rogers: [00:04:08] I'm not from here. I am a military spouse. I've moved around, but I will say I love it here. But definitely the politics is everywhere. It permeates everything. So I agree with that.
Zach Knight: [00:04:18] It's funny and it's really come full circle for me when you think about it. Because when you work in the finance sector and you have this overlap with the public sector, that overlap is policy and politics. So it's been sort of interesting to come back to that, even though I was probably trying to run away from it from the very beginning.
Linda Rogers: [00:04:36] It is very interesting. Good. Well, tell us about Blue Forest and how it came about.
Zach Knight: [00:04:41] Yeah. So we have a great story that literally starts with a Peace Corps volunteer and a bond trader walk into a bar and joking aside, that one of my co-founders and now COO was a Peace Corps volunteer and had some really good ideas around environmental restoration or ecological restoration, and myself and him and two others, two other classmates from UC Berkeley when we were in business school, entered this concept into a competition. And it's like the one story of a business school project case competition actually working and being brought out into the real world. So that was really exciting to be one of four founders, too, because I don't think this is something I could have done alone, or just with one other person without all of the other founders we had at Blue Forest, I think it would have been really challenging to get this off the ground. But in any case, we were fortunate enough to win that competition that Morgan Stanley and Kellogg put in, and the prize was to present your work at the Milken Institute Global Conference. And you obviously know about that. Folks that listen to your podcast will know about it. But some of my co-founders that didn't work in the finance space didn't know about it.
Zach Knight: [00:05:46] I actually had to convince them to go. And I said, guys, this is $25,000 a ticket. We'll never have this access again. And the long and short of it was we gave our ten-minute pitch and we answered an hour of questions and there was real interest from real institutional investors, and we had not yet had our first conversation with the Forest Service. So we knew from right there that there was real demand from the investor community, even all the way back in 2015, for this type of green infrastructure, natural climate solutions, nature-based solutions, whatever we call it now. Right. But we knew we had a lot of work in front of us. How do we get the Forest Service on board? How do we get the utilities to the table? How are we actually going to create the product that these investors want such that they can invest in it? But validating that demand on the front end was really, really important for us. And I don't think we would have been able to do it without going through quite literally, a case competition, which I think I still laugh about a little bit. Yeah.
Linda Rogers: [00:06:41] Well, it's quite an experience and you really do have a unique solution. So why don't you walk us through kind of the goals of the FRB and how it's structured?
Zach Knight: [00:06:49] Yeah, absolutely. So what we've done at Blue Forest is build a really deep and important partnership with the US Forest Service, and they're the federal land manager that's responsible for managing almost 200 million acres of forest and grassland across the country. And a lot of that is located in the western US, which has pretty high risk of catastrophic wildfire, which we'll talk more about throughout the podcast. So in partnership with the Forest Service and the World Resources Institute and the National Forest Foundation, we created this public-private partnership called the Forest Resilience Bond. And the idea behind this is to bring in capital from private investors, which could be insurance companies and impact investors and maybe family offices, but also foundations. This is a blended capital approach from that perspective to cover the upfront costs of doing this really critical ecological restoration across our forest land to reduce the risk of catastrophic wildfire. What we learned going into this was if we can reduce that risk of catastrophic wildfire and restore these ecosystems, there's a whole host of additional co-benefits, right? We can do great work on the rural development side. We can protect water quality. We can enhance water quantity, which in a state like California, water is a scarce resource.
Zach Knight: [00:08:04] We can avoid those smoke days and all the public health impacts from that. And that means there's a lot of other groups that benefit from this work that we at Blue Forest helped to bring to the table. So this may look like those investors putting the money upfront, but all of the groups that benefit the US Forest Service, the state agencies, the water and electric utilities, the flood control districts, and even the corporates all put money into this structure over time. And that's what ultimately pays the investors back with a modest rate of return. The structure of this is actually really simple. We borrowed structures from the infrastructure project finance space. We just dropped down a project level LLC for each project, and our investors are actually lenders to that project vehicle, which we then manage. So it's actually a relatively simple structure. And the hard work in this is engaging all of those other groups that benefit from this work happening largely on federal land, getting them to the table not for financing, but to actually be funders of this project based on, again, those benefits they receive from a healthy forest and a functioning ecosystem.
Linda Rogers: [00:09:09] Yeah. And how is it evolved? I mean, with many times when we're talking to people that are creating these new investment models, the way it started is not the way they've ended up. They've seen what worked, what didn't. Can you kind of talk through if it's evolved since your first experience setting one up?
Zach Knight: [00:09:29] It absolutely has. I mean, the evolution of the structure may be a little bit less interesting, but having some great investors, whether they're foundations like the Moore Foundation, the Rockefeller Foundation, or impact investors like Impact Assets and Calvert Capital, Calvert Impact Capital, and RSF, they've really helped us come up with a structure that's going to fit their needs for investors, and that's what we've learned is this investor demand. It is pretty significant. And how to make this fit for the right type of investors. Right. So like why do we engage insurance companies? Why is this a good product fit for a donor-advised fund that wants relatively low-risk, low-return but high-impact types of investments? Why is this a good fit for that? So I think one thing we've learned and has evolved is understanding investor demand and building a product with our investors in mind. We know what needs to happen on the ground. Nothing is going to change that. The structure of the investment, though, and how we allocate risk and parse that through the structure, that's something that can be really helpful for investors. If we understand what they're demanding, what they need, what they want to see in a structure. I think the other thing that has evolved a bit is who can be the group managing the project on the ground. We initially worked with the Forest Service. They bring on a nonprofit partner that has now expanded to not just nonprofits, but counties, what's called resource conservation districts here in California, which are quasi-governmental entities, and even tribal nations that can be implementing these projects that we can be entering into this financing with. So I'm excited to see the growth and demand from investors. And I'm also excited to see the growth in what we call implementation partners, those groups that are tasked with actually implementing the activities on the ground and managing these projects, being able to have counties and native nations and others at the table for that. It's going to be incredibly valuable for our work and make it much more impactful.
Linda Rogers: [00:11:24] Yeah. And I mean, one of a couple of the unique attributes that your bond has is one, you're not buying the land, kind of doing all these things and then selling it back. The other is the people, they have skin in the game. Right. So it's not like you're issuing a municipal bond, which I guess could be another approach. I don't know how often that's done, but let's say a city issues a municipal bond investors could invest in that. But then it's just that one entity. So I just, I like that there's that skin in the game. Right. Can you kind of talk to that?
Zach Knight: [00:12:05] Absolutely. Yeah. We've seen examples. There's a great example out of Flagstaff. Groups like the Trust for Public Land have been really impactful in creating ballot measures where people can say at a local level, no, no, no, I want you to tax me and I want you to spend the money in this way. So that's what I wonder in some ways about the scale that some of those things can reach. And also we believe at Blue Forest that, yeah, utilities are part of the solution, but it's not just on them. It also needs to be on the state agencies they partner with on the federal government as it is federal land. But the other thing you said, Linda, that I want to come back to is, in a way, what we're trying to do is create as much impact and as capital light a way as we can, right? So a lot of organizations want to buy land and keep that land in conservation, and that can be a really great thing. We don't want to do that. We want this land to remain as public land. We just want to restore that land. Right. And when you start to think about what does it cost to buy an acre of land versus restore an acre of land and keep it in public hands, we can actually be a lot more impactful with the same amount of money by just doing that restoration and partnering with our public agencies. The other thing I'd mention here, too, is we had to prove this concept right, like this had never been done before. This was changing the behavior of the federal government in a positive way, I'd say and they've really adopted this. And now we have a number of projects and many more in the pipeline. But it was the ability to show that we can go in the same watershed with the same partners, with the same contracts, with the same financing vehicle, with the same investors, that we can redo it and it can happen much more quickly and much more easily. Our first project took three years to get together just a $4 million financing. Imagine, you know, your day-to-day job or me back at Merrill Lynch, spending three years putting together $4 million financing. I'd lose my job probably pretty quickly, right? So that took three years, and we proved the concept in about eight months after the environmental planning and a number of other things were done, we were able to do the same project work at about four times the size, and then the whole collaborative, the local group that came together says, we want to see this happen. They said, let's plan at the whole watershed level. And they went about 20x what the first project was. So it really shows us this pathway to how do we get to scale within a watershed, how do we get these partners on board? And that's why. Well, it's very interesting from a finance perspective, a lot of the impact that we have is actually getting these groups to collaborate right and working together, maybe for the first time in their history, depending on who those partners are, because they're the ones that are going to be effective in their watershed. We're really just trying to provide the tools from that perspective.
Linda Rogers: [00:14:42] Yeah. And how did that conversation even start? I mean, were you cold calling people like even the idea of getting insurance companies, of course, how that's been, you know, highly on the media about the pains that they are in because of the cost with wildfire and other natural disasters. So, I mean, is it just cold calling? Is it reaching out to contacts? How did you get started there?
Zach Knight: [00:15:01] So with the Forest Service - had some contacts, but really I've met with thousands of Forest Service employees and to get those first three years were going to Washington and sitting in the same meeting room and doing 20 people in the room for an hour presentation, move them out, do the next 20, do the next, and sort of go through like that and doing webinars and all that. On the investor side, it's actually been quite a bit easier. For example, that insurance company reached out to us and said, hey, we've seen what you're doing. I manage a few billion dollars, and I think I'd like to be an investor, even if it's only a single million dollars, which again, as someone who's worked in finance for their whole career, you never see emails like this unless you're working on something like the Forest Resilience Bond at Blue Forest. So that was really amazing to actually see institutional investors coming in on a reverse inquiry when we weren't even marketing anything. And the conversation went really great. He said, I've got three questions. I said, before you ask those three questions, this is a contract to cash flow. This is an agreement. This is guaranteed by so and so. And he's all right. That answers my questions. It sounds structured. Let's you know let's move forward. I'm kidding I mean there's more due diligence than that obviously. But we've actually had a lot of folks approaching us and sort of coming to us to be investors. And we've seen in each product, each Forest Resilience Bond, the FRB catalyst facility, which is one of our newer products that we've launched, and even our fund, we've been largely oversubscribed before. We've had a chance to close things because there's so much interest in this type of investing, and that's great. From my perspective, we can bring in more capital, we can get it better pricing for the projects. So I'm really thrilled to see that much demand.
Linda Rogers: [00:16:38] Yeah. And do you see interest in using FRBs innovative structure to finance other environmental needs?
Zach Knight: [00:16:44] Absolutely. First thing we talk about is funding versus financing. Funding is the money that goes into the project looking for the conservation outcomes a healthy forest, a healthy coral reef, what have you. Right. Whereas financing comes from investors, they want to have that money back, plus a concessional return, a market rate return, some sort of impact-related return. So that's the first thing we talk through folks. Do you actually want and need financing or do you just want funding for your project? It has greatly benefited Blue Forest to stay really focused on the wildfire crisis, because it's a solvable crisis, and it's unfortunately an everyday thing here in California. My kids, my seven-year-old school is outdoors. And, you know, we've been checking the AQI the last two days to see if school is going to be open or not. So there's real personal impact and there's economic impacts across the state. So we've stayed focused. That said, we have found a number of environmental proven environmental interventions that require this multi-stakeholder solution from a financing perspective. And we're starting to develop those into projects now. Again, we're staying within the western US and looking at riparian restoration. So repairing stream corridors and trying to bring back known natural - what's the best word here - construction experts or engineers. The beavers. So bringing back beaver dam analogs and post assisted log structures to keep water in streams.
Zach Knight: [00:18:06] And now that has real ecological benefits. But those also serve as firebreaks lower down below the reservoir in places that we do still have a lot of fire activity. So there's a connection point to fire, but it really is a proven environmental intervention. And our hope over time, as our team grows, is that we can take any of these proven environmental interventions that we know work. We maybe don't know how well they're going to work, but we know they work that require that the multiple stakeholders to come together to solve them. And honestly, I see most environmental problems as multi-stakeholder problems. There's very few that one group can do everything about. You say, hey, this is Forest Service land. They can just solve this problem. Forest Service is an incredible agency that does incredible things every day. This is a problem where they know they need partners and they've been open about requesting that help and trying new things. So that's really validating to me too, because this is a way that the government is delivering on their goals, that they haven't had this as a tool in their toolbox in years prior. Right? So that's really exciting and motivating from my perspective too.
Linda Rogers: [00:19:10] Yeah. Well, good. So I see you now have an asset management arm that I really don't know too much about, other than the blurb that's on your website. So why don't you just tell me more about it and how you decided to kind of expand in that direction?
Zach Knight: [00:19:24] Yeah, I'd say we were pushed a little bit by some of our investors. The story starts. We were on a site visit, actually, where there was a large meadow restoration part of the project where conifers, pine trees and fir trees had encroached on the meadow. They were draining the water table. It was something that needed to be removed. And we had this giant pile of cut-down trees that unfortunately, a lot of these projects, they just put them in a pile and they burn them. And they do that because they say we're reducing fire risk, and the emissions from this will be so much less than the emissions from a larger forest fire, which is true. But we had to think to ourselves, there's got to be a better way to do this. And I had an insurance company out on a site visit and we started talking about this and they said, well, why? What is the problem? Why does this need to be burned? Why can't we do something of value with it? And at the end of the day, it was because the system that delivers this ecological restoration had just too many bottlenecks, right? We don't have enough contractors to go out and do the work. We don't have enough infrastructure to take these largely smaller-diameter trees, right? When we're thinning the forest and trying to promote successional growth, we want to keep the larger trees and we want to take out the smaller trees.
Zach Knight: [00:20:34] Not surprisingly, those don't have the same value to the timber operators and folks that create lumber from that wood. They're still opportunities to invest in things like mills, but there's a need for lots of different types of infrastructure to utilize this material. So we talked to the insurance company. We said, what do we need to do to get this system working better so that we can increase the pace and scale of this restoration, get better outcomes from these projects, and create a virtuous cycle where we'll have more contractors, we'll have more of an ability to take this material, we'll create economic value, but we'll also keep that carbon sequestered so that from a climate finance standpoint, we're not allowing all of those emissions. And I should say the emissions piece is incredibly important. When you look at the wildfires in 2020 and 2021, they emitted more carbon, our best carbon sink, our forests, emitted more carbon than our whole transportation sector. In Canada, they're at 300% of total countrywide output in carbon emissions just from the fire activity. So it really is staggering. And that's an important piece to understand. How do we improve those outcomes? So that's what the fund's looking to do. It's looking to invest in infrastructure that contractor businesses some more typical GP/LP fund. It's wholly owned by our non-profit organization. So all of the fees and carry continue to support our mission. And that made sense to me because we wouldn't have this fund if we didn't have a great and robust science team with an enormous amount of science advisors that have helped us understand what's the best way to utilize this woody biomass coming off projects, what's the most efficient way to try to keep some of this carbon sequestered and create real jobs in these rural areas that haven't been as looked after in some ways as other places.
Zach Knight: [00:22:14] So we've launched this fund called the California Wildfire Innovation Fund, in partnership with CSAA who's the California regional affiliate of AAA, and we really envisioned this with them. And for insurance companies. And we're actually out marketing the balance of the fund with them as an anchor to other insurance companies, trying to show them that there are market-rate investments that can actually reduce risk on the actuarial side of the house for insurance companies. Right. And I don't think there's been enough of a connection or people pushing on that thread. And that's something that we hope to do and not just do it in the venture space. You see lots of climate tech venture funds that are thematically focused, which is wonderful, and I love to see that. A lot of times we're meeting with insurance companies, we talk to their venture folks first, and I want people to understand there are other asset classes besides venture in which we can have a real and meaningful impact on climate, reduce risk for insurance companies, and actually get market-rate returns.
Linda Rogers: [00:23:09] Yeah. That's great. I love what you all are doing. I mean, what's the best way for people to stay in touch with you and your organization? I don't know how active you are on LinkedIn or you have newsletter options?
Zach Knight: [00:23:20] Yeah, definitely LinkedIn I'd say we're pretty active on. I'd also suggest that folks go to our website just www.blueforest.org/contact, that's how you can sign up for our newsletter. We do a monthly newsletter that updates folks on partners, projects, scientific publications, and that might be the other thing. Please definitely follow us on LinkedIn and check your other social media. But check out the papers. We just launched a paper on the multiple benefits of forest restoration, and we just launched a report with the California Council on Science and Technology on the human health benefits of improving forest health in California. Really looking at smoke, modeling the impact of wildfire smoke. So we're always going to lead in a lot of ways with science, because I actually think it's the scientific innovation of measuring a lot of these benefits that allows us to unlock the financial innovation that we're doing with the fund or products like the Forest Resilience Bond.
Linda Rogers: [00:24:14] Awesome. Well, thank you so much for joining us today.
Zach Knight: [00:24:18] And thank you so much for having me. It was an honor.
Linda Rogers: [00:24:20] Well, I learned a ton. I hope that you did too. I've been following this group for a long time, and I'm excited that I got them on the podcast. And so I will put the information we talked about on the Investing Forward Podcast website, so you can make sure to stay in touch with Blue Forest.
Linda Rogers: [00:24:36] My name is Linda Rogers and this is Investing Forward. If you liked what you heard, leave us a rating. Subscribe and stay tuned for next time.
Linda Rogers: [00:25:18] Linda Rogers is the owner of Planning Within Reach, a Registered Investment Advisor. Linda Rogers is the owner of Planning Within Reach, a Registered Investment Advisor, Planning Within Reach produces the podcast and makes it available on its website and through other distribution channels. Linda Rogers and any guest on the podcast are providing their own views and opinions and are not necessarily the views and opinions of Planning Within Reach. Nothing on the podcast should be construed as a solicitation or offer or recommendation to buy or sell any security investment. Advisory services are only provided to investors who become Planning Within Reach clients pursuant to a written investment management agreement. Clients of Planning Within Reach may hold positions in securities discussed in this podcast. Past performance is no guarantee of future results. All investments involve risk and may lose money. The Investing Forward podcast is for informational purposes only and should not be relied on for any investment decisions. Consult with a financial advisor, accountant, attorney, or conduct your own due diligence.
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego County and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.
Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning and ongoing impact-focused investment management services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.