After winning Morgan Stanley’s Sustainable Investing Challenge, a team of entrepreneurs raised $4 million to help protect 15,000 acres of public forest in California.
The journey wasn’t short or easy.
In 2015, four students at the Haas School of Business at the University of California, Berkeley, got together with a novel idea: Create a financial instrument that would offer private investors market-rate returns to fund the work of safeguarding forests from the risk of wildfires while protecting water resources.
They were convinced they had a good idea, but were still shocked when they placed first out of 129 teams from around the world in the Kellogg-Morgan Stanley Sustainable Investing Challenge, a global student competition for innovative financial vehicles that seek positive environmental or social impact and competitive financial returns. More than three years later, on Nov. 1, 2018, following the deadliest forest fire season in California’s modern history, their idea became a market reality: The company they formed, Blue Forest Conservation, issued a five-year $4 million Forest Resilience Bond aimed at warding off drought and fire in 15,000 acres of the Yuba River Watershed in northern California.
The story of Blue Forest Conservation, the Bay-Area-based public-benefit company formed by the original teammates—Zach Knight, Leigh Madeira, Chad Reed and Nick Wobbrock—isn’t just about the triumph of perseverance and idealism. It also demonstrates how far the sustainable investing market has come in just a short while, and also how much further it has to go.
From Victory to Reality
Blue Forest’s own growth has happened in parallel with the rapid change in the sustainable investing market. Participating in the Kellogg-Morgan Stanley competition provided the validation that the team needed to move forward. “I’m not exaggerating when I say that Blue Forest and the Forest Resilience Bond would not exist if it weren’t for the Sustainable Investing Challenge,” says Madeira. “When we won, we realized we weren’t just a bunch of crazy MBA students with another wild idea.”
Indeed, after winning the Sustainable Investing Challenge, they could have gone their separate ways into the business, environmental or nonprofit worlds. Instead, they came together as Blue Forest, found partners in the U.S. Forest Service and the World Resources Institute, and courted potential investors and environmental groups, even as the vagaries of weather, markets and uncertainties of a startup might have shaken their resolve.
A lot happened in those three years. Deadly wildfires have devastated many regions in California, as well as other states. “The average person has become much more aware of wildfire and forest management issues than they were even a year ago, but the groups we work with have known about these issues for a long time,” says Madeira.
Those who manage forests and fight wildfires know that the problem isn’t just dry seasons, careless campfires or an errant lightning strike that can spark an inferno. Preservation and prevention require proactive management.
Blue Forest’s conservation plan has been predetermined by the US Forest Service. It calls for restoring the forest to a more natural state. Treatments are determined by the Forest Service and may include the selective removal of larger trees, the restoration of meadows, and the use of prescribed burns to remove flammable tinder and keep invasive species at bay. Ideally, the work will produce a thinner, healthier forest with a lower risk of wildfires. Their plan would fund forest restoration crews and create new jobs in local communities, while also improving the quality and quantity of water flowing to the North Yuba River, a vital watershed.
Despite the clear long-term benefits of this strategy, tight federal and state budgets make the upfront funding hard to secure, which is why Blue Forest’s plan all along has been to tap private investors. “We’re trying to marry the conservation world and the lending world,” says Wobbrock. “Even though we call this first project a pilot, it’s actually pretty big by the standards of the Forest Service and conservationists.”
A Field Trip for Investors
“We started by touring a restoration project that was not the Yuba project—one that was separately funded—to get an idea of where the Yuba project would be heading,” Madeira says. “And then, by going to the Yuba project site, we really got a chance to see the ‘before’ picture. We plan to go back over the next couple of years to show all the stakeholders the ongoing results of the restoration work.”
The investors bought in. A number of private lenders will make market rate and concessionary loans, and the Forest Service will make in-kind contributions, bringing the total project cost to more than $4.6 million to fund forest restoration projects through local restoration partners such as the National Forest Foundation. The Rockefeller Foundation, the Gordon & Betty Moore Foundation, Calvert Impact Capital and CSAA Insurance Group will fund the upfront costs; various beneficiaries of the restoration work and reduced fire risk, including the state government of California and the Yuba Water Agency, will share in the cost of paying back lenders over time1.
“We eventually want to treat the entire watershed, so this is a pilot for that,” says Knight. “It’s also a great new model that we hope to replicate in other parts of the state and across the West, where it’s critical to mitigate the increasing risks of wildfires and drought.”
The Sustainable Investing Challenge as Catalyst
As this year’s 9th annual Kellogg-Morgan Stanley Sustainable Investing Challenge nears, Blue Forest serves as an example of what competing participants might aspire to.
“Blue Forest’s innovation embodies exactly the kind of inspiration and ambition we had in mind when we joined forces with Northwestern’s Kellogg School five years ago to support the Sustainable Investing Challenge” says Audrey Choi, Morgan Stanley’s Chief Sustainability Officer and Chief Marketing Officer.
“We are very proud of this team and what it has been able to accomplish,” Choi says. “It is a terrific example of the innovation the field needs and what is possible for those participating in our global student competition each year.”
The Blue Forest founders said that without the impetus of the Sustainable Investing Challenge, it’s highly unlikely they would be doing what they are doing today. “While we were in business school, the reason we started talking about this was because we wanted to compete in the Sustainable Investing Challenge,” Madeira says. “Without that push and external motivation, I don’t think we would have had these conversations or come together the way that we did.”
1Morgan Stanley is not involved in this transaction.