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A Simple Strategy for Complicated Times

Jason Amundsen

The Ecosystem Marketplace finds out how one big mitigation bank in the Southeastern United States plans to diversify its portfolio as it navigates the challenges and opportunities in a dynamic market.

The Ecosystem Marketplace finds out how one big mitigation bank in the Southeastern United States plans to diversify its portfolio as it navigates the challenges and opportunities in a dynamic market. When George Kelly, an environmental attorney, and Dixon Harvey, an outdoor enthusiast, first launched the Environmental Banc & Exchange (EBX) in 1990, they were wary of environmental markets. "We said we weren't sure about these markets," says Harvey. "We just decided to start EBX with a little bit of startup capital. The basic vision was that we can improve the environment and generate a respectable return at the same time." More specifically, Kelly and Harvey used their little bit of startup capital to launch one the United States' first private mitigation banks. The U.S. Clean Water Act requires developers who build on or near a wetland to offset any unavoidable damage to the wetland by restoring an equivalent ecosystem somewhere else. The Endangered Species Act makes a similar requirement of developers when they damage endangered species habitat. As a result of these legislative requirements, the last several decades have witnessed a growing demand for habitat restoration in the U.S. To supply this demand, entrepreneurs like Kelly and Harvey have set up mitigation banks that restore habitat, get credit from the government for doing so, and then sell that credit on to developers who need it to meet permitting requirements. A report by the Environmental Law Institute estimates that between 1992 and 2002 there was a 376 percent increase in the number of private wetlands banks in the US. No one knows for sure, but some think the market for environmental mitigation is worth several hundred million dollars. It is not surprising, then, that in the nine years since its founding, EBX has far exceeded Harvey's initial modest expectations. The company is now one of the largest mitigation banks in the country, with 1,573 wetland acres and 29 miles of streams restored or under contract for restoration. And while Harvey elects not to disclose the company's revenues or profits, he doesn't hesitate to say, "Let's just say that on the revenue side it's a positive curve. 2006 has been the best year yet."

How it Works

EBX's twelve employees have varied backgrounds in real estate, engineering, and business. "When we do a mitigation project we hire the engineers and contractors to get the job done," says EBX's Chief Operating Officer Thomas Rinker. "We supervise. We identify the sites. We expend the capital to buy those properties. The best analogy is that we are real estate developers where our end product is a fully functioning ecosystem." EBX expends almost half its time and energy identifying potential restoration sites. On every project it undertakes, the company then lines up the technical experts—the ecologists, civil engineers, and contractors—and pays for most of the costs up front. "This is an extremely risky business," says Randy Wilgis a Principal with EBX. "There's a lot of money up front and we have a lot of conceptual design work that goes into every project." The company is then paid out over a period of time (usually around seven years) as it releases its credits to the developers or government agencies buying them to offset development elsewhere. Frequently there is a five-year contractual monitoring period where the company's work remains under evaluation to ensure that any corrective maintenance on a site gets completed. Both EBX and critics of mitigation banking agree that avoiding environmental impacts is the ideal. "Yet in situations where there are unavoidable impacts, the restoration of related ecosystems is a whole lot better than doing nothing, which is where our society was not more than 10 years ago," says Rinker. "The issue we need to focus on is whether the regulatory agencies and state legislators have the fortitude to set, and uphold, mitigation ratios that at a minimum attain a 'no net loss' balance." While EBX's founders say they are happy about their company's success to date, plenty of challenges await them as they attempt to stay at the top in an ever-expanding field of competition. "We are still in a maturing phase, where all the players- the bankers, credit buyers, and regulators- are working through what this market will look like," says. "The mitigation market is here to stay, but we expect it to look a lot different in ten years from what we see today."

Winds of Change

Mitigation banking as a private industry began to take off in the mid-1990s, but the hodgepodge of regulatory agencies at the federal, state, and local levels make this a confusing and often uncertain industry. For example, this June the U.S. Supreme Court shook up the mitigation industry by introducing the very thing it needs to avoid at all costs: regulatory ambiguity. In a 4-1-4 split decision, the Supreme Court threw the legislative reach of section 404 of the Clean Water Act, which governs mitigation, into doubt. As The Ecosystem Marketplace reported in August, "The decision throws into question just how stridently the Act should be enforced, what exactly should be protected, and even the meaning of such basic operational words as 'waters,' 'navigable' and 'adjacent.'" While entrepreneurs like EBX warily wait to see which way the legal winds blow, they are more optimistic about new proposed rules from the Corps of Engineers and Environmental Protection Agency. According to Professor J.B. Ruhl of the Florida State University College of Law the new rules, likely to come into effect in early 2007, will probably increase the demand for mitigation. "The mitigation industry is pushing hard for these rules changes, they definitely want this," says Ruhl. But despite the attention currently being paid to judicial rulings and new guidelines at the federal level, Ruhl says it is the states—not the Federal Government—that will decide whether or not private-sector mitigation continues to grow in the coming years. Company officers at EBX agree. The company is opening an additional 3-4 offices nationwide in the next couple of years, and it's the states that are determining where EBX hangs its shingle.

A Simple Strategy

Over the next five years Harvey says he hopes to see the company expand into new areas where the market for mitigation credits is already well established. "There's things to think about with the E.U., a carbon market in Canada, and such. For now we're focused on being the dominant players in the U.S. market. In simple terms, if there's not a market in a specific state then we don't want to spend a lot of time there." "The challenge is ensuring that the regulations for mitigation are well defined and robust. My big question is this: is there an open process for selling mitigation?" asks Wilgis, who is in charge of expanding business at EBX. "Are there defined ratios and defined expectations? For example, some states have strong wetlands regulations but don't have any stream regulations." According to Rinker, EBX also intends to look into carbon sequestration projects, habitat conservation, and water quality. How will a small company span these different areas? "It's simple," says Rinker. "It's great people. We need to keep flexible and keep our fixed costs, namely staffing, real tight. In hiring we'll bring people into the team who can play multiple roles effectively. Our simple challenge is making sure we are focusing on the markets where we stand a good chance of success." Jason Amundsen is a Minneapolis-area freelancer. He can be reached via his website at www.twowordy.com. First published: August 22, 2006 Please see our Reprint Guidelines for details on republishing our articles.

Please see our Reprint Guidelines for details on republishing our articles.