The Finance Gap in Sustainable Wild Capture Fisheries

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Over the past few years, three broad strategies have evolved to address the challenge of achieving sustainable wild capture fisheries. These consist of:

  • Addressing governance, regulation and policy
  • Providing preferential access to markets via certification mechanisms and Fishery Improvement Plans
  • Aggregating mission aligned capital

While each of these strategies have merits in and of themselves, they function best if their implementation is aligned, particularly in emerging markets where parallel or consolidated approaches are more likely to succeed than a serial approach. The implementation of these three strategies independently of each other often result in distortions that misalign incentives. As a consequence, this lack of alignment has resulted in few real world business examples or models that can effectively scale across fisheries, geographies and communities. Despite the attractiveness of economics of fisheries reform in at a macro level, the financial implications for practitioners in the real world have been challenging.

We especially note the development of mission aligned capital for sustainable fisheries in the past year. The Althelia Sustainable Oceans Fund and the Rare Meloy Fund are now either operational, or close to being operational. These new facilities represent important progress in this space.

While these represent important steps forward, they do not, as of yet, address the demands of current market conditions, particularly in emerging markets. Based on our field assessments in Asia, Latin America, parts of Africa and the United States, the reality is that the majority of the demand lies in defining, developing and testing sustainable fisheries instruments and models that may, one day, be eligible for the Meloy Fund or the Oceans Fund.

One sequence of fund development is to a) prove a concept, b) grow and refine and c) to deploy large scale capital (courtesy of Dalberg Global Advisors).

  1. Prove the concept – at this stage, practioners are testing financial instruments and models in a variety of settings with a wide variance of risk – returns and a great deal of tail risk. Transactions are often small, with high transaction costs, and with limited to no track record. While the Meloy Fund may most closely approximate these characteristics, the Funds requirements and relatively high return requirements and minimum transaction sizes remain a mismatch for the sector.
  2. Grow and Refine – at this stage, practioners are aggregating small scale proven models into larger vehicles; allocating and pricing risk appropriately; have a track record to demonstrate risk returns and an experienced team.
  3. Deploy Large Scale Capital – at this stage, practitioners are able to deploy large pools of institutional capital towards proven concepts; have more stable returns with lower tail risks and lower transaction costs as well as strong comparable track records for the sector and fund managers.

Based on our reviews, in the absence of financial instruments and model with documented and understandable risk, the sustainable wild capture fisheries sector appears to have a significant funding gap at the “Prove the Concept” stage. Resources are required to define these instruments and models, ideally with existing sector participants, many of whom are searching for approaches to transition NGO driven projects to investable entities with very limited success to date.

In reality, there is a significant pool of potential projects in the form of Fishery Improvement Plans, fishery projects, blue economy projects and alternative livelihood projects in many geographies. While Wilderness Markets has developed a systematic analysis of the potential investment opportunities in a number of fisheries, we have been struck by the rather random approach to this challenges and the lack of resources to systematically support the transition to investable entities that may, one day, be eligible for investment from the Meloy Fund or the Oceans Fund.

How to Develop Impact Investment Opportunities in Sustainable Fisheries

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The Need for Sustainable Fisheries Finance

We know all the problems associated with overfishing and we know that research shows:
1) that switching to more sustainable management will lead to increased revenues and food security; and
2) the cost for doing so exceeds what can be provided through traditional development and philanthropic organization.

How do we get past the second to make the first possible? Supported by the World Bank, and with input from dozens of impact investors and fishery experts, we detail the main barriers and potential approaches to overcome them in our latest paper: Developing Impact Investment Opportunities for Return-Seeking Capital in Sustainable Marine Capture Fisheries.

Who Should Read This Paper

This paper provides an overview for international development organizations, development finance institutions, NGOs, and the governments they work with of (i) the key concerns that impact investors may have when considering the financing of sustainable fisheries, and (ii) potential approaches for public-private partnerships to overcome these obstacles. It is intended as a primer for these actors, to understand the perspective of the commercial impact investor.

Overview

This paper explains the central challenges that keep impact investors from participating in sustainable fisheries, and is structured along four main barriers:

  1. A lack of reliable fishery data
  2. Ineffective fisheries management
  3. Unreliable infrastructure systems
  4. A paucity of investment-ready enterprises

It then proposes three models for sequencing and combining different sources of capital to overcome these obstacles:

  • Serial approach: Public and philanthropic funders first support the establishment of strong governance arrangements, improved data collection, and fishery management. Once these initiatives mitigate some of the risk associated with a fishery investment, then return-seeking investors are incentivized to finance sustainable infrastructure projects (often through public-private partnerships) and/or enterprises along the value chain, focused on outcomes that achieve a triple bottom line: social responsibility, economic value, and environmental impact.
  • Consolidated approach: Governments negotiate agreements with a single private sector entity or cooperative to delegate fishery management responsibilities. The private firm or cooperative then simultaneously invests in fishery data, management, infrastructure, and triple bottom line enterprises.
  • Parallel approach: A range of investors and other stakeholders (for example, governments, nonprofit organizations, fishing collectives) develop coordinated investments to improve fisheries data, management, infrastructure, and triple bottom line enterprises. Efforts can be separately funded, but they work in tandem and share the ultimate goal of achieving sustainable catch with an appropriately capitalized and profitable fishing sector.

Each of these sequencing models presents particular challenges and opportunities. Structuring investments to achieve triple bottom line outcomes is still a new idea within the fisheries sector. There is growing evidence from other sectors, however, including agriculture and forestry, that these types of investments are achievable. Examples include the Moringa Fund[1] and Livelihood Funds,[2] which bring together public institutions, private investors, and NGOs, using innovative investment models to simultaneously address environmental degradation, climate change, and rural poverty while helping businesses become more sustainable.

The Impetus

Attracting impact investments is critical for the future of fishery recovery and expansion—these projects cannot rely on short-term loans and grants; they need longer-term finance that is committed to sustainability and responsibility. Development organizations, NGOs, and other noncommercial actors have a critical and catalytic role to play in crowding-in impact investment for sustainable fisheries by sharing risk with the private sector, promoting policy reforms, and funding interventions (through either concessional lending, grants, and/or technical assistance) with the intention of removing the barriers to impact investment.

Read the paper: Developing Impact Investment Opportunities for Return-Seeking Capital in Sustainable Marine Capture Fisheries

 

[1] The Moringa Fund is a EUR 84 million investment fund that targets profitable large-scale agroforestry projects with high environmental and social impact in Latin America and Sub-Saharan Africa. The fund makes equity investments of EUR 4–10 million per project and adds value through its technical skills, environmental and social expertise, and global network.

[2] The Livelihood Funds are a series of investment funds created by Danone, which brings together investors—including Schneider Electric, Crédit Agricole S. A., Michelin, Hermès, SAP, CDC Climat, La Poste, Firmenich, and Voyageurs du Monde—to invest over EUR 40 million to finance nine on-the-ground programs for mangrove restoration, agroforestry, and rural energy.

 

Projected change in global fisheries revenues under climate change

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A recent paper (September 2016) in the scientific journal of the National Institutes of Health exploring the implications of climate change on global fisheries revenues provides some sober reading.

The report explores how fisheries revenues of maritime countries will be impacted by climate change as a necessary  “crucial next step towards the development of effective socio-economic policy and food sustainability strategies to mitigate and adapt to climate change”.

The report shows “that global fisheries revenues could drop by 35% more than the projected decrease in catches by the 2050 s under high CO2 emission scenarios. Regionally, the projected increases in fish catch in high latitudes may not translate into increases in revenues because of the increasing dominance of low value fish, and the decrease in catches by these countries’ vessels operating in more severely impacted distant waters. It finds that developing countries with high fisheries dependency are negatively impacted.”

See: Lam, Vicky W. Y. et al. “Projected Change in Global Fisheries Revenues under Climate Change.” Scientific Reports 6 (2016): 32607. PMC. Web. 18 July 2017.

The significantly higher impacts on developing country revenues both for export and domestic consumption are documented in the paper and provide further evidence to the risks climate change creates for wild capture fisheries.

Coral Reefs and Ocean Health

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Every so often, we run across reports that force us to stop and question our assumptions. Recent papers on global warming and the impact on oceans is a topic we have been monitoring for a couple of years now, with each new paper more depressing than the last.

It is our view that the role of ocean warming on stock health, and by extension, investment risks associated with stock health is either ignored or underestimated in most wild capture fisheries investment models.  However, with little information on which to base this assumption, it has been difficult to express this disconnect. Furthermore, most of the impacts are felt at the base of the supply chain  – by fishers and fishing firms.

A recent open paper in the journal Nature provides some interesting context. Titled “Coral reef degradation is not correlated with local human population density”, the research appears to “suggests that local factors such as fishing and pollution are having minimal effects or that their impacts are masked by global drivers such as ocean warming” and …. “findings indicate that local management alone cannot restore coral populations or increase the resilience of reefs to large-scale impacts. They also highlight the truly global reach of anthropogenic warming and the immediate need for drastic and sustained cuts in carbon emissions.”

If these findings are true – and we are unsure there is scientific consensus around them – it will have significant implications for wild capture value chains, local populations and for the range of local and community based efforts attempting to address overfishing through local management.

We would welcome comments or thoughts on this paper, which can be accessed at this link.

Bruno, J. F. and Valdivia, A. Coral reef degradation is not correlated with local human population density. Sci. Rep. 6, 29778; doi: 10.1038/srep29778 (2016).

How Poor Data is Holding Back Fisheries Reform AND Impact Investors

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The Problem(s)


Poor management of fisheries is calculated to result in losses of USD $83 billion to the world economy each year. As cited in many other fisheries papers, data indicates an alarming proportion of fisheries, nearly 90 percent in 2013, are fully overfished, depleted or recovering, an increase from 75 percent just eight years prior.  Investments in fisheries could provide net benefits of USD $54 billion per year.

 If developing countries fisheries are to continue their role as a primary source of protein and income for millions, more than just public and philanthropic money must be invested in recovery and management.  Reform needs private capital. Unfortunately, there is a dearth of investable, risk-adjusted entities in sustainable fisheries that can meet triple bottom line goals. This then hampers participation of impact investment capital. Simply put, although there are investors with money, there are not nearly enough viable entities in which to invest. This challenge is further compounded by poor data.

The Role of Data for Management and Investment


Often bypassed in fishery initiatives, capturing good data is critical to both fisheries management and investment. Among other data points, management requires data about size, sex, species, nursery areas and seasonality to be able to manage the fishery to ensure continuity of the resource. Investors need to be able to assess risk to their prospective investments. For fisheries, this means understanding how well the fishery will perform in the future, i.e., whether there will be more fish in the sea and how many. Management data and investment data go hand-in-hand.

Indeed, in “Towards Investment in Sustainable Fisheries”, the three key enablers of sustainable and profitable fisheries are secure tenure, sustainable harvests, and robust monitoring and enforcement, each of which relies on robust data. Investable entities and risk management are key requirements for investment that build off these enablers. Encourage Capital’s strategy for small-scale seafood investments also relies on interventions driven by data, including catch accounting systems, and product tracking and traceability.

 Lack of data is identified as one of the major concerns with regards to stock health and effective resource management in the major domestic and export fisheries of Indonesia, the number two producer of wild-caught fish in the world. Indeed, for industry, the lack of clear recommendations and supporting data is a significant issue from a decision-making perspective. This lack of data and analysis directly affects efforts to build consensus and accountability at all levels of the value chain.

Stay Tuned…


Data is critical to ensuring food security and income through better managed fisheries and investments thereto, which is why data collection, analysis and sharing is one of the focus areas of our work in Indonesia. Follow us to see our next post, where we share what we’re working on in to get better data in Indonesia.

Connecting the Dots: Linking Sustainable Wild Capture Fisheries Initiatives and Impact Investors

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Connecting_the_dots_coverWhy aren’t we seeing the impact investments in wild-capture fisheries that have been transforming smallholder agriculture like cocoa and coffee?

Wilderness Markets, with the support of the David and
Lucile Packard Foundation and the Gordon and Betty
Moore Foundation, undertook a series of fishery value
chain assessments to better understand the opportunities and constraints for private impact capital to flow into wild capture fisheries markets.

Given the investments in developing sustainable fisheries pilots, we expected to identify a range of investment opportunities in each of the fisheries assessed. However, we did not find investment opportunities that could address the suite of challenges associated with improving financial and social outcomes, while also contributing to conservation outcomes, particularly in developing country fisheries.

Our research indicates the lack of triple-bottom line (TBL) investment opportunities is due to six main constraints to an economically sustainable fisheries value chain—data, management, market differentiation, infrastructure, finance and the lack of investable entities.

Thus, while there are impact investors interested in these markets, and there are a number of livelihood opportunities for investment, there are few to no entities ready to take on investments that are capable of achieving a TBL outcome similar to examples in the agricultural markets. In reality, investing in the open access, wild capture DCFs for only economic and/or social outcomes is likely to exacerbate and accelerate both the degree and rate of fish extraction.

Looking across the value chains assessed, taking action on solely one point, such as improving data management, has not instigated a cascade of solutions toward sustainability. In fact, the data shows that all six sustainable value chain constraints—data, management, market differentiation, infrastructure, finance, and the lack of investable entities—must be addressed simultaneously to move toward investable, self-sustaining fisheries. Similarly, linking the value chain approach to the EDF/ISU framework allows for a data-driven, market focused approach in selecting, prioritizing and implementing interventions.

Ultimately, developing sustainable seafood value chains means developing a portfolio of solutions. On the assumption that the Key Enablers are being addressed and that secure tenure is part of the solution, there are two kinds of value chain based opportunities appropriate for foundation-type support: the first will inform value chains by providing information about the conditions, opportunities and constraints and is most appropriate for grants; the latter will test and pilot models in seafood value chains that are based on successful innovations in other value chains. The “test and pilot” work is also appropriate for grants and, we anticipate, program-related investment, which could lead to triple bottom line entities attractive to impact investors.

In the end, success hinges on whether the stakeholders are willing to work together and, most of all, put in the hard work needed to address all the constraints.

Click here to download Connecting the Dots

Table 3 presence or absence of key enablers, drivers and requirements

Sustainable Seafood Pipeline Development

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Fishing Net Floats

During my time at Verde Ventures, the challenge of developing a viable portfolio in sustainable seafood continued to vex us. Despite the challenge and need, we were unable to develop a serious pipeline of high impact transactions, as we had developed in coffee. In fact, despite an internal commitment to place $1 million in sustainable fisheries, we were only ever able to commit $50,000 in 3 years.

After leaving Verde, I decided I wanted to get to the root of why this was the case. The need is clearly present – with the natural resource clearly under significant threat, with a large segment of many developing country fishery (DCF) populations dependent on the natural resource, and the increased demand for ethically sourced product, surely we could develop a pipeline of deals?

With the support of the David and Lucile Packard Foundation as well as the Gordon and Betty Moore Foundation, I was fortunate to have the opportunity to assess four fisheries in order to identify and assess the constraints preventing impact capital from accessing this market. At the same time, I was to identify potential investment opportunities, understand their capital requirements prior to finding a match for these requirements.

Our work took us through the multi-fishery fresh fish value chain from Baja California to the US; Indonesia’s multiple yellow fin and skip jack tuna value chains, the Blue Swimming Crab value chain as well as, California’s Groundfish value chain. These four fisheries were assessed against a common set of frameworks in order to maintain consistency, with an overall focus on USAID Value Chain Analysis and a focus on development and improved economic outcomes for harvesters.

Our findings, over the past 12 months of field work are sobering. Anyone anticipating the immediate deployment of large sums of high impact capital will be disappointed. While we were able to identify a number of very strong livelihood models and opportunities, these all came with significant environmental costs. The only exception to this was the California Groundfish fishery. None of the DCF were able to provide environmental, social and financial returns based on the simplest models developed in the agriculture value chain impact market.

The key constraints identified across the fisheries were:

  • Uncertain stock health
  • Lack of investable opportunities at the harvester level
  • Lack of effective aggregation and legal recognition at the harvester level leading to the inability to access adequate financing
  • Lack of access to appropriate / adequate infrastructure
  • Lack of a viable triple bottom line model and business case
  • Lack of market data

Each of these constraints in and of themselves would be significant issues in any developing world context. The reality is that they all co-exist in developing country fisheries, and combined, make it very difficult to establish and operate any form of small and medium size enterprise that would be acceptable to impact investors. Interventions designed to improve quality – such as refrigeration – require investable entities, a strong business case, organized harvesters with adequate equity and access to markets.

However, even if all these elements are addressed in any of the assessed fisheries, any investment will almost certainly increase rates of natural resource extraction and impact stock health in open access systems.MACAU Fisherman

The one example we identified where this was unlikely to be the case was the California Groundfish fishery, where the Federal ITQ system has been designed and implemented to ensure stock health is not negatively impacted by over-exploitation. This is an important step, and has, in our opinion, created the conditions necessary for investors to seriously consider investments in the fishery at multiple levels of the value chain.

Over the course of the next few weeks, we’ll explore these findings and look at some of the opportunities and solutions identified as a result of these assessments.