Who knew that forest thinning would be a profitable investment? Leigh Madeira, Chad Reed, Nick Wobbrock and Zach Knight, all second-year MBA students at the UC Berkeley Haas School of Business, earned first prize at the the 2015 Morgan Stanley Sustainable Investing Challenge with their pitch, “Blue Forest: Monetizing the shared benefits of forest management in the United States.” The team was selected as the winner out of 250 teams from business schools around the nation. Even before the results were announced, Madeira commented that she felt “privileged to be a part of the 10 (finalists) … and honored to be representing Haas.”
All the team members praised Haas for providing them impeccable resources within the social impact field. Madeira stated she was drawn to Haas because it is “a leading institution for social impact investing.” Wobbrock then chimed in that at Haas, “We are able to be innovative and creative” because “Haas is a leader in this (social impact) space.” Knight echoed, “Haas is the intersection between business, finance, environment and sustainability, but ultimately it was the culture that drew me in.”
Additionally, the team referenced various professors who were supportive of their work and initiative, whether listening to their pitches or tweeting about them. Haas professor Severin Borenstein was extremely influential on all of the team members, as all of them took a class taught by him. Wobbrock commented, “He is a phenomenal teacher and researcher, and I get to hear him on NPR every once in a while.” Other influential professors were Robert Strand, Bill Reifeiss and Laura Tyson.
The competition aims to “create a positive impact in a world of perpetual resource scarcity,” allowing MBA students such as Knight access to “innovative financial instruments.” After working on Wall Street for a number of years, he appreciates the opportunity to “bring structured investing and net impact together.” On the other hand, Madeira who previously worked in investment banking and recently participated in a Kiva fellowship in Ecuador volunteering with a local microfinance institution, suggested that the competition allowed her to “combine [her] interest for investing with [her] passion for social and environmental impact.”
Wobbrock, deemed by his teammates as a “resident expert,” came to Haas with a strong background in environmental engineering and experience serving as a Peace Corps volunteer in Honduras. He previously was an intern at the Nature Conservancy in San Francisco, where he was asked to use “business and engineering hats” to find “sustainable, technological and business solutions to solve problems.” He continued, asking, “What if investing in the environment would be more cost effective than other solutions we have thought about?”
Upon arriving at Haas, Wobbrock found Knight, Madeira and Reed, as they realized that “engaging stakeholders who might not usually be paying for environmental services could make improvements in environmental infrastructure.”
In fact, most forests in the United States, especially in California, are overgrown. In fighting every forest fire, forests become even more overgrown. Having a small fire every ten years allows for forest thinning to prevent large fires. After the Rim Fire in Yosemite National Park in 2013 — the biggest wildfire on record in the Sierra Nevada Mountains and the third-largest wildfire in California history — the team members realized that investing in forest thinning would potentially both prevent forest fires and be profitable for investors. Madeira commented, “The question isn’t ‘is this going to work?’ but rather ‘how are we going to pay for this?’ ”
“There is a vicious cycle in forest management,” Knight stressed. “Whenever the forest service fights these large fires, it directly drains the forest-thinning budget.” Therefore, by asking investors to provide money up front and fund forest thinning — the program of cutting down smaller trees and brush that soak up a lot of water — more water trickles down to the water and hydro-electric utilities. Thus, water costs are greatly decreased, so investors can make a return.
The Blue Forest “product will manage forests and their returns, which will be based on additional water supply, which is generated by the forests and then bought by utilities while simultaneously helping the forest service suppress forest fires.” This extra water is a direct result of the “snowpack accumulating at a greater depth” because of the proactive thinning. Because the ladder fuels will be eliminated because of investor money, there will not be a “risk of having crown or canopy fires,” which would harm the environment even more. Ultimately, it is a “win-win situation for the environment,” as it is “sustainable forest management while reducing fires and generating water,” says Knight. This way, the investors take on the risk, and are paid for the resultant benefits.
Cynthia Wong, a San Francisco-based vice president with the Morgan Stanley Institute for Sustainable Investing, stated that the campus Haas School of Business made the Berkeley team stand out as the “team’s approach … maintains a high level of financial rigor and innovative thinking, while seeking to generate environmental impact and a return for investors.”
The elephant in the room is: “Why hasn’t Morgan Stanley used or implemented any of the winning ideas that have been pitched?” Overall, Wong comments that the challenge is to “identify the the next generation of sustainable finance practitioners” and “connect them with an unparalleled level of industry of experience and expertise.”
Now all we have to do is wait and see if this idea receives the investment it requires.
A previous version of this article misspelled the name of Leigh Madeira.
Contact Daniella Wenger at [email protected].
A previous version of this article misspelled San Francisco.