Reeling in investments in sustainable fisheries
A total of 31.4 percent of global fisheries are being fished at biologically unsustainable levels, according to the Food and Agriculture Organization of the United Nations. However, a 2016 study by Costello and others said the application of sound management reforms to global fisheries will increase biomass by 619 million metric tons relative to a business-as-usual scenario.
One way to enable sustainable fisheries management is to target the activities of small-scale coastal fishing businesses. Given their socioeconomic status, coastal fishing enterprises typically lack the economic independence to be able to completely disengage from unsustainable practices that are in favor of lucrative catch. They also represent 90 percent of the total 30 million fishing businesses globally, according to the FAO. This shows their vital role in the transition toward sustainable fisheries.
It is critical for funding to be channeled into fishing businesses as a way to incentivize a behavioral shift toward sustainable practices. With government resources becoming increasingly constrained as some nations address multiple challenges, there is a greater need to leverage private capital. Despite this need, there is a scarcity of platforms and financial instruments available to channel resources toward fisheries.
Bridging the gap
Two organizations working to bridge this gap are Meloy Fund and Catch Together.
Meloy Fund is an impact investment fund that makes debt and equity investments in fishing-related enterprises that support the recovery of coastal fisheries in Indonesia and the Philippines. The fund is a subsidiary of Rare, a global conservation organization.
Catch Together partners with fishing communities in the United States and Canada to structure and finance impact investments. It also provides support services such as help for fishing communities in acquiring quotas.
Smallholder agriculture and small-scale fisheries have similar business models. But impact investments in the latter are trailing behind.
Dale Galvin, managing partner at Meloy Fund, said the unpredictability of fisheries is the reason for this. Kelly Wachowicz, cofounder, managing partner and CFO at Catch Together, said the "ocean environment is much more dynamic than terrestrial environments." Therefore, "management systems and investment strategies need to be able to be adaptive to accommodate changes over time" that need to be successfully implemented in fisheries.At this point, almost every fishery-management investment has been accompanied by some kind of subsidy.
An additional reason for risk in fisheries is the difference in property rights. Unlike with agriculture, where land tenure is very clear, in fishing "you don’t have the right to generally manage your fishery," Galvin said. As a result, "investments are much harder to organize" and "monitoring fisheries management strategies in the water is difficult," Wachowicz said.
Building a track record of successful fisheries investments is key to creating established credibility and curtailing perceived risk. Meloy Fund and Catch Together do exactly that.
Meloy Fund looks at growth-oriented enterprises that have a direct connection to coastal fisheries. Galvin said not only are coastal fisheries an under-invested sector, they also "achieve most of the social and environmental objectives." These include affecting the state of coral reefs, generating livelihoods for small-scale fishing enterprises and benefiting the broader economy. Along with making its investments, the fund works to improve the management of coastal ecosystems.
Catch Together focuses at the harvest level. Its staff work with fishing communities to finance the purchase of quota rights. "It is these investments that are most aligned with long-term fishery health," Wachowicz said. Investing downstream in the value chain often places added pressure on the fishery. In such cases, it is important to pair investments with a management strategy that accounts for the standards upstream.
Another dimension of Catch Together’s strategy is the cultivation of community leadership. According to Wachowicz, "Our thesis is that by working with communities to own quota, we create a long-term economic interest for the community and fishermen that’s tied to the health of the fishery."
In effect, inherent value is created in the fishery that is constantly adapting to changing fishing conditions.
While a strong impact case can be made for fisheries, it is up to players such as Meloy Fund and Catch Together to build a strong investment case.
As a first-time fund in a new sector, Meloy Fund sees encouraging interest from investors. Galvin said the partnership with Rare is critical to the fund’s value proposition.
"Rare is scaling coastal fisheries management in the countries Meloy is operating in. So you have this great opportunity to marry governance and management with investment," Galvin said.While large-scale investments are indeed the goal, at present it appears that direct investments are the way to go.
However, there is some difficulty in building investment traction. This is because the investor mentality is typically that "no one wants to be first," Galvin said. "The downsides of being in a new sector [include] that it is not easy to make a decision because there are not a lot of data."
Wachowicz said flexible investment terms are key in this sector. For instance, foundations can often provide program related investments (PRIs) at 1 percent to 3 percent interest with three- to five-year terms. In contrast, fisheries investments may require longer amortization terms. Equity transactions can offer as low as 5 percent to 6 percent annual cash yields and up to 12 percent to 15 percent in total return. These types of strategies would require a five- to 10-year investment horizon.
Apart from foundations, predominantly family offices are active investors, Wachowicz said. While there is a lot of appetite from institutions, the challenge of scale limits their participation: "We work with investments that are as small as $100,000 as the first step — and this might lead to a $2 million-3 million portfolio."
This tends to be too small for institutional investors who manage billion-dollar portfolios, seeking minimum investment commitments of $25 million-$50 million in size. At this early stage of market development, there are not yet opportunities to make commitments at that scale.
Both Wachowicz and Galvin said there is a potential for larger-scale investment vehicles such as blue bonds to attract private capital into fisheries. For instance, Rare is looking at bonds as a way for governments to "finance dramatic increases in the amount they allocate to coastal fisheries management," Galvin said.
However, for private capital to be properly absorbed in this sector, fisheries need to be managed well.
"So where is the government going to get money to increase fisheries management?" Galvin asked. "If they do go out to the market, invest in a blue bond, and then raise that money and deploy it correctly — [and see] the benefits of spending that money on fisheries management in terms of fish, jobs, food security, and climate change — all of these benefits can be measured and more than pay back the cost of the bond."Along with wild-catch fisheries, investments in aquaculture also offer huge opportunity.
While blue bonds would deliver the scale that institutional investors look for, there are added complexities when adapting them to fisheries. Wachowicz said that while it may be challenging to create a larger scale of public-private partnerships and use creative financial structuring to develop blue bonds, they represent a promising direction for sustainable fisheries financing.
According to Galvin, there is a strong sustainability angle for investing in aquaculture because it reduces pressure on wild-caught fisheries and also provides stable incomes to fishing enterprises. Similarly, Wachowicz said that the technical innovation allowed by aquaculture creates room for building companies to scale.
In the end, investment return in fisheries is less of an issue for investors than the complexity and risk of the transaction structures. Wachowicz said the long investment time periods required as well as the lack of initial project-development capital are barriers to private-sector investment: "Efforts to support the creation of fisheries investment blueprints and projects can facilitate capital flow to the sector and also serve to help investors become more comfortable with the transaction complexities."
Investor participation to date has been encouraged by risk-mitigating instruments such as guarantees.
Galvin said the presence of guarantees "changes the risk profile significantly" and motivates investors sitting on the fence to "pull the trigger." Wachowicz said, "At this point, almost every fishery-management investment has been accompanied by some kind of subsidy, suggesting that blended finance strategies may be more successful in the short run than purely privately funded investments."
While large-scale investments are indeed the goal, at present it appears that direct investments are the way to go. So are sector-focused funds. Proof of concept is the main driver in order to build investor confidence regarding the potential of this sector. As such, coupling investment strategies with technical assistance is necessary, as is evident in the approach of both Meloy Fund and Catch Together.
As investors start to channel funds into fishery-related enterprises that integrate sustainability, the case for strong impact and financial performance going hand in hand becomes even stronger. Thus, developing success stories may be the first step towards generating a larger market buy-in.
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