Terrasos and the evolution of habitat banks in Colombia

by Tim Male, Executive Director of EPIC

I talked with Mariana Sarmiento, who founded Terrasos ten years ago after finishing a graduate degree from Yale University.  Terrasos is a B Corp that is the only habitat mitigation banking company operating in Colombia, a country that has a no net loss of habitat law that creates regulatory demand for nature-positive offsets. 

Where did this idea come from, to start a mitigation banking business in Colombia?
I was at Yale University, working with a professor Chad Oliver, who was doing work with a company in Mississippi and trying to understand how conservation and development can overlap to get sustainable outcomes.  That company was managing wetland mitigation banks and trying to make deals work that also involved USDA Conservation Reserve Program lands. I worked with them for a year helping them put landowner decision tools together and during that process, the no net loss regulation was being revised in Colombia, but they didn’t have any mitigation banks at the time in Colombia because the regulations didn’t allow or encourage it.

I had worked with the Ministry of Environment and Sustainable Development before grad school, and they asked for my feedback.  I said, “You are going to have an implementation problem.  You need to think about biodiversity banks.”

I put white papers together for them and initially after graduation I was going to go back to work for the Ministry.  But some of the key personnel changed and the effort stalled out. And then I had to figure out something different to do.

I ended up advising companies that had offset obligations under the law and needed to write compliance plans and deliver their own permittee responsible mitigation under the new legal framework

A good friend told me to go and make sense of this “mitigation stuff – you thrive in chaos.”

…That’s a great insight into a start up founder’s mind…. 

Yeah.  That is when I started setting up Terrasos around the core concept of giving companies that don’t know how to or want to do ecological restoration a product that would cover ‘delivery risk’ for their habitat compensation compliance needs. With my colleagues, we looked at places that had lots of impacts going on and found a landowner who was willing to be paid to do conservation and used an MOU to launch the first bank.  We had a crediting methodology in the works in 2014.  Greg Watson at the International Development Bank was driving a climate change and biodiversity agenda for the IDB Lab at the time and he encouraged us to really get serious and put a $1 million equity investment into our early ramp up. 

But interest was really slow. Latin American countries are very conservative about doing anything that isn’t explicitly written in law.  And habitat banks weren’t in the law.

Thankfully, the advisory work picked up.  We started working to get companies to be able to invest in well-designed plans to do compliance within no net loss rules.

And then I got a call out of the blue from the Environment Minister.  We had a meeting because he wanted to understand how and why mitigation banks worked. That opened the door for the Ministry to draft a habitat banking regulation at the same time as the pilot project was taking shape. 

That was 2017.  By 2018, the habitat bank was registered under that regulation. The first transaction came in 2019.  Partnerships for Forests in the UK gave us additional money to work with landowners and develop new banks and work on communications and knowledge generation around this work.

Today we have a 20 person team, and 8 habitat banks and are working on a new equity raise to expand further. We have about 3,000 hectares of habitat banks, and our compliance consulting has continued as well – we’ve helped companies with more than 40,000 hectares of habitat offsets, with most of those offsets provided directly by the companies under plans we wrote. We are a B Corp which is a great way to communicate what we stand for.

We are still leaving out a lot of properties and landowners that would be great partners…  there just isn’t a big enough market yet largely due to ecological equivalency, where interested landowners fall outside of high-demand geographies, or enough capital to get enough projects started.

What is different about a mitigation bank in Colombia?
One of the tricky things about the Colombian regulation is that there is no preference for preservation versus restoration, but there is an implicit agreement that you need to do restoration to get to no net loss. The way we make sense of this is to focus 80% of the credits from a project on preservation and 20% restoration. 

And Colombia is one of only four countries in the western hemisphere with no net loss policies for biodiversity – Canada, Mexico, Colombia, and Peru which started a no net loss regulation but theirs is voluntary.  The United States has no net loss for wetlands and streams, but you don’t have a no net loss policy for biodiversity or even for endangered species.

And Colombia can be a tricky place to work.  There are parts of the country where we just wouldn’t risk developing a project – too much conflict and security risks and complexity around land tenure. 

Unlike the United States’ endangered species conservation banks, our regulations are habitat based, not on species.  It means we can look at things more holistically. Compared to wetland banks, credits are calculated very simply based on acres with some ratios and no credit release schedule and there isn’t really a difference for quality.  That’s a problem we need to fix so that restoration and preservation are weighed differently.  Industry is going to go for the cheapest thing and right now that is preservation.

We make a big deal about permanent land protection in the U.S. but I know that is a lot harder in places like the United Kingdom and Sweden because land ownership laws just don’t make permanence easy or even possible.  What about in Colombia?
Permanence requirements are not really clear in our environmental regulations.  We put land protection in place on all our offset banks sites, but its not really an easement – it’s a land use restriction within the land use title.  Its called usufruct. This is a big difference since we don’t have easements in Colombia.  We protect sites for 30 years since this is the limit in the law on a land use restriction  in the property title.  However, this also matches with the lifetime of the projects given by the government for a lot of oil, mining, and energy concessions so there is some consistency.  If we could do permanent, we would, but nobody wants commit to in perpetuity.

Tell me about what happens at an offset bank property?  What kind of properties are you looking for and how do you create benefits for nature?
Most of our offset banks are for forests ecosystems but we also have one grassland bank.

Average size is about 300 hectares. We fence the property.  Remove the livestock and take care of all the disturbances.  Then we wait to see what happens.  Many properties were not cleared that long ago or still have habitat remnants on site.  Maybe rapid regeneration will take place. 

But typically within a year we start building a local nursery.  We try to produce all the trees at the site level.  That is important for the project outcomes.  By 1.5 years in we will have started planting.  Hopefully that is when we’ve secured financing from credit buyers and can ramp up our restoration even more.

We have separate teams that do habitat management and compliance so that everybody has the right incentives.  And we mostly get paid as the companies meet compliance requirements in their permit – in other words, as our regulatory agency signs off on the compliance plan that has the offset credits written into it. This is different than the U.S, right, where anyone could buy the credits at any time, even before the have applied for a permit.  Maybe an analogy is that what we are doing is aggregating multiple permittee-responsible mitigation needs offsite, because of the different ways our permits are issued.  It’s not as clean as it is in the U.S. but that could change over time.

The permitting agency wants to see the spatial configuration of what will happen on the site.  We manage and pay for habitat on the whole site, even if the initial buyer is only a fraction of it.  We get cash flow from the first transactions, selling the lower risk (preservation) credits first, and then as the restoration results start materializing, we are able to sell those.  Colombia doesn’t really have the concept of the credit release schedule in place, but we incorporate this concept in our contracts with performance milestones, so we are basically doing this ourselves to make sure we have clear additionality and a trustworthy product.  

Do you own the land or are you working with landowners?
We don’t own the land – we find private landowners, mostly farmers. We try to work with them – if they want to be participants in the work – in operating the project. Because we are trying to create an economic engine that starts with a habitat bank.

So the first thing that happens is getting the landowner onboard.  Then we do the permitting process – that can take us 7 months.  By then, we have already done a market feasibility study and we know if there is lots of potential interest in credits or whether we will just be dependent on 1-2 businesses to make it work.  We start meetings to evaluate buyer interest.

Once the agreement is in place we start paying the landowner.  Sometimes landowners just get an annual payment, but if they are actively involved in bank management, they would get monthly fees for their work.  If project makes a profit we have a profit sharing split. 

These landowner partnerships are good at the moment and work for our business model, but the transaction costs are really high.  So, long term we want to include possibilities to purchase the land.  Does that make sense?

What kind of companies are interested in buying credits?
Many of our buyers are smaller businesses - clients who have no limited capacity in doing the ecological protection and restoration work themselves.  They might purchase 2 credits or 200 credits.

At the other extreme, large mining companies with huge footprints want to do the work themselves so they can keep track of all the co-benefits and get credit for all the social capital they can possibly generate.  They basically do big permittee-responsible projects because they have such huge offset requirements.

The kinds of businesses that are most interested in having someone like us provide their offsets are ones that don’t have a permanent relationship with the landscape – ones that build projects that have impacts at the time of construction but not really from operations.   For example, buyers who need to offset new pipelines and electric transmission – linear projects. Typically, these are companies that build and go, but have ambitious sustainability goals

What about the voluntary biodiversity credit market – are you seeing interest there?
What we seen is that there will be companies that will want to buy high quality habitat credits for a whole set of reasons.  Some are ones that have already been making Corporate Social Responsibility voluntary donations to nature.  Like ‘adopt a jaguar’ programs.  And we think individuals also want to do some offsetting of their personal impacts.  We looked at ‘willingness to pay’ for similar products that represent biodiversity conservation. – we think $20-$60 price range is what people are willing to spend, but we sell those in units that are only 10 square meters in size but representing thirty years.

Everyone is obsessed with carbon so a lot of money is going to those projects, but that is changing and more are looking for biodiversity gains and we hope to find equity investments that will allow us to rapidly expand the number of voluntary biodiversity credit offerings we can provide.

What is the difference between voluntary and compliance credits?
Voluntary credits can serve different purposes, besides offsetting a specific impact in a particular ecosystem. Any one and anywhere can buy voluntary biodiversity credits. Since these are voluntary, we created a protocol for our voluntary credits off of Colombia’s compliance framework and came up with a formula to determine how many credits a project can issue.  But obviously going forward we will be looking to test our standards and credits against approaches being developed in other countries.

How has the market changed since you started your business?
Look, we created a new product in an old market.  There was a way of doing things before that people were used in terms of doing the habitat work themselves, but its not always great for nature. The tricky thing has been finding the companies that really want a good quality offset.  As opposed to just meeting compliance requirements – I’ve heard that about early stages of the U.S. regulations too. 

People also just don’t even know that these habitat banks exist here.  But that is changing and we’ve been able to slowly boost the prices as people realize what we’ve got.

What kind of biodiversity or habitat impacts are covered or not covered by the regulations?
Grassland ecosystems all around the eastern part of Colombia are being converted to oil palm and other large-scale commercial agriculture and they don’t need to offset.

The way that it works is that depending on the type of ecosystem impacted, the offset ratio will be different.  For example, tropical dry forest is mostly gone in Colombia outside of protected areas so it has a really high crediting ratio – a one hectare of impact to 10 acres of benefit ratio. Abundant systems have smaller ratios closer to one-to-two.