Senior Policy Manager James McKitrick recently spoke with experts at the Environmental Policy Innovation Center about the American Forest Foundation's innovative use of a State Revolving Fund loan guarantee to finance climate action. This story, included in its entirety below, was originally published on the Environmental Policy Innovation Center's blog on January 31, 2023.

Using the SRF guarantee provides upfront capital that allows our program to issue green bonds to drive down financing costs. This makes it economically feasible for family forest owners to finally participate in voluntary carbon programs at scale and jumpstart sustainable forest management on their lands.

Underutilized State Revolving Fund Loan Guarantees Can Unlock Additional Funding For Nature-Based Solutions

An interview with James McKitrick, Senior Policy Manager at the American Forest Foundation.

While the federal government has provided substantial new public funds through the Infrastructure Investment and Jobs Act and the Inflation Reduction Act for nature-based solutions, more funds are needed to bolster the nation’s use of nature-based projects to improve water quality, reduce climate change, and build resilient communities. Private financing can effectively and efficiently top-up investment in nature-based solutions–but it can be hard or expensive for many communities or nonprofits to access these funds. Fortunately, there are ways to braid and leverage public and private funding that can increase access to capital. In this blog, we discuss how the American Forest Foundation (AFF) has successfully become the first nonprofit partner in the country to use loan guarantees secured through the Clean Water State Revolving Fund program to unlock private financing for small landowners–an achievement due in part to Maryland’s legislature expressly making loan guarantees available to nonprofits and for-profits.

EPIC: The AFF’s Family Forest Carbon Program (FFCP) enables small family forest owners to access climate finance from carbon markets so that they can implement sustainable forestry practices. What are some barriers that small family forest owners face when accessing climate finance?

AFF: Family forest owners - those who own no more than 1,000 acres of land - make up the largest portion of all U.S. forests at about 290 million acres. But financial and technical barriers have historically locked them out of participating in carbon markets. Approximately 99 percent of the land participating in forest carbon projects are plots more than 1,000 acres. One of the most significant barriers to entry for family forest owners is high upfront costs to enroll their lands in carbon projects, with no financial return for decades.

EPIC: AFF was recently awarded a $2.5 million State Revolving Fund (SRF) loan guarantee for the FFCP. How does a loan guarantee (specifically a SRF loan guarantee) help these family forest owners participate in the carbon market?

AFF: Using the SRF guarantee provides upfront capital that allows our program to issue green bonds to drive down financing costs. This makes it economically feasible for family forest owners to finally participate in voluntary carbon programs at scale and jumpstart sustainable forest management on their lands.

EPIC: We’ve also advocated for innovative uses of the SRF for green infrastructure and nature-based solutions in our comments on several states’ Intended Use Plans, because we’re aware how difficult it can be to secure SRF awards for these types of projects. The Clean Water SRF, in particular, has funded primarily wastewater treatment plant projects over the last ten years, despite green infrastructure and nature-based solutions being eligible projects. What was the process like pursuing a loan guarantee from Maryland’s Clean Water SRF program?

AFF: Policymakers and SRF administration staff in the State of Maryland have been extremely helpful, and we owe much of the success of the process to their willingness to push the envelope. Leaders in the General Assembly, such as the Vice Chair of the House Environment and Transportation Committee, Delegate Dana Stein, were instrumental in ensuring Maryland’s Clean Water SRF program authority was sufficiently aligned with EPA regulations to move forward on innovative financing methods, both with the Comprehensive Conservation Finance Act of 2022 and House Bill 94 of 2021.

EPIC: The loan guarantee allows AFF to use a green bond structure and raise money from private lenders at lower interest rates than would be available without the guarantee from the state. The green bond proceeds are used to pay to enhance forest conditions, which generate carbon credit sales over time, allowing landowners and AFF to pay back the loan. Could you give an example of how much the guarantee might save on the costs of green bonds for AFF and private landowners?

AFF: The guarantee provided by AFF to support repayment of principal and interest payments on the 2022 green bonds ensured a strong Baa1 investment grade rating assigned to the bonds offered to institutional bond funds. The investment grade rating enabled AFF to ensure certainty of execution and to stay on target to deliver the FFCP to stakeholders in the Mid-Atlantic Appalachian Mountain region. The value of the AFF guarantee not only ensured significant value in debt service savings versus alternative sources of capital, but it permitted the FFCP to begin proving out its concept that capital markets investors can finance the investment required to tackle critical climate mitigation efforts. The recent SRF guarantee, backed by Maryland’s Triple-A credit rating (one of only 12 states to have such a rating), strengthens the FFCP’s ability to reach even more family forest landowners as the program expands across the state, while financed by future debt issuances and facilitating potentially lower borrowing costs to the program.

EPIC: Do you have any advice or lessons learned for other entities wanting to pursue SRF loan guarantees or for the SRF community of practice in further advocating for more widespread use of SRF loan guarantees?

AFF: Education is key. It seems that not all state administrators know that they have this authority from the EPA to do something so innovative with their programs. Having a fully realized project proposal ready to present to the program is also critical. This enables administrators and their staff to fully think through adapting internal processes and procedures that ultimately allow for more creative and beneficial projects in the future.

This loan guarantee authority is one example of many changes that can make state revolving loan programs work better in support of green infrastructure and other nature-based solutions. EPIC is continuing to encourage SRF policy reforms like these in states around the country and hopes to support AFF in its future work promoting investments in nature-based solutions.

To learn more about the American Forest Foundation and the Family Forest Carbon Program, visit familyforestcarbon.org or contact Kristen Voorhees, Communications Director at media@forestfoundation.org. You can visit this page to learn more about conservation finance legislation in Maryland.