195 Douglas Eger – How to IPO natural asset companies and raise billions

A conversation with Douglas Eger, CEO and founder of Intrinsic Exchange Group, about how to value nature and make it the centre of our economy and not some non-calculated externality, and more.

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Chapters

• 1:50 Why are you doing what you are doing? Why Soil?
• 4:30 What is the deep underlying problem?
• 7:22 Why value nature?
• 10:46 What is the Intrinsic Exchange Group?

Transcript

SPEAKER_00: 0:00

Today, a slightly different structure. How do you value nature and make sure it's at the center of our economy and not some non-calculated externality? How do you IPO a natural asset company and raise billions to restore nature? This is a massive conversation, but because of tech issues, we only managed to scratch the surface. So stay tuned for a part two and who knows, maybe a part three where we'll be digging much deeper. But in the meantime, enjoy and let us know what we should dig deeper into next time.

UNKNOWN: 0:30

you

SPEAKER_00: 0:35

This is the Investing in Regenerative Agriculture and Food podcast, Investing as if the planet mattered, where we talk to the pioneers in the regenerative food and agriculture space to learn more on how to put our money to work to regenerate soil, people, local communities and ecosystems while making an appropriate and fair return. Why my focus on soil and regeneration? Because so many of the pressing issues we face today have their roots in how we treat our land and our sea, grow our food, what we eat, wear and consume. And it's that we as investors, big and small, and consumers start paying much more attention to the dirt slash soil underneath our feet. To make it easy for fans to support our work, we launched our membership community. And so many of you have joined us as a member. Thank you. If our work created value for you, and if you have the means, and only if you have the means, consider joining us. Find out more on gumroad.com slash investing in RegenAg. That is gumroad.com slash investing in RegenAg. Or find the link below. Welcome to another episode today with the co-founder and CEO of the Intrinsic Exchange Group. Welcome, Douglas.

SPEAKER_01: 1:47

Thank you for having me.

SPEAKER_00: 1:49

And we're going to obviously explore what that group is and does and will do in the future. But to start with a personal question, how did you end up focusing on, let's say, the beyond financial values, like the soil regeneration? Your journey is a fascinating one, and I would love to explore it a bit here. How did you end up building what you're building now?

SPEAKER_01: 2:11

You know, I really think the journey began when I was quite young. I always had a passion for nature and I couldn't quite, you know, square the fact. Everything that I cared about deeply was under threat. You know, I grew up at a time when environmentalism was, you know, peak and I would look out and things were always getting worse. Right. So part of it was, is there a way that I could, you know, make a difference? And I tried a number of different, you know, avenues early on. I thought politics might be the way kind of quickly. disbursed myself of that, that it was too slow and cumbersome. And my father actually challenged me at one point. He said, you know, we're looking at the effects of major legislation. And here it was in the US, the, you know, Endangered Species Act, the EPA, the, you know, major environmental legislation. And it was 10 years on. And he said, He said, how are we doing? And I said, well, we're doing less bad, but we still have major problems. And so I had tried to work for conservation groups early on, and it was kind of the heart of a major recession in the States. And so I was not able to get a job there. So I just began working, you know, on things that I thought could make money with the idea I eventually would come back to conservation, which has been a theme. And I have to say the motivation is I was tired of losing and seeing that everything that we were working on was maybe slowing down the rate of decline, but not actually getting at the root problem. So when I had some resource and had matured enough to think through the overall problem, I came back to it and said, what is that problem? And is there a way that we could really move the needle at scale. And that brought me to

SPEAKER_00: 4:25

creating

SPEAKER_01: 4:27

IEG.

SPEAKER_00: 4:28

And it's very interesting you mentioned problem and not problems. So let's double click on that. What is that underlying or overarching or whatever word we want to use there, problem? What did you identify in your work, both on the environmental side and also on, let's say, the financial sector or the financial side? And then through, I don't know, deep meditation or maybe spending a lot of time in nature, what did you find as the underlying problem that we need to tackle and that you're building something to actually tackle that.

SPEAKER_01: 5:02

Yeah, you know, I think the fundamental is that we left nature out of the mainstream of the economy because we didn't see it as a resource. It was actually, you know, we built a very effective economic system for extraction. And that was, you know, the capital formation and the incentive was to make things efficiently and effectively. Nature was looked at as, you know, abundant resource that maybe even need to be tackled. It was in the way and it didn't have direct value. And we've come to realize that it's fundamental. We are looking at nature's economy, the goods and services that we consume worldwide are equal to or greater than world industrial GDP. And half or more of our economy is dependent or highly dependent on those ecosystems functioning. And so we're putting at risk on one side, the ability to live on the planet, to have an effective economy. And on the other side, we're leaving off what would be doubling the economic output if we included nature's value into it. So until we get that fundamental rewiring of the system to take in those data points, all we're doing is trying to slow down the decline in natural infrastructure. And, you know, to an extent, we're included in that by not fully pricing in human and social capital as well. So it's natural human and social capital that are missing from the equation. So we had a market defect that, you know, I like to say we make dream green, but we live our lives with the red and black of financial statements on a personal level, you know, on a corporate level and a governmental level. And if we don't rewire the that and change the equation, it's very difficult to really make lasting, effective change. And so I felt like we needed to get to that base level and find a way to alter the equation if we were going to effectively deal with some of the major problems that we face in the world.

SPEAKER_00: 7:23

And I think many would agree on that statement that we didn't value nature. We haven't valued nature in any balance sheet, in any public statement, et cetera. Of course we value it when we look at it, we value when we go to a national park, we value it when it's in our garden, et cetera, et cetera, but it hasn't been part of that economy piece. But also a lot of people would, might be worried if we do end up doing that. If we put a number, like, of course, like if the Amazon is worth 10 trillion I'm just throwing a number out. And if somebody pays 11, which nobody has luckily, but what would you say to that group that says, okay, making it part of the balance sheet might create... incentives for things we don't want? Or would you say we're such a dire state, we have to, like there's no other way to putting it on the balance sheet?

SPEAKER_01: 8:17

You know, I've been waiting my entire life for us to find the moral high ground and be able to bring nature in as an ethic, whether it is a fashion, whether it is a political movement. And they have all failed, you know, to reach the levels that are required. They're good efforts Right. And I think at the end of the day, I would agree with those and go, I wish we didn't have to look at nature as a commodity. But we live in a world where, you know, market economics are dominant throughout the world. Even those countries that, you know, have taken a different pathway are really have bought off on market forces. And so although we talk about nature as priceless, meaning it's invaluable, we care for it in a market economy what that means is it's left out and it can be destroyed and degraded and so you know what we we don't get to vote but every you know couple of years um but we make economic decisions daily maybe hourly or minutely and

SPEAKER_00: 9:26

in many seconds nanosecondly in some cases

SPEAKER_01: 9:30

yeah yeah and if if we're unable to align those interests it's very difficult so I would say, yes, we're in a dire strait. We're in a place where just in the last 20 years, we've lost half of the species of the planet in volume. Some are going extinct at record rates. And we have a climate catastrophe. And all of these are coming together at a time that people are not as well served by the economic system. The negative externalities are now getting so large that they're overwhelming the value of what we've been able to produce and the efficiency in producing goods and services in an industrial way without nature being at the core. So fundamentally, my emotion, I agree. I love nature. I think it should be valued by itself. But we live in a world where that's just not practical. And if it were, I think we would have already done it. So I think we have to take some bold moves to try to correct the curve because it's a downward curve and it really hasn't mitigated over my entire lifetime.

SPEAKER_00: 10:47

So what's the bold move? How do we, let's say, use, quote unquote, we actually use the forces of the financial sector that have been extremely good at certain things and allocation and extraction and efficiency, like you mentioned. How do we unleash those forces? I'm using the word very specifically, deliberately on... restoring because we're in such a dire state it's not even protecting it's protecting what we have left but restoring um what once was or probably beyond or in a different shape because we can never go back how do we what's the first step there and then of course we get to the group the intrinsic exchange group you're building

SPEAKER_01: 11:29

yeah you know the the approach here is If you value something, and here natural assets are what we need to value in their production of ecosystem services and their intrinsic value, right? If we can convert those natural assets into financial capital, then we have the capital and price signaling to be able to tell the economy what we want it to produce and how we want it to produce it. So let's take that from kind of top line words to reality. How do you value

SPEAKER_02: 12:07

nature?

SPEAKER_01: 12:08

Exactly. The current state of play, and I'll say on the conservation side, if you're a country and you have high forest cover, low deforestation rates, and you're wanting to develop an economy for your people, you don't have a lot of choice. choices today, right? You can't value that forest for its ecosystem services being produced. You have to look at some aspects of the extractive economy. Now, that could be ecotourism, but at some level, ecotourism becomes extractive. You know, we can overrun places so that we actually damage what we've come to look at and to enjoy. So, until you are able to say that forest producing those ecosystem And being a natural asset can put wealth into my pocket as an individual. So I don't look at the forest as something I need to cut down so I can grow soybeans or raise cattle or timber or whatever it may be. But I can look at it as a way to generate wealth for me and my family. We can move that up and say corporations are in the same. And I'll come back to how they can and what their desire is. is and what they're limited from in this current economic system. And that's true of governments, right? They don't necessarily want to destroy their natural capital, but they may not have a lot of choices or good choices. So I would say if we then look at corporations and Right now, I think governments are behind the curve. They're not really leading. We're not even dealing with climate change when the evidence is pretty bold in front of us that things are going awry. You've got corporations that would like to deliver products that consumers want, that are healthier, that are more sustainable, but they're limited in what they can do. And the consumer is way out front. They would love to see products and services delivered in

SPEAKER_00: 14:26

another way is that different like has that changed as to ask the investor question why now is it that consumer which of course also then works in these companies and also votes at some point like is the consumer like the mindset or the movement has that shifted over the last decades as you've been observing the space working in this space I mean there's no this space but has that been is that the driver now like there's a pull factor coming in

SPEAKER_01: 14:55

well I you know First, it was education, right? Maybe even to the turn of not this century, but the last century, there was the beginning of understanding that nature wasn't limitless. A book like the Sand County Almanac by Aldo Leopold, when he realized that if you go kill wolves, eventually the deer will overpopulate and they'll actually damage the forest and the mountain. And there were the leaders in environmental thought that began to put it together that that you needed to have a holistic view of nature and human's place in it. we became aware of pollution and the downsides of industrial production. And then what do you do? We did the easy things like, okay, that pipe that's just pouring something into the river. Yeah, maybe you could stop that, but you'd have to stop the whole economy to stop spewing carbon dioxide, which we couldn't see. And it was a slow moving disaster as the same thing we have with the lack of biodiversity. When do you pull so many P pieces of nature apart that it collapses. You know, hopefully we can recover before that, but that's what we're in danger of. So I think people were first having to be educated and then they had to see some effect in their lives. And I think now we're beginning to see some of those stresses. We see it on the financial side. How many different financial crisis have we been through? You know, it's about every decade we have some major either recession or financial crisis. And And they look up and see increasing storms and we call them natural disasters, but they're actually human-made disasters because we got rid of nature, right? And by and large. So, if you look at it, I think the awareness, the concern, we went through COVID, we came very close to not delivering food in long supply chains starting to fall apart. And so, all of these stressors are raising the awareness and people go, I would like to see the change. I don't know what I can do because, you know, I think they're a bit frustrated with politics and they look and say, hey, we're not making change at scale around the world and we can even retrograde. So you may have countries that were progressive in their protection of the environment with a new administration completely change and not support that. So I think they've looked more and more, the consumer, the public, to brands to represent their ideals, but there's a limit. And this is, you know, coming back to where corporations are today. Let's look at a company like Danone, right? And here was a major food producer. The former CEO had, you know, done a lot of work for Regenerative, the One Planet Initiative, became a B Corp, Public Benefits Corp. And he was ousted because there was an activist shareholder group that said, you're focusing too much on all of this social benefit and environmental benefit and not enough on producing financial returns for us as investors. And there's the core right there that they're limited. And you may even have, you know, some major hedge funds or major investors and they say, hey, we'd love, you know, to invest in our values, but they can't get it at scale. So So until we give those companies and those investors, so you really have two sides that want to get together, but they have a gulf between them. So the companies want to change their practices at scale, but they can't continually raise the price of the consumer goods, right? Particularly in an inflationary environment. And the investors are saying, we can't invest in you. As fiduciaries, the investors may not be able to invest except for market rates of return and the corporations can't continually raise the price of their products because the consumer can't afford. And the reason is, if we're now dealing with agriculture, is the farmers are rewarded and paid for a commodity crop, but they're not paid for producing ecosystem services or creating a healthy environment through their practices. So we're solving for financial capital and we're missing that, you know, natural and social and human capital element that if it were priced in, would change practices very quickly. So that's the way out.

SPEAKER_00: 20:30

And so... Where do we start? I mean, we start with pricing it in, but that would be... No, let's leave it at that. Where do we start with pricing it in? Because you clearly make the case for it needs to be priced in. I think many people reach that conclusion, but then finding concrete pathways to do that hasn't turned out to be so easy because I'm imagining that this conversation, not exactly this obviously, but it has happened many, many times in history. It we just value nature into our economic system, we'll be fine on CO2 and biodiversity. I see a lot of insects flying out this window on ground cover, even on water cycles, et cetera, et cetera. And somehow we haven't done it yet. So what's different now and or what's different with what you're building?

SPEAKER_01: 21:21

So I agree 100% with what you've said. And a lot of people have been looking at this. And I think there was a progression of the understanding that we needed to price them in. And we can go back maybe to the 1980s where we started to flip conservation and thought and ecological discussions to financial terms, right? We didn't talk about natural capital until maybe 30 years ago because we realized that just talking about conservation didn't really get at the core of the problem. the brilliant people that said, hey, we need to look at the value of what nature is producing. So, you know, I think an important turning point was when we started to talk about nature in terms of ecosystem services, meaning the value, the financial value of what it produces and the notion of ecosystem service valuation. And, you know, we even borrowed the lexicon of finance and said, said natural assets were actually natural capital, which was a little bit of a misnomer because if it was capital, we wouldn't have this problem. But what we have is financial assets that we'd like to turn into financial capital. So our approach was the financial system is totally flexible. It may seem like it's more like chemistry or biology or physics where it's natural law, but it's an agreement to agree. It's a social invention, which makes it very powerful, but also difficult to change.

SPEAKER_00: 23:07

This is going to annoy a lot of people who study it. That's like, it's not the same as biology, et cetera. There's no, okay. But it's, I mean, yeah, it's all, I don't want to say, it's all in our head. It's a social agreement, just like money. And so, which means we can change the agreement.

SPEAKER_01: 23:22

And yet that's hard because people have built their lives off of, you know, one thing. So that if you can't charge rents That doesn't exist. Current and future cash flow. It's the only way you can measure an equity. And we said, well, it is the only way you can measure it unless we decide to change, like you just said. So what we did at IEG was let's get back to that foundational level. Let's create a new asset class based on nature itself. The main underpinning to this is a new form of corporation, a natural asset company. The natural asset company is chartered to protect, to grow, to restore natural assets. And we created a financial accounting system that's bifurcated. Keep your standard gap IFRS for things that are monetized. But we created a new accounting system, which we called statements of ecological performance, which account for the flow of ecosystem services in financial terms. So think of that as your natural income statement, the asset that produces it, that produces those ecosystem services that are consumed around the world, worth over$100 trillion a year. And we included some biophysical measures like biodiversity, species richness. And we said, we want investors to be able to look at both of those and determine what the value of not only price to earn or price to revenue, but price to ecosystem service. And as you said, the minute an investor says, yes, I believe that to be true, I'll buy that, the underlying does become true. And what we've done is we've converted the asset from potential value to financial capital in a transaction. So the way a natural asset company works is it obtains the rights to the ecological value on a given landscape. That could be a natural land.

SPEAKER_00: 25:31

But not the ownership of the land.

SPEAKER_01: 25:33

It doesn't

SPEAKER_00: 25:34

have to. That's the fundamental underline. It could be, but doesn't have to. It could be

SPEAKER_01: 25:37

on private lands, but certainly on public lands, no. That's the patrimony of the country and the people. So on natural lands, it would be, you know, rewarding those who have been good stewards that have good biodiversity and natural capital today. It can be to restore

SPEAKER_00: 25:56

it. So you tackle that problem of the points that have been taken care of. mostly indigenous peoples for our biodiversity are not going to be rewarded if we only reward the gain instead of the already underlying asset that is incredibly rich. I think it's 85% of biodiversity is hold on those lands, even though it's only 5% of the earth's surface. So there's a big trigger there to call it capital or value.

SPEAKER_01: 26:24

Exactly. In fact, we're working with an indigenous group right now to create an act around their 1.5% million acres of tribal lands for that exact reason, because they've, as they've rightly said, they've been taking care of the land for thousands of years. But now they're in this horrible position where the only way they can provide for the tribe is to think about extractives, oil and gas, mining, timbering, and they want an alternative. So in a NAC structure, the ecological rights to the land are obtained by the corporation. Again, they have to share the benefits. Here's another thing that, you know, we wanted to make sure would happen. We even have this with carbon credits today or conservation in general. And this is a knock on, you know, what the perception of conservation can be, particularly in the global south where, hey, you guys messed up your environment and now you're asking us to preserve and not develop the way you did. Right. And so we have this biological richness that people are not paying us for. But you're saying don't develop it. And so they're caught. Right. So we wanted to make sure that the benefits from a natural asset company would be shared with the local population for stakeholders in the area in a meaningful amount. So we actually wrote that into the rule set that we're partnering with the New York Stock Exchange to list these natural asset companies under a rule set that we're working to get approved by the Securities and Exchange Commission. And the methodology...

SPEAKER_00: 28:12

So you're literally going to do an IPO with a NEC, basically. So

SPEAKER_01: 28:18

when we

SPEAKER_00: 28:18

do that... I just want to let it sink in with people. There's going to be one of the IPO news that's not plural, but you can see over the next months, years, it could be a natural asset company that actually does something different than the typical IPO you see.

SPEAKER_01: 28:35

Right. So in that process of an IPO, we're converting that natural asset value. And the way that's, you know, arrived, it's not just making it up. There's this industry that's been developing this expertise over, you know, 30 or 40 years. And what they do is say, okay, there are 38 ecosystem services that are in our framework, you know, There's carbon sequestration, pollination services, freshwater production, food provisioning, all of these various things that we know have value. We add those up and we say on that given landscape, you're producing X amount of those. So that's the flow of ecosystem services in financial terms.

SPEAKER_00: 29:21

Per year, basically, or per quarter.

SPEAKER_01: 29:23

And then what is done is you project that out over 100 years. It's a long-lived asset. You discount it back. by about 2%. Really the use of capital over that is the discount rate. And you end up with an asset value that is roughly, you can use this as a rule of thumb, if you're producing$3,000 worth of ecosystem services per acre per year, you'd multiply that by 60 and that will give you the asset value. So these are big numbers, right? They can range in that tends to hundreds of billions of dollars. We would take that to the New York Stock Exchange in a NAC that has a given area, either in working lands where we've enrolled farmers, they become the major shareholder, or it's a government. It can be an indigenous group. Whoever the natural stakeholders are of that land, they're the issuer, right? They own the company. They're the beneficiaries of holding that equity. We take it public. Now we have resources to continue to manage that protected area.

SPEAKER_00: 30:36

You have resources if somebody, like somebody, somebody, many people take part in that IPO. Like that other side of the equation, there has to be enough, there have to be enough investors, which could be, I mean, I know you're looking at the pension side, like enough investors that see that value and make sure it floats successfully on the stock exchange and does creates this tens of billions or whatever the amount is that then flows back to the landscape. What's your feeling there? For the last

SPEAKER_01: 31:09

year and a half, we've been out talking to investors. Which is brutal. They can be family offices, DFIs, pension funds, those that have a mandate for sustainability or ESG, those that don't, sovereign wealth funds, and the retail market The individuals that say, hey, if I could invest in a forest, if I can invest in a coral lake, I would love to do that. And I could get a return. Fantastic. We'd been testing this, and we said, here's the accounting framework. Here's the value proposition for you, investor. If we take something and move it from producing X amount of ecosystem services to 2X to 3X to 4X, and that's the value increase in your equity, are you comfortable with that? Does that make sense to you? Can you buy off on that value proposition? And when we started, I have to say, I was hopeful that maybe five or 10%, we'd go a little crazy, but maybe we'll take a punt. We'll give it a shot, see what happens. I think now on our calls, it's more like 80% or 90%. And the investors are saying, we're desperate to match up our financial returns with our environmental and social ethics. And we can't do that at scale. So we have these major funds that are essentially doing negative screening. So So what they're doing is saying, OK, I won't invest in fossil fuels or mining or timbering. but then everyone else's portfolio looks pretty much the same. And, you know, it was kind of a pithy insider comment, but there was a big fund manager. And he said to us, he said, I never knew I was an impact investor. I buy Apple. And what he was meaning by that was ESG funds. Yeah. You, you really aren't able to differentiate greatly.

SPEAKER_00: 33:11

They're going to be some impact investors listening to this. They're going to be very annoyed, but yeah, no, it's a, it's a valuable point. So we're, we're, running out of time there are six trillion questions I want to ask but I want to ask when what's the timeline looking which is impossible to answer I know because you're dealing with New York Stock Exchange SECs etc but what's your we're talking October 2022 when can we do something like this when are you hopeful that something will be when will there be an IPO that we can participate in or a market where we can participate because maybe not the initial one will be for retail but after that We

SPEAKER_01: 33:49

partnered with the New York Stock Exchange just about a year ago, and we began working on the rule set for the natural asset companies in this asset class. We've been in discussions with the regulators. We're hopeful that we will be filing our final rule set to be able to list these natural asset companies in the next month. There's a regulatory statutory period that would take us to basically the middle of 2023. And if that goes forward, we could have our first NACs coming public by the end of next year. So we've been working on this for a number of years, developing the exchange relationship, the accounting framework, the various folks that want to list companies, be it companies or countries or entrepreneurs, building that investor base. We wanted to bring that all forward so that it would all be ready once we have regulatory approval to bring those first NACs to market so that we can show that nature not only has intrinsic value, but it has financial value. And we can start to right this wrong of a fundamental mistake of leaving nature out of the center of our economic system.

SPEAKER_00: 35:08

I think we'll leave it at that. I'm imagining there will be a lot of questions from the audience. And I think we're going to do a part two to this before end of next year, I hope, so we can unpack more of the process as well. I want to thank you, first of all, for your time today. We had a lot of technology issues to get this going, but I'm very happy we recorded. No, a teaser is not the right word, but a very good first one. But stay tuned for a second one where we unpack a lot of these things. So if you enjoyed this, let us know And we'll definitely get back and explore much more because there's so much to unpack here. So thank you so much, Douglas.

SPEAKER_01: 35:45

Thank you. Enjoyed the conversation. Look forward to our next one.

SPEAKER_00: 35:55

Thanks again and see you next time.