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Nature's Own Hedge Fund


Nature's Own Hedge Fund

Illustration by Nicholas Blechman

On the day in May 2008 when Mark Tercek, a managing director at Goldman Sachs (GS), got a cell-phone call from a headhunter informing him that he’d likely gotten the job of running the Nature Conservancy, he was so excited that he backed his Jeep Grand Cherokee into a tree, shattering the back window. Anxious that gouging a tree might be a bad omen, he jumped out to see how bad it was. To his relief, he’d done far more damage to his vehicle than the tree.

Tercek spent more than two decades on Wall Street, and none of those years in green think tanks or chained to a bulldozer blocking a logging road. As a city kid from Cleveland who camped and hiked infrequently, he had come late to the joys of the outdoors. Now, it appeared, he’d be leading the world’s largest conservation organization, which has a million members, chapters in 50 states and 34 countries, and more than $5 billion in assets. The Conservancy’s $1 billion in annual income dwarfs all conservation competitors. And it had been run, for most of its 60-year history, by lifelong conservationists. Tercek had big ideas about how to radically change the traditional approach to solving environmental problems and improving the Conservancy’s operations, but would career greenies listen to the theories of a banker?

Led by Tercek, the Conservancy earned $246 million in investment income last yearPhotograph by Dave LauridsenLed by Tercek, the Conservancy earned $246 million in investment income last year

Reservations about his background quickly diminished after he took the helm in July 2008: The stock market tanked, real estate cratered, and the Conservancy’s donations and dues, heavily timed to tax-related yearend giving, fell by 27 percent. The organization’s $1.6 billion investment portfolio racked up losses of $321 million by the end of fiscal 2009—especially alarming because the fund typically covered 10 percent of operating costs. The timing was perfect for a guy with a head for numbers to save the day.

Tercek quickly cut $80 million from the Conservancy’s $530 million operating budget and ordered reductions of 9 percent of its 3,700-member staff in February of 2009, a painful decision in a place full of passionate lifers. “I had to lay off a large number of people that I really respected,” says Peter Kareiva, the Conservancy’s chief scientist. “Yet everybody realized Mark was right—that he could prioritize, see this unemotionally, that his Goldman experience was a credit.”

Tercek, 55, didn’t come to the Conservancy to fight financial brush fires. With the help of his board and the input of the Conservancy’s 600 scientists, he wants to remake the face of the American and global environmental movements. He has no quarrel with the current model—largely built on the strategies of confront, litigate, regulate. But by itself, that approach has proven inadequate. “All the things we care about—forests, coral reefs, fish stocks, biodiversity—we have less of instead of more of, despite everyone’s best efforts,” Tercek says.

Environmentalism, he fears, has become too elitist, too white, too partisan, too full of doomsayers, too concerned with saving nature from people instead of for them. He’d like to expand environmentalism to include the world’s largest polluters so that ecologists and corporations can work jointly to preserve nature because it’s the smart economic choice.

He knows that there are “bad actors” who may never see the light and that some of his more confrontational environmental allies believe cozying up to polluters only serves their greenwashing efforts. Greenpeace, for example, categorizes the Conservancy as “a right-wing environmental organization” and frets that collaboration with industry undermines the green movement. In 2009 the Conservancy helped broker pollution credits to three large U.S. corporations to protect Bolivian forests. Greenpeace dubbed it “a carbon scam.”

Tercek counters: “Why wouldn’t we want to work with companies with the biggest environmental footprints? It would be irresponsible for us not to try.”

With his pressed chinos, beige sweater, and polished loafers, Tercek looks far more like a Harvard MBA (which he is) than someone who studied English and published poetry as an undergrad at Williams College (also true). At Williams he acted in plays and seemed likely “to become an artist instead of a business man,” says his wife, Amy Tercek, who has known him since 1973, when they met in high school.

After getting his bachelor’s degree in 1979, Tercek wandered to Japan to learn the language, teach English, and study Aikido, the Japanese martial art. After two years, he talked his way into a low-level data-crunching analyst’s job at Bank of America (BAC) in Tokyo, enjoying it far more than he expected. By 1982 he was at Harvard; he joined Goldman in 1984.

Tercek made partner in 1996, demonstrating a willingness to take on all manner of jobs, including corporate finance and real estate. In 2005 he was named director of Goldman’s relatively new Environmental Strategy Group, working to ramp up investments in sustainable energy. His boss, Goldman CEO Hank Paulson (soon to depart to lead George W. Bush’s Treasury Department), had advised Tercek that it would be a good fit. “The thing about Mark is that he knows how to get things done,” says Paulson, now a senior fellow at the University of Chicago’s Harris School of Public Policy Studies. “He knows how to execute.”

Tercek was in the class of 221 partners who shared in Goldman’s 1999 initial public offering; Bloomberg News reported that partners got stock options worth on average $63.6 million at time of issuance. After much pondering, Tercek tossed his hat into the ring for the Conservancy post. It was curiosity about Tercek’s Goldman credentials that won him an initial interview, but it was his obvious homework on the organization’s mission and vision for where it ought to go that intrigued the search committee. “Choosing Mark was a big step off of the traditional path,” says Gretchen Daily, a Conservancy board member who is director of the Center for Conservation Biology at Stanford University. “But I have to say it’s been tremendous.”

In his spacious, light-filled office behind the glass-and-stone façade of the Conservancy’s building in Arlington, Va., Tercek is totally at ease. Six-foot-four, lean and fit, he wants to make it clear that the Conservancy was a vaunted organization before he arrived—downright Goldman-like, in fact. To date, the Conservancy has acquired more than 117 million acres of environmentally significant land—some of it donated, some of it purchased—which it typically sells to government agencies to be turned into parks or preserves. “Think about it,” Tercek says. “It was global, deal-oriented, entrepreneurial, scrappy, pragmatic. It wanted to get stuff done. It bought things like a merchant bank does. It took principal risks. It felt very familiar to me.” And though it’s not Goldman money, he’s doing fine. The Conservancy pays him $550,000 a year.

Tercek’s biggest bet yet is the Conservancy’s five-year partnership with Dow Chemical (DOW), announced a little more than a year ago. During the project, 20 Conservancy scientists are getting unprecedented access to Dow’s facilities, starting at Dow’s sprawling Freeport (Tex.) plant. The idea is to help the chemical giant do an inventory of its global land and water assets as a way of allowing Dow to put a value on its “natural capital” and to determine how to best protect and enhance it.

“I know there’s a lot of skepticism about these corporate initiatives, but for Dow to agree with us philosophically that it relies on nature for business reasons and to begin to put a business value on its natural assets, that’s huge,” says Tercek.

There’s nothing new about environmental groups aligning with corporations; indeed, core to the Conservancy’s success has been its ability to raise huge sums from Big Business and use the money to buy those millions of acres. But no green group has ventured this far into the weeds with an industrial conglomerate of Dow’s size, reputation, and reach to work on a project of this ambition. Dow has annual sales of $60 billion, and its 5,000 products are manufactured at 197 sites in 36 countries. It frequently finds itself in court over pollution issues. For example, the company is involved in a nine-year-old lawsuit filed by Saginaw County (Mich.) residents alleging Dow is responsible for dioxin contamination of a nearby river. While a state judge denied class-action status to 2,500 plaintiffs last year, individual suits are continuing. Dow says it will continue to “vigorously defend” itself.

In the past, an industrial giant with a plant surrounded by wetlands might have seen the marshes as a cheap place to dump pollutants, laws notwithstanding, or simply as a nuisance that brings constant battles with bird-watchers. But gains in ecological science prove that wetlands are important natural buffers against storm surges, never mind their value as biodiversity havens and natural filters of water. If a company is persuaded to see the marsh as “green infrastructure”—that is, as an asset whose well-being enhances the security of its plant—it changes corporate thinking. Marsh conservation becomes integral to the company’s business strategy.

Dow’s Freeport-area facilities cover 5,000 acres of land and coastal marsh. Dow, increasingly concerned about the vulnerabilities of its facilities to hurricanes, had been thinking about building concrete flood walls through that marsh. Conservancy scientists have persuaded the company to consider marsh enhancement instead, though Dow says it’s premature to speculate on an outcome and Kareiva, the Conservancy’s science chief, says “careful engineering calculations” and modeling studies will determine whether that’s a practical alternative.

If naturally enhancing the wetlands turns out to be the solution, Dow would be putting a business value on its natural infrastructure: It would get a relatively inexpensive barrier against storm surges while fish and bird habitats get restored. And the Conservancy will have scored a major coup if Dow takes this theory and applies it globally to all manner of natural assets—and other big-footprint industrial conglomerates follow suit.

For its efforts, the Conservancy is getting $10 million from Dow to cover its research costs—an eyebrow-raiser for environmental groups such as the Environmental Defense Fund, which won’t take money from its corporate partners to avoid accusations of greenwashing. “There’s no road map for this,” says Neil Hawkins, Dow’s vice president of sustainability, “but unless you start trying to put values on these assets it’s hard to put that value into your global business strategy.”

Dow has agreed that the research will be published in annual progress reports, and significant scientific studies that come out of the collaboration will also be offered to peer-reviewed academic journals, meaning that failures and problems will be published along with successes. The Conservancy won’t work with companies that don’t meet those terms. Even so, “we have to be careful,” Tercek concedes. “We don’t want to appear to be fooling anyone—or that we’re being used.”

You don’t have to go far to find doubters of this strategy. “Oh, come on, Dow is awful,” says Anne Rolfes, head of the Louisiana Bucket Brigade, a watchdog organization in New Orleans that has sparred with the company over alleged pollution. “We would never take money from them or partner with them.”

Kareiva sympathizes: “A community will have a bad experience with a subsidiary and say, ‘Why are you working with them?’ Our measure has to be net benefit on a global scale—a recognition that the earth as a whole will be better off, while recognizing there will be local setbacks.”

On Tercek’s watch, the Conservancy has emerged from the recession in stronger shape than ever. Despite that $321 million loss to its portfolio in 2008-09, nobody panicked. Last year the Conservancy earned $246 million in investment income alone, in part by putting 17 percent of its $1 billion endowment in rebounding hedge funds and an additional 19 percent in private equity. Its nearest conservation rival in funding, the World Wildlife Fund, has total revenue of under $240 million.

One Tercek move that won over the Conservancy’s demoralized scientific staff was promoting Kareiva to the executive level and insisting he be in the room when any major decisions are made. Tercek calls him “my closest intellectual adviser.” The other major staffing change was more startling; Tercek recruited the “wrestling guy.” Hiring Geof Rochester away from World Wrestling Entertainment two years ago to shake up the Conservancy’s approach to membership and marketing is the embodiment of Tercek’s expansive view of what conservation needs to become.

Rochester, a 53-year-old African American who ran the marketing for the WWE’s million-viewer pay-per-view WrestleMania, is trying to apply lessons of relevancy and longevity from the WWE to the Conservancy. “Wrestling started in TV, and now look—they’re in pay-per-view, books, movies, DVDs, video games,” says Rochester. “Ultimately, the conservation movement needs to appeal to its audiences in all those platforms. We need reengagement with the public around the world.” Conservation, he says, “risks becoming irrelevant if it doesn’t change. Look at the demographics—surveys show 30 million people consider themselves ‘engaged’ in conservation in America.” Yet the same surveys count 130 million more who are “concerned” but not yet members of green organizations. Those are the people Rochester wants to reach.

Rochester has launched member initiatives in Hong Kong, Australia, and Latin America with a goal of reaching 5 million dues-paying members. There is also a push to create Conservancy preserves in the heart of major cities, where the organization’s work can be on better display.

When The Lorax opened recently, the Conservancy negotiated a tie-in with its global tree-planting program, an effort the group hopes to repeat. “We’re a brand,” says Rochester, “and there’s no reason we can’t be recognized in almost every country in the world.” Rochester says he’s advocating more “evolution than revolution,” since the Conservancy isn’t about to abandon its core mission of raising money to buy conservation lands.

“That’s still incredibly valuable,” says Tercek, “and we want to remain nimble and opportunistic in that regard. But we now know this approach will never be enough. We just can’t buy everything worth saving.”

Wells is a reporter for Bloomberg News in New York.

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