13.3.2.1 Wetland banking

Although wetlands only cover six per cent of the total world surface, they form hotspots for biodiversity and deliver ecosystem services to billions of people.1One of the ways to maintain the volume intact and generate biodiversity benefits is by means of 'mitigation banking'. A mitigation bank is a wetland, stream, or other aquatic resource area that has been restored, established, enhanced, or (in certain circumstances) preserved for the purpose of providing compensation for unavoidable impacts to wetlands, mostly drain and fill actions.2 As the main objectives of wetland banking are to preserve wetlands and to provide a habitat for endangered species, it is therefore required that: (i) the real estate developer should first assess how to avoid or minimise impacts on wetlands; (ii) in instances where impacts cannot be avoided or minimised, and the real estate development plan will nonetheless be approved, the wetlands have to be replaced; (iii) replacement can take place through ensuring the restoration of prior wetlands, the enhancement of other low quality wetlands or the creation of new wetlands; and (iv) it will be ascertained that each hectare of wetland damaged or destroyed will be replaced (the mitigation ratio can vary, generally more than 1:1). In the commercial sense, ' wetland banking' should be understood as a "regulatory arrangement by which a company will restore a former wetland area to a sufficiently functional and diverse condition. People required to perform compensatory mitigation can then purchase "wetland credits" from this company, instead of creating the wetland themselves".3 As the developers of new wetlands, the 'mitigation bankers', can be companies, agencies and individuals, wetland banking has become a business opportunity. This also makes it an investment opportunity.

Wetland banking is a well-developed mechanism that originated in the US under the Federal Clean Water Act 1972 of the US Army Corps of Engineers regulations (Clean Water Act). The creation of regulated wetland banking was inspired as a measure to protect America's rivers, lakes, swamps, and other wetlands from disappearing. The Clean Water Act established limits on how these different types of waters could be developed. After the Clean Water Act entered into force, it became illegal to fill, dredge, or in any other way to damage a wetland without a permit from the US government, specifically from the US Army Corps of Engineers, the regulatory governmental agency that supervises the wetland bank certification. In order to obtain such a permit, the Corps of Engineers first determines whether the damage can be avoided and then, in cases where the damage is unavoidable, whether it can be mitigated or minimised.4 Different actors, e.g. private companies, public entities and public works agencies can establish and maintain wetland banks. In most cases of mitigation banking, a third-party entrepreneur, the mitigation banker, gains authorisation from the regulators to create or restore a relatively large area of wetlands. The process of replacement provides for the restoration or creation of wetlands in order to obtain replacement credits for future wetland impacts. Afterwards, these wetlands are used as a 'bank' of credits. The value of a bank is defined in 'compensatory mitigation credits.' The US Corps of Engineers and the EPA decide on the number of ' credits' a certain bank is worth, and determines the number of credits that are made available to the mitigation banker. Bank credits are released by the agency when "a bank project achieves its pre-determined performance standards".5 The mitigation bankers can sell these credits to third parties, i.e. real estate developers that use them to satisfy their mitigation obligations towards regulators,6 or use them themselves. It is important to note that wetland banking credits can be sold in a relatively open market, restricted to a defined ' service area'.

Wetland mitigation banking in the US is now largely an entrepreneurial activity: "77 per cent of 454 approved or proposed banks identified in a 2006 report by the US Army Corps of Engineers involve the private third-party production of wetland credits for sale".7 Since the first permit for an entrepreneurial bank was submitted in 1991, wetland banking has developed into a market.8Wetland banking can be considered the first successful environmental credit market that sells products certified using metrics of ecological function. It is quite distinct from carbon markets. What "is being traded isn't so much the right to pollute, but rather, in a complicated and oblique fashion, the right to develop" economic activities in a nature area.9 This system has been copied by several countries. Puerto Rico has created a market in the right to develop beachfront property and New Zealand has established a market for the right to exploit fisheries.10

A concrete example of the wetland banking business is the 'Nanticoke Headwaters Project' managed by Ecosystem Investment Partners (EIP).11 EIP is a private equity fund manager that acquires and manages high priority conservation properties across the US. It invested USD 27.5 million in wetland, stream mitigation banking, and conservation (endangered species) banking across a variety of landscapes, and claims that the investments generate multiple revenue flows. In 2007, together with The Conservation Fund (TCF) and the State of Delaware (US), EIP developed a project that aims at the conservation of the last-remaining massive forest area in Delaware. Over the past two centuries this area has been significantly modified. The impact of intensive agriculture and the development of monoculture pine plantations resulted in the loss of over 50 per cent of Delaware's pre-settlement wetlands. By using private investment capital, market-based conservation mechanisms and the support of conservationists, the project claims to have saved 2,300 acres of the forest area that otherwise would be converted into residential subdivision. Collaborating with the "US Fish & Wildlife Service, the State of Delaware and the US Army Corps of Engineers, EIP utilises the demand for ecosystem service credits found in Southern Delaware (needed to offset unavoidable impacts to wetlands and streams) to pay for the conservation and restoration as well as to generate a financial return for EIP's investors."12 The credits are being generated through the establishment of Delaware's first private wetland mitigation bank and the restoration of original wetlands. These credits are sold for profit either to the State Forest, the Wildlife Management Areas, or to a private conservation buyer.