The NYSE has proposed to adopt new listing standards for the common equity securities of a “Natural Asset Company,” a new type of public company defined by the NYSE as “a corporation whose primary purpose is to actively manage, maintain, restore (as applicable), and grow the value of natural assets and their production of ecosystem services.” And, “where doing so is consistent with the company’s primary purpose,” a NAC would also be required to “seek to conduct sustainable revenue-generating operations,” and “may also engage in other activities that support community well-being, provided such activities are sustainable.” In addition, NACs would be prohibited from engaging in unsustainable activities, that is, activities that “cause any material adverse impact on the condition of the natural assets under its control, and that extract resources without replenishing them.” Although existing regulatory and listing requirements would continue to apply to NACs, in many ways, the proposal contemplates something approaching a new NAC governance and reporting ecosystem, if you will, that would involve specific provisions in corporate charters, new mandatory policies (environmental and social, biodiversity, human rights, equitable benefit sharing), new prescribed responsibilities for audit committees and a new reporting framework, including mandatory “Ecological Performance Reports.” Why did the NYSE introduce this proposal? Notwithstanding all of the developments in ESG disclosure and investing (such as ESG funds), the NYSE contends that “investors still express an unmet need for efficient, pure-play exposure to nature and climate.” According to the Intrinsic Exchange Group, which pioneered the NAC concept and advises public sector and private landowners on the creation of NACs, “[b]y taking a NAC public through an IPO, the market transaction will succeed in converting the long-understood—but to-date unpriced—value of nature into financial capital. This monetization event will generate the funding needed to manage, restore, and grow healthy ecosystems around the world and bring us closer to achieving a truly sustainable, circular economy.” Will this proposal be a game changer to rescue our environment or merely a chimera? Time will tell. The proposal is open for comment for 21 days following publication in the Federal Register.
According to the NYSE, the value that nature offers has generally “not been included in the financial system,” which has led to the rapid degradation of “ecosystem services,” such as clean air, water supply, flood protection, productive soils for agriculture, climate stability and wildlife habitat. The NYSE observes that economists estimate the value of ecosystem services at more than $100 trillion per year. Although many seek “to deploy financial capital toward sustainability, stewards of natural landscapes have often had little choice other than extractive development to fund their budgets or garner a return on investment.” As a result, there is a huge gap in the financing needed to transition to a sustainable economy. To help fill that gap, the NYSE maintains, natural assets must be brought into the “financial mainstream.” To that end, the NYSE is proposing to adopt Section 102.09, which sets forth new listing standards applicable to NACs, a new type of public company.
This is how the NYSE envisions NACs:
“NACs will be corporations that hold the rights to the ecological performance (i.e., the value of natural assets and production of ecosystem services) produced by natural or working areas, such as national reserves or large-scale farmlands, and have the authority to manage the areas for conservation, restoration, or sustainable management. These rights can be licensed like other rights, including ‘run with the land’ rights (such as mineral rights, water rights, or air rights), and NACs are expected to license these rights from sovereign nations or private landowners.
“Under the proposed amendments to the Manual, capital raised through an NYSE-listed NAC’s initial public offering or follow-on offerings must be used to implement the conservation, restoration, or sustainable management plans articulated in its prospectus, fund its ongoing operations, or otherwise fulfill its purpose to maximize ecological performance (i.e., the value of natural assets and the production of ecosystem services). While a core purpose of a NAC is to maximize ecological performance, under the proposed rules, a NAC would also be required to seek to conduct sustainable revenue-generating operations (e.g., eco-tourism in a natural landscape or production of regenerative food crops in a working landscape) provided that such operations are consistent with the NAC’s charter and do not cause any material adverse impact on the condition of the natural assets under the NAC’s control and seek to replenish the natural resources being used. Therefore, all NACs are prohibited from directly or indirectly conducting unsustainable activities, such as mining, that lead to the degradation of the ecosystems it is trying to protect. In conducting its revenue-generating operations, a NAC could monetize ecosystem services that have markets (e.g., through the sale of carbon credits)…. In order to align the interests of local communities with the objectives of maximizing the value of natural assets and the production of ecosystem services, a NAC would also be able to use its funds for activities that support local community well-being (e.g., education, health), provided that such activities are sustainable.”
As contemplated by the NYSE, NACs would report their revenues and expenses in their financial statements prepared under GAAP and filed with the SEC in their annual reports on Forms 10-K, 20-F or 40-F. Under SEC rules, a NAC would also be required to disclose all material information about its license with a natural asset owner in its IPO registration statement and subsequent periodic reports. Under the proposed listing standard, NACs would be required to meet the same quantitative initial and continued listing standards as are applied to operating companies listed on the NYSE, and would be subject to all of the other rules applicable to NYSE listed operating companies.
In addition to these standard requirements, to allow investors to assess the effectiveness of management, a NAC would be required to publish periodically information on the ecological performance of the natural assets licensed to the NAC in an Ecological Performance Report, which would provide “statistical information on the biophysical measures (e.g., tons of carbon, acre feet of water produced), condition, and economic value of each of the ecosystem services produced by the natural assets managed by the NAC.” The EPR would be based on a Technical Ecological Performance Study conducted by the NAC. Under the listing standards, a PCAOB-registered independent public accounting firm would be required to examine and attest to both the EPR and the Study. In preparing EPRs and conducting the mandated Studies, NACs would be required to follow IEG’s Ecological Performance Reporting Framework, which the NYSE has licensed from the IEG. (The NYSE also has a small minority interest in IEG and one seat on IEG’s board of directors.)