Failure of a California almond grower shows the unsustainability of some sustainable agriculture investments

ImpactAlpha | 29 October 2024

by Imogen Rose-Smith

Trinitas Partners had plans to transform the world with almonds. The world had other ideas. 

When we last saw the Redwood City, Calif., venture capital firm, which specializes in large-scale agriculture investments, it had been promoting Mahi Pono Pomona Farming. It had billed the 41,000 acre former sugar plantation on the Hawaii island of Maui as an exercise in sustainable agriculture that would help support the local economy and provide for local residents. 

The Hawaii effort had been criticized largely because it depended on getting an attractive deal on water supplied through a complex system of aqueducts from another part of the island. 

Trinitas’ California project also caused a fight over water rights. Then, almond prices collapsed. And interest rates rose, alongside inflation. 

Burdened by approximately $188 million debt, Trinitas Partners and its 7,856 acres of almond farms in California’s Central Valley filed for Chapter 11 bankruptcy in February of this year, alongside Trinitas Advantaged Agriculture Partners IV, the investment vehicle supporting the project.

The almond farms were never a going concern. 

There is an increasing demand for nature-based solutions. Real assets, owing to their size, sustainability, and return profile, are of particular interest to institutional asset owners. But just because something is a natural investment does not always mean it is good for the environment. Or that it is a good investment. 

And that presents a challenge in the emerging world of nature as an investable asset class. 

Prominent institutional investors

Trinitas does business through Trinitas Farming and Pomona Farming. The concerning questions around Trinitas and Pomona Farming, along with Mahi Pono, highlight the risks of letting asset managers, or even asset owners, be the ones to dictate what a sustainable investment is. Especially when it comes to things that are so important to life on earth, such as nature, biodiversity, and water.

Pomona Farming, Trinitas Partners, and Trinitas Advantaged Agriculture Partners IV were all founded by Kirk Hoiberg, William Hooper, and Ryan Paton. Hoilberg, Hooper and Paton formed Trinitas Partners as a private equity company in 2008. 

None of the firm’s founders had farming experience. Hoiber was a former senior managing director within CB Richard Ellis in the corporate real estate business. Hooper has a background in hotels and ventures. Patton, according to reports, was also an executive at CBRE. 

Among the investors in Trinitas Advantaged Agriculture Partners IV is the Regents of the University of California, which made up 51% of the limited partnership. Also participating are an affiliate of Main Street Advisors, the asset management business owned and operated by Paul Wachter, former California Gov. Arnold Schwarzenegger’s financial advisor and the former chair of the investment committee of the U.C. Regents. 

Also among the 60 investors are Makena Capital, a well known outsourced CIO firm founded by former members of the Stanford University investment office, and Bessemer Trust, the $140 billion multi family office. 

In addition, PSP Investments, the asset manager for the Public Sector Pension Investment Board, Canada’s second largest pension plan with C $264.9 billion in assets under management, owns Pomona Farming, the Trinitas Partners-related entity which also operates almond farms in California (Pomona is still operating). 

Pomona Farming and Trinitas Partners bill themselves as sustainable investments. Pomona Farming boasts that it is “raising the standard on food purity and safety” by engaging in “thoughtful agriculture.”

Yet, from the beginning their projects have courted controversy, largely for their water use. And now the Trinitas Partners bankruptcy shows that such a large agriculture project can be a high risk project not just to local communities, but to investors as well. 

The firm keeps a low profile, with a website that hasn’t been updated for many years and provides little visibility. In a rare 2014 video, Patton describes Trinitas as “a classic Silicon Valley startup, except we have nothing to do with technology.”

“We have everything to do with investing and sustaining a company and its values in the agricultural space in the state of California.” 

Nature as an asset class 

There is a huge demand, and need for, investments in nature that preserve, restore or regenerate natural systems and landscapes. Land and water can be sources of carbon capture, food production, sanitation, health and wellness. Not taking care of our environment can lead to further disasters, including fires, flooding, and drought. 

The UN reports that $7 trillion each year is invested in strategies and activities that negatively impact the natural environment, more than 30 times the approximately $200 billion that was invested (in 2022) through public and private assets, in pro-nature investments, according to the UN Environment Program. Further, the cost of not preserving and protecting our environment could be as much as $2.7 trillion in annual GDP by 2030. 

Bloomberg New Energy Finance in its November 2023 Biodiversity Finance Factbook, found that biodiversity receives $116 billion in annual investment. At least $996 billion is needed, a delta of $830 billion. Bloomberg reports that the largest amount of investment, $433 billion by 2023, is needed to transform agriculture and cropland. 

Investors are waking up to the need to protect biodiversity. In December of 2022 Ceres announced the launch of Nature Action 100, an investor initiative to engage corporations on their involvement with nature. Modeled on the Task Force for Climate-Related Financial Disclosure, the Task Force on Nature-Related Financial Disclosures issued its first set of disclosures and guidelines in 2023. 

Still, nature as an investment seems to remain poorly understood and under capitalized. Bloomberg found there was $9.6 billion in payment for ecosystem services in 2021, with the majority of that (57%) in watershed, followed by forestry and land use carbon. 

According to a report on real assets by the London based £352 billion investment manager Aviva Investments, however, nature-based solutions has among the lowest level of real asset investment. The 500 investors surveyed, representing $3.8 trillion in assets under management, invested only 4% of their real asset allocation in nature based solutions. The survey found that few investors have high return expectations for nature-based infrastructure strategies. 

Enviva Partners 

Not all nature based solutions, however, turn out to be good for nature, as a series of scandals and accusations of greenwashing suggests.

Take Enviva Partners. The world’s largest supplier of wood pellets for the biomass energy industry billed itself as a sustainable business. In December 2020, the Bethesda, Md.-based company added Jeffrey Ubben, the impact focused hedge fund manager, to its board. 

“Given the world’s commitment to phasing out coal and decarbonizing our future, there are few companies better positioned than Enviva to innovate and deliver practical solutions to the environmental challenges we face as a society and create long-term shareholder value in this space,” Ubben said in a press release announcing his appointment. He added that he was looking forward to supporting “Enviva’s vital contribution to a Net Zero world.”

Enviva went on to be a significant position for Inclusive Capital Partners, the impact focused hedge fund firm that Ubben shut down in 2023. 

Enviva, founded in 2013, has been besieged by criticisms from activist groups that its business was bad for the environment. Dogwood Alliance, Natural Resources Defense Council and other NGOs have found evidence that Enviva contributed to deforestation in the U.S. Southeast.

“It’s never been carbon neutral,” organizer Othelllious Cato told the Columbus, Georgia based  Ledger-Enquirer. “Burning of wood pellets for power emits more carbon per megawatt produced than burning coal.” 

Others defended the company. Forester Joe Davison told the nature news site MongaBay that Enviva replaced demand for wood, rather than increase it. With demand for pulpwood falling with the demand for paper, “Enviva is taking the wood that the sawmills don’t want that would otherwise be left to rot on the site,” he said. “It is providing a market to landowners for that low-value wood.” He said he believed new tree growth was exceeding annual tree harvest, something Enviva also maintains. 

Enviva Partners filed for bankruptcy in March, with a debt burden of $2.6 billion. While the Chapter 11 filing was unrelated to Enviva Partners environmental record, the environmental NGOs celebrated nonetheless. Dogwood Alliance’s Danna Smith told the AP that she viewed the filing as a sign that what she called Enviva’s “greenwashing tactics and lack of transparency” had caught up to the company. (A subsequent shareholder action suit accusing Enviva of greenwashing was dismissed by a judge.)

As with Trinitas, ESG issues do not appear to have been a direct cause of Enviva’s financial problems. In his lengthy explanation submitted to the bankruptcy court of what went wrong, interim CEO Glenn Nunziata, who joined Enviva in August of 2023, cited rising interest rates, inflation, supply chain issues, and COVID-19.

According to Nunziata, one of Enviva’s major problems was its reliance on the spot market to fulfill client demand. Constantly short of wood pellets, Enviva relied on the spot market. This worked well when spot prices were low, but became a problem when prices rose to a record high in 2022. 

Reliance on the spot market was a problem as well for Enviva’s claims of sustainability, which rested on the quality and sourcing of its wood. Could it maintain that level of quality control in the spot market?

Credits for carbon

One way to monetize nature-based solutions to date has been through the market for carbon offsets. The market for voluntary carbon offsets, in particular, has been beset by scandal.

Last year, Renat Heubergert, CEO of Southpole, the world’s biggest seller of offsets, resigned amid a growing scandal regarding a huge carbon offset project in Zimbabwe. The New Yorker called out the scandal in its headline “The Great Cash-for-Carbon Hustle.” The article detailed how Southpole and its CEO had signed a deal to convert vast acres of land in Zimbabwe into carbon offset projects by encouraging locals to not cut down trees, a practice known as “avoided deforestation.” Southpole helped sell the carbon credits to leading corporations such as Volkswagen, Gucci, Porsche and others. 

Southpole is far from the only problematic actor in the voluntary carbon offset universe. The carbon offset verifier Verra has come under criticism for overcrediting forestry projects, claims the company denies. 

Southpole, at least, appears to have had little idea where the $40 million invested in the Zimbabwe land project had gone. The investments were supposed to protect and restore forest land (owned by a former show jumper turned financier who had received the land in payment for a debt) and support the local community.

“South Pole had hardly any idea what had happened to tens of millions of dollars its clients had spent supposedly offsetting their carbon emissions,” wrote the New Yorker’s Heidi Blake. Blake describes a breakfast meeting with the eccentric owner of the Zimbabwe land where he explains how he got the money into the country. “I don’t know what you’re going to report on this, and I hope to God it’s not all of it, because I probably will go to jail,” she says he told her.

But as Blake makes clear there is “no hope of curbing the worst effects of climate change without saving our remaining forests.” Goldman Sachs for one expectscarbon offsets to be a vital part of the clean energy transition. Southpole cut ties with the Zimbabwe project and, as ImpactAlpha reported, is seeming to right the ship as investors sign on for a new funding round. 

The carbon offset market will continue to grow even as it experiences bumps along the way. 

California dreaming 

Then there is California. And its agribusinesses. And its water fights. 

Almonds are an especially controversial crop. According to the statistics it takes 1.1 gallons of water to grow one almond and approximately 1,600 gallons to produce one liter of almond milk. In parched California that is a significant drain. 

In his 2019 bestseller, “The Dreamt Land: Chasing Water and Dust Across California,” Mark Arax writes of California’s San Joaquin Valley, “One of the most dramatic alterations of the earth’s surface in human history took place here.” 

Arax tells the story of Stewart Resnick, one of the largest farmers in the country. Resnick grabbed the flow of the five rivers that run across the plain, “in the name of first wheat and then beef, milk, raisins, cotton, and nuts.” Then, he used pumps to seize the water beneath the ground. 

“As he bled the aquifer dry, he called on the government to bring him an even mightier river from afar. Down the great aqueduct, by freight of politics and gravity, came the excess waters of the Sacramento River. The farmer moved the rain. The more water he got, the more crops he planted, and the more crops he planted, the more water he needed to plant more crops, and on and on,” Arax writes.

“One million acres of the valley floor, greater than the size of Rhode Island, are now covered in almond trees.”

Resnick, 87, who lives in Beverly Hills, owes much of his fortune, estimated to be around $10 billion, to the approximately 120,000 acres of land he owns in San Joaquin Valley. As Arax explains “In less than two decades, Resnick had purchased 120,000 acres and planted the largest groves of almonds, pistachios, pomegranates, and citrus under the control of any one man in the world.” 

Resnick, a millionaire many times over before he got into the crop growing business, owed his agricultural success to his ability to divert water to irrigate his crop empire. By Arax’s estimate, Resnick’s 15 million trees in the San Joaquin Valley consume more than 400,000 acre-feet of water a year. For comparison, the city of Los Angeles consumes 587,000 acre-feet.

Part of this irrigation was achieved through water right deals and a controversialpublic private water storage partnership agreement. Investigating how Resnick was irrigating his crops during the California drought, Arax found that the landowner was siphoning off water from the valley’s giant aqueduct. 

Water rights

Trinitas Partners has applied a similar playbook. They, too, struck controversial deals to gain attractive water rights. Trinitas leaned heavily into the idea that their approach to farming was water-efficient and almonds are a sustainable crop. 

Crucial to the Trinitas strategy was, as co-founder Hoiberg made clear in his testimony before the bankruptcy court earlier this year, the securing of “extremely favorable water rights and competitive water costs.” Hoiberg added that the portfolio’s water costs “average less than $100 per acre foot, significantly below the $400-$900 per acre foot market average in many parts of the San Joaquin Valley.”

In 2017, PSP acquired a majority stake in Pomona Farming and its 10-year old almond portfolio. According to the Canadian pension plan, which prides itself on its track record in sustainable investing, the plan intended to “leverage the acquisition to launch a larger platform, primarily focused on California almonds and water rights, and to build scale in the US agriculture sector.” 

I am no ecological or biodiversity expert. What I do know is that it is unwise to have someone with a large amount of economic skin in the game be the one to dictate what a good natural capital deal is. As investors wade into more nature based solutions we need far greater transparency and clarity around the important questions of what is actually good for our planet. 

New ways of monitoring natural capital deals are emerging, some including AI and other technologies. And the carbon offset market is improving. But improved oversight is only effective if we use it, rather than believing what investors say.

I for one do not have confidence in an institution like, say, U.C. Regents, to tell us what a good nature based investment is (disclosure: I worked for the U.C. between 2017 and 2019. The Trinitas investment was made before I joined. I also subsequently worked on an independently funded research project regarding Mahi Pono) 

One of the problems for large institutional asset owners like PSP or UC Regents is that owing to their size they need to make big investments. That, by its nature, leads them to large environmental projects. The types of projects more likely to be beset by challenges and stakeholders with competing agendas. 

As for Trinitas, it turns out flooding the market with almonds was a bad idea. According to Hoiberg’s testimony, everything was going great (those sweet, sweet water rights) until around 2022. Then, almond prices fell to record low levels and stayed there for a couple of years. At the same time, inflation drove up the costs associated with farming. Rising rates made borrowing more expensive. 

The almond trees were not yet mature enough to harvest, leaving Trinitas’s farming operations cash flow negative. Feeling the strain, Trinitas Partners began talks with TAAP IV investors about how best to address the problems. When TAAP IV investors declined to put up additional capital into the project, Trinitas Partners turned to the debt holders. 

In November of 2022 TAAP IV entered into a loan agreement with Rabo Ag totaling $168 million for two loans, by far the project’s largest outstanding debt. Eventually, it was agreed that Trinitas Partners would best be restructured through bankruptcy. That has now happened, with the 7,856 acres of almond farms being sold off at auction. 

In its most recent publicly available investment report the UC Regents lists TAAP IV with a net IRR of $0. 

Investment in nature is desperately and urgently needed. But they have to be good investments, for people, planet – and profits