CFO of Chestnut Carbon breaks down a first-of-its-kind carbon deal with JPMorgan Chase.

Who said you can’t teach an old bank new tricks?

This summer, an institutional bank signed a new type of deal for a new asset class. Chestnut Carbon, a carbon market project developer that plants forests and sells the credits to corporations, collaborated with Microsoft and JPMorgan Chase to create one of the largest carbon removal offtake agreements in the United States.

Gregory Adams, Chestnut Carbon’s CFO, took CFO Brew behind the scenes of this first-of-its-kind non-recourse project financing for carbon afforestation. The company currently operates in eight states: Oklahoma, Texas, Arkansas, Alabama, Mississippi, Louisiana, Georgia, and South Carolina, where it buys land to plant native, diverse, and conservation-grade forests to generate carbon credits.

Adams spent nearly five years at JPM and the rest of his career at Morgan Stanley, Goldman Sachs, and other financial institutions, working on energy and project development and commodities. After being CFO at Chestnut for less than two years, he helped orchestrate a $210 million credit facility to provide Microsoft with 7 million tons of nature-based carbon removal credits over 25 years, from forests planted in the southeastern US.

Start early. While JPMorgan came out publicly as wanting to be the “carbon bank of choice” in late June, Adams had already been in talks with JPMorgan for months. Chestnut had signed its agreement with Microsoft in January, which was when his conversations with the bank went into high gear. But Adams floated the idea to multiple banks before the Microsoft deal. In July, Chestnut and JPMorgan closed on their deal.

“It’s a new asset class,” he told CFO Brew. “So you want to be able to go in front of people sooner than later.”

But not too early. Adams warned that “if you don’t have a contract, it’s going to be a short conversation.” He suggested drumming up interest in a new type of deal. JPMorgan declined to comment for this story, but Vijnan Batchu, global head of JPMorgan’s center for carbon transition, told Bloomberg in July that “providing this kind of financing gives developers the runway they need to succeed at an attractive cost of capital, allowing them to focus on delivering significant carbon projects and fulfilling contracts.”

Having a long-term partner that the bank trusts is key to getting the financial institution on board. And Microsoft thinks in terms of several years to decades for its carbon removal projects, according to Brian Marrs, the company’s senior director of energy and carbon removal. For Chestnut Carbon, getting Microsoft’s buy-in helped convince credit officers at JPMorgan that Chestnut was a stable investment even if the asset was unfamiliar.

“This longer view of the carbon removal market is essential for advancing the bankability necessary to attract private capital into the space, while likewise attracting top-tier developers to solve complex execution challenges,” Marrs told us.

Microsoft is also one of only two companies in the world with an AAA rating from S&P Global Ratings (the other is Johnson & Johnson). While Microsoft was not involved in the selection of JPMorgan, it did participate in a few discussions with both the bank and Chestnut Carbon to make sure all partners fully understood the terms.

“It signals that there’s increasing investor interest in the sector. There’s been many years of growing momentum and demand for carbon markets,” Margaret Morales, director of Carbon Capital Lab, told CFO Brew. “It’s hopefully foreshadowing a lot more money coming into this space.”

Know what a bank wants. According to Adams, he knew how these banks operate from working inside them.

“I think I was a pretty informed consumer,” he said.

While the “nature space” is a new asset class, unfamiliar to banks, Adams explained it to them in their own language. He structured the project like a power purchase agreement—a long-term contract between a power generator and a buyer like a utility; banks are already familiar with this.

“Instead of power and electrons and a utility, it’s carbon credits and it’s Microsoft,” he said.

He drew further parallels to initiatives the bank already understood. For example, he knew that in a power plant project, a bank would want an independent engineer, but there’s nothing to engineer when planting a forest. So instead he hired a technical advisor, something new but equivalent. He knew banks were used to seeing insurance advisors for traditional asset classes, so he hired one of those, too.

“Trying to identify analogs from asset classes that lenders and their credit officers are used to seeing and apply them here, I think, really helped us with our credibility and the bankability of the overall structure,” he said.

De-risk it. “Banks today are busy with conventional assets, and they don’t have a lot of room to look at things that are far afield,” Adams said. “Particularly if the risk profile is something that they don’t really understand.”

Planting forests to make money is a risk, not only because it’s a new mode, but also for the unpredictability of an environment subject to drought, flood, disease, and wildfires. Just one of these events could wipe out the entire forest (and the money-making credits) in one fell swoop. And at a time of human-caused extreme weather events, investing in forests can be a hard sell.

According to Adams, Chestnut Carbon has done its best to mitigate these risks by structuring its forests very intentionally. The company is planting on noncontiguous parcels so the eggs aren’t all in one basket. It’s planting native and diverse trees that are adapted to the local environment and more resilient to disease.

But according to Morales, the real de-risk is the fact that Chestnut Carbon owns the land, so in case of default there is hard infrastructure that has value for the bank to reclaim.

“That is a type of collateral that lenders understand,” she told CFO Brew.