The Economist: The Innovation Machine
January 12, 2013
NYT: China’s Great Uprooting
June 15, 2013

The Issue of Scale

Recently, we were fortunate to be at Cavallo Point with some of the country’s top thinkers on sustainable investing. The crowd of nearly 100 is full of investors, developers, foundation directors, Australian ranchers, Nature Conservancy and PricewaterhouseCoopers senior execs, and many more.

This summit felt a bit like a small version of the original TED, with its 20-minute presentations and 5 minutes of Q&A per speaker. Today’s topics range from the future of deregulated energy, to the emerging investment opportunities in stormwater, to how Oprah’s ranch in Hawaii is producing tremendous amounts of food in a natural way — all while creating new topsoil. We meeting in Cavallo Point’s chapel, which seems apropos considering that sustainable investing feels, in some ways, like a new religion, orthodoxy or ethic (depending on how you choose to see it).

Too often, such summits are too boring (long talks), not deep (speakers not carefully selected or knowledgable) and not fun (people not encouraged to be themselves). Not so here. The reason this summit is not boring, quite deep and fun is because of the gathering power of Dave Chen, founder of Equilibrium Capital. Dave is one of the world’s leading sustainable investment visionaries, he walks his talk with his business, and he even has fun after-hours with his responsible (and delicious) wine.

Dave invited everyone here today to talk about one core issue: scale. In other words, how do we take all of this sustainable investment innovation and turn it into a way to feed, house and employ 4 billion (of the 7 billion) people in the world who want to move into the middle class, eat chicken and drive a car? As people emerge into the growing global middle class, it’s not realistic to assume they WON’T behave like others who are already there. They will.

Dave’s framing question for today — How do we build scale for the things we care about? — is designed to plant the seeds with a crowd powerful enough to find real solutions for everyone, but especially the growing middle class. Why the global middle class? Because we know they’re coming, and we know that they’ll need to be supported at a time when less than one (1) percent of the globe’s water is drinkable. This confluence of factors is a major investment opportunity for those who are paying attention. Dave rightly believes there are plenty of great ideas in the world, so the question is: What will it take (from an investment perspective) to turn the greatest ones into big ones?

While the videos from today will eventually be online (just like TED) here are some nuggets of wisdom captured throughout the day (the videos are full of rich content, so be sure to watch them if sustainable investment is of interest). These pearls are more about why people should invest, not how:

Dave Chen, Founder and CEO, Equilibrium Capital
• This is an economic shift, and it has to be put in economic terms.
• To quote Gretzky: You have to skate to where the puck is going to be, not where it is.
• Why are we doing this? A deep sense of commitment, and the sense that this is an opportunity.
• When we started this firm in 2007, went on a long walkabout: India (a dozen microfinance investors), Bill Chambers, Mark Edlen (Gerding Edlen), Brian Rohter (New Seasons Markets). What we saw inspired and informed our approach. Rohter, for example, beats the industry standard (by a long way) on sales per square foot at New Seasons, all while delivering real sustainability. It’s possible.
• “Our goal is to bring mainstream capital to bear in sustainability.”
• “Water is the next oil. Our job is to figure out how to invest.”
• Investment vehicles can serve as a fulcrum. The goal is returns and impact – at planetary scale.

Allan Emkin, Managing Director, Pension Consulting Alliance
• “For the last 25 years, you didn’t have to be smart — you just had to be lucky. You could move around money in just about any way and still make money. The world was operating without a sense of history.”
• We’re not back to where we were six years ago. Yes, accounts may be back to their 2007/8 levels for the first time. But the liabilities of people continued to grow during those times, and then there are the lost opportunities over the years. We’re still 30 to 40 percent behind.
• The Wall St. model is slowly falling apart for large institutional investor, as it’s driven by fees, not performance.
• “There is an active desire to put money into timber, water, alternative energy. And not enough competition. Early movers will earn value.”

Malcolm Preston, Global Head of Sustainability Services, PricewaterhouseCoopers
• “If you want investors to care about sustainability, you have to talk about money first. Then sustainability.”
• “Make no mistake, we are destroying the world. I am passionate about using money to make it right.”
• “The main problem with capital markets is that they operate as if air and water are infinite.”
• “The first mover organizations on the forefront of dealing with scarce resources are the ones who will win.”
• Sustainaiblity Accounting Standards Boards are on the rise in U.S.

Hal Harvey, CEO, Energy Innovation
• “With energy, we’re battling against the rotary phone. We need to move the utility industry toward the direction of the communications industry.”
• “We need a regulated monopoly with distribution, and companies paying to use the wires.”
• The VC world went big into clean tech 4 or 5 years ago, and they’re still there.

Tom Steyer, Founder, Fahr LLC
• “We’re in the middle of a revolution. It’s good, and it will make us rich. So why are we fighting?”
• “Just because the two-party system has broken down in Congress does not mean that we’ll be denied our democracy. We just have to go out and get it state by state, and eventually we’ll end up back in Washington.”

Grant McCargo, Founder and CEO, Bio-Logical Capital
• “Hawaii imports 90 percent of food and energy – that’s a sustainability opportunity.”
• “Mixed-use development creates a sense of place – with 20 percent returns.”
• UC Davis Net Zero energy project – biggest in the country.
• Buildings have to be 50 percent more efficient than code in order to get close to net zero.
• “Net zero isn’t good enough – we wouldn’t even apply for a project now unless we can go net positive on energy, food and more.”
• “How can we put more in than we take out? It’s possible.”
• “Our mixed use buildings helped us ride out the economic storm – mother nature doesn’t plant 10,000 acres of corn.”
• “How do we apply our mixed-use urban lessons to farms? It’s about diversity.”
• “We’re getting 50-60,000 pounds of growth per acre on Oprah’s farm with no topsoil loss – we’re getting topsoil gain.”
• “There used to be as many bison in America as today’s livestock. They were self-supporting and didn’t need antibiotics.”
• “We eat, we sleep, we consume energy – investing in sustainability lowers risk.”

Matt Donegan, co-president, Forest Capital Partners (retired)
• “Seventy-five percent of wood will be grown on high-yield plantations, which means it will replace wood cut from forests.”

Alan Hayes, Exec. Chairman of Australian Pastoral Funds Management
• On the biggest risk in farming: “Debt. There’s no common sense in banks anymore.”
• On the reason good property goes for sale: “There are four reasons, and they all begin with D: Death, debt, drought, divorce.”
• On why you shouldn’t cage animals: “One animal gets a cough, and the rest get the flu.”
• On how you know your ranch is healthy and productive: “Happy cows get pregnant, and happy steers get fat.” (Yes, that one brought down the house).
• “Asia is better off to buy from us – they don’t have the land for livestock.”

Rodney Lake, CEO, The Lake Group Global Resources LLC
• Investment framework: Integrity, discipline, continuous improvement.
• Margin of safety: more upside than down, understand the value of the opportunity.
• Business & management: Invest in long-term fundamentals (tailwinds) and avoid businesses with negative long-term fundamentals (headwinds); invest with honest and capable teams.
• Partnership: Alignment of interest, metrics for performance + transparency, be in business with people with whom you want to do business.
• Circle of competence: Keep it simple.
• Independence.

Tom Avinelis, Principal, Agriculture Capital Group
• Between now and 2050, we’ll go from 1.8 to 3 billion in the middle class.
• Don’t just invest the land…invest the midstream assets of packaging, etc.

Doug Evans, Senior Managing Director, Abbot Downing
• “There’s a ton of cash just sitting on the sidelines, looking for something to do.”
• “It’s in the trillions, well above the 15-year average.”

Brent Gaulke, VP, Gerding Edlen
• “If you do it right, the neighborhood is the amenity.”
• “There’s more demand than there is supply.”
• “Going to net zero is not enough.”