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World Scientific
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Published by
World Scientific Publishing Co. Pte. Ltd.
5 Toh Tuck Link, Singapore 596224
USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601
UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE
Library of Congress Cataloging-in-Publication Data
Sandor, Richard L.
Sustainable investing and environmental markets : opportunities in a new asset class / Richard
Sandor, Nathan Clark, Murali Kanakasabai, Rafael Marques.
pages cm
ISBN 978-9814612432 (hardcover : alk. paper)
1. Investments--Environmental aspects. 2. Investments--Moral and ethical aspects.
3. Clean energy investment. 4. Sustainable development--Economic aspects.
5. Environmentalism--Economic aspects. I. Title.
HG4521.S3324 2014
332.6--dc23
2014014878
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
Cover image:
Buckminster Fuller and Chuck Bryne, Dymaxion Air-Ocean World Map (1981). This print
belongs to Dr. Richard L. Sandor. The use of an image of the Dymaxion Map is courtesy of the
Buckminster Fuller Institute (BFI). The word Dymaxion, Spaceship Earth and the Fuller Projection
Map are trademarks of the BFI. All rights reserved.
Copyright © 2015 by World Scientific Publishing Co. Pte. Ltd.
All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means,
electronic or mechanical, including photocopying, recording or any information storage and retrieval
system now known or to be invented, without written permission from the publisher.
For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance
Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy
is not required from the publisher.
In-house Editors: Chye Shu Wen/Rajni Gamage
Typeset by Stallion Press
Email: [email protected]
Printed in Singapore
ShuWen - Sustainabe Investing & Environmental.indd 1 24/7/2014 12:20:45 PM
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pagev
FOREWORD
WorldScientificistobecommendedforpublishing—andenviron-
mental market pioneer Richard Sandor and his three colleagues for
writing — this masterly and path-finding overview of an asset class
that is already important, rapidly gaining further scale and scope,
and yet surprisingly and systematically underused.
My 1999 book Natural Capitalism, co-authored with Paul
Hawken and L. Hunter Lovins, asked the question: If capitalism is
the productive use of and reinvestment of capital, what is capital?1
Industrialcapitalismdealsseriouslywithonlytwokindsofcapital —
financial capital and physical capital (i.e., money and goods). It
ignores and even liquidates two even more valuable kinds of cap-
ital — natural capital and human capital (i.e., nature and people).
Withoutpeople,thereisnoeconomy,andwithoutnature,thereare
no people, so this omission is material. But if you play with a full
deck, productively using and investing in all four forms of capital,
thenyoumakemoremoney,domoregood,havemorefun,andgain
stunning competitive advantage. The authors of this book provide
here a vital toolkit for people to start capturing these opportunities
by valuing and investing in the salient missing parts.
Familiar environmental markets already monetize and trade in
the abatement of negative environmental externalities — unpriced
costs to health, wealth, and security imposed by one party on
1PaulHawken,AmoryB.LovinsandL.HunterLovins,NaturalCapitalism:Creatingthe
NextIndustrialRevolution(Boston:LittleBrown,1999):freedownload(withasummaryofthe
articlefromtheHarvardBusinessReview)atwww.natcap.org.
v
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vi SustainableInvestingandEnvironmentalMarkets
another.2 Avoiding these costs can be valuable: Air pollution has
already cost a half-billion northern Chinese people an estimated
2.5 billion person-years of life expectancy — five years per person.3
Less familiar and less mature than improving air quality, but
evenmorepromising,arewaystomakemarketsin savedresources.4
Resource efficiency is typically profitable simply because (1) saving
resourcescostslessthanbuyingthem;and(2)withnewintegrative
design techniques, efficiency often produces expanding rather than
diminishingreturns.5 Thesavingscanbedramatic:Adetailed2011
bookshowedhowtheUnitedStates,forexample,couldruna2.6-
fold bigger 2050 economy with no oil, coal, or nuclear energy and
one-third as much natural gas — $5 trillion cheaper in net present
valuethan“businessasusual”(withallexternalitiesvaluedatzero).6
Thistriplingofend-useenergy-efficiencyandshiftingofenergysup-
plies from one-tenth to three-fourths renewable would strengthen
national security, require no new inventions or Acts of Congress,
and could be led by business for profit.
Yet, that study’s astonishing financial returns (e.g., tripling or
quadruplingU.S.buildings’energyproductivitywitha33%internal
rateofreturn(IRR)anddoublingthatofindustrywitha21%IRR)
2Hank Patton has devised a transactional framework for intergenerational commerce so
thatpeoplenotyetborncaninvesttodayinprovidingthegoodsandservices—andavoiding
the“bads”andnuisances—thatwilladvancetheirinterestsandourown;seehank@worldste
ward.org.
3Yuyu Chen, Avraham Ebenstein, Michael Greenstone and Hongbin Li, “Evidence on
the Impact of Sustained Exposure to Air Pollution on Life Expectancy from China’s Huai
River Policy.” Proceedings of the National Academy of Sciences (8 July 2013); available online
atwww.pnas.org/content/early/2013/07/03/1300018110.
4Amory B. Lovins, “Making Markets in Saved Resources.” In Festschrift for E.U. von
Weizsa¨cker, RMI Publication #E89-2725 (June 1989); available online at www.rmi.org/
Knowledge-Center/Library/2013-19MakingMarketsinResourceEfficiency.
5Amory B. Lovins, “Integrative Design: A Disruptive Source of Expanding Returns to
InvestmentsinEnergyEfficiency.”RMIPublication#X10-09(2010);availableonlineatwww.
rmi.org/rmi/Library/2010-09IntegrativeDesign; Amory B. Lovins, Michael Bendewald,
MichaelKinsley,LionelBony,HutchHutchinson,AlokPradhan,ImranSheikhandZoeAcher,
“FactorTenEngineeringDesignPrinciples.”RMIPublication#X10-10(2010);availableonline
atwww.rmi.org/rmi/Library/2010-1010xEPrinciples.
6AmoryB.LovinsandRockyMountainInstitute,ReinventingFire:BoldBusinessSolutions
fortheNewEnergyEra(WhiteRiverJunction,VT:ChelseaGreen,2011);availableonlineat
www.rmi.org/reinventingfire.
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pagevii
Foreword vii
reflect only private internal costs and benefits. Those results leave
outallavoidedenvironmental,security,andothernegativeexternal-
ities (including the avoidance of 82–86% fossil carbon emissions).
Theyalsoomitmajorpositiveexternalities,suchassidebenefitsthat
havebeenwelldocumentedtotransformrealestatebyaddingvalue
oftenworthone,sometimestwo,ordersofmagnitudemorethanthe
energy savings themselves.7
The markets already being made in saved resources — so that
all ways to provide or save resources can compete fairly — are
impressive and valuable. But they barely scratch the surface of the
asset- and wealth-creating opportunities. For example, Chapter 13
of Natural Capitalism outlines some of the roughly 20 new ways
my team devised in the 1980s for making markets in saved energy,
water,andmaterials.8Manyofthesemethodsaregraduallyentering
use. For example, electric grids in about three-fifths of the United
Statesnowlet“negawatts”(savedelectricity)anddemandresponse
(changing the timing of electrical demand) compete in formerly
supply-side-only auctions. In the giant PJM power pool, 94% of
the winning bids in a recent auction came from the demand side,
because negawatts cost less than megawatts.
In transport, some jurisdictions are starting to make markets
in“negatrips”and“negamiles,”encouragingcompetitionbetween
differentwaysofgettingaroundorofnotneedingto.Suchmarkets
can even reward real estate developers. “Smart-growth” or “new-
urbanist” models create or restore compact, walkable, mixed-use
cities and towns that help people be already where they want to be
so they need not go somewhere else. Since such layouts are more
desirable and valuable, they generally boost developers’ profits. In
water, efficient use is starting to bid against increased supply, and
the same is true for some other resources.
7Scott Muldavin, “Value Beyond Energy Cost Savings.” (2010); available online at
www.greenbuildingfc.com.
8ThisdiscussionisalsoprovidedinChapter5.3ofthepredecessortoHawkenetal.,Natural
Capitalism,op.cit.—namely,AmoryB.Lovins,ErnstU.vonWeizsa¨ckerandL.HunterLovins,
FactorFour:DoublingWealth,HalvingResourceUse(London:Earthscan,1987),pp.164–176.
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pageviii
viii SustainableInvestingandEnvironmentalMarkets
These markets can spur “solutions economy business models,”
which typically lease the desired service rather than sell a product
whose use produces the service. Solutions-economy business mod-
els align providers’ interests with customers’ interests — that is,
rewarding both for doing more and better with less for longer.9
Underlying environmental markets are the vital principles of
financialeconomics—soundbutoftendangerouslyoverlooked.For
example, the lower financial risk of the small, fast, modular invest-
ments now taking over the electricity market is one of the reasons
these projects are often worth an order of magnitude more than is
normally assumed.10 Some traditional suppliers of capital continue
to chase big, slow, lumpy projects. For example, huge investments
are still being made on the basis of apparently low spot prices for
frackednaturalgasthatreflectneithertheattendantrisksanduncer-
tainties nor the value of the gas’s price volatility. (The volatility is
discoverable from the straddle in the options market and is likely
to rise if the apparent cheapness of wellhead gas causes expanded
exports of liquefied natural gas, petrochemical producers’ pivots
to cheaper gas, and downstream bottlenecking.) Counting price
volatility alone approximately doubles the price of gas that is rele-
vantforfaircomparisonwithitsconstant-pricecarbon-freephysical
hedges—energy-efficiencyandrenewables—thatareincreasingly
outpacing and outcompeting it. Financial analysts have a duty to
warn investors who ignore volatility — which is akin to construct-
ing a bond portfolio of all junk bonds and no U.S. Treasury bonds
byconsideringyieldbutnotrisk.Analystscouldalsoadviseinvestors
to short the portfolios of those who persist in such foolishness.
In addition to such tactical openings, the strategic horizon for
applying financial economics and making environmental markets
9SeeNaturalCapitalism,op.cit.,Chapter7.
10AmoryB.Lovins,E.KyleDatta,ThomasFeiler,KarlR.Rabago,JoelN.Swisher,Andre
LehmannandKenWicker,SmallIsProfitable:TheHiddenEconomicBenefitsofMakingElectrical
ResourcestheRightSize(Snowmass,CO:RockyMountainInstitute,2002);formoreinformation,
visitwww.smallisprofitable.org.
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pageix
Foreword ix
stretchesboundlessly.HermanDaly,ecologicaleconomistandpro-
fessor at the School of Public Policy of University of Maryland,
neatly summarizes how the first Industrial Revolution made peo-
ple about 100 times more productive because the relative scarcity
of people limited the exploitation of seemingly boundless nature.
Today, we have the opposite pattern: abundant people but scarce
nature.So,itisnolongerpeoplethatwemuststrivetousefarmore
productively, but nature. The four interlinked principles of natu-
ral capitalism — (1) radical resource productivity; (2) producing in
the same way nature does (closed loops, no waste, no toxicity);
(3) rewarding these shifts through solutions-economy business
models;and(4)investingsomeoftheresultingprofitsbackintothe
kinds of capital in shortest supply (natural and human capital) —
can,together,createanextraordinarilylessrisky,moredurable,and
more rewarding economy for all — forever.
In today’s dirty, depleted, and dangerous world, environmental
markets are the key both to short-term tactical opportunities and
to longer-term transformational ones. I applaud Richard Sandor,
Nathan Clark, Murali Kanakasabai, and Rafael Marques for crisply
describing where to find the key and how to insert and turn it —
andforgivingusaglimpseofthetreasuresbehindthatgoldendoor.
Amory B. Lovins
CofounderandChiefScientist,
RockyMountainInstitute
OldSnowmass,Colorado
October2014
