For Smart Companies, the New Gold Rush is Green
from September/October 2008
by Brian Dumaine
The same venture capitalists who provided the money to create the computer industry and the Internet strongly believe green tech will be to the energy industry what the steamship was to clippers, what television was to radio, what the Internet has been to traditional media—a disruptive force that destroys old business models and ushers in the new. At play is economist Joseph Schumpeter’s theory of creative destruction, which he likened to a Darwinian process where new, better technologies push out the old. The creation of new green businesses can happen within conglomerates such as General Electric, Sharp, and Toyota—and has—but innovation is much more likely to come from small companies, because change is much harder in large organizations.
Old-line energy companies that do not adapt to change in a carbon-scarce world will shed jobs, if not go out of business altogether. Displaced oil drillers and coal miners will need to be retrained. The good news is that opportunities to engage in new kinds of work will abound. Over the next decade or two the new green economy will create hundreds of thousands of new jobs and will generate as much wealth as computers and the Internet, if not more.
Record amounts of venture capital are flowing into green tech. According to the consulting group Clean Edge, clean-energy investments rose from 1% of total American venture investing in 1999 to $2.9 billion, or nearly 10%, in 2006. The Cleantech Capital Group, a Michigan-based research firm, predicts that by 2009 those investments will grow to $10 billion, some 10 times what the Department of Energy currently spends on alternative energy research.
Much of the money is coming from Silicon Valley. A rapidly growing share of the $4 billion managed by VantagePoint Venture Partners in San Bruno, California, has been invested in green technology, including solar and biofuel start-ups as well as Tesla Motors, an electric-car company. Venerable Silicon VC firms such as Kleiner Perkins Caufield & Byers and Draper Fisher Jurvetson are also placing sizable bets on finding alternative energy solutions. Some of the enthusiasm is based on the possibility that when large oil companies like Exxon Mobil are finally ready to go green, they will have to rely on the technology today’s investors are sponsoring.
Money is flowing in from sources well beyond Silicon Valley too. Citibank, despite its troubles in the subprime mortgage market, has pledged $50 billion to invest in or loan to green-related businesses. The Carlyle Group, a huge private equity firm, is heavily invested in clean technology. Goldman Sachs, arguably the world’s most successful investment bank, has put billions of its own capital to work, investing in alternative energy companies like First Solar, GridPoint, and SunEdison.
Goldman Sachs has been a leader on Wall Street in integrating environmental considerations into its strategy and core businesses. Its foray into conservation and environmental awareness had unusual origins. In 2002, by way of its distressed-debt business, Goldman ended up owning roughly 700,000 acres of property in Tierra del Fuego, Chile, an area the size of Yellowstone National Park. Goldman employees on the trading desk weren’t sure what to do with this asset. One suggested a logging operation. Another suggested selling it. Someone else proposed another idea—maximizing the land’s value by purchasing it for conservation, a plan Goldman’s senior management and its board signed off on. Though the land and endowment cost relatively little by Wall Street standards, Goldman was under some pressure from certain shareholders and members of the business press who believed a public company shouldn’t use its funds to support an environmental agenda. Mark Tercek, who then ran Goldman’s mergers-and-acquisitions division and is now the head of the firm’s environmental-strategy team, says, “We took a lot of heat for that. But when we did it, everyone inside the company felt great. It was the right thing to do.”
Protecting land in Chile also has an intangible business payback. When Goldman is perceived to be at the forefront of an issue as crucial as global warming and climate change, it helps tremendously in recruiting smart young talent. That’s a huge competitive advantage in any business, but especially so in investment banking. Goldman for years has been a top pick among college graduates, but its Tierra del Fuego activities, it soon discovered, made it even more desirable.
The Chilean deal also sent a message to Goldman’s more than 30,000 employees that the top management was serious about the firm’s environmental impact. Each Goldman business unit was asked to come up with a green strategy. In its principal investing division, Goldman earmarked $1 billion of its own money for clean and renewable energy projects—and so far has exceeded that goal more than two times over. Many competitors watch closely what Goldman does, and when the firm was seen investing in green technologies, a wave of capital followed from, among others, two of the largest private equity firms, TPG Capital and Kohlberg Kravis Roberts & Co.
Goldman, as a major global commodities trader, is now trading carbon credits and providing related services in the European market and is one of the biggest players. The company also became the largest minority investor in Climate Exchange PLC, the owner of the Chicago Climate Exchange and the European Climate Exchange, voluntary markets for trading carbon credits. This is not philanthropy. If the U.S. Congress passes carbon “cap and trade” legislation [capping carbon emissions by establishing permissible limits for companies and allowing those that came in under the limits to trade the excess allocations to others], Wall Street players who have expertise in the area stand to make significant trading fees from buying and selling emissions allowances and related financial and risk-management products.
Goldman’s investment-research division evaluates the companies that it follows on the basis of their environmental, social, and governance performance. At first Goldman’s own research team complained that there was no indication that any of its customers wanted such information. And some of the companies Goldman followed were surprised and even annoyed by the questions the analysts began asking: What is your carbon footprint? What measures are you taking to reduce the use of fossil fuel in your operations? What steps are you taking to protect your company from the adverse effects of global warming? The companies answered them anyhow. As a result, many institutional investors and businesses alike came to see the value of this information in making investment and strategic decisions.
A growing number of big money managers at other firms believe that corporate America must change the way it does business if it is to thrive in an era of global warming. They are triggering seismic changes in corporate boardrooms around the country. The global management consultancy McKinsey & Co. now advises 20 of the Fortune 100 on how to build corporate sustainability programs.
What’s driving these behemoths? As concerns about global warming grow, corporations are coming under attack by both government and environmental groups; it is, in fact, likely that climate change will become the next big legal battlefield. In 2006, for instance, the state of California filed a lawsuit against six automakers, charging that greenhouse gases from their vehicles have caused billions of dollars of damage. The action contended that California must spend millions of dollars to deal with reduced snowpack, beach erosion, ozone pollution, and the impact on endangered animals and fish. [The suit
is ongoing.]
California is not alone. Eight states, as well as New York City, sued five electricity generators to reduce greenhouse-gas emissions. In addition, there is growing shareholder pressure to go green. More and more big institutional investors believe that those corporations that fail to adapt to global warming will soon see their shares pummeled. McKinsey, in a report called Preparing for a Low-Carbon Future, argues that the first companies to respond to climate change could not only protect their share price but also create a long-term competitive advantage. PG&E in California and FPL in Florida, for example, have been investing heavily in wind, solar, and nuclear power. That means they won’t have high revamping costs to clean up their power generation. Obviously they will be less affected by rising carbon-control costs than companies like American Electric Power, Southern, the Tennessee Valley Authority, and Xcel Energy, which are more heavily dependent on coal.
The McKinsey report says, “Rising input costs—for energy or transportation, say—will affect companies of every stripe, from retailers that consume energy in their stores to consumer product companies that design packaging. Investors will increasingly hold them responsible for managing emissions. Managers who fail to respond to calls for more transparency and better planning will face greater public censure or even charges of breaches of duty. They might also find the share price of their companies discounted in the capital markets.”
Some corporations, Wal-Mart for one, see green changes as an opportunity to slash energy costs and drive more dollars to the bottom line. Wal-Mart has built two new “green” supercenters, one near Bentonville, Arkansas, and one in suburban Denver. At the Bentonville store, skylights let in enough natural light that the fluorescent fixtures can be turned off a lot of the time. For those times when the lights are necessary, the company has installed superefficient LED lighting that could, as it becomes more affordable, cut electricity bills by as much as 80%. Motion sensors control the lights in the freezers: They switch on only when a customer is within arm’s reach. Overall, the company estimates that this store could save as much as $100,000 in annual electricity costs. At the Denver store, some of the energy comes from wind turbines and solar panels mounted on the roof. Dirty cooking oil from the deli and used motor oil from the lube department are recycled to heat the store. Some of the display cases are made from recycled bamboo. Spoiled food gets composted into fertilizer and resold for garden use.
Wal-Mart CEO H. Lee Scott Jr. has told his suppliers that the company is aiming for zero waste. It also plans to consume 100% renewable energy. To start down that road, Scott has set some tough mileposts. He challenged his 1.8 million employees to figure out how to cut energy use in Wal-Mart stores by 30%, reduce solid waste from U.S. stores by 25%, and boost the efficiency of Wal-Mart’s vehicle fleet by 25% over three years, and then double that within 10 years. Wal-Mart believes it will save $26 million a year in fuel costs for its fleet of 7,200 trucks by equipping them with auxiliary air-conditioning and heating units so that during drivers’ rest and sleep breaks, the big truck diesel engines will not be left idling.
Wal-Mart’s daily operations account for only 8% of its overall carbon footprint; the remainder is emitted by its 60,000 suppliers that provide Styrofoam coolers, broccoli grown with petrochemical fertilizers, and paper towels that have their origins in forests around the world. If the company has any chance of becoming remotely sustainable, it must press its suppliers to embrace a low-carbon diet as well. But ultimately big corporate consumers of energy such as Wal-Mart will not be able to keep growing without a radical shift in the kinds of energy they use.
Where will they find it? GE thinks it has some answers. In 2005 it launched Ecomagination, a program to get the entire organization focused on the challenge of building cleaner jet engines, locomotives, and coal turbines and of inventing entirely new products, such as energy-efficient LED lighting systems that account for less greenhouse gas. While it is still in its early stages, the Ecomagination program is showing results for GE and could act as a template for how all big corporations can adapt to the new green economy and avoid the crush of the oncoming wave of creative destruction.
Ecomagination was born during one of chairman and CEO Jeff Immelt’s “growth playbook” meetings. Every year he meets with all his division heads to do long-term strategic planning. Each of the division heads lays out what is likely to have an impact on his or her business over the next three to five years. At the 2004 meeting, Immelt heard a common theme: His executives told him that regulations on emissions will become more stringent, that environmental leadership is going to count, and that the company is going to have to address these issues, especially because their customers are feeling the same pressures. They also stressed that energy costs will continue to be high and that energy security is increasingly important to GE’s customers. Finally, they argued that in the future many of the world’s precious resources are going to be scarcer. As one executive put it: “The basic scenario is that we are facing an economy of scarcity.”
Immelt and his management team agreed to commit to Ecomagination. They would identify their most promising green technologies. They would boost green research spending. They would be publicly transparent about their environmental initiatives. At the same time, Immelt decided that by 2012, GE would reduce its own greenhouse-gas emissions by 1% from 2004 levels. This doesn’t sound like much, but the company points out that based on its projected growth, its emissions would have otherwise risen 40% over that period. Already this drive for increased efficiency helped save the company $70 million in energy costs in 2006 and $100 million in 2007. “We basically applied GE operational tenets to an initiative that was socially responsible and economic at the same time,” says Immelt. He promises to grow GE’s green product lines to $20 billion in revenues by 2010, up from $10 billion in 2005. More significant, over the same period the plan is to double GE’s R&D spending on green tech, to $1.5 billion.
“We use GE as a constant example, because it shows that there’s a market for building renewable infrastructure,” says Anne Kelley, the director of governance programs at Ceres, a Boston-based group of investors and environmentalists that works on climate change.
One of the biggest criticisms of Ecomagination arises from environmentalists who believe that GE has simply taken products it was making anyway and put a green label on them. There seems to be some truth to that charge. Initially, as part of the program, the Ecomagination team identified almost 20 products that generated about $6 billion in revenues in 2004. These included compact fluorescent light bulbs, wind turbines, and solar cells, as well as some not-so-identifiably-green products like locomotives, jet engines, and clothes dryers. GE says that each product labeled green has passed a two-step certification process developed by a New York City consulting firm called GreenOrder. First, Ecomagination products have to be substantially and measurably better in terms of operating performance than what’s currently available from either GE or its competitors. Second, they have to be substantially and measurably better in terms of environmental performance. These are the products Immelt says the company will grow to $20 billion in sales by 2010.
Within the environmental community, some worry about the strengthening ties between big businesses such as GE and environmental organizations. The concern is that if the two traditionally antagonistic groups become partners, the green community will have a hard time serving as watchdog. Such criticisms are off the mark. The environmental community is full of smart, serious people who aren’t likely to be hoodwinked by a big company. Cooperation between the Environmental Defense Fund and the utility TXU led to the scrapping of eight polluting coal plants. The partnership between Goldman Sachs and the Wildlife Conservation Society resulted in the creation of a valuable preserve in Tierra del Fuego. The campaigns of investor groups such as Ceres and the Investor Network on Climate Risk have led to corporations’ taking action to reduce their carbon footprints. “What did we accomplish before we started working together?” says GE’s head of Ecomagination, Lorraine Bolsinger. “I’d say the answer is not much.”
Brian Dumaine is executive editor of Fortune Small Business. This article is reprinted from The Plot to Save the Planet: How Visionary Entrepreneurs and Corporate Titans Are Creating Real Solutions to Global Warming. Copyright ©2008 by Brian Dumaine. Published by Crown Business, a division of Random House Inc.
