Critically Evaluating "Sustainable" Investments

    I caught the WSJ headline and hoped it would be talking about the dubious nature of many "green investments." Many are not particularly "green" and others are absolutely stupid business models. Funds normally have little expertise is judging either. If they hire expert support, it is often just some "woke" yuppies will no critical skill set or experience.

      The financial studies that praise the economic value in "sustainable investment" fail to sort out the noise. Large, well-run companies find it necessary for the PR to claim "sustainable" policies. Most of this stuff is "green wash" which is the short-hand for saying environmental spin. This is harmless enough on its own. Although experts have struggled for years to show that the even adoption of  actual environmental management systems (i.e. ISO) has a positive correlation with actual environmental performance of a company. Any occasional modest correlation can normally be written off to the fact that having such a system reflects a general consciousness of the area of concern that is often not shared by other firms. Companies that worried about this tend to be more contemporary in their general style of management, but this may mean nothing about environmental performance. Lazy managers and naive financial folks long are short-hand expressions of "being green" that will give them some perk without them having to understand the details. Certification programs are particularly popular in Europe and Asia and are routinely used in marketing of the companies, although there is normally no correlation between holding the certificates and actual performance.

     This is not to say that all "sustainable" investments are troublesome. Often the optimal resource use for the bottom-line is also the least wasteful of material and energy. Similarly, the regulatory burden of less environmentally-friendly practices is still not always factored into their business case by management. Making these decisions requires some work and is not advanced much by simply referring to the matters as "sustainable."

     But the real short-coming is in the evaluation of new ventures that frequently uses the same set of sloppy, socially "woke" standards. This may often cause investors to put their normally hard-nosed requirements for a sound business model on the shelve. Two common types of new environmental investigations seem to reappear with great frequency.

     The first I will call the "displacer" model. This technology or service is directed at one problem but produces one or more collateral problems just as serious. The classic is a water treatment system to remove a pollutant that results in a particularly difficult to manage waste. Sometimes any cost savings on the water end are more than off-set on the waste management side. Another example more relevant to today's market, is electric vehicles and their related infrastructure (charging stations, parts, etc.). In many parts of the world, such vehicles will be charged at night on an electric grid largely fed by coal-fired power plants. In those cases, the emissions per vehicle actually increase by more than a factor of two. See previous blog post with studies on this issue.

     The second type of problematic environmental investment is the "engineer's dream." This is a new technology or service that may be very clever in its technical approach. Currently it is very common to find these projects in the waste management and renewable energy field. The engineering is impressive, but can smell a bit academic or, on the other hand, a bit flaky and rough around the edges. Some key questions are if it is so superior why isn't it in broader use? The corollary is why hasn't some industry leader in the sector acquired or invested in the specific approach? Some examples are the "green fuel" that is made for some waste stream, but at great cost which makes it very economically unattractive (and this was before the current depressed oil prices).  Proposals that are heavy on engineering often come from people with that background and have very poorly conceived business foundations.

     The buzz words sound good in the elevator pitch, but quite often are pretty empty in the substances and details. These investment issues have been around for a long time, because many firms making these decisions lack the internal expertise or third-party assistance to make the most informed decisions. I have done this work for years and find clients surprised to actually get real information and insight.

The author has been doing environmental due diligence work for over thirty years in the United States and Europe. He has represented Mead, Best Foods, Morgan Stanley, 3M and other major firms and investors.


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