Green Finance: The Hunt for Pennies on the Pavement

By: Robin Hicks

Dave Chen is a glass half-full sort of person, which is probably to be expected of a man who runs a multi-billion dollar investment firm and owns a wineyard that produces Oregon’s finest sustainably grown Pinot Noir.

But business hasn’t always come easy in the nine years since Chen founded Equilibrium Capital, a US-based firm that invests people’s money in ventures that try to create a better world.

Just five years ago, investing in sustainability was not seen as a safe bet.

“We had to really work at getting to get an interview or an audience with an institutional investor,” says Chen, who spoke to Eco-Business on the sidelines of the recent Ecosperity conference in Singapore.

Now though, everyone wants to talk about making investments that do good, he insists.

“If you talk to just about any large institution today, they are all concerned about stranded assets, climate risk in their portfolio, and whether they going to miss out on the low-carbon economy opportunity,” says the Taiwanese-American.

“They won’t necessarily use the word sustainability. But they will use those very defined strategies and macro trends that are opportunities and threats in their portfolio.”

So has sustainability, to use a financial term, been de-risked?

“I don’t care whether you’re talking about public equities or fixed income. Risk is just part and parcel of the investment game,” says Chen. The more important question is, do investors view sustainability as an economic trend and an economic shift? I think the answer is absolutely yes.”

Despite global disapproval of the United States withdrawing from the Paris Agreement on climate change, Chen believes that the consequences of President Donald Trump’s decision are overblown.

We’re messing around with complex ecological and economic systems, and we’re going to make mistakes.

Though he talks to investors who are now more worried about the flow of trade between the United States and Asia, and the availability of labour as a result of a Trump presidency, Chen says that Trump’s impact on sustainable finance will be negligible.

“President Trump’s declaration makes for a great, emotional news story. But issues such as energy, water, demographic growth, consumption and the preservation of arable land – these are all economically driven, and in many ways the cost curves now win out.”

Financial firms with assets worth tens of trillions of dollars are now committed to aligning their portfolios with worthy causes.

However, to achieve the United Nations’ Sustainable Development Goals (SDGs), a global action plan to end poverty and fight climate change, that was the focal point of the Ecosperity event, US$5 trillion to US$7 trillion will be needed every year through to 2030.

Pennies on the pavement

Much of that capital will come from recognising sustainability not as a cost but as a business opportunity, and Chen says that these opportunities commonly present themselves in the simplest ways.

“Sustainability is oftentimes about the little things,” he says, referencing the Jack Johnson song, the three ‘R’s: Reuse, recycle, reduce. “These things are not necessarily sexy,” he says.

What Chen’s company hunts for are “nickels in the sidewalk” – business opportunities lodged in the cracks between business processes.

“What we’ve found is, when you separate out business processes, you miss a lot of the opportunities such as recycling and closing the loop.”

Finding those opportunities takes hard work and a healthy dose of humility, says Chen.

“We’re messing around with complex ecological and economic systems, and we’re going to make mistakes.”

Mistakes are inevitable in a space in which businesses are still learning, says Chen. Even Unilever, often held up a bastion of sustainable business, is not infallible.

The consumer goods giant recently announced a scheme to recycle single-use plastic sachets, which it introduced more than a decade ago to sell shampoo, soap and detergent to lower-income consumers. The sachets have blighted communities in countries such as Indonesia by polluting waterways and clogging drains.

“Unilever started with good intentions, repackaging detergents into single-serving portions that would allow the bottom of pyramid not to be taxed by distribution channels and by large packaging. That makes all the sense in the world. The downside is that they created a waste stream,” he says.

Chen’s firm manages between US$2 billion and $500 billion a year in “real assets”, an asset class of farm lands, forests and real estate that he says is still largely untapped. The challenge, he says, is identifying opportunities that do more than do good.

“There is a tendency over the last five to 10 years to think of impact investing and sustainability in romantic terms; the drive to save the planet and feed the hungry. But to create scalable solutions, they’ve got to make economic sense.”

“You’ve got to go through the hard work of aligning interests and benefits. We use glib terms like ‘win-win’ – but that’s what we’re looking for.”

On a bad day, it can feel like you’re Sisyphus, rolling rocks up a hill. But on a good day, you can take comfort in the fact that the capital markets are one of the swiftest moving devices that humankind has invented.

The Asian opportunity

Though the bulk of Equilibrium Capital’s business is in the US, with about 30 per cent overseas, Chen’s Asian experience includes working with China Development Bank to help the financing giant develop a green cities framework for real estate investment.

Chen says that Asia is “ripe” for opportunities to develop sustainability portfolios, although the region has been slower than Europe or the US to catch on.

Asia has gone from “go, go, go, growth above all else” to a point where an emerging middle class in countries such as China and India has started to value a better living environment, Chen notes.

“We’re now turning our attention to sustainable practices. We’re starting to equate quality issues to economic shifts. And when there’s an economic shift, the investor is not far behind,” he says.

“Across all of Asia there is tremendous opportunity. The region is challenged by strong population growth, so is consuming a lot of water, energy and food.”

He cites sustainable agriculture and technology such as advanced greenhouses as one big opportunity for the region.

Pushing rocks up a hill

Though Asia has been relatively slow to embrace sustainable finance, this is a world that moves extremely quickly, Chen remarks. His glass is half-full about this region catching up rapidly.

“On a bad day, it can feel like you’re Sisyphus, rolling rocks up a hill. But on a good day, you can take comfort in the fact that the capital markets are one of the swiftest moving devices that humankind has invented.”

Chen estimates that, in just 15 years, renewable energy has attracted around US$1 trillion in investment from the capital markets, and it is a sector that is “growing exponentially,” he says.

Pointing to the state south of where he lives, California, Chen calls it a “minor miracle” that the world’s sixth largest economy went from using zero renewable energy to 25 per cent of the energy mix in 15 years.

The progress has been so rapid, that the state is now aiming for 100 per cent renewable energy by 2040.

“The capital markets are swift. That’s what gives me some level of comfort,” says Chen. “Despite what makes for big news and jingoism with Trump’s withdrawal from Paris, the market has already spoken.”

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