Friday, April 20, 2012

Sustainably Financing the Business of Sustainability

I am following a blog called Feld Thoughts, posted by a Venture Capitalist named Brad Feld.

Brad's thoughts today hit on two themes: the need for themes when investing in business, and the need for great businesses to have not just customers, but what he calls "raving fans".

For Enterprise, themes are important because if you choose well, you get customers who are raving fans (Brad's words).  If you choose poorly, you get something less.

So, here's is the theme for my business: sustainably financing the business of sustainability.

What is sustainability?

It is living with limits.  A limit may be a goal, something towards which we strive.  It may be a boundary, within which we are safe and secure.  It may be a constraint, beyond which we cannot go without impairing the integrity of our activities.  It may be an irritant that stimulates inquiry that leads to insight that drives the evolution of knowledge, work and wealth that is the real story of human history, and the real driver of our prosperity.

Limits are everywhere, physically and economically.  It is important that we know, more or less, where they are and what they are.  If we mistake a boundary for a constraint, we get not safety, but stagnation. If we mistake a constraint for a goal, we get irrational exuberance, and a turbulent prosperity of booms that always go bust.

Sustainability is what lies between the two extremes of stagnation and exuberance.  It is vital, energetic, exciting, resilient, adaptive, evolving value creation that is at once both stable and dynamic.

Every business is in the business of sustainability, unless it is hyping exuberance, or stifling innovation.

Sustainability is emerging as an important theme in finance and investing, especially among our largest Institutional Investors: pensions, endowments, insurance companies and commercial banks.  Some of this is being catalyzed by concerns about the environment, and the limits of industrial expansion imposed by the limits of our biosphere.  Some is being catalyzed by concerns about the economy, and the rapidly accelerating cycle of boom-and-bust that many see as increasingly anything but sustainable.  Some is being catalyzed by corporate misconduct, and the stunning collapse of so many companies that turn out to be more hype than substance.

In this way, limits to sustainability in the connections between Enterprise and Investment can be seen as an irritant that is stimulating inquiry that will lead to insights into new and better ways to align the interests of Enterprise and Investment in a shared commitment to both real value creation, and sustainability.

Anticipating this drive towards sustainability as a value that is shared between Enterprise and Investment is the evolution of Project Finance as a new solution for bringing together Enterprise and Investment around revenue sharing as a strategy for investment return realization.  This technique supports: alignment of interests between Enterprise and Investment along multiple points of value, financial and additional; the transparency of business operated according to a pre-agreed plan; and decisions that balance short-term performance against longer term sustainability.

Right now, Project Finance is practiced primarily as an alternative form of public finance.  Projects tend to be quasi-governmental in both purpose and scale, and some form of governmental credit is usually required to stabilize investor return expectations.

However, this technique is so effective at delivery sustainability, that it is easy to see how it can only become more mainstream, as sustainability continues to grow as an important theme with both Institutional Investors, and the individuals whose wealth these Institutions are charged with investing.

I don't know if the professionals at large financial institutions will ever become what Brad Feld describes as "raving fans" of using proven project finance techniques to sustainably finance the business of sustainability, but who knows?

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