B-School Incubates Winning 'Green Screen'

B-School Incubates Winning 'Green Screen'

As a materials use expert with 15 years experience working on pollution prevention and sustainable manufacturing initiatives, I have seen many projects pay out with varying degrees of financial and environmental success. So when I got a call from a friend to advise a university-based project on “green” investing, I jumped at the chance. The program would help students make investment decisions that attempt to take account of parameters of environmental performance.

The challenge was daunting: I know that innovation, radical improvements in quality and efficiency, and teamwork across business functions are at the heart of strong projects that promote sustainable, clean production -- they’re also the markers for great business investments. I also know that finding good, green investments can be grueling. I’m happy to report that working with these students has energized me professionally and personally.

Intuition, Frustration, Get Things Rolling

The project began in early 2000, when Tim Stepanek, a venture capitalist in Minneapolis, Minn., discovered Natural Capitalism, the groundbreaking book by Paul Hawken, Amory B. Lovins, and L. Hunter Lovins. Natural Capitalism posits that our current levels of resource use and waste are unsustainable -- and that there were viable alternatives to the status quo. Long disheartened by what Stepanek saw as environmental decline, and disquieted by his inability to respond to his eight-year-old daughter’s questions about what could be done to save the Earth, he wondered if Natural Capitalism might hold a key to real progress.

We met to talk it over. Stepanek told me, “There’s an investment opportunity here. I can’t quite put my finger on it yet, but there is something here.” So, convinced he would learn far more by attempting to build a “Natural Capitalism” portfolio than by continuing to just think about it, Stepanek contacted a friend at the University of Minnesota Carlson School of Management and asked if he could fund an elective field studies project.

The result: a “Legacy Fund” that the school is considering as a unique part of a leadership track on sustainable business. We are working to integrate the principles in other classes, mostly by changing case studies and project topics.

A Problem and an Opportunity

The first challenge was to fully appreciate the then state of the art in green investing. Students found that many screens used to find green investments had been limited to using environmental regulatory data and company responses to questionnaires. Some screens that looked for emerging technologies such as fuels cells and solar power, but many of those investments seemed risky and of uncertain impact.

Key advisors insisted that a new approach to environmental screening was needed, one that emphasized positive screens selecting for breakthrough products and “nuts-and-bolts” enabling technologies. We focused on companies with products and services that could take advantage of what we believed to be huge potential markets related to enabling the challenges of natural capitalism: bio-mimicry, re-investment in natural capital, service-for-product business strategies, and radical resource productivity.

Next, the students developed a "green screen" to evaluate and compare companies, and produce numerical scores that proved useful for prompting discussion on competitors within industry sub-sectors.

Most of the students’ efforts go into deciding if a company might be an “eco-efficiency enabler,” or an “industry transformer,” or whether another strategic approach to sustainability might be required. It’s rigorous work, but the students come to see how companies’ operations, products, and applications, and even technology development curves and marketing strategies, fit the Natural Capitalism imperative.

News to the Companies

Five semesters later, the project attracts about 12 MBA students each term. The students search for companies with high potential for revenue growth, measured by the likelihood of their products to reduce environmental harms. In one key finding, we realized that, frequently, the companies themselves are unaware of their potential to reduce environmental harms or profit from green alternatives, and have never been approached as part of a green investment analysis.

As part of the class, the students contribute research to a portfolio provided by a local venture capitalist, which is managed by an investment management firm developing its own “Eco-Leaders” offering. The group has developed nearly 100 impact analysis reports that can be used as what we call a “green fishing pool” for any investment style.

Results have been encouraging: Despite uncannily poor timing (we began the project’s investment activities at the top of the market, April 2000) the portfolio managed to lose less than 1% of its value over the next 12 months. Returns have accelerated recently, easily outperforming the Russell 3000 and NASDAQ indices: Last year's returns on the Legacy Fund ended up about +7% for the calendar year, and our “Clone Fund,” a wildly aggressive growth fund employing the purest application of our principles, clocked +22% for 2001.

Even more encouraging has been the clear return on investment in students’ initiative. They’ve garnered invaluable experience in stock-picking, product analysis, process analysis, marketing, and environmental issues.

Signs of Progress

It’s been easy to quantify our success: A recent screen by an advisor using our criteria found more than 400 “high impact” firms in the Russell 3000 index, with products and services that can reduce environmental impacts.

We found another 200 firms with processes that are uniquely clean and have a high probability of securing a competitive advantage because of that clean orientation. What’s interesting is that the resulting lists have minimal overlap with existing SRI and green funds.

Our approach is also replicable, as a new cadre of student investors takes up the challenge each semester, and advances the analysis and development.

Other investment funds have already been spawned, both private and public, as advisors take the learning from this project and create and adjust portfolios to achieve high impact in green investing. Two funds using these principles in a more conservative fashion have already attracted $6 million from local investors.

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Terry Foecke is managing partner of Materials Productivity LLC, which provides waste reduction and green investing consulting services.