Financing Our Cleantech Future

My longtime friend and colleague Bill Green changed jobs recently. That's not normally newsworthy — friends and colleagues do that all the time. But if you're concerned about the future of clean technology — in particular, how we're going to fund the massive scale-up of renewable energy, clean water, and the other infrastructure changes needed to build a clean economy — Green's career move warrants more than just passing interest.

Green is a seasoned environmental entrepreneur, with more than 20 years of management and investment experience. He has led five companies, including Ecolink, one of the first firms to produce alternatives to ozone layer-depleting chemicals, and the Strategic Chemical Management Group, an environmental management company. For seven years, he was in venture capital, a co-founder of VantagePoint Venture Partners' CleanTech practice, among the largest cleantech VCs, with more than $1 billion dedicated to the sector. (In 2003, Green invited me to join VantagePoint's Cleantech Advisory Council, where I still serve.)

Last week, Green announced that he was joining Macquarie Capital Funds as a senior managing director. If you're like me, you probably didn't know much about this company, part of The Macquarie Group, a massive Australia-based global investor and manager of infrastructure, real estate, and other businesses. The Funds division manages more than US$116 billion in assets around the world, much of it large infrastructure projects.

Why is this particular job change worth singling out? Green's evolution from environmental entrepreneur to venture capitalist to a senior director of one of the world's foremost investment banks mirrors the trajectory of the cleantech movement itself. What began in the 1980s and 1990s with a handful of scientists, engineers, and idealistic entrepreneurs, funded by a small circle of friends, came to life during the 2000s with the infusion of tens of billions in venture capital, private equity, and corporate and government investments. That gave rise to the thousands of growing companies that today are manufacturing everything from solar cells to electric cars — and all of the batteries, fuels, engines, controllers, software, and other components that make these things work.

Now, as a new decade begins, it's time to take things to the next level: ramping up proven technologies at massive scale.

That's where Green and Macquarie come in. They are at the leading edge of large investment banks that have the financial firepower to unleash mature technologies globally, financing the wind farms, solar fields, and energy storage facilities that will be needed to bring renewables to scale.

Bill Green describes this evolution in terms of a "corporate lifecycle."

"In the beginning you've got an entrepreneur who comes up with an idea that is transformative in its promise and can attract venture capital," Green explained recently. "The entrepreneur builds a team, develops a product that is what I call 'pre-commercial' — they have a product that works, by whatever definition their sub-category requires, and they've built one of them. They then face the challenge of building their first fully commercial deployment. Once there is an example of a fully commercial deployment, they can think about replicating at commercial scale — what in the semiconductor industry is called 'copy exact': Build a factory, build an identical one somewhere else, build a third somewhere else."

That first commercial deployment is the most difficult to get funded. Once it's proven itself — that it can perform reliably and generate a predictable cash flow — it is more or less a matter of "copy exact," stamping them out from place to place. This is a role for project financing — as distinguished from company financing — and is the realm of investment bankers.

Deploying even one commercial-scale plant can require more capital than most people imagine. Consider BrightSource Energy, which builds and operates large-scale solar thermal plants, in which massive arrays of mirrors beam sunlight to a central tower, boiling water to create steam to run a generator. BrightSource (which happens to be funded by VantagePoint, along with Morgan Stanley, BP, Chevron, Google, and others) has contracts to build several of these plants, at $2 billion to $3 billion a pop. And then there are wind farms. Building one will set you back anywhere from $150 million to $1 billion or more. So, too, a biofuels refinery. Real money, as they say.

Big as those price tags are, cleantech projects are relatively small compared to other infrastructure projects — airports, bridges, toll roads, and the like — making them less appealing to large banks that prefer large projects. Moreover, a lot of investment bankers haven't yet developed expertise in renewables. "Renewables is still a sector that is largely the province of a small group of people who have devoted many years to understanding the sector, who have grown up in the sector in various ways," says Green. "And the sector has yet to fully mature to the point where every institution has developed the capabilities to invest in it. So, many bankers have taken a view that says, 'If this is not my specialty, I would rather back the larger transaction.' That leaves a tremendous opportunity for those of us who both understand and elect to focus on this subsector."

Green and Macquarie view the cleantech sector as ripe for their style of banking. "There's still a gap between Silicon Valley and Wall Street when it comes to understanding the complete capital-formation value chain from venture capital through to equity and debt," says Green. Put another way, the VCs and the bankers haven't yet become a well-oiled machine in handing off venture-funded companies to those who can take their technologies and products to scale — the way, say, a new microprocessor chip can go from R&D to commercial development, with manufacturing plants deployed around the world in relatively short order.

As he sets now out to find and fund proven commercial technologies, Green says he will focus on wind farms, utility-scale solar, utility-scale solar thermal, and geothermal energy. Beyond that, he says, "I'm interested in finding the opportunities that are a bit less obvious but that come in the form of more traditional infrastructure." Transmission, for example. "We believe that there may be opportunities for Macquarie in the emerging conversation around how renewable energy is moved from point of generation to point of use. This has been a real puzzle piece that's starting to get more attention, but I think it's still underserved from the standpoint of capital development." Wastewater purification and landfill waste-to-energy technologies are two more interesting infrastructure opportunities, he says.

Of course, it's not just the financial opportunity that interests Green as he starts this next phase of his career. "I am so excited to be able to point to steel in the ground and tell my son that our company participated in bringing that wind farm or that solar field into existence. I deeply enjoyed the years that I spent in conceptual conversation around bringing to life things that were only the dream of an entrepreneur at the time I first saw them. Now, I'm ready to see these things deployed at scale all over the place, and this is the absolute best platform that I could imagine to make that happen."

It will be interesting to watch. As the financial heft of national governments hit their limits, we'll need the big financial machines — which funded the Internet, cellular networks, highways, bridges, water systems, and mass transit systems — to make clean technology part of the global fabric. Macquarie isn't the first investment bank to jump into cleantech, but it has made clear that it wants to be at the front of the pack.

As if to underscore his excitement for his new role, Green leaves me with a few parting words not typically associated with the dry world of large-scale finance: "It's really cool," he says. "Really cool."

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The Green Business Decade in Review

Okay, I'll admit: The headline above is a bit of a come-on. I couldn't possibly do justice to the past 10 years' worth of green business activity — at least not in the following 1,500 or so words. But as we view the whatever-it's-called decade in the rearview mirror, it's tempting to assess what's transpired since the good old days of Y2K to see how far we've come — and how far we haven't. So, let's do that.

First, the good news: The greening of mainstream business has continued apace since the clock struck 2000, growing continually more rapidly as the decade wore on, even amid a Great Recession. The idea of green companies appears to have extended into the next concentric circle, beyond the true-blue, values-driven companies and the next tier of large leadership companies, to a third tier of companies that hadn't previously been concerned about global warming or other environmental issues. Today, it's hard to find a sizable company that isn't talking the talk and, to some degree, walking the walk. Trying to be seen as green is now more the rule than the exception.

The bar keeps rising, too: What seemed cutting-edge 10 years ago — carbon neutral products and companies, zero-waste factories, green chemistry, life-cycle analysis, green buildings — is now mainstream, or at least warrants a so-what? response when trumpeted by companies. Things that used to make headlines — or, at least, good promotional copy — are now business as usual.

And each year brings about a succession of whodathunk moments: Big-bad retailers committing to green up their supply chains, big-bad auto companies committing to transforming their products and manufacturing processes, big-bad packaged goods manufacturers launching green product lines, big-bad computer makers dramatically improving energy efficiency and recyclability, big-bad food processors and fast-food chains committing to sustainable sourcing, big-bad utilities committing to energy efficiency and renewables, and many other companies — big-bad and otherwise — announcing goals, partnerships, or achievements that wouldn't have seemed likely not that long ago.

Now, the big-bad news: Most companies are engaged in green business activities in only the most superficial ways, addressing just a small portion of their operations and impacts. Few have looked holistically at what they do from an environmental perspective, let alone made bold, audacious commitments to reduce their impacts or transform their products and processes to embrace a new green ethic. While more companies are engaged than ever before, their collective efforts are barely scratching the surface.

(On February 4, my colleagues and I at GreenBiz.com will issue our third annual State of Green Business report with specific measures of progress, or lack thereof. The report will debut at two State of Green Business Forums, in San Francisco and Chicago.)

So, while there is much to celebrate at the dawn of a new decade, there is a nagging feeling that much of this amounts to a false sense of hope — that all of this good news may be too little, too late. But maybe not.

In that decidedly indecisive context, here are three reasons why I'm discouraged, and three reasons that I have great hope for the decade ahead.

1. We're not moving the needle. As I said, the sum total of all this green business activity hasn't changed things much. Most global environmental indicators continue to head in the wrong direction. And where progress is evident, it isn't taking place at the scale and speed needed to address climate, water, air quality, toxicity, food security, biodiversity, and land-use challenges, among others. Even in developed economies like the U.S. and Europe, key indicators of progress — for example, the amount of energy and water consumed or waste and pollution emitted per unit of gross domestic product — has only mildly improved. In fast-growing developing economies — China, India, Southeast Asia, Latin America, and others — the story, in terms of consumption and emissions trends, is frightening.

2. The public still isn't getting it. There's little sense of urgency, and for good reason: Most people on the planet are focused like a laser on getting through the day — feeding and sheltering their families, staying alive and well, finding work, maintaining basic human dignities — and have little time or interest in protecting the commons. Meanwhile, the "haves" are largely focused on keeping what they've amassed, if not adding to it, and generally can't be bothered with the greater good. Most individuals have little understanding of the environmental impact of their lives, content to make a few simple, largely symbolic changes in their shopping or personal habits. As a result, consumer pressure on companies to transform their products and processes is relatively meek. Yes, there is a growing cadre of citizens concerned about the climate and other planetary ills, and a new generation entering the marketplace with a greater green ethic, but their power to effect change to date has been tepid at best.

3. There's little sense of urgency. In generations past, people took to the streets to protest wholesale injustices and inequities and, in the process, helped bring about sweeping changes, from the U.S. to the U.S.S.R. These masses were supported by political and business leaders who saw great opportunity in dramatic change, for both themselves and society in general. So, where are the masses marching in the streets demanding action on climate change in the name of future generations? Where is the anger over inaction on energy and climate issues — arguably among the greatest civil and human rights issues we've ever faced? Where is the bandwagon of consumer boycotts and shareholder actions forcing companies to respond? Where are the politicians expending their political capital fighting barriers to a green economy? Why aren't the threats to our security — food security, housing security, water security, energy security, national security — fomenting scores of green Manhattan and Apollo projects? Yes, there are encouraging examples of all of these things, but they are happening much too slowly and don't seem to be making much headway.

So much for the bad news. Amid all this, I'm encouraged, excited even, about where business is headed.

1. Green innovation is booming. There's a revolution taking place that even many of its participants can't yet see. It involves the confluence of energy, information, building, and vehicle technologies, and the promise of a wealth of impressive new goods and services. Some of these will be seen this decade in the emergence of the so-called smart grid, in which everything from appliances to automobiles are connected via two-way, always-on connections, enabling not just better management of energy resources, but an array of new capabilities that improve people's lives while reducing their impacts. These things may not be overtly marketed as "green," but much like the iPod and iTunes, they stand to transform how we live, work, drive, and play in ways that we can't yet imagine, while vastly reducing materials and energy needs. All of this will help to transform how companies think about what they do, leading to, among other things, closed-loop systems of commerce. And it's not just about technology. Innovations in food production, apparel and footwear manufacturing, and many other industrial processes and feedstocks are advancing faster than most people recognize.

2. Companies are reinventing themselves. Largely as a result of these innovations, companies will continue to find themselves crossing sectoral lines and entering new lines of business. I wrote in 2006 about the "new energy companies," old-line companies like chemical manufacturers, auto makers, IT companies, and food processors that have found themselves in the energy business. That trend has accelerated as the aforementioned technological convergence takes shape. So, too, with green building, as I noted recently: a new wave of old-line companies (think Firestone and Sanyo) are now in that sector, too. Each of these players brings new energy and momentum to the green business arena. Meanwhile, early-stage companies are getting out of the lab and off the ground, invigorated by capital flows that, while recently slowed, are beginning to rebound. Slowly but surely, some of these innovators are going public or are being swallowed by bigger fish, extending their capabilities and reach.

3. Sustainability is becoming about more than just the environment. This is long overdue. One of the more frustrating trends of the past decade was the conflating of "green" with "sustainability." The latter, of course, means much more than environmental responsibility, though you wouldn't know that listening to most corporate marketers and PR firms, which treated the two terms as one and the same. But that's changing. The social side of sustainability — a broad swath of topics including working conditions, community impacts, human rights, product safety, access to education and health care, increased opportunity for all, and more — is beginning to be considered by some large companies. It is showing up in corporate "responsibility" reports, of course, but also in the design and delivery of products and services for the poor, both in developed and developing countries. It is showing up in corporate concerns over obesity, product safety, access to clean water, and dozens of other things. Some of the companies involved were dragged to these issues by activists, but that's how many of today's environmental leaders were born — companies like Nike, McDonald's, Starbucks, Home Depot, and others. To be sure, the social side of sustainability remains early-stage, but the trends are encouraging.

At the end of the day — and the decade — how does all of this stack up? I won't venture to say. There are too many unknowables that could help or hinder the shift to greener companies and economies: the vagaries of world economics, rapid technological developments, dramatic political shifts, fast-emerging impacts of climate change, roller-coaster oil prices, natural disasters, populist movements, and many others.

One thing is certain about the green business decade before us: It will be at least as interesting as the one just passed. Whether that's a good thing or not remains to be seen.

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