The question of sustainability is one that’s increasingly being discussed across the political and academic spectrum. However, the impression that it stops there is one that’s sorely mistaken. Increasingly, the issue of sustainable practices is one that’s become essential for private companies to understand their long-term viability.
Just ask David Chen. Chen has spent a career sitting on the boards of dozens of different private companies while working for venture capital firms. Today, he’s the principal and chairman of Equilibrium Capital Partners, a firm he founded in late 2007, and an Adjunct Professor of Finance at the Kellogg School of Management at Northwestern University.
And for Chen, his experience with discussions over sustainability isn’t limited to the classroom, it’s something he’s seen in action in corporate board rooms for years.
Environmental Investing is Not About Idealism
Chen emphasizes that the idea that there’s some separation between a company’s bottom line and sustainability is simply unfounded Environmental issues aren’t just a matter of appealing to green-minded consumers, they’re a serious risk category that has to be factored in to any company with an eye towards staying successful in business in the coming years.
“At COP21, everyone focused in on the fact that 174 countries signed the agreement. That was actually a monumental, unbelievable feat; that was the real story. But almost as important was the fact that corporate CEOs were there, and not just for public relations, because I think that there's a growing awareness that this ‘low carbon economy’ is not something that is off in the horizon.”
This merging of environmental and corporate concerns is something that Chen has observed for some time in a wide variety of corporate board rooms.
“The big agricultural companies, they sit around the board room and do you know what they talk about these days? Water,” says Chen. “That is not a light and fluffy category: the idea that our crops might not have water. Then they talk about energy, because the joke in agriculture is that it’s about nothing but water and energy. Then they also talk about climate change. If you are the peach manager at processed fruit company and the climate line across your orchards is changing, if it's getting hotter later in the season, or there's a shift and it's becoming unfriendly, nature-wise, to your orchard, there’s nothing light and fluffy about that. It's not like we can move the trees.”
A lot of the same issues consuming environmentalists and climate change advocates are also playing out in the highest echelons of decision-makers in the private sector. Not because of increased issue-advocacy in the business world, but because it’s essential to finding success.
“Grocery retailing has concentrated into basically 10 or 15 stores that now command about 80% of the market share in America,” Chen continues. “At that kind of market share, their supply chain certainty is really important. So they're worried about regionality, growing closer to their distribution centers, not necessarily because of carbon miles, but because of shelf days. They’re worried about the uncertainty of the fact that 70% of the vegetables grown in this country are grown on the West Coast. None of these are light and fluffy issues, they're all board level issues.
A Broader Shift in How We View Success
Even beyond corporate boardrooms, the question of which companies actually have viable plans for long-term growth that factor in sustainability is part of a broader shift in how we understand business success. And it’s a shift that’s essential to investing, as well.
“I think that the big shift that has taken place in a lot of the pension funds, for example, is that they are now looking at this issue in the vernacular of risk and opportunity as opposed to the vernacular of imperative and obligation,” says Chen.
“Ask yourself why the Pentagon in almost every one of their forward flex scenarios incorporates climate change,” he continues. “Granted, they did all that planning at a time when the American oil supply wasn’t as optimistic, but the base of all that is basically risk management and security. If you can grow your own aviation fuel as opposed to drill for it, it’s an act of sustainability. It was about climate change, but it was also about national security.”
In many ways, it’s an acknowledgement less of a new approach than a recognition of how the traditional methods for valuation were woefully incomplete. Short-term thinking may improve a balance sheet or an income statement for a quarter or two, but it’s never going to contribute to building the sort of world-beaters that most investors are really searching for. A company that builds its business model on practices that are bad for the environment or the surrounding community is most likely severely limiting its potential.
Sustainability an Opportunity for Investors and a Necessity for the Planet
Today, Chen is focused on helping communicate just how essential it is for business leaders and issue advocates alike to begin rethinking their approach, both through the investments he’s making at Equilibrium Capital and with the lessons he’s teaching in Kellogg’s classrooms. Chen has a front-row view to the many different ways the investment community is helping to mold the future to improve lives for everyone.
“One category that we continue to be excited by are the changes that are taking place in sustainable agriculture,” says Chen, when asked what areas he was most excited by. “The changes that continue to take place in water and input efficiencies in agriculture and our energy footprint. Water as an asset class, the move towards organics, green human habit and real estate, making waste materials into a valuable commodity stream, whether that is energy or water or nutrients. They all have a different profile and they all have something exciting to add to the picture.”
Chen is a member of a new generation of investors and business professionals for whom working to secure a better future is recognized as being a necessity both for their career and for their conscience, with no clear separation between those two.
“Again, nothing I’ve said is about advocacy, imperative, duty,” says Chen. “It’s all about revenue, survivability, product line, assurance of the ability to do business.”
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