Mark Brandon is the Managing Partner of First Sustainable (, a registered investment advisory catering to socially responsible investors. In addition to Socially Responsible Investing (SRI), he may opine on social venturing, microfinance, community investing, clean technology commercialization, sustainability public policy, green products, and, on occasion, University of Texas Longhorn sports.

Monday, April 24, 2006

Clean Tech Heavyweights Eye Green Technology

John Doerr and Vinod Khosla, both partners at Kleiner Perkins Caufield and Byers, have made large commitments to the green space. According to a widely syndicated Associated Press Interview over the weekend, Doerr acknowledged committing $100 million or 20 percent of their latest fund, in addition to the $50 million Kleiner has already invested in the space. Khosla, outside of the auspices of Kleiner Perkins, has been a huge investor in ethanol and bio-diesel. Both men feel that clean and sustainable energy could be as big or bigger than the internet and biotechnology.

In my opinion, it will be bigger. However, the revolution will not be as sexy as the other two, and therefore, may go unnoticed by the business media. At least, it will not garner the same kind of headlines of a Netscape (now part of AOL), Google (NASDAQ: GOOG), or even E-toys. This is not necessarily a bad thing.

First, the fundamentals. Energy demand for all purposes, including electricity production, transportation fuel, and heating and cooling, has a worldwide market of over $3 Trillion. That is with a "T". In the last several years, thanks to the burgeoning worldwide economy, that figure is growing at 3 percent per year. That is $90 billion. To put that in perspective, the annual growth in the energy sector is bigger than the whole internet economy.

Second, for the vast majority of citizens, governments, and other large consumers, they do not care from where their electrons came, as long as it comes reliably. This means that, at some point in the future, there will be a massive tipping point where the technology, capability, and capacity of clean energy competes with the unclean alternatives. In the words of Ross Perot, you will hear a "giant sucking sound" coming from the companies that have not planned for the sustainable future once the new technologies compete on an even keel with the old ones. The world will convert to the new sources faster than many critics think.

The clean energy future may not be as sexy as the creation of a new medium, or the invention of remarkable healing powers, but the economic effects of a clean energy future will be greater. Growing affluence and urbanization in the two most populous nations, India and China, will make it a necessity.

Friday, April 14, 2006

Cellulosic Ethanol an Environmental Disaster?

I subscribe to Forbes Magazine, and read every issue cover to cover. Just about every investment adviser in the U.S. does as well. On environmentalism, however, the magazine usually lacks serious input beyond spouting their usual anti-environmental stance. Peter Huber's column "The Forest Killers" puts me over the edge.

Cellulosic ethanol refers the distillation of agricultural waste, including "switch grass and wood chips" (a phrase made popular in the president's State of the Union), into ethanol. Huber paints a dire picture of what would take place if the process became widely avaiable. He envisions peasant farmers in India raping the landscape the clear it of lumber, prairie grass, cow dung, and god knows what else in order to get the feedstock for making a gallon of gasoline. It would be as if a barren field were suddenly strewn with diamonds, with the result being leveled forests and drained wetlands.

Maybe Huber is trying to invent the next Y2K/Doomsday/Peak Oil/Nuclear Holocaust scenario. Unfortunately, it shows little understanding of the process. Although the process is similar in theory to how a Kentucky Moonshiner makes grain alcohol out of corn, the scale required to produce enough barrels to make the enterprise worthwhile would make it out of reach to the small farmer. First of all, even at $3 per gallon, the profits derived from gasoline do not begin to approach that of moonshine. Farmers are likely to take that into account before they engage in a dangerous, explosive process. Secondly, the equipment required to distill ethanol, while not on the scale of an oil refinery, still requires economies beyond even the village level. Third, the sheer amount of feedstock required to make one gallon of ethanol is so immense that it could only be done on an industrial level. Fourth, given the effort required to gather such an enormous amount of feedstock, one would presume that the landowners -- even the land dwellers -- would make the calculation that other uses are more profitable. Lumber, soil for growing, grassland for grazing, wetlands for fishing will likely remain more profitable uses.

This is not to say that small farmers can not benefit from ethanol production. Quite the contrary. But, it requires a little more organization than the marauding bands of pillagers that Huber envisions.

Wednesday, April 12, 2006

Alien Tort Claims Act: The Activist's Bazooka

Companies engaged in Greenwashing had better watch out for Terrence Collingsworth of the International Labor Rights Fund in Washington. I recently sat in on a presentation in New York City with one of Collingsworth's associates, and there happens to be a sidebar in the latest of issue of Forbes about the ILRF tactics. His tactic: the 19th century Alien Tort Claims Act which gives the US jurisdiction in cases of international law. Enacted to enable the prosecution of high seas piracy and the slave trade, the Act is now being used to clobber the companies who say one thing but do another.

Two companies are in the crosshairs of this act: Wal-Mart (NYSE:WMT) and Nestle (OTC:NSRGY, VTX:NESN). Wal-Mart is in court again, facing charges of labor abuses in its supply chain. Following a dust-up in 2002 over working conditions, Wal-Mart enacted a code of conduct in an effort to appease the activists. The problem was that the company did not do enough to ensure that its own code of conduct was followed. Collingsworth argues that issuing a code of conduct equates to a contract between Wal-Mart and the employees. Not following it constitutes breach of contract. Therefore, all of the employees affected are injured parties.

Nestle, being the largest purveyor of chocolate in the world, needs to procure lots of cocoa. Half of the world's cocoa is produced in the tiny African nation Ivory Coast. Ravaged by years of civil war, forced labor and indentured servitude are commonplace. Although Nestle owns no farm that uses forced labor, the network of middlemen makes it is easy for tainted cocoa to wind up in the company's chocolate. Archer Daniels Midland (NYSE:ADM) and privately held Cargill are the largest middlemen in the field, and are facing their own accusations. However, prompted by possible congressional legislation, Nestle instead signed on to an agreement five years ago to get their chocolate certified as "slave free" by 2005. The deadline has come and gone, and tainted cocoa still gets through. As in the case with Wal-mart, not following the terms forced on them constitutes a breach of contract.

There is much precedence for the use of the Alien Tort Claims Act. It was successfully used to challenge Unocal when they allegedly forced the Burmese military to build a pipeline. Exxon (NYSE: XOM) was accused of hiring a military junta to guard a gas liquefaction plant in Aceh province, Indonesia. For decades, Bridgestone/Firestone has been facing questions about the use of child labor at rubber plantations in Liberia.

The danger of over-using this Act is that companies will not bother to have a code of conduct, as it provides a fat target for class-action lawyers. Collingsworth's non-profit does not seek out-sized fees, but since the genie is out of the bottle, it is easy to imagine that greed-driven lawyers will see a chance to extract settlements out of multi-nationals.

Monday, April 03, 2006

Clean-Energy Trends 2006

A wonderful report by Clean Edge details the opportunities awaiting Clean Tech investors over the next few years. Forget oil exploration. Wind, solar, biofuels, and hydrogen are the most exciting places to be. Cumulatively, despite having record earnings years and still-worthwhile run-ups, the stocks of oil companies like Exxon (NYSE:XOM), Valero (NYSE:VLO), Chevron (NYSE:CVX), and British Petroleum (NYSE:BP) have not kept pace with the exciting results of clean tech companies, such as: (The analysis of these companies is my own, although they were mentioned in the report)

  • Energy Conversion Devices (NASDAQ:ENER). Up roughly 100 percent since last April 4, this photovoltaic materials producer has been on a tear with new partnerships in China. Currently, it is losing prodigious amounts of money, but is nonetheless in a cash favorable position, recently filing to sell an additional $150 million in a secondary stock offering. Curiously, this company is headed by former General Motors CEO Robert Stempel, who is best known for losing prodigious amounts of money at the head of that company before being forced out. By prodigious, I mean prodigious by the standards of those days (early 1990's). His successors at GM have since eclipsed him.
  • Evergreen Solar (NASDAQ:ESLR). This company makes photovoltaic panels. The stock has also doubled in the last 12 months, but still faces challenges. Prices for silicon, the main material for its PV, have also skyrocketed in the last 12 months. Evergreen lost its contract with its main sililcon supplier in March, and had to scramble to replace it, albeit at less favorable prices. Nonetheless, this company is the purest pure play in the solar field.
  • Itron (NASDAQ:ITRI). Up 92 percent in the last year, this company provides the meters, the data collection, the software, and the data mining for electricity and water usage. The model is highly defensible, since it takes a long time to acquire the relationships to get the contracts they have in place. The only challenge is a concern about stock dilution, as it is using its high priced stock to go on a buying spree.
  • Spire Corporation (NASDAQ:SPIR). This is another materials company, buoyed by strong demand for all things PV. Up 72 percent in the last 12 months, Spire is not a pure play solar stock, as it also competes biomedical imaging and optoelectronics. Some company news touts its thin film technology, which I predicted would be the technology of the year in an early-January post.
One of the striking trends mentioned in the report was the increasing presence of the VC community. Clean tech investments in private equity went from 3.3 percent to 4.2 percent IN A YEAR. This topic could take up another post.