Sustainable Companies Portend a Resilient Economy and a Stronger America

Proactive global companies are moving the concept of sustainability beyond an intangible vision and aspirational goals in support of concrete actions and visible performance metrics with public reporting and disclosure. These companies value innovation, conscious capitalism, and a new model for business that is accountable to a global citizenry rather than to crony capitalism or political funding activism. These companies also realize they must offer a responsibility-based “service” to others for their products and services to differentiate themselves and compete successfully in a dysfunctional society. The business market has changed with consumer options too numerous to count, social media, and growing support for environmental, social, and governance, or “ESG,” principles. Economic performance still must be achieved, but more C-suite executives are balancing their bottom lines with a more sophisticated complexity grounded in scientific, systems-based thinking. These proactive global companies are often stronger ESG performers with a stakeholder focus and adaptive governance structures. Both will help companies be more resilient amid rapidly changing dynamics, such as post-pandemic COVID recovery and throughout the Biden Administration.[i] In response to demand and regulatory drivers, the quality and quantity of ESG data will continue to improve. Meanwhile, in the United States, the Biden Administration will reinvigorate ESG policies and climate urgency.[ii] Transparency will be a key aspect in sustaining organizational values and will serve as a management method to build a resilient culture.[iii] Lastly, there will be an increase of bottom-up approaches to assess climate-related risks.

Companies and global enterprises cannot succeed nor profit in a post-pandemic society that is failing with little regard for the integrity of workers, consumers, natural resource use, equality of access or environmental resilience. Ignoring the trend towards sustainability principles will leave the laggards at a perilous high risk of failure because of exposure to the creative destruction of capitalism in normal business cycles. Investors will increasingly price ESG criteria into decision making. Here are the top ten reasons not to ignore this transformational trend:

1. Companies with sustainable business models have lower costs of capital, better capital expenditure levels in their industry peer groups, and enjoy quality training for their workforce, better management, succession strategies, and industry respect.
2. Commitments to sustainability and its implementation appeal to Millennial and Gen Z human capital with relevant skill sets encouraging this market transformation and values-based capitalism. Companies in heavy metals, minerals extraction, utilities, and energy-intensive manufacturing are realizing that with senior staff retirements they confront a “brain drain” and human capital shortfall.
3. Sustainability-minded companies enjoy wider networks of stakeholder support and respect—especially from Millennials—which are reinforced and validated through social media efforts. This change is providing communications, marketing, sales, and public affairs benefits on proactive and defensive corporate issues. Dozens of CEOs worldwide are taking voluntary pay cuts as companies lay off workers to deal with the pandemic’s impacts on revenue. This cooperative gesture could help enhance a company’s ability to attract and retain workers in the long term. The next few decades will see the largest generational wealth transfer in history: an estimated USD $30 trillion from Baby Boomers to Millennials. This will mark an important milestone for ESG investing. Millennials filter through a sense of responsibility to concentrate on value-based investments.[iv]
4. Sustainability becomes the centerpiece of innovation, encouraging improvements in the R&D process, engineering methods, product design, quality control, and productivity metrics throughout the company’s supply chain. Improvements to existing products, methods or processes already in the mix are more likely to appear than just sole reliance on new products. It is important to note that underinvestment can result in greenwashing. Delayed action on sustainability initiatives is a business risk, and products will become outdated or nonviable.
5. Resource, materials, energy, and water impacts are accounted for with sustainability, along with decreases in waste materials and negative community and ecosystem impacts. Stakeholders’ concerns are better managed and enhanced corporate-community partnering can be sustained with improved risk management and more economical results. Product development, design and process improvements occur that are focused on durability, efficiency, minimal waste creation, and maximum resource recovery and reuse. Life-cycle cost analyses for products improve, contributing to positive company and socioeconomic outcomes beginning at product inception instead of at product disposal.
6. Financial and non-financial compliance and goal-oriented outcomes are fostered with increased levels of cross-team respect, allowing partnering and innovative solutions to be undertaken. This fosters an outcome that is less confrontational, avoiding adversarial hurdles within companies and across stakeholders and their external markets.
7. Product branding, loyalty, and cost benefits accrue to support better teaming with customers and the media for future market share retention and growth. Sales and marketing initiatives can become more effective and productive. These gains can be reinvested into customer service, O&M support, social media, revenue sourcing, data analytics, and feedback for new product development.
8. Improved performance within peer industry groups of sustainable companies promotes better economic outcomes for products and motivation for senior management to achieve performance incentives that benefit the customers served. As noted above, companies who differentiate themselves on sustainability principles are also able to attract relevant Millennial talent. These workers are drawn to a comprehensive value stream that is not merely financial, but reflective of wider values, integrity, and character. This is especially important post-pandemic as the social domain will attract more attention under ESG strategies.
9. Under the Biden Administration, the SEC is developing rules that would require public companies to more honestly disclose the risks that they face from climate change. It is still unclear which climate-related information should be quantified and disclosed, what metrics companies should use to do so, and whether the SEC’s disclosure requirements should differ sector by sector. However, companies should work to get ahead of these changes with innovative business strategies.[v]
10. The pandemic accelerated the need for a different approach to investing due to the parallels between the unforeseen risks of a pandemic and environmental issues as complex as climate change. It highlights the limits of most static forecasting models which do not function well with non-linear, complex systemic risks. Socially responsible and ESG exchange traded funds (EFTs) have become an area of increasing focus for issuers and investors. The social element of ESG will move to the forefront, while the green bond market will continue to grow as climate change remains a strategic domestic and global consideration.[vi]

Historical growth with its cyclical patterns and consequences has fostered a false sense of consumer capitalism security, marked with concentrations of capital and power. The pandemic has shined a spotlight on these flaws in thinking, inequality, and lack of resilience. Yet status quo capitalism without sustainability-focused improvements does not support the global capacity to bear a doubling of the Western-lifestyle expectant population in 15 years as related propaganda might purport or drastic changes due to pandemics portend. At this current resource consumption trajectory, what level of growth can really be achieved? Capital availability, mergers and acquisitions, and technological innovation create complexity in this growth thesis. These growth tensions were already appearing in global markets as of 2014 and are spreading as diminishing returns for investment confront many industrial sectors.

New Metrics

Leaders as diverse as product designers for GE, Eaton Industries, Apple, Amazon, and Ford Motor Co. to leaders in cities, counties, and local governments are demonstrating how to create a new structural framework for growth that is sustainable. In places across the U.S. from Seattle to New York and Austin, Texas to Arlington County, Virginia, locally-led initiatives center on buildings, “Smart Cities” growth, efficiencies in energy, water, solid waste, transport, and sustainable incomes in local economies. Companies, such as Amazon, are working on ESG transparency since there is no one way for investors to use ESGs. Investor communication grounded in data, science, and markets is important in order to get investors on the side of a company. Once investors are involved, sustainability can advance from only being involved in the spending or cost elements to being included in investment goals which further integrate sustainability into core business and product models.

The venture capitalists Energy Impact Partners have created an index that tracks performance of companies spanning a wide range of climate-friendly technologies. This index shows that these companies are dominating the broader market. The Climate Tech Index is different from technology indices that are more narrowly targeted, such as ones that only track clean energy companies. There is currently no other index that is as encompassing of other industrial sectors such as electric vehicles, plastics recycling, or plant-based meat production and “farmaceuticals” from agriculture. The index has over 30 companies and functions as a tool for tracking the aggregate performance of new market entrants and established companies. Additionally, the index is outperforming the Nasdaq, as shown below in Figure 1.[vii]

Figure 1. Climate Tech Index outperforming Nasdaq[viii]

These trends may focus less on economic growth measured by GDP, and more on human health, well-being, and quality of life outcomes. These are embodied with clarity in the United Nations’ 17 Sustainable Development Goals (SDGs).[ix] Historically, companies have focused on the environmental and governmental aspects only. However, COVID-19 highlights the importance of social elements. Environmental and governance aspects are both measured quantitively, but social aspects are more subjective. Because of this, it will be challenging to measure progress and to prove that social elements are beneficial. But COVID-19 is increasingly showing that social issues are essential to address inequality, access, misinformation, affordability, immigration, and racism issues confronting our interconnected global society.

Post-Pandemic Importance of ESGs

The pandemic has revealed a need for a renewed and refreshed lens on ESGs and the ability to change engagement protocols to address topics around employee health, safety, access, and support. The responsible investment arm of Institutional Shareholder Services conducted a survey of asset managers to gauge the extent to which COVID-19 has impacted their consideration of ESG in investment decision-making and engagement activities.[x] The majority of respondents were from developed Northern Hemisphere countries. The results are shown in Figures 2. The key takeaways are that a considerable proportion of respondents reported that the social domain is attracting more of their attention. Those who reported that ESG engagements have grown since the start of the pandemic state that the primary drivers of growth include client and stakeholder demand, racial inequality and diversity, and regulatory changes.[xi]

Figure 2. Changing consideration of ESG factors since COVID-19

It is apparent that ESG funds are continuing to gain assets despite COVID-19 being one of the most significant market disruptions since the Depression. For example, as of April 6, 2021, the S&P 500 ESG Index was outperforming the S&P 500 by 2.47%. As discussed above, damage to a company’s reputation could stem from changes in what is perceived as socially acceptable by stakeholders and stakeholders becoming increasing concerned about social aspects of business.[xii] How companies manage their relationships with their workforces, the societies in which they operate, and the political environment after the pandemic, will determine their long-term survival and livelihood in the 21^st century.[xiii]

Investors will explore opportunities to invest in equitable and resilient communities. They will achieve this outcome through a diversified asset allocation targeting risk-adjusted, market-rate returns. Broader views and definitions of capital will arise, with new sources and metrics of value beyond merely gross domestic product. The current monetary system and model for capital delivery must improve and leverage the reach of public funding with more public-private partnering (P3s) and matching funding to create investment outcomes and decrease the limiting reliance on grants. Sustainability measures advance collaboration among governments, companies, and universities, which is in turn replacing mindless competition. The subsequent financial maturity of businesses and industries will likely become less Darwinian and more strategically service oriented. In the short term, bubble speculation and monopoly concentration in business must be altered in deference to investments that create a lasting multiplier benefit to stakeholders. Accountability, responsibility, long-term durability, innovation, and stewardship are the real values created by corporate sustainability that endure.

A greater incorporation of system-focused management principles will create a closed-loop system where traditional “law of commons” thinking erodes in favor of longitudinal externality accounting. Shared ownership models like those already seen in hotels, ride sharing, electric microgrids, agricultural co-ops, and health care will further expand with a heightened focus on product resilience and durability in new ownership and delivery models. The entrepreneurial, startup companies entering the market with this new business model are also likely to model sustainable practices because of their relatively high investment in capital equipment as small and mid-cap companies (compared with mature companies) and because of their unique managerial incentives.

Next, under the Biden Administration, Trump-era efforts to discourage sustainable investing will recede. President Biden nominated Gary Gensler to be the next chairman of the SEC, and he was sworn into office in April 2021. Gensler’s predecessor, Jay Clayton, did not focus on mandating additional ESG reporting and relied on existing, stale SEC disclosure. With Gensler in role, the SEC is expected to take on ESG reporting again. There will likely be discussions about environmental disclosure rules focused on carbon footprint, board-level diversity disclosures, disclosures of matters concerning workforce diversity, inclusion and equity, and corporate political spending disclosure. The Trump Administration finalized a rule that is considered a barrier to ESG funds in investment plans. Under this plan, fiduciaries selecting ESG funds must separate the legitimate use of risk-return factors from inappropriate investments that sacrifice investment return, increase costs, or assume additional investment risk to promote non-pecuniary benefits or objectives. President Biden has ordered a review of the rule. The EPA’s regulatory actions could also impact ESG-related risks such as regulatory actions limiting greenhouse gas emissions. An increased focus on environmental and social justice will impact the “S” aspect of ESG.[xiv]

Investors have already been placing a larger emphasis on climate risks in portfolios due to calls from stakeholders, extreme weather events, social externalities, economic risks and losses, and recognition that companies proactively managing climate risks are more resilient. During the Biden Administration, investors could expect to see a closer link between ESG and profitability/social externalities. The additional policies will be grounded with data showing that sustainable and ESG equity indices outperformed conventional indices during spikes of volatility in 2020, shown in Figure 3.[xv]

Figure 3. ESG equity indices outperform conventional indices

The past decade has set the table and transformed companies, industries, and global markets culminating with the pandemic in 2020. The process has been marked with confusion, setbacks, and achievements by corporate shareholders, NGOs, and stakeholder leadership. Consequently, the Congressional Budget Office now forecasts a reduction in U.S. economic growth by 1% to 2025, compared with the 1980-2007 period. The results of structural, corporate dysfunction grounded in stale short-term quarterly thinking have been validated by senior executive boards for too long since 1980. Global, market, and customer actions now impact growth priorities, competitiveness, and income equality in U.S. society. These trends can no longer be ignored because of the governance, market, and financial operating risks that are created. Moreover, we have seen a renewed moral and ethical dimension to business practices and societal growth decisions which would apply equally to sovereign governments, companies, and NGOs together.

Thinking Long Term with Durability in Mind

Despite the best-laid plans, we do not know what is immediately around the corner. In 2021, that lesson reinforces our view that a long-term, sustainable approach centered around strong ESG principles is more important than ever.[xvi] Until recently, markets generally were built on voluntary outcomes for capital investment, loans, product selection, and consumer choice. Yet markets are human enterprises formed by business, political, and cultural choices. A corporate failure to address more sustainable outcomes in the upcoming decade could place at risk whether 50-70% of current companies listed in the Dow Jones will survive or not in the listing index over the next decade. For these companies to survive, they must ensure they are participating and contributing to thriving societies and global markets, and not just to their boards and shareholders. The affected communities, skilled employees and stakeholders already realize that their public success and well-being are on the line.

This awareness on both sides will be the center of a new value proposition that offers genuine value that is affordable and sustainable for people, communities, businesses, and societies. That new value cannot be measured solely by GDP. Government spending must generate better returns beyond entitlements spending focused on physical and social infrastructure, R&D, innovation, entrepreneurial startups, and healthcare and defense efficiencies through informed information technology. Technology solutions focused on processes, without asking why and what for, are only half truths. Companies must focus on doing no harm as they pursue their strategic business objectives; their raison d’être will be held accountable, feet to the fire, through social media and global communications in our on-demand world. That leadership will come from the engineering, communications, scientific, and IT systems and functions with less reliance on the corporate, legal, and financial functionaries of the past. A new commitment to the government, corporate, and university partnering from 1945-80 will foster innovation and solutions, and less inequality, inaccessibility, and complexity.

The evolution has begun, but at what pace? Which industries will lead and for how long? Who will lead and how? How should progress and outcomes be measured? And is there a moral and ethical obligation to do no harm as we consider our collective future imperatives for the 21^st century? In response to demand and regulatory drivers, the quality and quantity of ESG data will continue improving and become an essential guidepost.[xvii]

You, as the leaders of tomorrow, will be answering those difficult questions in the choices you make. The Greatest Generation of WWII provided 20^th century leadership, and Baby Boomers had their day after Vietnam. With your gifts and your training, it is now time for you to become the Smartest Generation. You must now advance the transformation towards a sustainable future marked by success that is lasting and measured to foster new global outcomes wider than mere profit and income inequality (contrary to production and consumption), and not just more clever financial engineering ahead.

By Michael J. Zimmer, Executive in Residence and Senior Fellow, Ohio University Voinovich School of Leadership and Public Affairs, and Allison Shryock, Undergraduate Research Scholar, Ohio University Voinovich School. Originally published February 2015 as “Sustainability Emerges as Central to Global Corporate and Social Innovation”; revised April 2021.

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[i] “ESG in the Time of COVID-19.” See: https://www.spglobal.com/en/research-insights/featured/esg-in-the-time-of-covid-19

[ii] “Seven ESG Trends to Watch in 2021.” See: https://www.spglobal.com/en/research-insights/featured/seven-esg-trends-to-watch-in-2021

[iii] “Top 6 ESG investing trends in 2021.” Feb. 22, 2021. See: https://www.refinitiv.com/perspectives/future-of-investing-trading/top-6-esg-investing-trends-in-2021/

[iv] Ibid.

[v] “’All hands on deck’: SEC seeks input on climate risk rules.” March 16, 2021. See: https://www.eenews.net/climatewire/stories/1063727537

[vi] “Why COVID-19 Could Prove to Be a Major Turning Point for ESG Investing.” July 1, 2020. See: https://www.jpmorgan.com/insights/research/covid-19-esg-investing

[vii] “New index shows climate tech companies are outperforming the Nasdaq.” March 12, 2021. See: https://www.axios.com/climate-tech-market-performance-23ca0c8d-d227-4298-912c-b70d953e092d.html

[viii] Ibid.

[ix] “The 17 Goals.” https://sdgs.un.org/goals

[x] “Survey Analysis: ESG Investing Pre- and Post Pandemic.” Oct. 20, 2020. See: https://corpgov.law.harvard.edu/2020/10/20/survey-analysis-esg-investing-pre-and-post-pandemic/

[xi] Ibid.

[xii] “ESG in the Time of COVID-19.” See: https://www.spglobal.com/en/research-insights/featured/esg-in-the-time-of-covid-19

[xiii] “Top 6 ESG investing trends in 2021.” Feb. 22, 2021. See: https://www.refinitiv.com/perspectives/future-of-investing-trading/top-6-esg-investing-trends-in-2021/

[xiv] “A Preview of ESG Regulation under the Biden Administration.” Feb. 16, 2021. See: https://www.natlawreview.com/article/preview-esg-regulation-under-biden-administration

[xv] “ESG and the Biden Presidency.” Feb. 19, 2021. See: https://corpgov.law.harvard.edu/2021/02/19/esg-and-the-biden-presidency/

[xvi] “Seven ESG Trends to Watch in 2021.” See: https://www.spglobal.com/en/research-insights/featured/seven-esg-trends-to-watch-in-2021

[xvii] Ibid.

Microgrid Financing Options to Facilitate Future Growth

Michael J. Zimmer, executive in residence and senior fellow at Ohio University, was recently an invited speaker at The 4th Microgrid Global Innovation Forum held May 16-17, 2017 at George Washington University in Washington, D.C. Mr. Zimmer addressed issues and innovations on evolving microgrid financing options primarily in the U.S. With other experts on his panel, “Evolving Microgrid Financing Options,” he contributed to the deeper understanding of structures to secure microgrid financing and the changing infrastructure and policies affecting microgrids. Mr. Zimmer also serves as Washington Counsel for the Microgrid Institute since its founding in 2012, and advises its newly-created Microgrid Finance Group formed in 2016. Mr. Zimmer has guest lectured on microgrids in various classes at Ohio University, in local meetings sponsored by Upgrade Ohio, and in various national fora. In the following blog, Mr. Zimmer draws from and builds upon his recent forum remarks last month.

Microgrids represent one of the fastest-growing technologies in the electric utility industry today offering multiple benefits to the state, the utilities and the customers they serve. North America hosts the largest deployment of microgrids, closely followed by Asia and Europe. The key growth driver for the future will be in the commercial and industrial arenas that will grow to represent 30% of global markets. Commercial and industrial projects are primarily driven by cost and economic benefits of solar, combined heat power, energy storage and their interface especially for hospitals, data centers, military, universities, schools and healthcare facilities. Ohio has just started to examine these questions as part of it grid modernization proceedings launched in April 2017 by the Public Utilities Commission of Ohio (PUCO).

Noting that soft costs are 50% of the development costs for microgrids, there is an increasing quest to standardize the microgrid as service model including use of more sophisticated control systems, DC power flows, better storage technologies, and closer integration with advanced metering. For many decades, the transmission and distribution (T&D) sectors were solely served by the electric utilities. Now the question is arising as to who will modernize the T&D sectors in the future? Many  stakeholders, including energy service companies, equipment vendors, the five major technology and information management companies, foreign vendors and international utilities, startups, entrepreneurial companies and telecom companies, along with the electric utilities, are seeking to serve this $400 billion per year electricity sales and services market in the U.S. Electric power is one of the most capital intensive sectors in the national  economy today scheduled to spend up to $2 trillion by 2030 to modernize the aging U.S. electric system.

The microgrid derives its value from its interwoven complexity. This is exactly what makes quantifying its value so difficult and also makes the issues of capital access and financing more challenging. Government funding typically covers only a portion of the microgrid’s costs. For the remainder, microgrids tend to rely on variations of financing models that originated in other related industries. These include such tools as direct ownership, utility rate base treatment, vendor financing, energy service contracts, power purchase agreements, leasing, debt and bond financing, green and infrastructure banks and other clean tech energy model and tools in the state marketplace. As microgrids move from the pilot or demonstration phase to fuller commercial deployment, the quest arises for more financial models and disciplined structures to support financing ahead. Right now in the United States, that there are five major viable financing models:

1. Special microgrid investment funds;
2. Vendor financing;
3. Energy service companies;
4. Utility financing (in rate base or through unregulated special entities); and,
5. Warehouse financing.

The best way to analyze microgrid financing is from the vantage point of risk management strategies. Key areas of opportunity to differentiate and create success for microgrid project financing include:

• A capacity maintenance agreement with regular service for the project;
• A minimum amount of capacity guaranteed from the microgrid system to ensure a minimum bill or baseline to support project financing;
• A solid warranty from an investment-grade vendor ideally for 1-3 years;
• An insurance policy covering certain extraordinary costs, performance and/or the efficacy of the system designed for the microgrid;
• A battery disposal strategy of e-wastes associated with decommissioning batteries from the project as energy storage increasingly is part of a project; and,
• Aggregation to create scale, diversify risk and support a more attractive regulatory outcome to diminish regulatory risks for the project.

Diving deeper into warehouse financing and performance—a form of integrated development finance for portfolios of sound, developed microgrid projects—is important for flexible financing at commercially-reasonable terms and interest rates to support project development and success. Warehouse financing should be coupled with smart incentives such as clean funding mechanisms (in the 21 states that offer that special funding), green banks or under the Smart Cities movement in the United States. Finally, technical assistance with small grants for technical services and predevelopment costs are desirable to support the warehouse financing strategy.

Warehouse financing builds a project pipeline that can access the capital markets more efficiently through securitization. Short-term development and aggregation of loans occurs that facilitate secondary market participation and lower the capital costs for projects. This financing could also be coupled with credit enhancement techniques to reduce risks and round out the capital stack for a microgrid project coming from foundation program-related investments (PRI’s), donor management funds or clean technology funds at the state level. These credit enhancements could take the form of guarantees, subordinated debt, loan loss and debt service reserves, or interest rate buy downs to diminish risks and attract private capital and lending.

Warehouse financing is already being used in the U.S. for energy efficiency, PACE loans, solar project development and also recently energy storage loans. Such loans often range from 10-20 years and carry interest rates of 5-6%, plus closing costs. The state repackages smaller loans to reach a certain value of closed loans at certain aggregated levels to create scale. These packaged loans are then securitized through the secondary capital markets and the loans are leveraged with ratios ranging from 4-8 times the original values reported by various sources in Connecticut and New York. Pennsylvania also participates in its energy financing strategy in a multistate warehouse for energy efficiency loans called “Warehouse for Energy Efficiency Loans,” or “WHEEL.” This program is administered by AFC First Financial and is used by states seeking access for clean energy lending and financing. WHEEL works through the National Association of State Energy Officials (NASEO), the Pennsylvania Treasury, Renewable Funding, and Citigroup Global Markets, to package these smaller loans that are sold to bond investors. Proceeds from sales after aggregated and bonds are issued, go to recapitalize original state funds. Strict lending criteria are followed and high minimum credit scores are sought for risk management. Contractors are trained in intake and origination to ensure quality control over such programs.

For microgrids to succeed in their financing goals, their financing strategies must be built from known successes, existing capital market frameworks and often states with Green Bank or Resiliency lending programs. Success in financing balances:

• Leveraging existing contractor networks;
• Consulting with the financial community for project development;
• Identifying sustainable funding sources with long-term viability; and,
• Engaging utility partners, ensuring knowledge of available rebates and including on-bill financing mechanisms with state utilities.

When thoughtfully conducted, less taxpayer or ratepayer dollars are utilized and these programs facilitate use of public-private partnerships—“P3” structures and mechanisms in the 36 states with P3 framework legislation.

Financing support must be demanded by vendors, project developers and microgrid leaders. The industry itself will not just happen as a matter of state policy or through utilities without a market-based demand from its customer base.

Related research from a National Institute of Building Sciences (NIBS) task force augments this discussion by looking at resiliency-based mortgage financing for residential and commercial/industrial applications. Resiliency suffers from a lack of commonly-defined terms, similar to the lack of standardization in defining a microgrid, and even P3s. For a microgrid project financed with resiliency considerations in the cash flow and income aspects, determinations will still need to be made about the quantity, additionality and nature of ancillary benefits from the project. These must be guided by the industry and will be based also upon state public service commission determinations. To secure resiliency benefits and additional cash flow, the microgrid must offer:

• A determination of hazard/risk expressed in probabilistic terms over underwriting scenarios over one or more time periods;
• Resilience offered by the microgrid, measured against a potential disaster event based on the level of risk and potential added improvement in resilience associated with the microgrid investment;
• Evaluation of the dollar amount of losses avoided based on the micorgrid project’s resilience to a calculated hazard risk should be developed by the sponsor over the life of the loan and also on an annualized basis;
• Value and/or net operating income should be reevaluated based on avoided losses created by enhanced resilience from the microgrid; and,
• Negotiation of loan terms to reflect additional value from building the microgrid and the income streams associated with the project. The lead in both isolation of those streams and calculation methodology should come from the developers and the industry itself working closely with its vendors. Additional revenue streams would facilitate consideration of larger project loans, the inclusion of development phase, down payment reductions for private lenders or interest rate reductions in return.

Despite differences across international and domestic U.S. markets, access to market-based financing will facilitate the rapid growth of the microgrid industry in the coming decade. Some in the electric industry see microgrids as the next market iteration of solar, which has grown 800% in the period from 2010-2015. Solar expanded another 119% in 2016 alone. Financing is the primary growth factor and will serve as an essential catalyst for future growth of microgrids with energy storage.

CE3 Blog by Michael J. Zimmer, Executive in Residence and Senior Fellow, Ohio University Voinovich School of Leadership and Public Affairs & Russ College of Engineering and Technology. Edited by Elissa Welch, CE3 Project Manager, Ohio University. June 2017.

 

Sustainability Emerges as Central to Global Corporate and Social Innovation

Proactive global companies are moving the concept of sustainability beyond an intangible vision and aspirational goals in support of concrete actions, visible metrics and public reporting and disclosure. These companies value innovation, conscious capitalism, and a new model for business that is more accountable to a global citizenry than to crony capitalism or PAC activism. They also realize they must offer a responsibility-based “service” to others for their products and services to differentiate themselves and compete successfully in a dysfunctional society with consumer options too numerous to count. Economic performance still must be achieved, but more C-suite executives are balancing their bottom line with a more sophisticated complexity grounded in scientific, systems-based thinking.

Companies and global enterprises cannot succeed nor profit in a society that is failing with little regard for the integrity of workers, consumers, natural resource use or environmental resilience. Ignoring the trend towards sustainability principles will leave the laggards at a perilous high risk of failure because of exposure to the creative destruction of capitalism in normal business cycles.  Here are the top ten reasons not to ignore this trend:

1. Companies with sustainable business models have lower costs of capital, better capital expenditure levels in their industry peer groups, and enjoy quality training for their workforce, better management, succession strategies and industry respect.
2. Commitments to sustainability and their implementation appeal to millennial human capital with relevant skill sets encouraging this market transformation and values-based capitalism. Companies in heavy metals, minerals extraction, utilities and energy-intensive manufacturing are realizing that with senior staff retirements they face a “brain drain” and human capital shortfall.
3. Sustainability-minded companies enjoy wider networks of stakeholder support and respect—especially from millennials—which are reinforced and validated through social media efforts, thereby providing communications, marketing, sales and public affairs benefits on proactive and defensive corporate issues. A company must always manage with trust as we saw recently with Volkswagen’s emissions scandal.
4. A company’s leadership on sustainability thrives through its supply chain by fostering quality communications, productivity, modernization and execution support for sustainable results through thoughtful partnering and not rote supplier mandates.
5. Sustainability becomes the centerpiece of innovation, encouraging improvements in the R&D process and methods, and quality and productivity metrics, throughout the company’s supply chain. Improvements to existing products, methods or processes already in the mix are more likely to appear than just sole reliance on new products.
6. Resource, materials, energy and water impacts are accounted for, with decreases in waste materials and negative community and ecosystem impacts. Stakeholders’ concerns are better managed and enhanced corporate-community partnering can be sustained with improved risk management and more economical results.
7. Financial and non-financial compliance and goal-oriented outcomes are fostered with increased levels of cross-team respect, allowing teaming and innovative solutions to be undertaken with less confrontation or adversarial hurdles within companies, and across stakeholders and their external markets.
8. Product development, design and process improvements occur that are focused on durability, efficiency, minimal waste creation and maximum resource recovery and reuse. Life-cycle cost analyses for products improve, contributing to positive company and socioeconomic outcomes beginning at product inception instead of at product disposal.
9. Product branding, loyalty and cost benefits accrue to support better teaming with customers and the media for future market share retention and growth. Sales and marketing initiatives can become more effective and productive—the gains of which can be reinvested into customer service, O&M support, social media, revenue sourcing and feedback for new product development.
10. Improved performance within peer industry groups of sustainable companies promotes better economic outcomes for products and motivation for senior management to achieve performance incentives that benefit the customers served. As noted above, companies who differentiate themselves on sustainability principles are also able to attract relevant millennial talent that is drawn to a comprehensive value stream that is not merely financial, but reflective of wider values, integrity and character.

Historical growth with its cyclical patterns and consequences has fostered a false sense of consumer capitalism security, marked with concentrations of capital and power. Yet status quo capitalism without sustainability-focused improvements does not support the global capacity to bear a doubling of the Western-lifestyle expectant population in 15 years as related propaganda might purport. At this current resource consumption trajectory, what level of growth can really be achieved? Capital availability, mergers and acquisitions and technological innovation create complexity in this growth thesis. These growth tensions were already appearing in global markets as of 2014 and are spreading.

New Metrics

Leaders as diverse as product designers GE, Eaton Industries, Apple and Ford Motor Co. to leaders in cities, counties and local governments are demonstrating how to create a new structural framework for growth that is sustainable. In places across the U.S. from Seattle to New York and Austin, Texas to Arlington County, Virginia, locally-led initiatives center on buildings, “Smart Cities” growth, efficiencies in energy, water, solid wastes, transport, and more.

These trends may focus less on economic growth measured by GDP, and more on human health, well-being and quality of life outcomes. Broader views and definitions of capital will arise, with new sources and metrics of value. The current monetary system and model for capital delivery must improve and extend the reach of public funding with more public-private partnering and matching funding to decrease a reliance on grants. Sustainability measures advance collaboration which is in turn replacing mindless competition. The subsequent financial overhaul of businesses and industries will likely be less Darwinian and more strategically service-oriented. In the short term, bubble speculation must be terminated in deference to investments that create a lasting multiplier benefit to stakeholders. Accountability, responsibility, long-term durability, innovation and stewardship are the real values created by corporate sustainability.

A greater incorporation of system-focused management principles will create a closed loop system where traditional law of commons thinking erodes in favor of longitudinal externality accounting. Shared ownership models like those already seen in hotels, ride sharing and health care will further expand with a heightened focus on product resilience and durability in new ownership and delivery models. The entrepreneurial, startup companies entering the market with this new business model are likely to model sustainable practices as well because of their relatively high investment in capital equipment (compared with mature companies) and because of their unique managerial incentives.

The past decade has set the table and transformed companies, industries and global markets. The process has been marked with confusion, setbacks, and achievements by corporate shareholders, NGOs and stakeholder leadership. Consequently, the Congressional Budget Office now forecasts a reduction in U.S. economic growth by 1% to 2025, compared with the 1980-2007 period. The results of structural, corporate dysfunction are validated by senior executive, boards, market, and customer action and impact growth priorities, competitiveness, and income equality in U.S. society. The trends can no longer be ignored because of the governance, market and financial operating risks that are created.  Moreover, Pope Francis has encouraged renewed moral and ethical dimensions to business practices and societal growth decisions which would apply equally to sovereign governments, companies and NGOs together.

Thinking Long with Durability in Mind

Until recently, markets generally were built on voluntary outcomes for capital investment, loans, product selection, and consumer choice. Yet markets are human enterprises formed by business, political and cultural choices. A corporate failure to address more sustainable outcomes in the upcoming decade could place at risk whether 50-70% of current companies listed in the Dow Jones will survive or not in the listing index over the next decade. For these companies to survive, they must ensure they are participating and contributing to thriving societies and global markets, and not just to their boards and shareholders. The affected communities, skilled employees and stakeholders already realize that their public success and well-being are on the line.

This awareness on both sides will be the center of a new value proposition that offers genuine value that is affordable and sustainable for people, communities, businesses and societies. That new value cannot be measured solely by GDP. Government spending must generate better returns beyond entitlements spending focused on physical and social infrastructure, R&D, innovation, entrepreneurial startups and healthcare and defense efficiencies through informed information technology. Technology solutions focused on processes, without asking why and what for, are only half truths. Companies must focus on doing no harm as they pursue their strategic business objectives; their raison d’etre will be held accountable, feet to the fire, through social media and global communications in our on-demand world. Case in point again, Volkswagen. That leadership will come from the engineering, communications, scientific and IT systems and functions with less reliance on the corporate, legal and financial functionaries of the past.

The evolution has begun, but at what pace, which industries and for how long? Who will lead and how? How should progress and outcomes be measured? And is there a moral and ethical obligation to do no harm as we consider our collective future imperatives? You, the leaders of tomorrow, will be answering those difficult questions to advance the transformation towards a sustainable future marked by success and measured to foster new and wider outcomes than mere profit ahead.

CE3 Blog by Michael J. Zimmer, Executive in Residence & Senior Fellow, Ohio University; Edited by Elissa E. Welch, Project Manager, CE3; Originally published Feb. 2015, Revised Feb. 2016.