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Why Mr. Gore Chose Venture Capital and Not the Nonprofit World: The Environmental Social Commons Transitions to the Marketplace

By Tom Watson on December 5, 2007No Comment

Susan Raymond Ph.D

This is a very good thing.  The question is whether it is a bellwether for a broader evolution of the concept of social-financing and hence a narrowing of the applicability of “nonprofit” status to social problem solving.

Let us briefly review the bidding.

On the nonprofit side and in the U.S., an estimated $6 billion flows to environmental causes.  This represents more than a tripling of funding in the last 20 years.  Still, that $6 billion represents just 2% of all philanthropic giving.  An examination of the grant making of private foundations finds a similar pattern.  In 1998, foundations made nearly 5000 grants to the environment totaling $455 million.  By 2005, that had increased to 6500 grants for over $800 million.  Yet, environment as a percentage of all grants remained at 5%, and the portion of total grant value only increased to 5% from 4.7%.

Now let us look at the marketplace, the scope of which is difficult to grasp in its size and complexity. 

From a purely technology viewpoint, the total value of the global environmental technologies market is $600 billion, 100 times the size of environmental philanthropy.  Moreover, environmental technology and services companies represent over 1.4 million jobs in the U.S. in 115,000 private companies.  And those markets are growing as the drive for environmental protection spurs innovation and new technologies.

But technology is increasingly the least of the market.  Pollution, water rights, and even biodiversity are themselves becoming financial markets.  Beginning in the late 1980s, policy makers developed market approaches to trading pollution rights. By placing a financial value on an environmental “commodity” that had been free, investors can calculate the returns to conservation and innovate in their allocation of capital to its maintenance.  Initially these approaches were applied to sulfur dioxide emissions.  In the U.S. in 1990, the EPA set an overall limit on emissions, but allowed companies to trade among themselves to meet these limits.  Now, the market for SO2 allowances is valued at $4 billion, with swaps, puts and calls, and emissions allowances are used as collateral, being loaned or swapped for other pollutants.  And pollution?  In the U.S. SO2 emissions are on track to fall to half their 1980 levels by 2010.

Indeed, some financial observers expect the environmental commodities market to have a valuation of $1 trillion by the end of 2012.  Actually, the entire concept of market trading is built into the Kyoto Protocol, which itself would represent 40% of that market value.

A variety of exchanges have grown up around the trading concept, including the Chicago Climate Exchange and the EU Emissions Trading Scheme which is projected to have a capitalization of tens of billions of euros and, in turn, drive billions of euros toward investments in environmental technologies.

Experimentation with similar market approaches is underway for water and biodiversity.  In Australia, the Wentworth Group of concerned scientists has recommended a national system of water trading to provide security to both water users and the environment.  Biodiversity experiments have focused on the protection of endangered species or the protection of forests on rural areas where landowners are paid not only for the commodities they produce but for the environmental services they provide. 

The problems of pricing have impeded robust adoption of such experiments.  The price of a commodity should approximate the cost of replacing it.  But disaggregating the underlying value of something like biodiversity is difficult. Progress has been made in Costa Rica, in the Costa Rican Payments for Environmental Services Scheme, which introduced compensation systems for environmental services.  Forest owners are paid for the environmental services provided by their bio-assets, carbon, biodiversity, watershed management, and natural beauty.  In the decade 1996 to 2005, the program preserved the forests and increased household income by 15%.

The point is not to become enmeshed in the details of the examples.  The point is to appreciate the degree to which the common social good of environment, accompanied by emerging financial innovation, has become a vibrant marketplace where assets have monetary value and private investment and individual gain maintain the common good.

Where does that leave philanthropy and the nonprofit sector?  Certainly not in the dust bins of history.  The Vice President is giving his investment banking salary to an environmental nonprofit, after all, not to the NASDAQ.  Still, one wonders if the evolution of sophisticated thinking about the financing of the common good leads to an emerging specialization of role. 

Will advocacy be the comparative advantage of the nonprofit, and action the comparative advantage of the market?

Sources

  • Giving USA 2007
  • Foundation Center Statistical Information Service
  • Office of Environmental Technologies Industries, International Trade Administration, U.S. Department of Commerce.
  • C Murphy. Hog Wild for Pollution Trading. Fortune Magazine, September 2, 2002
  • G. Phillips and A Razzouk. A Trillion Dollar Marketplace. Environmental Finance. February 2007.
  • D Brand. Looking Beyond Carbon. Environmental Finance. October 2005.
  • JB Quinn. Forging Environmental Markets. Issues in Science and Technology, Spring 2000.
  • S. McCarthy and E. Grace. Environmental Finance: The Rise of Environmental Markets and Opportunities for Actuaries. Presented to the Institute of Actuaries of Australia, November 2004.
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