Capital Markets Darden Style (with Yiorgos Allayannis)

Yiorgos Allayannis is reason alone to come to Darden. It may be Darden urban legend, but I have heard tell that his classes cure hangovers. From the minute you sit down, you will be on the edge of your seat.

Having worked in sustainable development over the summer on an avoided deforestation project, I couldn't miss Yiorgos' class on cap and trade, which he taught as part of his Capital Markets elective class. I also thought this was an opportunity to try and capture the flow of a case-taught finance class at Darden.

We started from 30,000 feet, and asked 'Is there a problem?' The overwhelming class response was YES, with 60 YES votes and only 3 NOs.

Some of the other comments raised were:
- Even if there is not a problem, business is aligning behind this issue, so get on board!
- Even if we're not sure there is a problem, can we risk doing nothing?
- What happened to the ice over Greenland?

Then we asked, 'Whose problem is it? Developing or Industrialized Economies? Or is it everyone's problem?'

Molly and Gaurav Gupta had a great volley over the contentious issues of externality, equality and leadership. Molly's argument was that China, because of the pollution it creates as the leading producer of GHG emissions, needs to come to the negotiating table. China's pollution is having an effect on the health and well-being of countries outside its own borders, and if not everyone agrees to participate in Cap and Trade, there will be a flight of factories to non-participating countries like China where energy costs are lower.

Gaurav argued that it is the responsibility of developed countries, historically the grossest polluters with the largest demand for products produced in China and the highest GDPs to reduce worldwide GHG emissions.

Next we shifted gears to ask 'What can we do about it?'

Three solutions were discussed to some length--Cap and Trade, Tax, and Investments, with a surprising amount of attention given to the third--investments into the infrastructure to distribute cleaner energy products, such as wind, to the populous areas of the US that need energy (from Nantucket to NYC); and into investments that drive down the cost of new technologies to make them cheaper and thus more available. We also touched on the nuclear debate after a surprising admission came from the back row--Marshall Croft apparently ran a nuclear reactor for a year! An expert in the room!

Here there was a great interruption from Davide. He commented that 80% of our energy use is from non-renewable sources and that in recent years our energy use has doubled. Thus, it is not just a question of clean tech, but a question of reducing our energy consumption and the way that we use resources.

Finally we started talking about the Cap and Trade system. (Let me take a moment to say that I was really impressed by the enthusiasm and intelligence my classmates had brought to the discussion thus far. I think we would have begun discussing the structure of cap and trade far earlier if it were not for the overwhelming participation around the earlier discussion, which I believe was fundamental to talking about this new market mechanism.)

Here is an aggregation of my classmates definitions: In a cap and trade system a Government sets an explicit aggregate limit on the amount of production (of GHG, in this case). There are two companies, A and B. Each receive a certain number of allowances to pollute based on their previous levels of pollution, and based on the. Usually an allowance is some measurable quantity, such as one metric ton of carbon. A invests in technology that reduces their emissions below their previous levels. B does nothing. A can sell its unused allowance to Company B.

Patrick Connell interjected with the concern that Cap and Trade will create a divide between companies that can afford to modernize and those that cannot. This being a capital markets class, this was entertained, but not seriously. We believe in free markets! If a company cannot compete in the market, they will fail (unless of course they are the Big Three...)

Chris Brandriff brings up another great point. He reminds us that the end goal of cap and trade is to reduce the emission of the greenhouse gases that are warming the planet.

There are advantages in taking a leadership role to get us toward this goal. Yiorgos provides California as an example. Investing in the carbon markets can spur growth in clean tech and allow California to be part of the discussion in setting the future standard. He asks, "Do you want to wait and be the last one, or the first and lead the charge to make the market efficient?"

We began talking about the dynamics of the new market -- how can you tell when a carbon credit is real? Has one ton of carbon, that would have otherwise existed in the atmosphere, been removed? How can credits be measured and verified? I was able here to share my experience working with avoided deforestation in Indonesia and my understanding of additionality. A great way to tell whether a project has been successful in reducing the upward trend of CO2 emissions is to understand whether it could have existed in the absence of carbon markets. If it could and would have been taken on anyway (positive NPV, mandatory by law), it should not receive credits.

I recomend that all my classmates or anyone interested in these issues read WRI's short (2-page) fact sheet on cap and trade for more on additionality and other issues discussed above.

It was truly an awesome class. It was informational and encouraging. I'm off to polish my resume and start networking to see if I can find employment doing project finance and project management in the new carbon economy.

Net Impact National Conference - Day 1

Net Impact held their annual conference to a sold out audience this weekend in Philly. Sustainable business has arrived. The conference was full of optimism that a business case can be made for greening operations, investing in clean tech, and scaling social enterprises, and that the momentum in the business world, together with public sector change, will move us toward to solving today’s most pressing crises.

Here are some quick take-aways from the panels I attended:

Day 1: Finance Goes Green (Panelists: Credit Suisse, Citigroup, Goldman Sachs, HSBC, CCX)

The panel was split between M&A advisory people and internal advisors on ‘green’ issues. Financial institutions have to be ahead of the curve and responsive to change; they are typically some of the most responsive institutions to major paradigm shifts.

Here’s where the panelists see green financing going:

Fuel Cells (1990s) -->Wind, solar equipment and energy generation (present) --> Energy efficiency and water issues (water is still currently in the realm of VC and PE). They see the current economic slowdown creating a blip, but not derailment, in that trajectory, especially with projects that take longer to go online (wind projects take 12-18 from financing to operation) and require greater upfront capital requirements.

And this is how they’re incorporating it into how they do business:

Citi: Dedicating $50 BB over 10 yrs to climate positive activities. 1) GHG reducing, 2) transitional technologies (getting to solutions that reduce GHG) like gasification.

HSBC: won’t loan to those that do not demonstrate an environmental plan, engage in constructive dialog with client companies.

Credit Suisse: Primary mission is to assess whether or not the business is financeable, but they seek to identify climate change and social risks during the due diligence process.

Goldman Sachs: Future pricing of negative externalities will change the structure of finance. Integrate environomental due diligence into all policy units. Work with IB side on natural resources deals, on principaling side on natural resources and renewable deals.

Unconventional Partners: KKR and EDF Join Forces to Drive Results

My favorite panel, this one focused on KKR and EDF applying lessons from their TXU negotiation, to pilot greening KKR’s entire portfolio of companies. Working with a few of KKR’s companies, such as US Food Service, they’re developing a process playbook for companies that seek to create real value by understanding their impacts and what drives excess energy and material usage. I can’t say what they’re like outside of this panel, but they seem pretty chummy.
Sustainability efforts and private equity may seem an unlikely marriage, but maybe it’s not. PE works with private companies that do not have the pressure of quarterly earnings and can afford to go after investments with a longer payback and ROI.

Future of Sustainable Investing (Panelists: Principals for Responsible Investing, Innovest)

Innovest is modeled after bond agencies and provides research/ratings to fund managers on a large universe of about 2300 companies. PRI works with institutional investors and help them consider Environmental, Social and Governance (ESG) issues when refining their portfolios.

This panel got going with a look at what caused the current financial crisis. The panelists highlighted that among the many causes was a breakdown of trust in the financial services sector--people sold products that were difficult for the customers to make sense of or that the sales person knew that their customers could not afford.

Innovest led the session; it was interesting to hear how they rate companies on a sector-by-sector basis, and especially how they rate banks (through who they lend to and underwrite).

The rest of the two-day conference was packed with panels, networking lunches, inspiration from people taking practical steps to respond to climate change, composting, and more.