Beware the Plastic Bottle Problem in Sustainable Investment
In Siem Reap, Cambodia, you can’t drink the water.
You also shouldn’t brush your teeth with it or swallow any when taking a shower. Many expats keep a bottle of peroxide handy in case they nick themselves shaving. The reason for such precautions is poorly laid and sealed infrastructure which allows sewage to seep into the plumbing around the city, resulting in tap water with a high content of human waste.
For a developing country, this isn’t unusual. Also common is the solution: bottled water. The city, and indeed the entire country, depends on plastic water bottles imported in vast quantities for drinking water. Typically sold for the equivalent of 10 to 12 cents each, bottled water is an affordable, easy fix that takes the pressure off the government to clean up the tap water, even while the empty plastic shells pile up in landfills, waterways, and streets.
This global phenomenon is what many non-governmental organizations call “the plastic bottle problem”: a cheap, convenient stopgap measure that discourages investment in long-term solutions because the status quo is good enough. Often plastic bottle problems have harmful side effects (take, for example, the Great Pacific Garbage Patch), and usually cost more in the long run than fixing the root problem. (By some measures, bottled water can cost anywhere from 300 to 2,000 times as much as clean tap water in the U.S.) But long-term solutions often have high upfront costs, both politically and monetarily, so we keep getting the plastic bottles instead of the new plumbing, and often don’t think much about it.
Once you start to see plastic bottle problems, though, it’s almost impossible to stop. From cell phone towers that lead to reduced signal to health care solutions that nibble around the edges, symptomatic fixes are a part of just about every industry. Just as importantly, they often make someone money.
Which is why investing around them is tricky.
Environmental, or “impact,” investing has grown into one of the biggest areas of finance over the past 10 years. Particularly popular among millennials, approximately $1 out of every $9 in a professional fund is now invested in companies that prioritize environmental or other social missions. Some research suggests this number may now be as high as nearly 20 percent of all managed funds.
For the environmentally conscious investor this is great news, as is the fact that impact investing can be very profitable. One study found that roughly 75 percent of impact portfolios see at or above market returns, upending conventional wisdom about the need to choose between a sense of personal duty and a retirement account.
But plastic bottle problems represent a potential minefield for impact investors because they masquerade as solutions while ultimately doing more harm than good.
Take, for example, voluntourism. Around the world, companies have developed to help vacationers work with communities in need. The industry is profitable and popular, and for someone looking to make a difference in the world, supporting voluntourism-related NGOs might look like a reasonable opportunity. Unfortunately, it’s becoming increasingly clear that volunteering your way around the world doesn’t achieve the desired results.
At best, these well-meaning travelers take up unnecessary space. At worst, they take jobs from locals, displace potential investment, and do work for which they’re unqualified. Not great news for someone who wanted those voluntourism investment dollars to go toward making the world a better place.
The key to avoiding plastic bottle problems is understanding that they are, at heart, a collective action problem, which is the Achilles’ heel of the free market. Businesses typically compete in a zero-sum environment whether they’re global behemoths or subsistence farmers. The ones that sacrifice short-term advantage may initially struggle to survive, so most markets will self-select in favor of momentary profits even when that creates bigger problems down the road.
In contrast, a sustainable fix must prove viability and profitability even in the face of short-term disadvantage.
“The framework I like using when I think about sustainability is breadth times depth times duration,” said Premal Shah, president and co-founder of the micro-investment group Kiva. “Breadth would be the number of people affected [and] the depth—what we look at—is the level of poverty we’re addressing.”
“Return on capital has to be greater than cost of capital,” he added. “So basically, if a subsistence farmer gets access to a hybrid cow through Kiva lenders, that hybrid cow has four times the dairy income versus the local variety, but it’s twice as expensive to purchase. Typically, the subsistence farmer wouldn’t purchase this hybrid cow because they just don’t have the cash upfront.”
In that scenario, the local cow--being cheaper upfront but less productive overall--is a plastic bottle waiting to happen. So, how can impact investors be sure they’re supporting the option that will enrich the farmer (and, of course, themselves) the most?
Figure Out the Problems You Want to Solve
If you think too big, you won’t be able to look closely at your investments. For example, “helping the environment” is a big mission, and using that as a primary investment strategy can go wrong simply by nature of scope.
Instead, focus on specific sectors and issues, and develop an (armchair) expertise. What ideas have been tried before, and what does the community know about potential unintended side effects of some initiatives? If you’re investing in an individual stock or a crowdfunding venture, who is involved and why are they qualified?
Even well-meaning projects can have damaging consequence. For instance, solar power depends on rare metals, and extraction often leaves behind toxic byproducts. Wind power has proven disruptive to the migration patterns of many birds, and electric cars often generate a surprisingly vivid carbon footprint.
In other words, learning about your new investments can go a long way toward making sure you don’t sink your money into something that looks and feels right when it’s not.
Feel Out the Community
Sustainable change requires a sense of community.
According to Bill Foreman, director of public relations for Heifer International, it’s a critical element of any sustainable project. Projects that don’t adapt to the communities they’re trying to serve might get off the ground, he explained, but they never get around to organic growth. As soon as the money and the third-party pressure goes away, so does the solution.
“Malawi, they just got over a terrible drought,” Foreman said, “and after that drought the trendy thing was that all the NGOs were teaching people to do climate-smart agriculture. But I was talking to our project director there and she said, ‘Bill, after the project ends, the farmers there stop doing it.’”
As a solution, climate-smart agriculture should have been a winner for every program working in Malawi, but the adaptive techniques kept failing to catch on. The reason? Despite their good intentions, aid workers didn’t take the time to get community buy-in. They didn’t get to the point where the community wanted this as much as they did, and until you get there the project is dead on arrival.
“You’ve got to do more,” Foreman said. “You’ve got to build a community and get people working together.”
Mind the Pioneer Gap
The pioneer gap, Shah explained, is when an idea has reached the point of “post-investment, pre-commercialization.” At this point the business has spent its money but hasn’t seen any return on investment, and may not for years to come.
It’s a common factor in plastic bottle problems, as both companies and governments try to avoid the losses and uncertainty that come with this gap. It’s also an issue that structurally holds back a lot of sustainable investment.
“You talk to a lot of investors who say, ‘Conceptually I can see how this reaches a lot of poor people and could give them a lot of income, but I don’t know if it will work,’” Shah said. Or, “they can’t get Series A investment because it hasn’t been de-risked.”
Sustainability as a concept focuses on gains that develop slowly and won’t see financial returns for years. In the case of projects like infrastructure, health, or education, the investment might not even have direct cash returns.
Finding opportunities to engage with companies or groups that have their eye on this gap, and ideas for how to solve it, can go a long way toward building solutions that will last.
Success isn’t just about having the right product or technology.
Government agencies and nonprofits can operate based purely on a sense of mission. They exist to take money and create a service. Private industry works the other way around, providing services in order to make money.
Pay as much attention to an investment’s balance sheet and leadership as you do to its mission statement and ad slogans. Choose sound, stable investments with a good rate of return that perform well in the long run. Not only will this strategy help your portfolio but these are also the companies most likely to make a difference years down the road. Firms that depend on constant outside capital, the ones that haven’t found a way to solve risk issues and make their model profitable, tend to falter.
And you know who they help from inside of bankruptcy? Nobody.
The Perfect is the Enemy of the Good
You can’t move forward without a leaving a footprint, and that’s just as true in environmentalism as in everything else.
The corollary to impact investing is known as sustainable investing, which is when people seek out companies that simply keep their environmental footprint light. Unlike impact investments, these companies don’t necessarily try to save—or even change—the world. They just try to make their widgets in an eco-friendly fashion.
The key to sustainable investing is recognizing the difference between the messy work of making real progress and the stuff that only appears to make a difference. Just because something creates waste or doesn’t take a fix all the way doesn’t mean it’s not worth exploring.
It may not be as glamorous as investing in solar paint (by the way, do not invest in solar paint), but by rewarding companies that go out of their way to consider their social and environmental significance, you can help spread your message and make some money, too.
The important question when considering an investment is whether the company is making an overall positive contribution, and what it takes to get there. Even if it’s making a difference one life at a time, investing can be worthwhile.