Post contributed by Aaron Fairchild:
Not too long ago I gave a talk at Bloom!, a local Seattle function where sustainable business entrepreneurs have 18 minutes on the clock to tell their story, answer questions and then move on.
It is a jazzy and frenetic format, and I had a lot of fun being part of the party-like speaking event. A week or so afterwards I asked the event organizers if they received any feedback on my talk, good or bad. The response was for the most part positive, except one person who commented that I was, well, “too capitalistic.” Pause… Deep breath… Contemplative grin…
I cut my green teeth nearly 20-years ago, at what was then, the hippy liberal University of Western Washington, taking classes on environmental justice and ethics. At the time I lived with Johnny D, an Earth First activist who used our kitchen as the hub that the local Earth First crew used to plan out their next monkey-wrenching action against the man. We thought that a career in environmentalism meant that you were either going to be an activist, an advocate in a non-profit somewhere, or an academic. No one at that time was considering capitalism’s role in the environmental movement. We considered capitalism to be the cause of our environmental problems, and not one of many remedies that can be used to cure them.
I understand where the comment after the speaking event comes from, and it continues to cause me to smile when I reflect on it. I don’t begrudge that perspective; I welcome the discussion as long as we don’t get bogged down in it. I continue to think it is amazing that there is even a discussion to be had, which is a sign of how far we have come. The fact is, markets that are allowed to run free within the regulatory framework imposed by society have efficiency, scope and scale far beyond academia, advocacy, and activism. However, we shouldn’t embrace free markets and capitalism at the expense of the others. They all need to co-exist and be cross-functional and supportive, but we must recognize that economy rules our world, and a fringe issue that is not embraced by the economy will always remain on the fringe. Until capitalism goes green, or the green movement goes capitalistic, society will continue creating brown fields, brown skies and toxic resources at the expense of future generations. Let’s take a peek into where capitalism is heading…
Daniel Goleman, the nationally known social psychologist and author of the #1 bestseller, Emotional Intelligence, recently completed a new book, Ecological Intelligence. In his book he explores how to remedy the lack of insight and understanding into the ecological impacts of the products we buy. He argues that by boosting our “ecological intelligence” we will collectively increase our understanding of the hidden ecological impacts and in so doing, bolster our resolve to improve them. He discusses how brain researchers examining purchase decisions have demonstrated that consumers’ emotional reactions to products’ ecological impacts matter for sales. Goleman examines how companies in several industries such Wal-Mart and industrial chemical production companies are already changing the way they manage their supply chains to address the need to limit their impacts and position the business to thrive in a radically transparent marketplace. He states that his mission is to, “alert businesses to a coming wave, one that will wash over any company that markets a man-made product.” He calls for “radical transparency” in the marketplace that allows consumers to be ecologically intelligent about the products they purchase.
Another new arrival on the marketplace scene is the L3C. The L3C is a “Low-Profit, Limited Liability Corporation.” This is a new type of LLC that is designed to attract private investors and philanthropists in ventures designed to provide a social benefit. An argument can be made that a new legally designated entity doesn’t need to be created in order for organizations to provide a social benefit. If a profit maximizing organization tackled the same business sector as a low-profit organization I would submit that it could provide a far greater social benefit. There are several issues that would need to be addressed to flesh out the argument, but the fact that there is an argument to be had is encouraging. The L3C is yet another sign of our progress and the nature of our progressive times.
There are more examples of capitalism gone green, from Socially Responsible Investing (SRI) to sustainable supply chain management. In fact, there are so many examples that I simply can’t mention them all, however, one example that is close to home remains. At G2B Ventures we are actively engaged in helping to support efforts in profitable environmental enterprise. We are working hard to demonstrate the value of smart energy efficient refurbishments in the residential housing market using a market-based approach that is acutely aware of public policy overlap into the sector. By being focused on profit maximization, and working with several local stakeholders to develop a market-driven premium for energy efficient homes, we will capitalize on the enhanced returns of energy efficiency to the benefit of our investors. If we can do this, we will be one more example that when green goes capitalistic, society and the environment are beneficiaries as well as the investor.
Post contributed by Aaron Fairchild:
Welcome to the residential world of green home living. You can now buy a green built home with a variety of different certifications. From LEED for homes to Built Green 3, 4, and 5 stars to Earth Advantage homes, environmentally green homes are more and more available to interested home buyers. In fact, in the Seattle region 25% of all new residential home construction is built to a green building certification. But what about homes for rent? While there has been a lot of attention paid to “green leases” in the commercial real estate market, if you are in the residential rental market, and concerned about your utility costs and environmental impact, there are next to zero green rental options available to you. What gives?
The issue of “split incentives” is the culprit. In a capsule the issue is that the landlord generally doesn’t pay the energy bill and wouldn’t benefit from lower energy costs that come from investing in enhanced energy efficiency, and the tenant doesn’t own the home and is therefore unlikely to invest in energy efficient appliances or systems. This issue is of particular interest to me.
I am the Managing Partner at G2B Ventures, LLC. G2B is establishing an energy efficient residential real estate investment fund. The Efficient Real Estate Fund will buy primarily single family homes at deep discounts and then refurbish them with an eye toward energy efficiency. Once the investment properties are acquired and refurbished we will be renting them out to capture rental income during the life of the Fund.
Our property management team will tell you that newly refurbished or constructed homes generally command higher rents. While this helps us at the Fund, we will eventually recapture all of the costs of energy efficient and general improvements when we sell the properties. But how do we increase our rents to help recapture the costs of energy efficient up-grades more quickly?
We are currently developing a model that shares the benefits of energy efficiency between the landlord, which in our case is the Fund, and the tenants. Here is what we are working on:
The landlord must start with an understanding of the energy costs associated with normal or average energy consumption and then baseline the property. For example, the landlord determines that during the winter months the average utility bill runs roughly around $250 and in the summer the rough bill is $200.
I am using easy to absorb numbers and I know this is a rough analysis so read on…
Now the landlord does the energy improvements and using the kWh savings for every measure installed she can easily calculate the monthly cost savings. Using our data for the Seattle area we roughly calculate that a smart $10k investment in energy efficiency can save roughly $50 per month. Using a $50 dollar per month savings we can now assume that during the winter months the average home occupant will spend $200 per month and during the summer he will spend $150.
The landlord will now offer the home for rent that includes the utilities within the rent payment. The rental rate is determined based on market rents plus the pre-retrofitted utility cost projection. Rent including utilities is normally avoided because the tenant is not incentivized to conserve energy, which could end up costing the landlord dearly. However, in our model, if the tenant uses less than the baseline utility monthly expense ($200 in winter and $150 in summer), the landlord will share the savings with the tenant 50/50. Instead of a split incentive, we are aiming for a “shared incentive.” For example, if the tenant’s bill in the month of January were only $150, the tenant would receive a check for $25, and the remaining $25 would go back to the landlord.
Clearly this model requires enhanced sophistication on behalf of the landlord. Good tracking systems and transparency are absolutely necessary. However, the benefit is clear for the landlord…
• Difficulty tracking
• Cost of retrofit
• Calculating the savings borne through efficiency
• More quality tenants
• Better relationship with tenant
• Enhanced property cash flow
• Enhanced asset value
…and for the tenant.
• Generally higher rental rates
• Landlord knows the utility consumption behaviors
• Greater interaction with the landlord
• Newly refurbished / clean / healthier rental
• Rental characteristics align with values
• Ability to receive energy savings checks every month the energy costs are below baseline.
• Greater interaction with the landlord
The Green Canopy blog is written by our CEO and Culture Curator, Aaron Fairchild, as well as our staff and a few very special guests.