Barriers to Venture Capital for Environmental Technologies

The National Environmental Technology Applications Center (NETAC), a joint project of US EPA and the University of Pittsburgh, in a November 1993 study identified four key barriers to access to venture capital for environmental technology companies. Briefly, these are

1. Unpredictable commercialization pathways As noted earlier too many federal and state agencies have the power to change the rules for environmental compliance during the technology development phase. By the time a technology to address a specific problem is ready for market, the conditions which define compliance may have changed making the technology irrelevant.

2. Lack of management experience Investors reject deals when technologists with no prior business experience head start- up companies. Strong technical expertise does not necessarily translate into marketing skills. Firms which include partners who have good business skills, in addition to technical expertise, are more likely to attract investors.

3. Potential Liability Some venture capital firms prefer to invest solely in proprietary products which are then sold to environmental services companies. This strategy is adopted in order to avoid any involvement with specific compliance issues or site cleanup liability issues. Similarly, large companies with successful environmental technologies developed for internal use hesitate to market them. They fear they will be sued because of their "deep pockets" if the technology does not work under a specific set of regulatory conditions.

4. Lack of adequate data on performance Companies with new, untried environmental technologies are often at a disadvantage in terms of developing performance data for their products. Few firms are willing to risk being put out of compliance by using an untried technology. Developers get caught in a classic "Catch 22" in that they do not have performance data and no one is willing to take the risk of using a technology without such data.

NEW PARADIGMS

New paradigms for balancing trade-offs between development and environment have emerged over the past four years. These are interrelated because they seek to balance benefits of development against destruction of ecological / environmental resources. However, there is no free lunch in that the 2nd law of thermodynamics remains intact. All processes which use energy produce residuals, and management of residuals will always require new inputs of energy and resources to prevent harm to the environment and human health.

Sustainable Development

In June 1992 the United Nations sponsored the Earth Summit in Rio de Janeiro. The nations attending the Earth Summit produced several key international treaties on biodiversity and global warming which affect traditional natural resource industries such as forestry, mining, and agriculture. These treaties contain written sets of assumptions concerning transfer of technologies and resources from industrialized nations to lesser developed countries (LDCs). They include a vision that the LDCs will not travel the road to environmental degradation experienced by industrialized nations.

Not all LDCs or developing nations agree with this vision. As far as the biodiversity treaty is concerned the destruction of the rainforest continues in Brazil. As far as the global warming treaty is concerned fossil fuel electric power development is growing in China.

US involvement in the UNCED conference was minimal due to opposition from then President Bush to the biodiversity treaty. Nongovernmental organizations were incensed by the low level of official participation and follow-up to the Earth Summit. Encouraged by then Senator Albert Gore, who attended the UN meeting, they developed their own alternatives to it. Proclamations on sustainable development were issued by an international coalition of environmental groups.

The Centre for Our Common Future widely distributed a plain English "Agenda for Change" which describes sustainable development in terms of the international agreements signed at UNCED. It describes "Agenda 21" as a new paradigm for the relationship between environment and economic development.

In a separate action an organization called the Business Council for the Earth Summit led by firms such as 3M, DOW, ABB, and Nippon Steel developed a business vision of sustainable development. They argue that long-term economic growth and environmental protection are inextricably linked. In 1993 the Clinton Administration developed a commission on sustainable development, chaired by now Vice-President Gore, but the commission lacks funds to implement programs for developing nations and LDCs.

Is Sustainable Development Possible?

Is sustainable development a market, a business, or a new way of doing business? Or, is sustainable development really a political movement and not a market? For instance, is it possible to find ways to balance needs for economic development with the carrying capacity of global ecosystems? Can this question be applied with analytical rigor to communities, corproations, or nations?

A key objectives for a business considering sustainable development practices would include at the strategic level minimizing errors of perception between knowledge of markets and resources. For instance, how does the firm link information about economics and ecosystems? What kinds of design tools are needed to integrate ecological information into development of a business enterprise?

Is sustainable development possible in business? In the US, in a McKinsey survey, [HBR; 6/94, Walley & Whitehead], while 92% of top corporate managers believed environment was a relatively important factor in decision making, only 85% listed it as a major goal, and only 37% believed they were successful in integrating environmental issues into daily decision making. Further, many companies treat environmental compliance as a functional activity outside of the core business activities of the firm.

It appears that the lessons learned by the total quality movement have not yet been widely transferred to the field of environmental compliance. As long as "environmental" is treated as an "add-on" instead of being integrated in business decision making, new environmental technologies may be a tough sell to management.

Natural Resources and Sustainable Development

Is sustainable development possible in the western states in the US? Bitter controversies continue over logging and forest management in conflict with protection of endangered species. Disputes over declining salmon have triggered conflict between users of hydroelectric power and environmentalists. Attempts to increase public lands grazing fees for cattle ranchers have encountered stiff opposition. Proposed new mining ventures have run into trouble because of their proximity to wilderness areas or national parks.

Some environmental groups, such as Earth First! are "drawing a line in the sand" rather than seeking solutions. On the wise-use side the so-called Sagebrush Rebellion of the 1970s appears ripe for a comeback albeit sparked by fringe political groups in addition to traditional stakeholders such as ranching, mining, and timber interests. Sustainable development, which depends on development of trade-offs between economic growth and environmental protection, is not likely to be widely accepted soon in the current political climate. What

Despite the intensity of these political conflicts, the actual economic importance of extractive industries is declining in the West. It is more likely that a major issue for sustainable development, at least in Idaho, will be water use for agriculture. Pumping of groundwater for irrigated agriculture is starting to impact the allocation of surface water in the Snake River plain. Almost 90% of Idaho's agricultural lands depend on some form of irrigation.

The major engine of economic wealth creation in Idaho continues to be agriculture. Idaho is ranked 19th in the nation (1992 data) in terms of the value of farm markets with $2.62 billion of which crops were $1.55 billion and livestock $1.07 billion. A total of 21,000 farms cultivated 14 million acres. By comparison, Illinois ranked 2nd in the US in terms of agriculture had 81,000 farms cultivating 29 million acres with a total 1992 farm market value of $7.5 billion. Significant factors in the differences between Idaho and Illinois include length of the growing season and average temperatures, annual rainfall (40-44 inches annually in Illinois compared to Idaho's 10-12), and quality of the soils. California is ranked 1st for agriculture in the nation with $18 billion in farm market value.

Industrial Ecology

Looking 20 years into the future some analysts see a merger among several streams of environmental technologies including cross- and-multi-media (air, water, soil) analyses of residuals transport and fate from multiple facilities and solutions that integrate ecology, economics, business management, and systems thinking. Today, these ideas are loosely connected by a field of research called "industrial ecology." It is positioned by its adherents as a framework for environmental management which is based on a straightforward analogy to natural ecosystems.

In a conference held in 1992 the National Academy of Engineering (NAE) described three stages in measuring progress towards this kind of approach to environmental technologies and management decision making.

1. The first stage, which represents in time industrial development up to about the 1970s, is characterized by linear, one-way flows of materials and energy. Production, use, and disposal of goods occurs without reuse, recycling, or recovery of primary materials, energy, or residuals. This paradigm continues in Eastern Europe, the countries formed by the breakup of the Soviet Union, and China.

2. The second stage, which represents in time industrial development since the early 1970s, is characterized by some internal recycling of materials, but there is still heavy demand for virgin materials and energy. This paradigm represents the regulation of industry in the US through 'command-and-control' policies that mandate dark green technologies. Some wastes continue to be disposed of without regard to impacts on human health or economic consequences.

3. In the third stage, which is located in time at some point in the future, industrial development is characterized by a very high degree of recycling, re-use, or transformation of waste materials. New energy inputs are needed to achieve these results and economic costs and benefits can be quantified to measure results. Movement towards this paradigm is represented by current efforts in the field of pollution prevention or waste minimization. Not everyone thinks this is the wave of the future. Critics feel that conventional pollution prevention processes provide immediate, measurable benefits and that industrial ecology is at best an item that belongs on long range research agendas.

Will Industrial Ecology Work?

Both the Japanese and Canadian governments have expressed strong interest in industrial ecology and have committed funds to research projects designed to produce benefits within the next five years or less. In the US in 1993 AT&T gave $300,000 in six research grants to US universities (MIT, Princeton, NYU, UCLA, U. Mich, & Spellman College) to support research in this area. AT&T said in its press release (WSJ 11/12/93) that "industrial ecology will be a guiding principle for sustainable development in the 21st century."

Hardin Tibbs, an expert on industrial ecology and consultant with Arthur D. Little & Co. says there are three steps companies must take to move from dark green to light green environmental technologies. First, companies must find ways to stop wasteful practices that lose money. Second, they have to reconfigure their production processes for waste minimization. Third, they must design production processes and products in terms of environmental issues as a major concern. This is sometimes called "design for environment," and is illustrated by efforts of manufacturers of electronic circuit boards to find substitutes for CFCs as solvents.

APPENDIX

Table 1: World Market Forecasts for the Environmental Industry

$ Billions ..................................... Sector 1990 2000 Change % Change --------------------------------------------------------------- Equipment 152 220 68 45%

Water Treatment 60 83 23 38% Waste Management 40 63 23 58% Air Quality Control 30 42 12 40% Other 22 32 10 45%

Services 48 80 32 67% ============================ 200 300 100 50% Source: OECD 1992

Table 2: Pollution Abatement Spending in 1991

$ Millions ................... Capital Operating Item Equipment Costs --------------------------------------------- Air 3,706 5,034 Water 2,815 6,345 Solid Waste 869 6,008 =================== Total 7,390 17,387

Source: US Dept. Commerce 1993

Table 3: Hazardous Waste Management Services Spending

$ Millions ..................................... Service Area 1991 1995 Change % Change --------------------------------------------------------------- Analytical Services 725 980 255 35% Environmental Consulting 1,230 1,700 470 38% Design & Engineering 1,755 2,560 805 46% Remediation/Construction 4,125 7,760 3,635 88% Transportation 1,172 1,184 12 1% Offsite Services 3,212 2,814 (398) -12% ============================ Total 12,219 16,998 4,779 39%

Table 4: Hazardous Waste Management Spending By Market Segment

$ Millions ..................................... Market Segment 1991 1995 Change % Change --------------------------------------------------------------- Superfund 2350 2888 538 23% Department of Defense 1176 2643 1,467 125% Department of Energy 1610 3567 1,957 122% State Governments 932 948 16 2% Industry 3940 4600 660 17% Underground Storage Tanks 2211 2352 141 6% ============================ Total 12,219 16,998 4,779 39%

Source: US Dept. Commerce

Table 5: Trade in Environmental Protection Equipment 1991

$ Millions ............................ Item Exports Imports Balance ------------------------------------------------------ Air 886 128 758 Water 450 216 234 Other 345 223 122 ============================ Total 1,681 567 1,114

Source: US Dept. Commerce

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© Dan Yurman, 1994.