Sustainable Systems

This is the second in a series of three blog posts [part I, part III] chronicling my economic journey as a leader in the movement for Socially Responsible Investment (now called Sustainable and Responsible Investment) and Triple Bottom Line Business (People, Planet, and Profit) in the 1990s and 2000s.

 

In this second blog post I talk a bit about the formation of Sustainable Systems and the formation of the Bay Area Family of Funds. — James Nixon

In 1995, my friend from Berkeley Citizen Action days, Joe Gross, came to see me at Progressive Asset Management one day and said that he wanted to start a socially responsible for-profit company because he was tired of raising money from foundations and other donors (as he had been doing as the Executive Director of Neighborhood House of North Richmond and then of Edge, the Alliance of Ethnic and Environmental Organizations).

After a couple of long conversations, we decided to start Sustainable Systems, and Progressive Asset Management agreed that our new company could be incubated at the Progressive Asset Management offices. Joe and I partnered on all of Sustainable Systems’ projects, but one or the other of us served as the Principal for each project.

Joe’s first project through Sustainable Systems was to help develop a regional job creation strategy to replace the jobs that would be lost with the closing of a couple of military bases in the East Bay. He identified the most successful job creation strategies in operation in the Bay Area and held a series of forums that featured each of them. The one he liked the best was the “Business Cluster” approach to business incubation pioneered by Jim Robbins. Subsequently, Sustainable Systems and Jim Robbins’ company, Business Cluster Development, partnered to create the Communication Technology Cluster, a communications technology business incubator in downtown Oakland, which was quite successful for a number of years and Joe become something of a guru to entrepreneurs of color in the East Bay.

Building the Sustainable Economy

My first project through Sustainable Systems was a series of three international conferences called “Building the Sustainable Economy” in 1995, 1996, and 1998.

I got started along this trajectory because, in 1993, I became uncharacteristically depressed after my divorce among other things. Since I was managing a state of the art information gathering system to do Progressive Asset Management’s social and environmental screening, I decided to make myself feel better by making a list of all of the good things I could identify that were happening in business and finance around the world.

As the list grew and grew, one day I had a genuine epiphany. I realized that these were not little side developments running counter to the main thrust of global Capitalism. Rather, they were different aspects of a new kind of economy that was emerging around the world—a Sustainable Economy—and I got the idea that it would be really interesting to convene the leadership of this new, Sustainable Economy.

I connected with Earth Day New York, and Sustainable Systems and Earth Day New York co-coordinated the first Building the Sustainable Economy conference at the World Trade Center, describing a Sustainable Economy this way:

“At the United Nations Earth Summit in Rio de Janeiro in 1992, the assembled nations adopted sustainable development as the principle that should guide the world’s economic activity. From this perspective, a sustainable economy is one that meets current needs by enhancing, rather than diminishing, the ability of future generations to meet their needs.

Some characteristics of a sustainable economy include:

• Life-cycle design of products to encourage high-quality, long-life and appropriate disposition.
• Health and environmentally sensitive production and distribution technologies.
• Conservation and generation of energy from safe, renewable sources.
• Protection and restoration of natural eco-systems.
• Organic agriculture producing healthful foods, improving soil and conserving water and energy.
• Energy-efficient, health-enhancing, and safe building construction.
• Residences located in proximity to workplaces and commercial centers.
• Transportation systems powered by renewable non-polluting energy sources.
• Equitably-financed holistic health care.
• Participatory business structures and management practices.
• Socially responsible investing.”

The conference turned out to be one of those rare undertakings that went well beyond the organizers expectations, with much of the leadership of the Sustainable Economy present and in conversation with one another, including:

• Amory Lovins talking about energy conservation, nega-watts and hyper-efficient cars and other products.
• Bill McDonough laying out the principals of green architecture.
• Michael Braumgart promoting “Cradle to Cradle” design, where recycling means “up-cycling” not “down-cycling.”
• Hazel Henderson describing an “Ecological Economics” and the need for sustainable financial markets.
• Karl-Henrik Robèrt giving one of his first major U.S. presentations on “The Natural Step” approach to understanding and implementing sustainability.

And on and on.

The next year we organized Building the Sustainable Economy II at the New School and incorporated one of the first Green Building Expos and brought the leaders of the Sustainable Economy into conversation with the political, environmental, and planning leadership of the New York Metropolitan Region, including the Mayor of New York, the heads of economic development and planning for the city, and the heads of planning and economic development for the New York Metropolitan Regional Plan Association.  Altogether, we looked at New York City through the lens of an emerging Sustainable Economy.

Construyendo una Economia Sostenible

During the run-up to Building the Sustainable Economy II, the American Friends Service Committee (AFSC) approached me about taking the conference to Cuba. AFSC had a strong presence in Cuba and particularly worked with Centro Felix Varela, a Cuban Non-Governmental Organization that established to explore the intersection of civil society, ethics, and sustainable development and was semi-independent of the Cuba government. AFSC wanted to join with UNESCO and Centro Felix Varela to co-sponsor Construyendo una Economia Sostenible in Havana in 1998 and I agreed to co-coordinate it.

I learned that Cuba had the highest per-capita number of sustainable development initiatives of any country in the world, not as aspects of a coherent economic strategy, but rather as independent responses to the U.S. blockade. Since Cuba couldn’t get enough fertilizer, the country developed a very robust organic agriculture sector. Since they couldn’t import enough medicines, they rediscovered the indigenous Cuban herbal and alternative approaches to health and healing called Green Medicine. Since they couldn’t get enough petroleum, they began to use the bagasse sugar byproduct as a biofuel. Since they couldn’t import enough cars, they became expert at car repair and bicycle production.

One of the main purposes of Construyendo una Economia Sostenible, was to help build relationships between these Cuban sustainable development initiatives and to encourage the Cuban government to develop an integrated sustainable development strategy, based on its robust Sustainable Economy, which could provide Cuba with strategic advantage as the county returned to be a force in the world economy.

As a run-up to the main conference, I went to Cuba as one of only two Gringos to attend the first gathering of all of the Cuban sustainable development initiatives, which was organized by Centro Félix Varela. It was very inspiring to be present and help provide the occasion for the founding of a network of these Cuban sustainable development initiatives and I was humbled to deliver the final address at this gathering to make the transition to the full conference.

The full conference was designed to bring together leaders in the field of sustainable development from the Northern Hemisphere (the U.S., Canada, and Europe), from the Southern Hemisphere (Latin America, India, and South Africa), and Cuba. One of my responsibilities was to recruit the leaders from the U.S., Canada, and Europe. I had no honoraria, but I could offer an all-expenses paid, legal trip to Cuba to talk with many of the other sustainability leaders from around the world.

The Cuban organizers of the conference wanted to make sure that the conference had someone who was the CEO of a major corporation that was a sustainability leader to demonstrate that this wasn’t just a fringe phenomenon in the U.S. I had gotten Ray Anderson, the founder and CEO of Interface, the world’s largest designer and maker of carpet tile, to speak at Building the Sustainable Economy II. I had been extraordinarily moved by his story.

Inspired by reading Paul Hawken’s The Ecology of Commerce in 1994, Ray Anderson launched Interface on a journey to sustainability, with the vision of being: “the first company that, by its deeds, shows the entire industrial world what sustainability is in all its dimensions: People, process, product, place, and profits.”

So I contacted Mr. Anderson to invite him to the conference in Cuba. He indicated initial interest and put me in touch with his staff to see if it was possible to get it on his schedule and make the arrangements. That process took a long time, but everything looked good until, right at that time, President Clinton chose him to be co-chair of the President’s Council on Sustainable Development (PCSD) and the word came down that the Clinton administration would not be happy if the first major speech of the new co-chair of PCSD took place in Havana.

Therefore, I had to find someone else. By then, Sustainable Systems had begun working with Sunne Wright McPeak, then President and CEO of the Bay Area Council, the business civic organization made up of the largest employers in the San Francisco Bay Area. So I invited her and, thankfully, she accepted. It turned out that she was a great choice, since she was the business co-chair of the Bay Area Alliance for Sustainable Development, a regional organization modeled on the President’s Council on Sustainable Development and she could speak to the sustainability efforts of the whole business community in the San Francisco Bay Area.

As the time for the event got closer and closer, we still weren’t able to get our licenses from the U.S. Treasury Department. It is a little known fact that it really hasn’t been illegal to go to Cuba, but rather it has been illegal to spend money in Cuba without a license from the Treasury Department. We were trying to get more than 100 licenses for our event, one the largest numbers ever.

I had tried to get Paul Hawken to speak at the first two Building the Sustainable Economy conferences, but he had passed. However, he accepted my invitation to come to Cuba and even decided to bring his daughters. As the time got closer and closer, and I still didn’t have the licenses, I got daily and sometimes more than daily calls from an increasingly agitated Paul Hawken, further complicating the already rather hectic run-up to the conference. More than once I asked myself, now why was it that I wanted Paul Hawken to do this so much?

In the end, we had to get a couple of U.S. Senators and 4 or 5 House of Representative members to confront the mid-level bureaucrat in the Treasury Department responsible for the licenses and, finally, we got them out. We set a record for the most licenses issued at one time, which may well still stand.

In organizing the conference, we put together a design committee, with Centro Félix Varela representing Cuba, and agreed that the first three days would feature morning plenary sessions with a speaker from the North, a speaker from the South, and a speaker from Cuba and afternoon workshops that would balance the three perspectives. The fourth day we would work together on a document that the conference could issue.

Right up until the last week before the conference, the Cuban government pretty much ignored us, but then they realized that a large number of the world’s sustainable development leaders would be in Cuba for the event and they wanted the government perspective represented. They got Centro Félix Varela to agree to add additional Cuban speakers to the first two days plenaries.

Very busy with getting our licenses and getting everyone to Cuba and settled, I didn’t pay too much attention to this until the conference began and the first speaker was a Cuban government economist who not only presented an old style communist perspective but also read his speech in a deadly dull mumbling presentation. I was sitting in the back of the room in agony, with visions of the attendees walking out in disgust.

Paul Hawken was up next and he gave a magnificent speech describing the environmental crisis humanity faces, the role business has played in getting us into this crisis, what needs to happen now, and the role business is uniquely capable of playing to lead in resolving the crisis. He got a standing ovation. I’m in the back cheering with everyone else, but, at the same time, I’m thinking “All is forgiven. You can bug me all you want about your arrangements. You’ve saved us, Paul.”
The conference took off from that point in a kind of magical way and really was a conversation among the world’s sustainability leaders about where the movement was and where it needed to go.

As a young man, I had been so inspired by the early Cuban revolution that I had always wanted to come to Cuba to talk about revolution. I was deeply moved to be asked to be a plenary speaker to the whole conference on the third day.

I closed my speech with:

Song of a Revolution

Let us join together and sing the song of a revolution that sustains and restores us, and the Earth.
Let us sing the song of a forest living and breathing and growing and thriving, home to all of our fine animal and plant and insect and human friends.
Let us sing the song of a people at peace, with bread on our tables and work for our hands and schools of wisdom and safety for our children and love in our hearts.
Let us sing the song of a movement, North and South and East and West, Black and Brown and Red and Yellow and White—a rainbow of force so clear and clean and strong that no-one can succeed in opposing us.
Let us sing the song of the Earth—our planet sick with a disease that only we humans have brought and only we humans can cure.
Let us sing the song of a revolution that sustains and restores the Earth as a place where life wins and death plays its role as a servant of life.
Let us sing the song of that revolution.

On the fourth day, the very articulate Ricardo Alarcón de Quesada, President of the Cuban National Assembly, came to the conference and spent two hours with us (with no notes) talking about the environmental movement around the world, the leadership Cuba was taking, and what should happen next. He was amazing, charismatic in the Fidel Castro mode, and impressively knowledgeable about sustainability and Cuba’s unique opportunity to be an environmental leader.

The conference closed with leaders from the northern, southern, and Cuban wings of the Sustainability Movement agreeing to continue to communicate and work together. In addition, the Cuban sustainability initiatives set up a national network to encourage joint learning, mutual support, and collaborative action. Everyone agreed that the conference had been extraordinarily inspiring and amazingly successful and I breathed a huge sigh of relief. To this day, that conference is the most complicated event I have ever helped organize.

As an aside, It’s a little known fact that, toward the end of the conference, the representatives from the San Francisco Bay Area got together in one of the meeting rooms of the Havana Libre Hotel, where the conference was headquartered, and created an initial formulation of Oakland’s Sustainable Community Development Initiative and an initial take on the Compact for a Sustainable Bay Area.

Bay Area Family of Funds

After we all got back, the Bay Area Alliance for Sustainable Development (Bay Area Alliance)—a multi-stake holder group representing the “the three Es” of sustainable development (Economy, Environment, and social Equity) as well as government and modeled on the President’s Council on Sustainable Development—completed work on the Compact for a Sustainable Bay Area (Compact).

The Compact laid out 10 challenges to sustainability in the Bay Area and 10 commitments to action. The Bay Area Alliance got an overwhelming majority of the 110 government jurisdictions in the Bay Area to adopt the Compact.

The Compact’s 6th commitment to action was, “Focus Investment to Preserve and Revitalize Neighborhoods.” As a response to this commitment, the Bay Area Council initiated what came to be called the Bay Area Family of Funds, a “double bottom line” pool of well over $250 million in private equity real estate and venture capital, organized as two real estate funds, a venture fund, and an environmental clean-up fund. The Funds were designed to deliver a market rate of financial return (the first bottom line) and substantial economic, social, and environmental returns (the second bottom line).

The Bay Area Council contracted with Belden Daniels and Economic Innovation International as Fund Builder and Sustainable Systems as Lead Consultant for the Bay Area Family of Funds. I discovered that Belden Daniels is the Dean of the Triple Bottom Line Fund field, having built funds with over $150 billion in assets.  Collaborating with him to launch the Bay Area Family of Funds has led to a 15 year association of close collaboration.

With Progressive Asset Management, we had demonstrated that socially responsible investing, using investment managers with top quartile financial performance, could produce financial returns in the public security markets that were consistently as strong as and frequently stronger than non-socially responsible investing. Now I wanted to help demonstrate that we could get the same kind of results with private investments in earlier stage companies before they went public or were acquired.

The Funds in the Bay Area Family of Funds have been extraordinarily successful at doing exactly that. I’ll give you a couple of examples.

Bay Area Smart Growth Fund I

We began building Bay Area Smart Growth Fund I in early 2000, when the “dot com bubble” was at its height. We thought we would build mixed-use office, retail, and housing, because office space, particularly for community based organizations and affordable housing were badly needed. We had the first close of this Fund in September of 2001 and raised $66 million. However, this was shortly after the dot com bubble had burst. Suddenly San Francisco, had a 20%+ office vacancy rate.

The fund manager, Pacific Coast Capital Partners, and the fund sponsor, the Bay Area Council, had to shift focus and one of the new focuses was buying, repositioning, and selling shopping centers that were in trouble. Vallejo Plaza was one of the best examples of this strategy. Vallejo Plaza was a 267,500 square foot shopping center on approximately 29 acres with 15 separate buildings that were constructed from the late 1960s to the early 1990s. Vallejo Plaza was located in Vallejo, California, at a transit hub in a district of Vallejo with a high concentration of Filipino Americans and other Asian Americans. It was also an area of Vallejo that had a high concentration of poverty, with household median income for the census tract at 39% of area median income in 2002.

Vallejo Plaza was designed as a regional destination shopping center, but, by 2002, it was in trouble, with the very successful Hill Top Mall taking away most of the higher end business. Since the closing of the movie theater, the bowling alley, and a number of anchor tenants, 100,000 square feet of Vallejo Plaza had gone dark. The parking lots were empty. Most of the tenants still located at Vallejo Plaza were local proprietors, but these businesses had seen their retail sales and the number of people who visited their stores drop dramatically. The neighborhood around Vallejo Plaza was also in decline.

Bay Area Smart Growth Fund I put together financing of $16.5 million, with $5.2 million coming from the fund and banks supplying the rest. Recognizing the changing demographics of the area, the investment was used to finance the repositioning and re-tenanting of Vallejo Plaza to serve the needs of the surrounding Filipino American and Asian American community.

The project included:

• Attraction of Seafood City, a new grocery store specifically serving a Filipino and Asian clientele.
• Establishment of a Mercado with space for lots of little shops for local merchants.
• Leasing of spaces to a Filipino banquet facility and a Max’s (the first U.S. location of the leading fast food restaurant in the Philippines).
• Bringing in other anchor tenants.
• Upgrading the outside appearance of the shopping center.
• Providing 10,000 sq. ft. of space at significantly below market rent to the Vallejo Community Arts Foundation, the Vallejo Music Theater, the Vallejo Symphony, and other organizations.
• Transforming the Vallejo Plaza into a mixed-use, mixed income project by selling a seven acre portion of the parking lot to a developer for the construction of 200 units of mixed income housing.

The Vallejo Plaza investment led to full occupancy of Vallejo Plaza and increased foot traffic and sales for the local proprietors, creating approximately 75 new jobs and retaining approximately 250 jobs. Smart Growth Fund I exited the deal in 2004 through a sale of the project, receiving financial returns well above the Fund’s target of a mid- to high-teen internal rate of return.

When I first visited the site, prior to the investment, there was virtually no foot traffic, no cars in the parking lot, the buildings looked dilapidated, and hardly anyone was in the few stores that were open. I went back some years later with a potential investor in Bay Area Smart Growth Fund II on a Thursday morning at 11:00 AM. There was substantial foot traffic going into the shopping center. The parking lot was full. The 200 units of mixed income housing were built and fully occupied. Lots of people were on the sidewalks and in the stores. Seafood City was crowded. There were lines out the door at Max’s. A celebration was taking place in the banquet facility. And there were new stores on the streets near Vallejo Plaza, with people patronizing them as well.

The Vallejo Plaza project is an excellent example of a double bottom line investment, where the second bottom line of significant economic, social, and environmental benefits and the first bottom line of a market rate of financial return work synergistically to mutual advantage. Theproject is a mixed use, mixed income, transit oriented neighborhood revitalization success story. Vallejo Plaza is also a strong example of the virtue of investing in inner-city domestic emerging markets where per-acre purchasing power is higher than in the more affluent but less dense suburbs. When Vallejo Plaza actually started to serve the residents of the neighborhood where it was located, it began to thrive.

I told the story of Vallejo Plaza at a conference a couple of years later and, after my presentation, a man came up to me and said that he was very pleased to meet someone who had participated in the transformation of Vallejo Plaza.

He said that he lived in the neighborhood and that he shopped at Vallejo Plaza all the time. He loved the selection of fresh fish. He bought clothes there for himself and his family. He took his family out to dinner there. He also told me that his wife’s father had recently died and they had a wonderful memorial service in the banquet room there.

He concluded by saying, “Vallejo Plaza is not just a shopping center any more. It has become the center of our community.”

Bay Area Equity Fund I

We had some trouble finding the right investment manager for Bay Area Equity Fund I, the venture fund in the Bay Area Family of Funds. Our first choice had one of their investments blow up just before we were about to choose them. One of our lead investors turned down our next choice. After a long argument with that lead investor’s representative, which I lost, I called Sunne McPeak to tell her. She replied that I had to find a way to fix the situation.

Right in the middle of that call I got a call from Nancy Pfund, a Managing Director at JPMorgan, who I had been talking to about an investment in Bay Area Equity Fund I. I put her on hold and went back to Sunne and asked her what about Nancy Pfund and JPMorgan as the investment manager for the Equity Fund. She answered, “Make it happen.” So I went back to my call from Nancy Pfund and made an appointment to explore the possibility that she could lead a group in JPMorgan to become the Fund Manager for Bay Area Equity Fund I. Eventually we came to agreement with her and JPMorgan and then launched the Equity Fund, which raised $75 million.

One of my roles in building the Equity Fund was to negotiate an agreement with the Ford Foundation, who was considering a $2 million program related (PRI) investment (i.e. an investment that contributed to the social/tax exempt mission of the Foundation). They wanted a high target for the number of jobs for low and moderate income employees created, strong criteria for the other aspects of the second bottom line (i.e. other environmental and social impacts), and a very detailed second bottom line reporting system that included the degree to which the Bay Area Equity Fund was influencing the venture industry to move toward double bottom line investing.

We worked out the deal, including a highly innovative aspect to the investment. Since Ford was making this investment as a PRI, they were limited to receiving back their $2 million plus a 01% per year return. They needed to decide what to do with their remaining ownership after they received back their $2 million + 01%. I suggested that they donate their remaining ownership to the Bay Area Council and the Alliance for Community Development, the two sponsors of the fund. They agreed that they would do that if the Equity Fund hit or surpassed its job creation and other second bottom line targets.

After 10 years, the Equity Fund certainly did. More about that in a bit.

Once a company was being seriously considered for investment but prior to the investment being made, a JPMorgan representative (usually Mark Perutz or Seth Miller), Elizabeth Y. A. Ferguson, who the Bay Area Council hired as an Executive Vice President to manage their relationships with the Bay Area Family of Funds, and I would meet with the company’s senior management to discuss their second bottom line strategy.

We were clear that every company had a second bottom line strategy that was either explicit or implicit. Sometimes they understood exactly what we were talking about and they presented a well-developed and carefully monitored strategy for their employment, environmental, and social impacts.

Sometimes they replied, “Second bottom what?” However, at a minimum every company that received an investment also agreed to embrace the idea of developing and implementing an explicit second bottom line strategy. After an investment was made, we worked with each company to strengthen their second bottom line strategy and then we assisted the company in implementing that strategy and reporting on their results.

Nancy Pfund had been a senior executive at Hambrecht and Quist, the San Francisco investment bank, before it was acquired by JPMorgan and, under her leadership, the Bay Area Equity Fund began with the same investment focuses Hambrecht and Quist had—technology, health care, and specialty consumer. Early on, I suggested that the Equity Fund expand its focus and take a look at a Berkeley solar company, PowerLight. They agreed, because clean technology (solar, wind, electric vehicles, bio-fuels, etc) fit within the second bottom line orientation of the Fund and because PowerLight was one of those companies with a highly articulated second bottom line strategy. The Equity Fund made that investment and it launched them into adding clean tech as a fourth investment focus.

Now, more than 10 years after its launch, it’s clear that Bay Area Equity Fund I has done an outstanding job along both bottom lines. The Fund has produced financial performance that is at the top of the top quartile of its vintage year, investing in some outstanding companies (with a particular emphasis in clean tech), including:

• Tesla Motors, the electric car company.
• Solar City, the leading residential and commercial solar installer in the U.S.
• BrightSource Energy, the utility scale solar energy producer.
• Pandora, the internet radio station.
• Revolution Foods, the country’s leading supplier of healthy lunches to school kids.

A few years ago, JPMorgan spun off the Bay Area Equity Fund I team who formed DBL Investors. They launched a second double bottom line fund of $135 million and are now going for a third fund targeted at $250 million.

After Ford had received back its initial $2 million in capital and its 01% annual return, I reconnected with them and we went through the very complicated process of determined whether the Bay Area Equity Fund I’s second bottom line performance warranted a donation of Ford’s remaining interest in the Fund to the Bay Area Council and the Alliance for Community Development. At the end of that process, the people I negotiated with at Ford said that Bay Area Equity Fund I had provided Ford with the highest number of jobs for low and moderate income people per dollar invested, the best second bottom line performance in general, the best second bottom line reporting, and the best financial return of any fund they had ever invested in.

For example, the Bay Area Equity Fund target for low- and moderate-income job creation was to invest in companies that produced 1,500 net new jobs.  In fact, the Bay Area Equity Fund has invested in companies that have produced 15,000 net new jobs.  And, therefore, they made donations worth by now many million dollars to the Bay Area Council and close to $10 million for the Alliance for Community Development.

And now we have clearly proven that it is possible to obtain top first bottom line financial performance and second bottom line economic, social, and environmental performance with private equity real estate and venture investments, just as we did in relation to investments in the public securities markets. This reality means that a new (and much better) kind of Capitalism is not only possible but also it is emerging and growing.