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July 18, 2014

Savvy Risks, Sustainable Rewards

How—and why—to take smart chances on renewable energy.

Bruce Usher

Impact investing—investing for both a social and financial return—is a popular concept these days. I do it primarily through investments in renewable energy companies, for two reasons. First, I passionately believe that renewable energy offers one of several critical solutions to the real threats posed by climate change. Second, I believe I can make a financial return.

As costs decrease and performance improves, renewable energy is increasingly competitive with fossil fuels, whose costs tend to go up over time. In very sunny or windy places, renewable energy is cheap enough to be cost competitive without any special incentives like rate subsidies. Renewables would become even more competitive if we can ever get policy agreement on climate change and were able to factor in the costs of fossil fuels to our environment. With increasing cost competitiveness, renewables have become a viable investment option.

While I believe you can make a market return, a big question frequently comes up: if that’s true, why isn’t everybody already doing it? Because it’s not for everyone. Impact investing requires you to play a long game: it’s easy to get in and very difficult to get out, as there are very few opportunities for liquidity. One advantage that I and other so-called angel investors have is that as individuals we have longer time frames and no firm deadlines, whereas professional investment funds almost always have to create liquidity for their clients within a decade. I do not invest where I expect returns to be low. But the return on impact investing is not usually quick, and to a large degree focusing on the financial returns misses the point.

In the kind of relatively early stage investing I do, the issue is more about risk than returns, and measuring risk is always trickier than measuring returns. Impact investors must ask themselves what kind of risks they are willing to take, and why. Specifically, know if you will you take technology risk or commercialization risk, or both. I take more risks than I would otherwise be willing to take to support new ventures that I think offer market-savvy alternatives to carbon-dependence. I don’t invest in unproven renewable or other technologies—although there is significant opportunity there—simply because I don’t have enough technology expertise to make a confident assessment of feasibility or market potential. That’s a significant differentiation, because so much early stage investment is in technology companies, and many tech firms have done exceptionally well for investors.

But I will take business commercialization risk. I tend to invest in business models that use innovative approaches to serve existing markets, transfer existing practices and models to as-yet-unserved locations, or that open up entirely new markets. For example, Community Energy develops large solar projects, but their business model is also based on marketing the projects’ environmental benefits. New Yorkers who frequent the city’s greenmarkets have probably seen representatives from Community Energy promoting an option for residential consumers to buy its wind power through ConEd. Other renewable energy developers might market to utility companies, but they don’t reach out directly to the end user.

If you step out of your comfort zone with risk, know why. Natel Energy created a small hydroelectric turbine that is much more environmentally friendly than traditional hydro turbines. Natel also targets an entirely new market: There are tens of thousands of agricultural conduits in the United States, and water drops from one conduit to another, from one field to the next. I was comfortable taking the risk because the technology was new but not radically so and Natel was entering a promising new market.

The other reason I was willing to take a greater degree of risk with Natel is at the heart of how I choose companies. I know the CEO, and know she is an extremely capable individual. Basing early stage investing on the right management team is not unique—ask any venture capitalist. Investing in great people is a prerequisite to success, as strong teams facing challenges to their business model will make necessary changes and pivot in the right direction.

Most of these principles apply to all startups. But for impact investors backing sustainability startups and in particular in the energy sector, risk matters more. By taking on risk that most others aren’t willing to take, impact investors help launch critical businesses that are creating solutions to the threat of climate change and many other of society’s toughest problems—solutions that otherwise might not come about. That’s a return on investment as valuable as any.

Bruce Usher is the Elizabeth B. Strickler ’86 and Mark T. Gallogly ’86 Faculty Director of the Social Enterprise Program and an Executive-in-Residence at Columbia Business School.