You Didn’t Build That, Part 3

A THOUGHT EXERCISE

Imagine you are an impact investor who wants to live in an energy-efficient, sustainably built home. You do your research, question your assumptions. You define your values relative to the various metrics that measure sustainability in residential real estate. You dig deep into issues such as certified lumber, community solar, cradle-to-grave carpets, green builders, solar everything, LED lighting, recycled-content construction material, low-flow, no-flow, reverse-flow, etc. And you conclude that to your surprise, buying an apartment is the best option. That LEED certification actually does mean something, and that due to a raft of fascinating socio/enviro/ecnono/demo-graphic patterns that have evolved since the financial crisis, you actually have a lot of options. A. Lot.

So you are stoked. Committed. Feeling really, really good about your path. Because finally you get to wake up in a space that reflects both your values and the broad direction that the residential real estate sector seems to be headed.

You now have to make a choice: seen exclusively through an impact lens, what is the “best” way to acquire such a thing?

Option #1: Buy an existing LEED-certified apartment. Think of this as the “used car option”.

Option #2: Buy a new apartment from a sustainability-oriented builder who is selling units in a recently-completed, LEED-certified building.

Option #3: Buy one on spec from a visionary builder who needs capital to break ground on a cutting-edge new building that goes way beyond LEED Platinum.

Option #3a: Decide to remain in your current home, do some intelligent upgrades, and to also provide construction capital for that builder.

The scenarios above represent different ways to invest in a company.

The first option is an exercise in pure values-alignment. Your decision to buy the apartment has no direct impact on the builder, and a second/third order impact on the market. You are simply buying the apartment from someone who is selling.

The second option gets closer to the idea of “value creation”, as your decision directly impacts the builder, who can now build another building financed in part by your capital. This is like buying shares in an Initial Public Offering (IPO), as your capital directly influences the fortunes of the company.

In the third option, the money you commit to the project is clearly creating value. But it is also a more risky deal. The project may take longer to complete, stressing the builder. New construction techniques may fail. Etc. This is like investing in a start-up, and your capital is catalyzing and value-creating. If the builder is successful, an entirely new way of thinking about construction may be validated. The world is a better place. Huzzah!

The fourth option reflects the possibility that you love where you live, and believe strongly in the vision of the builder. So, strongly, in fact, that you are willing to put your capital in service of her vision. This is, in many ways, the ultimate expression of “investing”, as you will derive no personal benefit from living in the space… but will derive financial benefit from the investment, and create environmental value, if the project succeeds.

In an intentionally provocative stance, I wrote earlier this week that those who believe that transactions in the secondary market steer corporate behavior are indulging in magical thinking. Let me reiterate the idea here, revealed by the above thought exercise: there is no direct transmission mechanism between the secondary markets and the listed companies themselves.

When asking yourself, “How will my carefully saved dollar be deployed to have the most impact?” Please be conscious that it requires more than changing your Facebook relationship status from “interested” to “invested”. What you DO with what you own (shareholder engagement, filing resolutions, voting proxies, etc.) is a far more powerful change-agent than what you own.

Your diplomatic, yet provocative, scribe,
Matthew

P.S. If any of you want to see some fireworks, plan to attend the US SIF meeting in DC next week. And while you’re there, grab me. I’d love to see some of my readers!