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Global Environment Fund
By making private equity investments in businesses that promote sustainable natural resource management, a cleaner environment and improved public health, GEF has certainly committed itself to the less traveled path. The fund's successful performance in building and growing sustainable enterprises, however, has a lot of investors and business people thinking about taking some new turns in their direction.
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Global Environment Fund -written by Chris Johnston
A Ph.D. in international politics, finance and investment economics combined with fifteen years of studying environmental regulations and writing five books on the subject made one point abundantly clear to Jeffrey Leonard: businesses can operate in an environmentally and socially responsible manner and still be profitable.
"I've always been focused on trying to minimize the negative side of environmental progress," says Leonard, president of the Global Environment Fund (GEF). "I also try to find creative, positive ways to use the private enterprise and for-profit system to solve the problems rather than see them as a cost."
Leonard and his founding partner, John Earhart, chairman of GEF, identified two major trends that they believed would characterize the next three decades of environmental concerns: 1) Problems such as contamination of the urban environment, ecological damage and health problems would increasingly become global challenges, and 2) environmental challenges would need to be addressed through internal technological innovations in the production processes rather than dealing with pollution externally as an "end-of-the pipe" challenge. The two believed they could take these challenges that were considered costs from a corporate finance perspective and turn them into opportunities.
"All of my experience gave me the insight to realize that there were opportunities to do things on the for-profit side from an investment perspective to address these same challenges." Leonard says.
Leonard and Earhart founded GEF in 1989 as an international investment management venture that has grown into one of the most successful environmentally focused private equity firms in the United States. Initially, the partners devised a business plan and raised $5 million, which, Leonard admits, in the scheme of capital markets is a pittance. Rather than continue to spend all of their time trying to raise money, they decided to just start investing it. Their efforts grew the original GEF to approximately $50 million of investment capital. Next, they focused on specializing in private equity and venture capital in specialized funds.
Since then, GEF has completed more than 30 private equity deals, with more than $350 million invested in private equity investments. In 1992, GEF became an SEC-registered investment manager. Moreover, each of the firm's four senior staff members has more than 25 years of experience in private equity, investment finance and environmental infrastructure development.
By making private equity investments in businesses that promote sustainable natural resource management, a cleaner environment and improved public health, GEF has certainly committed itself to the less traveled path. The fund's successful performance in building and growing sustainable enterprises, however, has a lot of investors and business people thinking about taking some new turns in their direction.
Let's talk track record. From 1998 to 2003, GEF's current management team has overseen more than $165 million in new capital investments with an average annual return rate of 29.5 percent. Though proud of this accomplishment, the members of this team are quick to point out that the more significant point is the growing number of exceptional companies whose underlying businesses address critical social and environmental problems.
The ideal profile for a GEF investment candidate features "undervalued companies with experienced management and a clear vision of how to take advantage of significant opportunities for growth and value creation." At the foundation for GEF's business strategy, though, lies an unwavering commitment to its sustainable investment philosophy. This philosophy encompasses a triple bottom line approach that emphasizes sustainable cash flow, conservation and environment, and community development.
Within its current portfolio, GEF maintains a wide range of environmentally focused companies, such as America Latina Logistica in Brazil, which reroutes cargo off of the roads to help protect a thin ribbon of ancient tropical forests in the nation's Atlantic coastal region. Named the Serra do Mar, this region's heavily decimated forests contain an astounding and unique diversity of plant and animal life. As another example in the U.S., Athena Technologies has pioneered new control systems that provide significantly improved efficiency and optimized performance for clean power sources, ranging from wind power to highly complex, large natural gas-fired power plants to fuel cells and microturbines.
However, GEF hasn't flourished this long without being grounded in reality. The enterprises in which it invests must be sustainable as businesses first, supported by viable revenue models to survive, then combine that with an ability to sustain the community and environment in which they operate. GEF defines "sustainability" as the ability to implement patterns of resource management, energy use, and pollution prevention that do not undermine productivity and environmental health for the future.
"Are we doing it because we are bleeding-heart liberals?" Leonard responds when asked about the pursuit of a triple bottom line that demonstrates profitability combined with social and environmental responsibility. "Well, that's why we used to do it, when we were in the nonprofit community, because it was in our hearts to do. So operating a socially responsive business is still in our hearts to do, but the reality is we are doing it as an enterprise because it is absolutely, completely intertwined in our business strategy for the long-term business success of the enterprise."
As a primary example of this type of enterprise, Leonard cites Global Forest Products (GFP). In search of well-managed forests that could meet the growing demand for high-quality, softwood lumber, GEF searched throughout the world Ð including Argentina, Australia, Brazil, Chile, New Zealand and Uruguay Ð and selected the South African plantations because of their exceptional record of more than 70 years of managing more than 200,000 hectares of Forest Stewardship Council-certified pine forests that produce a diverse variety of high-value wood products. The company also had proven itself to rely on sustainable management strategies. GEF, however, saw additional growth opportunity because the company was not taking advantage of the higher economic value potential of their well-managed, high-quality forests.
That's when GEF approached the owner, Anglo-American Corporation, about spinning out its softwood forests and associated lumber mills that were dedicated to sawing lumber into a new company, Global Forest Products. GEF wrote the business plan, created a joint venture with the owner, and recruited an international management team to bring the latest technological advances in the saw milling industry to the new enterprise.
Since GEF first invested in the company in 2000, Global Forest Products has already mobilized in excess of $30 million of new capital investment to upgrade and modernize the company's mills. The company could never have even fantasized about such an effort under apartheid, when it had been isolated and made minimal investments in its mills for the previous 30 years. Additionally, GFP instituted extensive training programs to empower its workforce to produce higher-quality, higher-value-added certified wood products distributed to the world markets.
GFP has also added more than 200 new jobs in an area of South Africa that has a 30 percent unemployment rate. The company demonstrates its commitment to the well-being of its approximately 2,000 employees and the communities in which they live by furnishing healthcare services, clinics, education through schools it helps to operate, HIV counseling and services, nutrition programs and clean water. Further, in the midst of its vast plantations, GFP maintains nearly 70,000 acres of protected areas, including the Klipkral Natural Heritage site. By doing so, the company protects valuable wetlands and rare bird and animal species habitats as well as one of the world's largest collections of giant tree ferns, some of which are more than 200 years old.
As an essential member of GEF's portfolio, Global Forest Products exemplifies the investment firm's goal of creating value for its investors by growing sustainable, well-managed, productive enterprises that will carve out a global legacy for the future.
Still, Leonard cautions, the company has a long road ahead to prove itself. "These trees take 28 years to reach maturity," he says. "It takes a generation to educate a new workforce and retrain people and build a workforce that is entirely literate. So in the third year of this enterprise, it would be extremely presumptuous to say that it's highly successful."
What keeps Leonard motivated to continue in the challenging field of investing in environmentally sound enterprises? "My whole net worth and life is bound up in GEF, so from a very practical standpoint there is that financial motivation," he says. "There's nothing like having your own money at risk to fixate yourself on the need to achieve success."
Further Reading
Acknowledgements
Writer: Chris Johnston
© 2005 World Benefit Productions, All Rights Reserved
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