3. PAGE 3
EXECUTIVE SUMMARY
T
he convergence of physical resource limitations,
economic value, and technological innovation
is driving a paradigm shift toward the more
efficient and localized use of natural resources—
providing an unprecedented opportunity for investors.
Within the critical resource sectors of food, water, energy,
and waste, firms are innovating new, distributed models for
resource management. These innovations have reached
(or will soon reach) price parity with the incumbent,
centralized resource delivery systems across these
sectors. This shift presents an unprecedented opportunity
for investors, who can finance and accelerate the transition
to localized resources while realizing exceptional risk-
adjusted returns on such investments. Financial innovation
is opening investor access to these opportunities through
new real asset project finance products.
The objective of this paper is to identify this
emerging opportunity for investors. It demonstrates
why distributed resource management models make
economic sense and outlines the subsequent investment
opportunity. It further details how a new class of innovative
investment products is emerging to link institutional
capital to sustainable real asset projects.
Source: U.S. Census Bureau, International Database, July
2015 Update
Fig. 1. Global population is projected to grow by over 40% in
the next quarter-century.
Source: US Census Bureau
WORLD POPULATION:
1950 - 2050
3 BILLION
4 BILLION
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
10
9
8
7
6
5
4
3
2
1
0
5 BILLION
6 BILLION
7 BILLION
8 BILLION
9 BILLION
• EFFICIENCY
• REUSE
• SOURCE OF DIVERSIFICATIONAA
SOURCE SOURCE SOURCE SOURCE
WASTE
TREATMENT USE
THE FUTURE: WATER CULTIVATION
USE
LOSSLOSS
LOSS
• INEFFICIENCY
• DISPOSABILITY
• HOMOGENOUS SUPPLYLL
SOURCE
WASTE
TREATMENT
LOSS
TODAY: WATER HUNTING
RETURN
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
BONDS
1% 2% 3% 4% 5% 6%
REAL ESTATE
UNITED KINGDOM
COUNTRY
POPULATION AT THE START OF THE
GROWTH PERIOD (Million)YEARS TO DOUBLE PER CAPITA GDP1
YEAR
1700 1800 1900 2000
53
65
33
16
12
16 822
1,023
22
48
28
10
9154
UNITED STATES
GERMANY
JAPAN
SOUTH KOREA
INDIA
CHINA
Incomes are rising in developing economies faster—and on a greater scale—than at any previous point in history
World Population: 1950–2050
Fig. 1. Global population is
projected to grow by over 30% in
the next quarter-century.
Source: US Census Bureau.
Fig. 2. Three billion more consumers will enter the global middle class by 2030.
This shift represents an unprecedented rate and scale of wealth creation and resource consumption.
Source: McKinsey Company.
4. PAGE 4
CONVERGING TRENDS
DRIVING MAJOR
PARADIGM SHIFT
THE CONVERGING TRENDS
C
ritical resources are facing increasing demand,
accelerating scarcity, and rapid environmental
change—creating crucial sustainability and
resilience challenges. Technological innovation is
simultaneously enabling new, more efficient decentralized
infrastructure to help alleviate resource constraints in a
more affordable, reliable and sustainable way.
Long-Term Resource Needs
The global population is projected to grow by over thirty
percent before the middle of this century1
,with three
billion more consumers expected to enter the global
middle class by 20302
(Fig. 1, Fig. 2). These trends are
driving unprecedented rates of consumption, dramatically
increasing demand for natural resources and exacerbating
the need to deliver sustainability
Resource Resilience Needs
Human activities are also dramatically altering the
Earth’s natural systems that support and sustain life
at unprecedented rates and scales (Fig. 3).3 4
These
trends are driving rapid global environmental change,
underpinning the need to deliver resilience solutions
at scale.
Fig. 3. Human activities have drastically and rapidly altered the Earth’s natural systems in recent decades.
Source: Rockefeller Foundation and Lancet Commission.
1
World Population Projected to Reach 9.7 Billion by 2050. 2015. United Nations Department of Economic and Social Affairs.
2
Dobbs, Richard, Jeremy Oppenheim, Fraser Thompson, Marcel Brinkman, and Marc Zornes. Resource Revolution: Meeting the World’s Energy, Materials, Food, and Water Needs.
November 2011. McKinsey Company.
3
Ecosystems and Human Well-Being: Synthesis Report. 2005. Millennium Ecosystem Assessment. Washington, DC: Island Press.
4
Whitmee, Sarah et al. 2015. Safeguarding Human Health in the Anthropocene Epoch: Report of the Rockefeller Foundation-Lancet Commission on Planetary Health.
The Lancet Commissions.
30 kWh
35
40
7
6
5
4
3
2
1
0
40
30
20
10
0
600
500
400
300
200
100
0
0-50
0-25
0
0-25
0-50
400
350
300
250
18001800 18501850 19001900 19501950 20002000
4
3
2
1
0
POPULATION
TROPICAL FOREST LOSS
ENERGY USE WATER USE
TEMPERATURE CHANGECARBON DIOXIDE EMISSIONS
Worldpopulation(billions)
Globaltropicalforestloss
comparedwith1700baseline(%)
Worldprimaryenergyuse(EJ)
Globalwateruse(thousandkm2
)
Meanglobaltemperature
change(o
C)
Atmosphericconcentrationof
CO2(ppm)
5. PAGE 5
Technological Capabilities
Innovation is driving new resource capabilities through
a new generation of decentralized infrastructure that is
cost-effective at scales substantially smaller than those
of conventional infrastructure. These technological
advancements—and the consequent feasibility of
decentralized infrastructure—result in increased
resource efficiency and opportunities for lowering the
cost and price volatility of natural resources.5 6 7
Take the energy sector, for example. Most electricity is
generated at large, centralized power plants, inefficiently
distributing to customers hundreds of miles away.
Today, however, technological advances in renewable
energy generation and storage are driving a shift toward
more decentralized energy production. We now see
greater diversity in energy generation sources (including
solar, natural gas, and wind), greater efficiency across
a distributed infrastructure system (less lengthy
transmission and transit costs as generation is closer
to both fuel supply and load), and greater resilience
(as the distributed infrastructure is not as vulnerable to
outside shocks, such as natural disasters, as incumbent
centralized systems).
This trend can be seen at an economy-wide level,
where the shift to more efficient and sustainable
production is already underway. This is illustrated by the
decoupling of GDP and CO2 emissions: the economy
is growing while we are using natural resources more
efficiently. 2014 was the first year that global GDP
decoupled from carbon emissions8
; in 2015, this was the
reality for twenty-one national economies.9
The United
States is the largest country to experience multiple
consecutive years of economic growth decoupled from
CO2 emissions, and projections indicate that the nation’s
shift to a cleaner electricity system after 2020 will sustain
this trend (Fig. 4)10
.
Fig. 4. Shifts to cleaner technologies are driving more efficient economic output in the US.
Source: World Resources Institute.
COST
TIME
PRICE PARITY
CENTRALIZED/EXTRACTIVE
MODEL
DISTRIBUTED/SUSTAINABLE
MODEL
17% 18%
S
ATIONS
18 MONTHS
40 50
.
ainstream
rect
ermediated
a
ea
d te
$Trillions(USD)
1995 20031999 20071997 20052001 2010 2012 2014
3
2
1
0
2
1950 1970 19951955 1975 2000 20151960 1980 2005 20201965 19901985 2010 2025
HISTORICAL FORECAST
CO2
GDP
$24,000
$20,000
$16,000
$12,000
$8,000
$4,000
$0
6,000
5,000
4,000
3,000
2,000
1,000
0
U.S. CO2 Emissions and GDP, 1950–2025
5
Heck, Dr. Stefan. 2015. Resource Revolution: Investor Opportunities in the New Climate. Stanford University.
6
Heck, Stefan and Matt Rogers. 2014. Resource Revolution: How to Capture the Biggest Business Opportunity in a Century. New York: Melcher Media.
7
Distributed Systems: A Design Model for Sustainable and Resilient Infrastructure. 2010. Victorian Eco Innovation Lab at the University of Melbourne.
8
Global Energy-Related Emissions of CO2 Stalled in 2014: IEA Data Point to Emissions Decoupling from Economic Growth for First Time in 40 Years. 2015. International Energy Agency.
9
Aden, Nate. 2016. The Roads to Decoupling: 21 Countries are Reducing Carbon Emissions While Growing GDP. World Resources Institute.
10
Aden, Nate. 2016. The Roads to Decoupling: 21 Countries are Reducing Carbon Emissions While Growing GDP. World Resources Institute.
TotalEnergy-RelatedCarbonDioxide
Emissions(MtCO2)
GDP(BillionsofChained2009Dollars)
6. PAGE 6
RESOURCE MANAGEMENT AND PLANNING NEED TO TRANSITION FROM
THE PAST MODEL THAT PLACED VALUE PRIMARILY ON EXTRACTING
NATURAL RESOURCES, TO A NEW MODEL THAT VALUES PROJECTS WITH
CONNECTED BENEFITS AND SUSTAINABLE OUTCOMES.”11
‘‘
DISTRIBUTED MODELS FOR
RESOURCE UTILIZATION
The convergence of these global mega-trends represents
“an opportunity to achieve a resource productivity
revolution comparable with the progress made on
labor productivity during the 20th century”12
through
innovative, highly-resilient distributed resource utilization
models. Just as networked computers and mobile devices
replaced mainframe computers and redefined how we
work, consume, and live, critical resource sectors are
undergoing a radical transformation toward distributed
infrastructure. This creates new standards of efficiency
and reduces vulnerability to shocks that would otherwise
devastate incumbent centralized systems.
These distributed models for sustainable resource
management are marked by efficiency (the ability to do
more with less resources) and reuse (the ability to convert
waste into value).
Efficiency: Doing More with Less
In order to achieve growth in the face of increased resource
demand, a revolution of production efficiency—the ability
to do more with less—is needed.13
By stimulating and
deploying technological innovation and establishing
new methods of organization and management, radical
improvements in efficiency will drive enhanced productivity
across the food, energy, water, and waste sectors.14 15
Reuse: Converting Waste Streams to Value
Reuse can be thought of as converting waste streams
into value that can then be utilized again, a concept
that is critical to achieving sustainable economic
development in the twenty-first century.16
By applying
proven technologies to current waste streams, new
opportunities to create sellable commodities from
previously discarded materials will drive more reuse, and
reduce waste, across critical resource sectors.
11
Dobbs, Richard, Jeremy Oppenheim, Fraser Thompson, Marcel Brinkman, and Marc Zornes. Resource Revolution: Meeting the World’s Energy, Materials, Food, and Water Needs.
November 2011. McKinsey Company.
12
From Crisis to Connectivity: Renewed Thinking About Managing California’s Water Food Supply. 2014. California Roundtable on Agriculture and the Environment. Prepared by
Ag Innovations Network.
13
Borza, Mioara. 2014. The Connection between Efficiency and Sustainability: A Theoretical Approach. Proceddia Economics and Finance. Volume 15: pp. 1355–1363.
14
Heck, Stefan and Matt Rogers. 2014. Resource Revolution: How to Capture the Biggest Business Opportunity in a Century. New York: Melcher Media.
15
Borza, Mioara. 2014. The Connection between Efficiency and Sustainability: A Theoretical Approach. Proceddia Economics and Finance. Volume 15: pp. 1355–1363.
16
Mohanty, C.R.C. 2011. Reduce, Reuse, Recycle and Resource Efficiency as the Basis for Sustainable Waste Management. United Nations Centre for Regional Development.
17
Distributed Systems: A Design Model for Sustainable and Resilient Infrastructure. 2010. Victorian Eco Innovation Lab at the University of Melbourne.
OVER THE NEXT FEW DECADES, THE WAY PEOPLE OBTAIN THEIR FOOD,
WATER, AND ENERGY WILL UNDERGO A MAJOR EVOLUTION. PEOPLE
WILL NO LONGER RELY ON INDUSTRIAL PRODUCTION UNITS HUNDREDS
OR THOUSANDS OF KILOMETERS AWAY. INSTEAD THEY WILL SOURCE
A GREATER PROPORTION OF ESSENTIAL RESOURCES, GOODS, AND
SERVICES FROM WITHIN THEIR ‘NEIGHBORHOOD’.”17
‘‘
7. PAGE 7
REACHING PRICE PARITY
ACROSS SECTORS
The transition to distributed systems in critical
resource sectors is no longer a question of if, but
when. Across agriculture, energy, water, and waste
systems, new business models are rapidly approaching
price parity with traditional centralized systems—some
have even exceeded parity and are now the low-cost
option. This shifting economic landscape will enable
distributed resource utilization through new technologies
in the very near future.
Agriculture
Sustainability Resilience Challenges
By 2050, it is anticipated that two-thirds of the global
population will live in urban areas and there will be
80 million new mouths to feed each year. Global food
production will need to rise by 70% in order to feed these
individuals.18
By 2030, nourishment needs are projected
to require up to 220 million hectares of additional
cropland globally.19
The world’s existing agricultural lands are, however,
already experiencing degradation. Soil degradation alone
is driving the loss of between one and twelve million
hectares of agricultural land per year—the equivalent
of 20 million tons of grain annually.20
At the same time,
roughly one-third of the food produced globally goes
to waste21
—either at points of production in developing
markets or points of consumption in developed economies.
Today’s centralized agricultural systems are also facing
increased vulnerability to outside shocks. Climate change
is already affecting the quality and quantity of food
production globally, a trend that is anticipated to worsen in
coming decades. The Intergovernmental Panel on Climate
Change has concluded that direct impacts from climate
change (such as extreme weather and precipitation
trends) will reduce crop yields by 0–2% per decade for the
remainder of the century, while indirect impacts (such as
increased plant diseases) could reduce annual crop yields
by up to 16%.22
Technological Innovation Price Parity
Innovation is currently driving new, distributed agricultural
production models that sustainably produces affordable,
nutritious, and resilient food23
. Emerging technologies
drive this shift and operate across the agricultural supply
chain; examples include indoor localized food production,
precision irrigation farming, and protein synthesis. These
projects consolidate to create agricultural systems and
markets that are sophisticated, replicable, and scalable.24
Recent research indicates that 90% of Americans
could now be fed entirely by localized food systems
within 100 miles of their homes.25
In light of these trends, it is no surprise that incumbent
centralized agricultural systems are beginning to make less
economic sense than more efficient, resilient, distributed
models. Vertical farming, characterized by the production
of food in vertically stacked layers using controlled-
environment agriculture technologies, uses up to 95%
less fresh water than traditional agriculture (Fig. 5).26
In
the United States, localized agricultural supply chains
now create more value for producers than mainstream
models, with “agricultural producers’ share of revenues
generally decreasing with distance to market and number
of intermediaries involved in the traditional [supply] chain”
(Fig. 6).27
Through greater economic efficiencies, many
of these projects can achieve higher returns than their
conventional competition.
COST
TIME
PRICE PARITY
CENTRALIZED/EXTRACTIVE
MODEL
DISTRIBUTED/REGENERATIVE
MODEL
DISTRIBUTETR D//D REGENERATIVEG TE E
1500 MILES LOCAL
on average, food travels 1500
to 2500 miles on its way to
our plate
vertical farming reduces
the need for long-distance
transport diminishing
the use of fossil fuel and
ensuring quality
(n=132)
COMMODITIES
(n=59)
% 0 10 20 30
Will increase over the next 18 months
Increased over the past three years
Source: Blackrock and The Economist Intelligence Unit, 31 Octob
Accelerating economics of distributed
regenerative models
18
Jenkyn-Jones, Bryce. 2012. Resource Scarcity and the Efficiency Revolution. Impax Asset Management.
19
Dobbs, Richard, Jeremy Oppenheim, Fraser Thompson, Marcel Brinkman, and Marc Zornes. Resource Revolution: Meeting the World’s Energy, Materials, Food, and Water Needs.
November 2011. McKinsey Company.
20
Whitmee, Sarah et al. 2015. Safeguarding Human Health in the Anthropocene Epoch: Report of the Rockefeller Foundation-Lancet Commission on Planetary Health. The Lancet
Commissions.
21
Lipinski, Brian et al. 2013. Reducing Food Loss and Waste. World Resources Institute.
22
Turn Down the Heat: Confronting the New Climate Normal. 2014. World Bank.
23
Cleaner Technologies: Evolving Towards a Sustainable End-State. 2012. Deutsche Bank.
24
Goedde, Lutz et al. 2015. Pursuing the Global Opportunity in Food and Agribusiness. McKinsey Company.
25
Zumkehr, Andrew and J. Elliott Campbell. 2015. The Potential for Local Croplands to Meet US Food Demand. Frontiers in Ecology and the Environment. Volume 13, Issue 5. P. 244-248.
26
Vertical Farming Infographics. 2016. Association for Vertical Farming.
27
Comparing the Structure, Size, and Performance of Local and Mainstream Food Supply Chains. 2010. Economic Research Service of the United States Department of Agriculture.
8. PAGE 8
Energy
Sustainability Resilience Challenges
The costs of relying on centralized fossil fuel energy
systems are becoming more apparent by the day.28
As the world continues to meet rapidly increasing energy
demand with fossil fuel combustion, anthropogenic carbon
emissions have reached unprecedented levels at an
unprecedented rate. The last time the Earth’s atmosphere
reached the levels of CO2
seen today (in the Pliocene
epoch, 2.6 million years ago), our planet was much
warmer, with a climate and sea level very different from
those in which modern human civilizations have developed
and thrived.29
The consequences of climate change are
already being observed and experienced around the
world; even at current (relatively low) levels, there are
more frequent occurrences of “extreme heat and extreme
precipitation, drying trends in drought-prone regions, and
increased tropical cyclone activity.”30
Percent of retail prices received by producers net of marketing
and processing costs, by place and supply chain type
COST
TIME
PRICE PARITY
CENTRALIZED/EXTRACTIVE
MODEL
DISTRIBUTED/REGENERATIVE
MODEL
DISTRIBUTETR D//D REGENERATIVEG TE E
fresh water used for soil-
based farming, 50–80% of
which is lost to evaporation
70% GLOBAL
1500 MILES
70-95% LESS
LOCAL
on average, food travels 1500
to 2500 miles on its way to
our plate
fresh water used for vertical
farming utilizing the
aquaponics or aeroponics
method
vertical farming reduces
the need for long-distance
transport diminishing
the use of fossil fuel and
ensuring quality
TRADITIONAL FARMING VERTICAL FARMING
Fig. 5. Vertical farming is
more energy and water-
efficient than traditional
agricultural methods.
Source: Association for
Vertical Farming.
28
Disruptive Technologies: Advances that Will Transform Life, Business, and the Global Economy. 2013. McKinsey Global Institute.
29
Kunzig, Robert. 2013. Climate Milestone: Earth’s CO2 Level Passes 400ppm. National Geographic.
30
Turn Down the Heat: Confronting the New Climate Normal. 2014. World Bank.
Traditional Farming Vertical Farming
uces
istance
ng
l and
% 0 10 20 30 40 50
Will increase over the next 18 months
Increased over the past three years
Source: Blackrock and The Economist Intelligence Unit, 31 October 2014.
100
80
60
40
20
0
Mainstream
Direct
Intermediated
Portland, OR
Blueberries
Sacramento, CA
Spring mix
Twin Cities, MN
Beef
DC area
Milk
ea
d te
Percentofretailprice
Syracuse, NY
Apples
2
1950 1955
6,000
5,000
4,000
3,000
2,000
1,000
0
Percentofretailprice
Fig. 6. Agricultural
producers’ share of revenue
decreases with distance
to market, helping drive
price parity for distributed
agricultural systems.
Source: US Department
of Agriculture.
9. PAGE 9
Centralized fossil fuel systems are also extremely
inefficient and inequitable. In the United States, we
waste more energy than we use—an issue that has
increased since 1970.31
Globally, one out of every five
people still lacks access to electricity, and twice as many
(nearly three billion people) use wood, coal, charcoal,
animal waste, or other biomass to cook their meals and
heat their homes. This lack of modern energy access not
only inhibits global economic development, but also leads
to the deaths of nearly two million people per year from
indoor air pollution.32
Technological Innovation Price Parity
Fortunately, clean energy technologies are increasingly
efficient and cost-effective. The cost of renewable, energy
generation has dropped dramatically over the past
decade and is poised for further reduction.33 34
Additionally,
new distributed energy storage technologies are rapidly
advancing in capability and cost (Fig. 7). The combination
of these distributed generation and storage tech-
nologies are anticipated to disrupt centralized energy
systems to the extent that developed markets will move to
an off-grid approach while developing markets will leapfrog
traditional centralized infrastructure altogether.35 36
Fig. 7. Distributed energy storage technologies are achieving rapid performance improvements and cost
reductions, disrupting centralized energy systems to drive more sustainable, distributed energy infrastructure
in developed and emerging markets.
Source: Goldman Sachs.
0
40
30
20
10
0
0
0-50
0-25
0
0-25
0-50
400
350
300
250
18001800 18501850 19001900 19501950 20002000
0
I. TROPICAL FOREST LOSS M. TEMPERATURE CHANGEL. CARBON DIOXIDE EMISSIONS
W
Globaltropicalforestloss
comparedwith1700baseline(%)
W
Gl
Meanglobaltemperature
change(o
C)
Atmosphericconcentrationof
CO2
(ppm)
$14,250
250 KG
120 KG
20 kWh
160 KM
275 KM
+72%
30 kWh
$5,250
-63%
-52%
+50%
5
2015
BATTERY COST (1000$) BATTERY WEIGHT (10s of KG) BATTERY RANGE
(10s of KM)
BATTERY CAPACITY (kWh)
2015 2015 20152020E 2020E 2020E 2020E
10
15
20
25
30
35
40
HOW LONG WILL IT LAST
Low carbon technologies achieve rapid performance improvements and cost reductions
Battery cost reduction/performance improvements
31
Heck, Dr. Stefan. 2015. Resource Revolution: Investor Opportunities in the New Climate. Stanford University.
32
Secretary-General Ban Ki-moon. 2011. Sustainable Energy for All: A Vision Statement. United Nations.
33
Net Energy Metering, Zero Net Energy, and the Distributed Energy Resource Future: Adapting Electric Utility Business Models for the 21st Century. 2012. Rocky Mountain Institute.
34
The Low Carbon Economy: Investor’s Guide to a Low-Carbon World, 2015–2025. 2015. Goldman Sachs.
35
Solar Power Energy Storage: Policy Factors vs. Improving Economics. 2014. Morgan Stanley.
36
Disruptive Technologies: Advances that Will Transform Life, Business, and the Global Economy. 2013. McKinsey Global Institute.
37
Solar Power Energy Storage: Policy Factors vs. Improving Economics. 2014. Morgan Stanley.
ENERGY STORAGE, WHEN COMBINED WITH SOLAR POWER, COULD
DISRUPT UTILITIES TO THE EXTENT THAT CUSTOMERS MOVE TO AN
OFF-GRID APPROACH.”37
‘‘
10. PAGE 10
In the United States, a considerable number of utility
customers will likely see price parity for distributed clean
energy systems within the next ten years (Fig. 8).38 39
The
electricity system of the near-future is therefore poised
to cost-effectively meet sustainability and resiliency
challenges by “encompassing an increasingly diverse
and interconnected set of actors”40
through distributed
networks and technologies.
Water
Sustainability Resilience Challenges
Over-consumption, inadequate valuation, inefficient
irrigation systems, and climate change are
exacerbating freshwater scarcity globally.42
Roughly
750 million people currently lack access to safe drinking
water sources, while another 1 billion lack access to
adequate sanitation services.43
By 2030, it is anticipated
that 40% of the world’s population will suffer from
water shortage.44
Fig. 8. Distributed clean
energy systems will likely
see price parity with
incumbent centralized
systems across the
United States within the
next decade.
Source: Rocky Mountain
Institute.
Solar + battery levelized cost of electricity (LCOE) vs. utility
retail price projections
Commercial-base case (Y-Axis $/kWh)
38
Solar Power Energy Storage: Policy Factors vs. Improving Economics. 2014. Morgan Stanley.
39
Net Energy Metering, Zero Net Energy, and the Distributed Energy Resource Future: Adapting Electric Utility Business Models for the 21st Century. 2012. Rocky Mountain Institute.
40
Net Energy Metering, Zero Net Energy, and the Distributed Energy Resource Future: Adapting Electric Utility Business Models for the 21st Century. 2012. Rocky Mountain Institute.
41
Distributed Energy. 2016. Rocky Mountain Institute.
42
Whitmee, Sarah et al. 2015. Safeguarding Human Health in the Anthropocene Epoch: Report of the Rockefeller Foundation-Lancet Commission on Planetary Health. The Lancet
Commissions.
43
Whitmee, Sarah et al. 2015. Safeguarding Human Health in the Anthropocene Epoch: Report of the Rockefeller Foundation-Lancet Commission on Planetary Health. The Lancet
Commissions.
44
Water Scarcity. 2013. UN Water.
CENTRALIZED ELECTRICITY SYSTEMS ARE BECOMING OBSOLETE. IN
THEIR PLACE ARE EMERGING ‘DISTRIBUTED RESOURCES’—SMALLER,
DECENTRALIZED SOURCES THAT ARE CHEAPER, CLEANER, LESS RISKY,
MORE FLEXIBLE, AND QUICKER TO DEPLOY.”41
‘‘
$1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0
2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050
NY
2026
CA
2031
KY
2047
TX
2047
HI
PRE-2014
SOLAR-PLUS BATTERY LEVELIZED COST OF ELECTRICITY
(LCOE) VS. UTILITY RETAIL PRICE PROJECTIONS
COMERCIAL - BASE CASE {Y-AXIS $/kWh}
Louisville, KY
Westchester, NY
San Antonio, TX
Los Angeles, CA
Honolulu, HI
LCOE Retail Price
100
80
60
40
20
0
P
B
Percentofretailprice
Syracuse, NY
Apples
lades)
durables)
ate
e
ng global
ption =
roduction)
ation
ources
edicted
ation grows
HE
UM
%
%
$1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0
2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050
NY
2026
CA
2031
KY
2047
TX
2047
HI
PRE-2014
SOLAR-PLUS BATTERY LEVELIZED COST OF ELECTRICITY
(LCOE) VS. UTILITY RETAIL PRICE PROJECTIONS
COMERCIAL - BASE CASE {Y-AXIS $/kWh}
Louisville, KY
Westchester, NY
San Antonio, TX
Los Angeles, CA
Honolulu, HI
LCOE Retail Price
10
8
6
4
2
Percentofretailprice
11. PAGE 11
In California, the sustainability and resilience challenges
facing incumbent water management systems are
clear. The state is home to the most extensive centralized
system of aqueducts and reservoirs in the world. Six
major water conveyance systems carry water from the
Sierra Nevada snow melt to provide roughly 60% of
the state’s water supply, and extensive groundwater
pumping infrastructure provides the remaining 40%.
But climate change is threatening the Sierra snowpack,
which hit a record-low of 5% of its historical average in
April 2015.45 46
Increased agricultural use is also straining
the state’s groundwater supply, with withdrawals now
running an annual deficit equal to 10–20% of urban water
use.47 48
Further complicating these issues is the fact that
billions of gallons of California water is unsafe to drink due
to industrial and agricultural pollution. Almost 2 million
Californians (mostly in rural communities) currently lack
access to safe drinking water.49
Technological Innovation Price Parity
Much like the innovations emerging in agriculture and
energy, new technologies are being developed to address
challenges in the water sector.50
These new technologies
“mean smaller [distributed] systems can provide the
health protection and security of supply that centralized
networks were designed to deliver”51
(Fig. 9).52
Emerging
innovations include green infrastructure, demand-side
management, decentralized waste treatment, and reuse
(Fig. 10).53
In the United States, where water is often locally
regulated by city, county, and state agencies, the bottom-
up approach of these distributed models lends itself well to
existing policy and regulatory frameworks.
Fig. 9. Distributed water
management systems are
enabling more efficient,
sustainable, and resilient
provisions of freshwater.
Source: Deutsche Bank.
Source: U.S. Census Bureau,
2015 Update
Fig. 1. Global population is proj
the next quarter-century.
Source: US Census Bureau
WORLD POPULATI
1950 - 205
3 BILLION
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
10
9
8
7
6
5
4
3
2
1
0
5 BILLION
6 BILLION
7 BILLION
8 BILLION
9 BILLION
• EFFICIENCY
• REUSE
• SOURCE OF DIVERSIFICATIONAA
SOURCE SOURCE SOURCE SOURCE
WASTE
TREATMENT USE
THE FUTURE: WATER CULTIVATION
USE
LOSS
LOSS
LOSS
LOSS
• INEFFICIENCY
• DISPOSABILITY
• HOMOGENOUS SUPPLYLL
SOURCE
WASTE
TREATMENT
TODAY: WATER HUNTING
Source: U.S. Census Bureau, Internationa
2015 Update
Fig. 1. Global population is projected to gro
the next quarter-century.
Source: US Census Bureau
WORLD POPULATION:
1950 - 2050
3 BILLION
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
10
9
8
7
6
5
4
3
2
1
0
5 BILLION
6 BILLION
7 BILLION
8 BILLION
9 BILLION
• EFFICIENCY
• REUSE
• SOURCE OF DIVERSIFICATIONAA
SOURCE SOURCE SOURCE SOURCE
WASTE
TREATMENT USE
THE FUTURE: WATER CULTIVATION
USE
LOSS
LOSS
LOSS
LOSS
• INEFFICIENCY
• DISPOSABILITY
• HOMOGENOUS SUPPLYLL
SOURCE
WASTE
TREATMENT
TODAY: WATER HUNTING
RETURN
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
Today: water hunting The future: water cultivation
• INEFFICIENCY
• DISPOSABILITY
• HOMOGENOUS SUPPLY
• EFFICIENCY
• REUSE
• SOURCE OF DIVERSIFICATION
45
About Water Risk in California. 2016. Ceres.
46
Achieving a Sustainable California Water Future Through Innovations in Science and Technology. 2014. California Council on Science and Technology.
47
About Water Risk in California. 2016. Ceres.
48
Achieving a Sustainable California Water Future Through Innovations in Science and Technology. 2014. California Council on Science and Technology.
49
About Water Risk in California. 2016. Ceres.
50
Cleaner Technologies: Evolving Towards a Sustainable End-State. 2012. Deutsche Bank.
51
Distributed Water Systems: A Networked and Localized Approach for Sustainable Water Services. Victorian Eco Innovation Lab at the University of Melbourne.
52
Cleaner Technologies: Evolving Towards a Sustainable End-State. 2012. Deutsche Bank.
53
Quesnel, Kim, Newsha K. Ajami, and Moemi Wyss. 2016. Tapping into Alternative Ways to Fund Innovative and Multi-Purpose Water Projects: A Financing Framework from the
Electricity Sector. Stanford University Woods Institute for the Environment.
12. PAGE 12
In many instances, these distributed approaches
have already reached price parity with centralized
infrastructure in the water sector55
—reducing the
need to continue ‘expand and supply’ infrastructure
approaches to keep costs low.56
Across the United
States, municipalities are passing the costs of stress
on centralized water infrastructure to customers, with
municipal rate-payers in 30 major US cities seeing a
41% rise in water costs since 2010.57
In New York City,
planners have already developed incentive structures
that encourage developers to build local storm and
wastewater treatment and reuse options in order to avoid
costly upgrades to the city’s sewers.58
In Philadelphia, the
Pennsylvania Department of Environmental Protection
and the US EPA adopted a plan to invest $1.2 billion
in distributed green infrastructure for the city’s sewer
system; it is estimated that achieving the same results
through conventional infrastructure would require a $6
billion investment.59
54
Quesnel, Kim, Newsha K. Ajami, and Moemi Wyss. 2016. Tapping into Alternative Ways to Fund Innovative and Multi-Purpose Water Projects: A Financing Framework from the
Electricity Sector. Stanford University Woods Institute for the Environment.
55
Leurig, Sharlene and Jeremy Brown. 2014. Distributed Water Systems: How to Make Better Use of Our Most Liquid Market for Financing Water Infrastructure. Ceres.
56
Walton, Brett. Distributed Water Systems: A Networked and Localized Approach for Sustainable Water Services. Victorian Eco Innovation Lab at the University of Melbourne.
57
Price of Water 2015: Up 6% in 30 Major US Cities; 41% Rise Since 2010. 2015. Circle of Blue.
58
Distributed Systems: A Design Model for Sustainable and Resilient Infrastructure. 2010. Victorian Eco Innovation Lab at the University of Melbourne.
59
Leurig, Sharlene and Jeremy Brown. 2014. Distributed Water Systems: How to Make Better Use of Our Most Liquid Market for Financing Water Infrastructure. Ceres.
Fig. 10. Emerging innovations are enabling distributed water management strategies to become increasingly
cost-competitive with centralized infrastructure systems.
Source: Stanford University.
Traditional vs. Distributed Water Management Strategies
TRADITIONAL MANAGEMENT
Stormwater Runs off impervious surfaces and
into storm drains or sent to detention
ponds for treatment before discharge
Potable Water Supply-side management through
expanded water resources
Wastewater Sent to large, centralized treatment
facilities and discharged to the
environment
DISTRIBUTED SOLUTIONS
Captured by green infrastructure and infiltrated
to the subsurface
Demand side management (DSM) through
conservation and efficiency
Sent to smaller, more local decentralized treatment
facilities; recycled for beneficial use
INCORPORATING DISTRIBUTED WATER SOLUTIONS IS A PRACTICE
THAT SOME COMMUNITIES HAVE ALREADY FOUND TO BE MORE
ECONOMICALLY, SOCIALLY, AND ENVIRONMENTALLY EFFICIENT THAN
USING CENTRALIZED WATER SYSTEMS ALONE.”54
‘‘
13. PAGE 13
Waste
Sustainability Resilience Challenges
The collection, transport, treatment and disposal
of waste streams (both residential and industrial)
are among the most persistent, difficult, and costly
challenges facing societies around the world today.
Given current population and economic growth
trends, this problem is poised to get worse. Global solid
waste generation, already above 3.5 million tonnes per
day, is on pace to increase 70% by 2025.60
The global cost
of dealing with this waste is anticipated to rise from $205
billion per year in 2010 to $375 billion per year by 2025.61
At current rates, waste volumes will triple by 2100.62
In
the United States, trash has become the leading national
export and, on average, municipalities now spend more
on waste management than on fire protection, parks and
recreation, and libraries.63
As the problems and costs of waste disposal continue
to grow, the price of developing new finite resources
and producing new raw materials to meet growing
demand is also increasing. For example, at current
consumption rates, natural reserves of tin will be gone
within forty years. Despite these very real scarcities, only
26% of tin is currently composed of recycled materials.64
Similar scarcity trends exist across inorganic material
extraction and development (Figure 11).
Comparable cost trends hold true for organic materials
as well. In the United States, food waste is the single
largest part of municipal solid waste streams. Over 97%
of this food waste goes to landfills or incinerators, costing
over $1 billion in disposal costs and foregoing any reuse
value.65
Converting this waste stream into biogas, for
example, could power more than three million US homes
for one year—creating an estimated $33 billion market
opportunity for converting the organic waste stream into
energy.66
Technological Innovation Price Parity
The concurrent trends of increasing disposal costs
and increasing raw material costs are resulting in a
sea change in the waste management sector; efficient
reuse models are becoming more economical than
traditional landfill solutions.67
These models are driven
by new innovations enabling resource repurposing across
the waste lifecycle, including but not limited to: anaerobic
digestion of organic materials, waste derived fuel
alternatives, and landfill gas recovery.
For example, energy savings alone from recycling
aluminum (compared to producing it from raw materials)
is now up to 95%; plastics 90%; and copper 85%.68
It is
estimated that reducing organic food waste by 30% in
developed markets could save up to 40 million hectares
of cropland, and the worldwide market for recycling
electronic waste is forecast to more than double between
2009 and 2020.69
60
Bhada-Tata, Perinaz, Daniel A. Hoornweg. 2012. What a Waste: A Global Review of Solid Waste Management. World Bank.
61
Bhada-Tata, Perinaz, Daniel A. Hoornweg. 2012. What a Waste: A Global Review of Solid Waste Management. World Bank.
62
Global Waste on Pace to Triple by 2100. 2013. World Bank.
63
Humes, Edward. 2012. Grappling with a Garbage Glut. Wall Street Journal.
64
How Much is Left? The Limits of Earth’s Resources: A Graphical Accounting of the Limits to What One Planet Can Provide. 2010. Scientific American.
65
Newman, Chris. 2010. US Environmental Protection Agency’s Food Waste Activities. US EPA Region 5.
66
Biogas Opportunities Roadmap: Voluntary Actions to Reduce Methane Emissions and Increase Energy Independence. 2014. US Department of Agriculture, US Environmental
Protection Agency, and US Department of Energy.
67
Cleaner Technologies: Evolving Towards a Sustainable End-State. 2012. Deutsche Bank.
68
Sustainable Solid Waste Management and the Green Economy. 2013. International Solid Waste Association.
69
Cleaner Technologies: Evolving Towards a Sustainable End-State. 2012. Deutsche Bank.
14. PAGE 14
TIN
(cans, solder)
GOLD
(jewelry, dental)
PHOSPHORUS
(fertilizer, animal blades)
ALUMINUM
(transport, electric, consumer durables)
Today’s global consumption rate
Half the U.S. consumption rate
Reverse base
Annual global consumption
reverse base
(assuming global
consumption =
global production)
World population
1
/2 U.S. per capita
consumption in
2006
X
If the demand grows, some key resources
will be exhausted more quicky if predicted
technologies appear and the population grows
HOW MANY YEARS LEFT IF THE
WORLD CONSUMES ATZINC
(galvanizing)
LEAD
(lead pipes, batteries)
SILVER
(jewelry, catalytic converters)
CHROMIUM
(chrome plating, paint)
INDIUM
(LCDs)
PLATINUM
(jewelry, catalysts, fuel cells)
ANTIMONY
(drugs)
URANIUM
(weapons, power stations)
NICKEL
(batteries, turbine blades)
TITANIUM
(cellphones, camera lenses)
COPPER
(wire, coins, plumbing)
4
8
9
13
42
29
13
17
19
30
59
(t(t(t(tttttt(t(t((( rrrrrr
4
20
34
36
38
40
42
57
142
510
116
46
45
61
143
360
90
345
1027
40
6.58 BILLION
WORLD POPULATION IN
APRIL 2007
301 MILLION
U.S. POPULATION IN
APRIL 2007
POPULATION COMPARISON
PLATINUM
0%
PHOSPHORUS
0%
GALLIUM
0%
URANIUM
0%
INDIUM
0%
COPPER
31%
NICKEL
35%
SILVER
16%
TITANIUM
20%
LEAD
72%
GOLD
43%
ALUMINUM
49%
ZINC
26%
TIN
26%
GERMANIUM
35%
CHROMIUM
25%
HOW LONG WILL IT LAST
PROPORTION OF CONSUMPTION MET BY RECYCLED MATERIALS
TIN
(cans, solder)
GOLD
(jewelry, dental)
PHOSPHORUS
(fertilizer, animal blades)
ALUMINUM
(transport, electric, consumer durables)
Today’s global consumption rate
Half the U.S. consumption rate
Reverse base
Annual global consumption
reverse base
(assuming global
consumption =
global production)
World population
1
/2 U.S. per capita
consumption in
2006
X
If the demand grows, some key resources
will be exhausted more quicky if predicted
technologies appear and the population grows
HOW MANY YEARS LEFT IF THE
WORLD CONSUMES ATZINC
(galvanizing)
LEAD
(lead pipes, batteries)
SILVER
(jewelry, catalytic converters)
CHROMIUM
(chrome plating, paint)
INDIUM
(LCDs)
PLATINUM
(jewelry, catalysts, fuel cells)
ANTIMONY
(drugs)
URANIUM
(weapons, power stations)
NICKEL
(batteries, turbine blades)
TITANIUM
(cellphones, camera lenses)
COPPER
(wire, coins, plumbing)
4
8
9
13
42
29
13
17
19
30
59
(t(t(t(tttttt(t(t((( rrrrrr
4
20
34
36
38
40
42
57
142
510
116
46
45
61
143
360
90
345
1027
40
6.58 BILLION
WORLD POPULATION IN
APRIL 2007
301 MILLION
U.S. POPULATION IN
APRIL 2007
POPULATION COMPARISON
PLATINUM
0%
PHOSPHORUS
0%
GALLIUM
0%
URANIUM
0%
INDIUM
0%
COPPER
31%
NICKEL
35%
SILVER
16%
TITANIUM
20%
LEAD
72%
GOLD
43%
ALUMINUM
49%
ZINC
26%
TIN
26%
GERMANIUM
35%
CHROMIUM
25%
HOW LONG WILL IT LAST
PROPORTION OF CONSUMPTION MET BY RECYCLED MATERIALS
Fig. 11. At current and projected consumption rates, inorganic materials face impending scarcities
that are driving the need for more efficient reuse models in waste management.
Source: Scientific American.
How Long Will It Last?
Proportion of Consumption Met by Recycled Materials (%)
15. PAGE 15
CREATING
UNPRECEDENTED
OPPORTUNITIES
FOR INVESTORS
HIGH IMPACTS = HIGH RETURNS
G
iven the increasingly compelling economics of
distributed resource management models70
,
“rather than facing a crisis because of resource
scarcity, we confront an opportunity that will reframe
the world’s economy and create opportunities for
trillions of dollars in impacts.”71
For investors, this
presents the chance to ‘do well by doing good’—generating
high-returns from investments that positively impact
sustainability across sectors.
Long-Term Stewardship of Increasingly
High-Value Resources
At a time of rapid population growth, rising affluence, and
environmental change, critical resources are increasingly
high-value. Technological advances are enabling supply to
meet increased demand through resilient, localized, and
long-term resource utilization. Investors who overlook this
are “missing out on an enormous opportunity for value
creation.”73
Global markets could realize $2.9 trillion
in savings in 2030 from capturing enhanced resource
productivity potential—and 70% of these productivity
opportunities have an internal rate of return of more than
10% at current prices.74
Investors capitalizing on these opportunities also benefit
from broader market trends, in which accounting for
environmental, social, and governance (ESG) factors
already yields higher returns in debt and equity markets.
Global equity strategies that focus on the materiality of
ESG factors have exceeded market benchmarks by an
annualized 500 basis points over the past decade.75
This
has become so widely understood that the US Department
of Labor recently revised its Employee Retirement
Income Savings Act (ERISA) guidance to explicitly say
that considering ESG concerns is part of a pension plan’s
fiduciary duty.76
In the United States, $1 of every $6 under
professional management is now aligned with sustainable
investing strategies (Fig. 12), and 65% of individual
investors expect these strategies to become even more
prevalent in the next five years.77
70
Environmental Finance and Innovation Forum Summit Report. 2014. Goldman Sachs.
71
Heck, Stefan and Matt Rogers. 2014. Resource Revolution: How to Capture the Biggest Business Opportunity in a Century. New York: Melcher Media.
72
Heck, Stefan and Matt Rogers. 2014. Resource Revolution: How to Capture the Biggest Business Opportunity in a Century. New York: Melcher Media.
73
Jenkyn-Jones, Bryce. 2012. Resource Scarcity and the Efficiency Revolution. Impax Asset Management.
74
Dobbs, Richard, Jeremy Oppenheim, Fraser Thompson, Marcel Brinkman, and Marc Zornes. Resource Revolution: Meeting the World’s Energy, Materials, Food, and Water Needs.
November 2011. McKinsey Company.
75
Bailey, Jonathan, Bryce Klempner, and Josh Zoffer. June 2016. Sustaining Sustainability: What Institutional Investors Should Do Next on ESG. McKinsey Company.
76
Bailey, Jonathan, Bryce Klempner, and Josh Zoffer. June 2016. Sustaining Sustainability: What Institutional Investors Should Do Next on ESG. McKinsey Company.
77
Sustainable Signals: The Individual Investor Perspective. 2015. Morgan Stanley Institute for Sustainable Investing.
ADAM SMITH’S CLASSICAL WORK ON ECONOMICS, WEALTH OF
NATIONS (1776), DEFINED THREE MAJOR INPUTS FOR BUSINESS:
LABOR, CAPITAL, AND LAND. THE TWO INDUSTRIAL REVOLUTIONS
THE WORLD HAS SEEN THUS FAR FOCUSED PRIMARILY ON LABOR
AND CAPITAL… BUT NEITHER OF THE FIRST TWO REVOLUTIONS
FOCUSED ON SMITH’S THIRD INPUT: LAND AND NATURAL RESOURCES.
THAT IS PRECISELY WHAT WE SEE HAPPENING NOW, AND WE BELIEVE
THE BENEFITS WILL BE EVERY BIT AS GREAT AS THE BENEFITS
ACCOMPANYING THE FIRST TWO REVOLUTIONS.”72
‘‘
16. PAGE 16
In short, successful investors are realizing that there
is more value in managing resources sustainably.
Higher impact is translating into higher returns,
as sustainability and resilience needs paired with
technological capabilities accelerate the value of natural
resources. As with the real estate sector, it is increasingly
understood that investing in the long-term stewardship of
real assets will generate better returns over time.
CAPITAL-READY PROJECTS
While many financial products allow for limited exposure
to these opportunities in a more general sense, the most
direct exposure to investing in sustainable resource
utilization is emerging in project finance. By investing
along the cycle of development, construction, and
operation of the asset, investors can benefit from the
cash flow and underlying appreciation of the resource.
Such project opportunities are technologically and
operationally proven and ready to be financed across
core resource sectors.
Project Models
Opportunities to invest in sustainable distributed
systems are manifesting as high-value real asset
projects across critical resource sectors. These
distributed infrastructure projects typically have
costs amounting to less than $100M (frequently in
the $20M–$70M range), have long-term contracts for
raw material inputs (such as municipal solid waste,
wastewater, biomass, etc.), include long-term off-take
contracts for outputs (energy, water, fertilizer, nutrients,
biochemical, etc.), and utilize innovative technology
that has been commercially proven over the past five
to ten years to convert the inputs to the output. Both
inputs and outputs are typically derived from and utilized
within a local radius, though most facilities can access
national markets for contingency. Overall, these small-
and mid-size distributed solutions not only provide
greater resiliency and efficiency compared to incumbent
centralized systems, but also increasingly yield strong
financial returns for investors.
In the energy sector, the market for distributed energy
storage in the United States grew 243% in 2015—and
is projected to reach $2.5 billion by 2020.78
In general,
the small- and mid-size project sector in North America
is expected to grow more quickly than the entire
infrastructure sector, which is forecasted to grow by 25%
annually over the next decade.79
Experienced Developers
Many project developers implementing distributed
resource utilization models have deep experience with
the innovative (and commercially proven) technologies
they are utilizing. These developers also often hold unique
competitive advantages in a localized project-scope,
Fig. 12. $1 out of every
$6 under professional
management in the United
States is now under
sustainable investment
strategies.
Source: Morgan Stanley.
COST
TIME
PRICE PARITY
CENTRALIZED/EXTRACTIVE
MODEL
DISTRIBUTED/SUSTAINABLE
MODEL
$Trillions(USD)
1995
Total volume of sustainable investments nearly doubled from 2012 to 2014
20031999 20071997 20052001 2010 2012 2014
$3.47 Trillion
$6.57 Trillion
7
6
5
4
3
2
1
0
Total Volume of Sustainable Investments Nearly Doubled
from 2012–2014
78
Munsell, Mike. 2016. US Energy Storage Market Grew 243% in 2015, Largest Year on Record. Green Tech Media.
79
Small and Mid-Size Sustainable Real Asset Project Finance. May 1, 2016. Ultra Capital, LLC.
$Trillions(USD)
17. PAGE 17
including strong customer relationships, familiarity with
regional regulatory environments, and experience with
sector-specific challenges.
Given the rapidly changing economic landscape of the
sectors in which they operate, however, many project
developers still lack “some of the resources, tools, and
knowledge required to attract capital from institutions and
other large-scale investors.”80
Building a bridge between
institutional capital and experienced developers with
increasingly high-value projects therefore represents
an enormous market opportunity to finance tomorrow’s
distributed, sustainable resource sectors.
EMERGING INVESTOR ACCESS
To date, conventional financial instruments have mostly
failed to access these new types of projects. As the
landscape evolves and these new distributed resource
management models take hold, financial
instruments that allow investors to capitalize on
such opportunities are emerging in real asset
project finance.
Real Assets
Real assets are physical goods (such as commodities,
infrastructure, or real estate) that are independent from
variations in the value of money.81
This definition alone
suggests some of the most beneficial characteristics
of real assets for investors: their returns are often
consistent, predictable, and largely uncorrelated with
other asset classes.82
With value derived directly from
their physical properties, real assets are generally low-risk
and offer attractive risk-adjusted returns compared to
alternative asset classes (Fig. 14).83 84
Fig. 14. Real assets have favorable risk/return profiles.
Source: Aquila Capital; private equity source Preqin.
20-Year Risk-Return of Selected Real Asset Classes vs.
Bonds and Equities
Census Bureau, International Database, July
opulation is projected to grow by over 40% in
er-century.
nsus Bureau
POPULATION:
0 - 2050
UNITED KINGDOM
COUNTRY YEARS TO DOUBLE PER CAPITA GDP1
YEAR
1700 1800 1900
53
65
33
16
154
UNITED STATES
GERMANY
JAPAN
SOUTH KOREA
INDIA
CHINA
95% LESS
ater used for vertical
utilizing the
nics or aeroponics
MING
RETURN
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
BONDS
1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18%
REAL ESTATE
AGRICULTURE
TIMBER
EQUITIES
PRIVATE EQUITY
CHART 2: INCREASES IN REAL ASSET ALLOCATIONS
% OF RESPONDENTS INCREASING IN THE PAST THREE YEARS/NEXT 18 MONT
REAL ESTATE
(n=192)
INFRASTRUCTURE
Volatility (standard deviation)
Return
80
Small and Mid-Size Sustainable Real Asset Project Finance. May 1, 2016. Ultra Capital, LLC.
81
Real Assets: A Sought-After Investment Class in Times of Crisis. 2012. Deutsche Bank.
82
Real Assets and Impact Investing: A Primer for Families. 2016. The Impact.
83
Private Real Assets: Improving Portfolio Diversification with Uncorrelated Market Exposure. TIAA-CREF Asset Management.
84
Real Assets: The New Mainstream. 2015. Aquila Capital.
18. PAGE 18
Investors have traditionally underweighted real assets in
their portfolios because they have been difficult to access
through standard investment offerings. Additionally, some
real asset markets have only recently developed or are still
taking shape.85
However, with long-term population growth
and consumption trends helping drive unprecedented
demand for natural resources, real asset investments are
increasingly in-demand and favored.86
A growing number
of institutional investors are now adding real assets to their
portfolios, and even more intend to do so within the next
year (Fig. 15).87
Newly structured real asset vehicles can provide investor
access to rapidly growing natural resource sectors.88 89
The opportunity for investing in real assets at a
project-level is emerging as the next frontier in
sustainable investing.
Increases in Real Asset Allocations
% of respondents increasing in past three years/next 18 months
CHART 2: INCREASES IN REAL ASSET ALLOCATIONS
% OF RESPONDENTS INCREASING IN THE PAST THREE YEARS/NEXT 18 MONTHS
REAL ESTATE
(n=192)
INFRASTRUCTURE
(n=132)
COMMODITIES
(n=59)
% 0 10 20 30 40 50
Will increase over the next 18 months
Increased over the past three years
Source: Blackrock and The Economist Intelligence Unit, 31 October 2014.
Fig. 15. Institutional investors are increasingly adding real assets to their portfolios and intend to maintain that trend.
Source: Blackrock and The Economist Intelligence Unit.
Project Finance
Project finance offers the opportunity to bring
institutional capital to real assets in order to deploy
distributed resource management models at scale.
Well-structured real asset project finance investments are
designed to mitigate or minimize intangible risks, which
makes this an attractive proposition for investors. The
inherent foundation of these projects is a defined set of
inputs and outputs that can be contracted—and often
guaranteed or insured—to deliver expected returns.
The same lack of up-to-date financial instruments that
has limited investor access to these types of projects has
also prevented project developers from deploying their
projects in a scalable, systemic way. Thus, project finance
tailored to the unique attributes of these distributed
systems is also an attractive proposition for project
developers whose growth has been stunted by lack of
access to appropriate capital.
With respect to the agriculture, energy, water, and waste
sectors, which desperately need increased investment in
distributed infrastructure to meet pressing sustainability
and resilience needs, the opportunity to meet the demand
of both investors and developers provides the ideal
scenario in which to truly have impact (Table 1).
85
Real Assets: A Sought-After Investment Class in Times of Crisis. 2012. Deutsche Bank.
86
Real Assets: A Sought-After Investment Class in Times of Crisis. 2012. Deutsche Bank.
87
The Ascent of Real Assets: Gauging Growth and Goals in Institutional Portfolios. 2015. Blackrock and The Economist Intelligence Unit.
88
The Ascent of Real Assets: Gauging Growth and Goals in Institutional Portfolios. 2015. Blackrock and The Economist Intelligence Unit.
89
Real Assets and Impact Investing: A Primer for Families. 2016. The Impact.
19. PAGE 19
Table 1. Real Asset Project Finance Examples
TECHNOLOGY MARKET PROJECT POTENTIAL
TYPE DESCRIPTION PLATFORM SIZE SIZE RETURN
AG R I C U LT U R E
Indoor Agriculture Localized/modular farming Hydroponics, aquaponics, $5B+ $1M– 18+%
and LED lighting $50M
AgTech / Internet of Operational and cost efficiencies in water Data, sensors, robotics, $10B+ $5M– 12%–
Things Ag and nutrient delivery and harvesting autonomous vehicles $25M 18%
Sustainable Protein Feeding the growing middle class Aquaculture, Single Cell $10B+ $5M– 18+%
with alternative protein sources Protein to replace fishmeal $25M
Waste-to-Value Profitable use of large-scale systemic Ag waste to marketable $10B+ $25M 18+%
waste streams products, woody biomass
to carbon products
E N E R GY
Distributed Storage Store energy for price arbitrage, Lithium and lead batteries $2B–$10B $100k– 12%–
resiliency, and grid services by 2020 $30M 18%
Hydropower Hydroelectric generation plants, Generation and water $10B $500k– 10%–
from low-head at existing dams to flow systems $50M 16%
in-conduit in pipes
Solar Community and distributed Photovoltaic $30B $1M– 10%–
solar projects $10M 18%
Energy Efficiency Implementing technology to use less Combined heat + power, $20B+ $1M– 10%–
energy to provide the same service LED lights $100M 16%
WAT E R
Water Reuse (On-Site) On-site water reclamation and re-use Moving bed bioreactor $10B+ $5M– 11%–
systems (MBBR) $15M 13%
Water Reuse Water treatment at the industrial Filtration, Biomimicry $5B+ $5M 10%–
(Industrial/Municipal) or municipal scale 13%
Brackish Water Treating salt water from water bodies Modular desalination $5B+ $5M 11%–
Treatment or after industrial use 14%
Industrial Water Treating industrial/fracking wastewater Modular water chemical $5B+ $5M 11%–
Treatment treatment and discharge 14%
WAST E
Waste-to-Energy Converting post-consumer organic, Anaerobic digestion, $15B+ $15M 12%–
food production, and farm waste composting 15%
to energy
Waste-to-Value Advanced material recycling Recycling or repurposing $20B+ $25M 18+%
previously unusable waste
Waste-to-Handling Biomass collection for feedstock Hauling and diversion $1B–$5B $1M–$5M 18+%
Inorganic Materials Recycling inorganic materials into Process technologies in $20B $10M– 15%–
Reuse new products material recycling facilities $50M 20%
Source: US Environmental Protection Agency, Department of Agriculture, Federal Energy Regulatory Commission
20. PAGE 20
CONCLUSIONS
W
ith rapidly evolving sustainability and resilience
needs and technological capabilities, critical
resource sectors are facing an unprecedented
shift away from centralized infrastructure towards more
distributed systems. The implications of this shift are
enormous—not only for resource efficiency, productivity,
and reuse, but also for investors.
As decentralized resource infrastructure reaches price
parity with centralized models across agriculture, energy,
water, and waste, opportunities emerge for investors to ‘do
well by doing good’—helping finance and accelerate the
transition to sustainable resource utilization while realizing
exceptional risk-adjusted returns on such investments.
While traditional financial instruments have been slow
to effectively identify and access these opportunities,
new instruments in real assets and project finance
are beginning to provide investors access. This is
transformative for environmental sustainability and
investors alike; the convergence of increasing resource
values, technological innovation, and new financial
instruments has created the unprecedented opportunity
to invest at scale in sustainable resource management
through distributed infrastructure.
ABOUT ULTRA CAPITAL
U
ltra Capital constructs portfolios of small to
mid-size sustainable real asset projects in
agriculture, energy, water and waste. We provide
institutional investors with diversified portfolios of
yield oriented real assets, and project developers with
capital and project finance expertise. Ultra Capital
has assembled an experienced team of investment
professionals with a broad range of expertise in project
development, finance, engineering, and capital markets
to deliver consistently underwritten and risk managed
project portfolios to investors.
www.ultracapital.com
