The Sustainable Brands 2009 conference in Monterey this week was very encouraging. Despite a rather steep price tag in this down economy (Ecounit could only afford to go because we were chosen as a “top 10 new venture” by the Sustainable Brands venture exchange panel), it was packed with great speakers and representatives from top brand companies including Coke, Pepsi, Kraft, Clorox, J&J, and SC Johnson.

The twitter chatter, which was non-stop throughout the conference, made a big impression on me, but most impressive were the real life sustainability stories that have begun to emerge. SunChips was perhaps the most amazing - they have developed a 100% compostable bag that will launch by Earth Day 2010. In their testing it breaks down completely in just 14 weeks. Check out the time lapse video.  Coca-Cola talked about their plant-based bottle, and Clorox talked about the amazing rise of their GreenWorks brand to approximately 42% of the green cleaning market just 1 year after launch! Indeed, recent data is showing that among a growing percentage of consumers, environmental attributes are more valuable than a low price point price.

But it’s not the extent of revenue or profit growth that is impressive at this point. It’s the amount of commitment and investment that was necessary to generate these successes. Yes, there are many fence sitters and outright deniers - perhaps the majority of companies are still in these 2 camps - but there are real examples of major corporate players taking gigantic strides. As a fellow conference-goer from Holland said to me: not long ago America was completely backward and seemingly unable to move towards a more sustainable future; but now, just 2 years later, America is “running fast past the EU”.

I believe the next year will not only bring more successes from a sustainability standpoint, it will also show us the dividends that result from the investments that brands like SunChips have made. The ROI - in pure dollars and cents - will get everyone to stand up and take notice.

It’s okay to be confused. By all accounts, the data coming in about the green consumer is conflicting at best.  Some reports tell us that 90% of Americans are changing their buying habits, while others state definitively that the green consumer is all talk and no action.  I decided to dig into it a bit.

One of the best sources for information on the subject is the Natural Marketing Institute’s Vital Trends report that was released in April.  The key takeaway from the report is that “the 20/80 is now the 80/20″. Translated, this means that whereas the green consumer was only 20% of the American population before, now they represent 80% of the population.  While that may sound like an overstatement, their data is rigorous and their interpretation of the data is sound. Essentially, they tell us that “sustainability” is a concept that influences roughly 80% of all U.S. consumers, though each person’s motivation for caring about sustainability issues may differ. They break down the population into groups, such as those who are truly committed to the health of the plant versus those who are more concerned about personal health versus those who are more concerned about conservation and frugality; but their point is that, at some level, each of these consumer segments has come to appreciate sustainability, and often times that appreciation translates into greener purchasing habits.

Hartmann’s report on The Rise of Consumer Responsibility supports these findings. Their consumer segments differ from NMI’s somewhat, but their fundamental takeaway is the same - that different segments “arrive” at sustainability in different ways, but in the end a majority of Americans are aware of and reacting to sustainability concerns, including environmental sustainability.
For the naysayers out there, a couple asides. First, it is true that “green” does not directly correlate to “sustainable”. By most definitions, sustainability accounts for social and economic - as well as environmental - concerns; green typically refers solely to the environmental leg of the 3-legged stool. But from everything I have seen, I think it’s fair to say that a person who is concerned about sustainability issues is aware of and sensitive to environmental issues.  Second, from all I have seen the data used by NMI and Hartman is absolutely legit (I believe Nielsen managed the NMI study).

With all this upbeat data, is it possible that the American consumer is still way behind? When you look outside the U.S. and compare with consumers in other nations, we can clearly see that the green movement has really just begun here in the U.S.  In fact, the latest Greendex survey by National Geographic and Globescan shows that
Chinese, Brazilian, and Indian consumers are far greener than Americans, with U.S. consumers the lowest among the 17 countries studied. No wonder a Japanese friend of mine recently scoffed at my musings about the emerging green consumer in America, laughing at images of Americans with their reusable bags who arrive at the store in their SUVs.  And the Japanese were were only #15 on the Greendex scale versus #17 (out of 17) for American consumers. But he’s right - we’ve got a long way to go before we are truly “green consumers”.

Nevertheless, I’m bullish on the emerging green consumer in America. We’re getting there. I’ve always contended that awareness is the necessary first step. If the NMI and Hartman studies are any indication, the majority of Americans have become aware of the environmental implications of their consumption habits. Now it’s time to start climbing up the Greendex rankings.

For those of us who are focused on helping consumers make eco-friendly lifestyle changes, shopping bags are a bright spot. Sure, there is still a huge problem - over 100 billion plastic and 25 billion plastic bags are used annually by grocery shoppers in the U.S. alone.  But the winds of change are blowing strong, and signs of improvement are plentiful.

In the last few weeks alone, newspapers around the nation have reported that several municipalities are exploring bag fees or taxes; the focus is on plastic bags, but increasingly municipalities are recognizing that paper bags are equal in their environmental impact.  For their part, Whole Foods announced that - after removing plastic bags from its stores last year - it will only offer FSC-certified (certified as sustainably produced by the Forest Stewardship Council) paper bags in the future.  Even the ACC (American Chemistry Council, a lobbying arm of the plastics industry) joined the party. On Earth Day they announced a plan - called The Full Circle Recycling Initiative - that aims for 40% recycled content in all plastic bags by 2015, including at least 25% post-consumer recycled plastic.

Clearly, these are big steps in the right direction. As much as many of us would like to see a complete switch to reusable bags, the fact is demand for disposable bags will remain for many years; so it’s important that suppliers begin to offer more eco-friendly alternatives. But when looking at the big picture, there’s no doubt that increasing the use of reusable bags is a necessity. Fortunately, EcoUnit - together with our partner Ray’s Food Place - is proving that rewarding use of reusable bags can have a huge and positive impact. In the EcoUnit program, every time a reusable bag is used there is a double environmental benefit: first, no plastic or paper is required; and second, the consumer is rewarded with an EcoUnit credit that can be used to support a local environmental cause. Early signs indicate that consumers are eager to do their part to help the environment and appreciate that their grocer has adopted the program, and the result is a significant increase in reusable bag use.

Together, a combination of more eco-friendly disposable bags and rewards for use of reusable bags are beginning to move the needle on this decades-old dirty habit of using disposable bags after every trip to the store.

Earth Day 2009 is unlike any other - more noticed, better advertised, and more active in every respect. Yet most importantly, it’s more mainstream. To me, what marks this year’s Earth Day is the fact that it’s a relative non-event. No longer are a few fringe environmentalists banging pots and pans to get our attention. It is simply a time when many of us - increasingly, the average American - put a little more stress on a subject that has become a part of our everyday lives.

The fact that Earth Day is a non-event is proof that the Earth has arrived as a centerpiece of our collective consciousness. And there are many data points to support this conclusion. So far in 2009, there have been 458 new “green product” launches, a pace that will triple the number of green products launched in 2008. And 2008 saw a more than doubling over 2007. So the American capitalist engine has seen the light, and it knows that green products are the future. With green products selling at faster rates than their conventional counterparts even today, for the first time in history the pundits believe that the green revolution cannot be quelled by an economic downturn.

Recent research by Hartman  also indicates that the American consumer believes that their purchase decisions are as important as their voting decisions. Americans want to live in a world where corporations share their values concerning sustainability. Similarly, today’s eco-aware consumers equate “sustainable” with “value” and “quality” - in other words, sustainability is a core buying criteria for an increasing percentage of Americans.

Or consider the fact that Thomas Friedman has drawn the conclusion that America’s growth engine - rampant consumerism - is finished.   While there are many factors at work, there is no doubt that the growing awakening among consumers of the “true costs” of their purchases will put a damper on consumer spending for the foreseeable future. When consumers consider the non-renewable resources, the emissions, and the end of life implications of their purchases, Earth Day is no longer an event that is discernible from any other day.

EcoUnit has recently launched its rewards program at Ray’s Food Place in Oregon, and it’s not a surprise that it’s been picked up by several national trades. Yes, it’s innovative and engaging for customers who can accumulate EcoUnit credits and choose how to spend them, but it’s momentous for 2 much more important reasons.

First, it’s a novel and productive way to deal with an ugly externality (resulting from both the production and disposal of plastic and paper shopping bags). Externalities - and figuring out ways to value and reduce them - are a key part of the sustainability movement. Cap & trade is a perfect example of the type of system that will become commonplace in order to reduce another externality, in this case GHG emissions.

Second, the EcoUnit program is a study in behavior change, including development of tools and techniques that can be utilized to affect that change. Incentives are commonplace where economic activity takes place, but a lot of environmentally-focused incentives have been in the form of penalties and bans for unwanted behavior. EcoUnit is building the case that positive feedback - rewards for good behavior - are an important part of building ingrained behavior change.

The EcoUnit program only launched in Oregon 1 month ago, so it’s too early to share metrics and results.  But the response from Ray’s shoppers has been very positive, and the number of program participants to this point has exceeded our expectations. Over time, we expect to see an increase in shoppers with reusable bags as well as more consistent reusable bag use - signs that use of reusables is becoming a habit.

If 2008 was the year when carbon emissions and energy hit the environmental radar of every American, 2009 is the year for water.  Sections of the country are preparing for extended drought conditions, at the same time that companies are beginning to understand that their exposure to water shortages is an important part of the overall sustainability picture.  Unfortunately, as much as we take water for granted, the issues are anything but simple.

First, we need to come to grips with the fact that water as a resource is in crisis.  Agriculture - also know as the the source of our food - uses 80% of all freshwater consumed in the U.S. Four recent water shortages, in addition to legally-mandated pumping restrictions in the Sacramento-San Joaquin Delta, have already resulted in farm losses totaling around $245 million through Summer 2008. With a relatively dry winter, Santa Clara Valley is forecasting water rationing in 2009. On the other side of the U.S., the Southeast is in the fourth year of extreme-to-exceptional drought conditions.

Thus far, conservation efforts have largely failed.  According to the “State of Green Business” report, government data indicates that consumption (as measured in gallons consumed per unit of GDP) reduced only about 12% over the 5 year period from 2002 to 2007. A primary reason for this failing is that the cost of water is artificially low. Unlike the price of oil, the price of water does not value the water itself; instead the price of water is determined by the cost of the infrastructure and transportation used to move water from one place to another. The average cost per 1,000 gallons of water in the United States is just $1.50, according to the American Water Works Association. In such an environment, the motivation to conserve is simply not strong enough.

But that, and a lot of other things concerning water, is about to change. Several water utilities in Southern California are talking about 20% to 30% annual rate increases for the next five years. Water curtailments and rationing are almost assured in a few major U.S. States. The linkage between water shortages and climate change is also becoming more clear. Water is inextricably linked with carbon emissions, as huge amounts of energy are required to move water. By one estimate, 95% of California’s energy efficiency goals can be met by water efficiency programs! The crisis also highlights antiquated infrastructure which is not set up to distribute recycled water, nor is it capable of capturing and storing sufficient amounts of rainwater as our snowpack decreases due to climate change. We will soon hear about huge costs required to upgrade this infrastructure.

The good news is that environmentalists and industry are now beginning to talk about “embedded water” and “water footprints”, concepts that will help bring the water crisis onto everyone’s environmental radar. When we consider that 1 cup of coffee requires 37 gallons of water, the water-impact of our everyday activities becomes easier to understand.  With rapidly increasing prices and a lexicon that is familiar to the common consumer, it will soon be clear that water is at the nexus of environmental and economic sustainability.

As the U.S. wakes up, it will become equally obvious that this is a global problem. The Pacific Institute estimates that there are 900 million people around the globe without ready access to potable water; and 1/3 of the global population already lives in “water scarce” areas; even worse, by 2020 it’s projected that 2/3 of the global population will live in “water scarce” areas! Ultimately, we will need to move from awareness to solutions. And those solutions will involve a better alignment between the purpose for which water is used and the quality of the water delivered for that purpose. Between now and then, however, we face enormous costs and social dislocation.

Though our forefathers did not define the term, the “pursuit of happiness” has somehow become synonymous with pursuit of wealth. We can look back over many centuries and appreciate that, given the rigors of surviving in a world with insufficient shelter and food, people pursued wealth as a means of survival, stability, and comfort. This was a means to an end; building wealth was a means to stability and comfort. But along the way, developed nations that have achieved reasonable levels of stability and comfort have become so enamored with the pursuit of wealth that it has become an end in and of itself - for both individuals and corporations. In the process we have lost sight of the fact that wealth and happiness are not synonymous. There is ample evidence that this is true here in America. The U.S., being the bastion of capitalism and the world’s richest country for may years running, again ranked only 16th on the happiness scale in 2008.

For those of us in the U.S., where the battered economy and fragile environment have us re-thinking what’s important, we are beginning to recognize that wealth does not equate to happiness. This recognition is part of what the cultural pundits mean when they talk about “Generation G”, where “G” stands for “generosity”. Coined by trendwatching.com,  Generation G consumers are disgusted with greed and its current consequences for the economy and long for institutions that care. Increasingly, consumers want to do business with companies who share their values, including values related to the pursuit of wealth.

Indeed, consumers are beginning to recognize that happiness can come in many forms, such as closeness to friends & family and through rich cultural experiences. These other ingredients that make up happiness are the stuff that Americans get to explore and thrive in over the next several years. Interestingly, other than B Corporations, most companies will need to walk a tightrope in this new world, pursuing growth and profits at the same time that they appeal to this emerging definition of happiness. Those who are able to walk the tightrope - or more aptly, those who tie their corporate goals to balanced and broad values that extend beyond the simple pursuit of growth and profits - will find the new world both stable and comfortable.

I tend to approach our environmental challenges with a corporate hat on, so I’m always looking for market-based approaches to correct capitalism’s blind spots. But our current systems don’t seem capable of preventing the tragedy of the commons - whether it be greenhouse gases in the atmosphere, depletion of major river systems, or piles of electronic waste that get shipped around the globe. Some significant changes are required to capitalism before we have reliable mechanisms for protecting the commons. I believe the current corporate ownership structure is one of the mainstays of traditional American capitalism that needs change.

Ownership Rights and the B Corporation
In today’s American capitalism, a corporation is by its very definition required to maximize its return on capital. In other words, based on legal definition, profit and growth for shareholders are the primary goals of any corporation. Of course, with environmental awareness growing among the general population, corporations can and must embrace the environment in order to achieve their primary goal of profit and growth, but it’s not uncommon that the pursuit of profit and protection of the environment are at odds with one another. In today’s capitalism, the pursuit of profit wins every time.

Even if the people who run corporations are card carrying Sierra Club members, they can only do their fiduciary responsibility by making decisions that maximize profits and growth for shareholders. In other words, other than some minor exceptions in a few states, a corporation that pursues social or environmental goals at the expense of financial returns can be sued by their shareholders.  This makes it extremely difficult for businesses to pursue growth and social causes simultaneously, unless support of those social causes can be tied closely to growth. Today, when push comes to shove - when increasing CO2 emissions generates profits & growth - corporations are required to pollute.

The B Corporation changes this. In so doing it undoes one of the fundamental pillars that pits today’s corporations against the environment. It lets people who run companies - many of whom care about the planet whether or not they are a Sierra Club member - treat the environment as a stakeholder so that a corporation does not need to sacrifice the environment for profits. With the B Corporation, the environment can finally have a seat at the table.  And the beauty of it is that we don’t need to throw out capitalism in the process; all fundamental tenets of capitalism hold true, only now fiduciary responsibility extends beyond pursuit of profit & growth. By recognizing the B Corporation and its principles as a legitimate entity at a federal and state level, the government can rectify one of capitalism’s primary blind spots.

I recently had the good fortune to experience a presentation by Vinod Khosla, one of silicon valley’s most successful entrepreneurs and more recently a major investor in cleantech through his Khosla Ventures. With analytical rigor and fascinating examples, Mr. Khosla laid out the challenges that lie before us on the road to sustainability (including hopefully avoiding climate change catastrophe). His view of the future is both sobering and hopeful.

In his view, as much as many of us would like to believe that adoption of alternative energy sources like solar and wind and similar changes will allow us to avert significant environmental dislocations, reality is quite different. First he reminds us that the developed world’s infrastructure (i.e. capital stock) is ageing and will need to be repaired and/or replaced over the next 25-30 years. Layer on top of this the fact that several billion people living in developing nations will continue to seek a lifestyle similar to our own, and it’s clear that we need to find a means of producing materials - from concrete to automobiles - that is far different from anything we currently know. I am not certain of his exact estimates, but it appeared that the technologies and alternative energy sources developed thus far and deployed into the future would only handle about 20% of our needs. Indeed, we need both more and cleaner energy sources if we are to absorb continued population growth and enable developing nations to pursue a better life. In real terms, he estimates that the world will need to increase CO2 productivity by 5.6% per year. Similarly, he estimates the need to increase energy production roughly 10X between now and 2050. Both prospects are literally unfathomable given the tools currently at our disposal.

But Mr. Khosla is optimistic.  He predicts that the unpredictable - black swans - will arrive. But what’s needed is a large number of bets to be placed on a large number of potential breakthrough technologies so that we improve our likelihood of identifying and bringing to market the few black swans that are needed to provide the abundance of clean energy that our future requires. So the question is: who has the foresight and ability to fund a huge number of highly risky projects?

While governments, business, and academia work through that morass, it’s important to note the rigor that Mr. Khosla applies to his analysis.  By starting with a realistic view of our long-term needs, he measures various potential solutions (e.g. biofuels, natural gas) based on their scalability and optionality, criteria that are appropriate given the enormity of the challenge ahead. Given their recent track record (who remembers the ethanol fiasco?), one can only hope that our government will begin to apply a similar level of logic and rigor when placing bets that will either save us or hamstring us over the next 100 years.

So what does factoring of externalities into the equation mean for the economy? As consumers, businesses, everyone along the chain of production and consumption experiences higher costs, more and more non-necessities will fall by the wayside. It’s the natural progression towards a post-growth economy.

I believe we will see a dramatic drop in luxury purchases in the near term, with substantially slower holiday spending, but it will be chalked up to “the economy”.  But I expect the cost of natural resources to climb even as the economy weakens. So even as the economy recovers, the level of consumption that we’ve come to expect in non-recessionary times will not return.  And without the consumer growth engine, the economy will be stuck near zero growth for the foreseeable future.

Why will this happen? Why won’t we see a return to 1980s style consumption? A combination of consumer awareness, legislative fiat, and changing perceptions of business will conspire to reduce disposable income at the same time that cultural norms frown upon excessive consumption.

The transition to this post growth economy will be rough.  Importantly, post-growth does not mean a gradual slow down across the economy. It means violent jolts to areas that are deemed wasteful and unnecessary; at the same time it means opportunities for areas of the economy that foster efficiency and sustainable growth. But there will be significant dislocation and pain for many, in the form of lower real income, lost jobs, and lost hope for an easy way out. I’m afraid the challenges and pain will outweigh the opportunities for the next few years at least.