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Natural Capitalism – The Next Industrial Revolution Part 2

| March 7, 2012

In Part One of Natural Capitalism, Amory Lovins, MacArthur Fellow, consultant physicist and Co-Founder of The Rocky Mountain Institute, explored two of the essential ingredients that have been missing from the contemporary valuation of capital. Here in Part Two he talks about ‘solution economy’ and ‘reinvestment in natural capitalism’ the third and fourth necessary ingredients that can make our lives – especially the lives of those of us who are 50 and older – more effective and our future more stable and constructive. This topic of Natural Capitalism is of critical importance to all of us who are interested in leaving a legacy of sustainability and genuine abundance to future generations.

The Third Principle of Natural Capitalism

natural capitalism - the next industrial revolution
The third principle of natural capitalism—the most interesting and powerful one, I think, which Jim Womack calls the “solutions economy”—provides the strongest kind of feedback by changing what we reward, changing the business model so that both the provider and the customer make money in exactly the same way—by doing more and better with less for longer. To do this, the “solutions economy” business model shifts from occasionally making and selling things to providing a continuous flow of value and service.

Examples are popping up everywhere. If you go to Europe or Asia, you’ll notice elevators made by Schindler, a Swiss company that is experimenting with not selling its elevators. Because the firm believes its elevators require less energy and maintenance than competing ones, if Schindler retains ownership of the elevators and pays the running cost itself, it can more cheaply and profitably provide customers with what they want, which isn’t an elevator; it is the service of being moved up and down. Instead of selling you an elevator, the firm leases you a vertical transportation service.

Similarly, Dow would rather not sell you a solvent. It’s a much better deal for both of you to lease you a dissolving service, after which Dow takes back the solvent and repurifies it. The more times it can be re-used and the less is lost on each cycle, the more money you both make. Dow can charge less, gaining market share. You pay less, yet Dow has more profit. In fact, if Dow can keep your parts from getting greasy in the first place, then no solvent is needed, and they can get paid for that too.

This takes us to a world in which, when a company tries to sell people a product whose use will deliver the service they really wanted in the first place, a smart customer will probably ask: “Why are you trying to sell me this product? If it had the operational benefits you claim for it, you’d want to get those benefits yourself by keeping it and just leasing me the service it provides. So why do you want to sell me this thing? There must be something wrong with it!”

The Fourth Principle of Natural Capitalism

The fourth principle of natural capitalism is to reinvest in natural capital. This is the easiest of the four because nature does the production; all we need to do is get out of the way and let life flourish wherever it wants to—it’s very good at that. Typically, those who learn to treat nature as model and measure and mentor, not as a nuisance to be evaded, are those whose business success depends directly on the health of nature around them—such as farmers, foresters, fishers, and ranchers. Allan Savory, the Rhodesian wildlife biologist, showed that the arid, brittle Western rangeland we thought was overgrazed is typically undergrazed, but it’s grazed in the wrong way. If the grazing pattern is carefully changed to mimic the natural co-evolution of grass and grazing animals, the result is actually more grass, more animals, and everything working much better. Then there is Wes Jackson’s work at The Land Institute on the high plains in Salina, Kansas, where he is trying to change agriculture from a monoculture of annuals to a polyculture of perennials that will look like a prairie, because that’s what works best there.

The rice farmers in California used to burn straw after the dry-rice harvest. Then they tried flooding the rice fields into a seasonal wetland instead, inviting in millions of ducks and geese, which provided free fertilizer and cultivation plus lucrative hunting licenses. The farmers harvested the previously burned silica-rich rice straw as a valuable building material. They are also paid for recharging the ground water. Although they are still selling rice, it’s merely a coproduct of these other activities, so the system is far more profitable. Thirty percent of the rice growing has been switched over to this system, which imitates some of the extraordinarily productive Asian and African coproduction systems.

I want to add the example of Gunter Pauli’s Zero Emission Research Initiative (www.zeri.org), because it shows how to reinvest in and with natural capital in the South. He points out that a billion people worldwide have poor housing or no housing, even though many of them live in places where bamboo, a grass that can be stronger than steel, grows prolifically. The Colombian architect Simon Veléz has figured out how to turn a hundred pieces of bamboo five meters long into a strong and beautiful 65-square-meter house. The bamboo grows in 100 square meters of bamboo thicket every five years. Including a cement slab and other amenities, the cash cost of the house is $1,700. Smoking the bamboo as a preservative method also yields a by-product of charcoal for cooking, which saves trees, and because the smoke brings acid to the bamboo’s surface, bugs won’t eat it, so it can last for 500 years. Growing the bamboo for structure and smoking sequesters enough carbon to sell to a broker for about $1,700, which means you just grew your own house, made it self-financing, and protected the climate—a nice example of what you can accomplish with integrated design.

You can achieve the same design integration and entrepreneurship at the level of a whole society. My favorite chapter in our book Natural Capitalism is the one about Curitiba, a Brazilian city the size of Houston or Philadelphia. Its population has quadrupled to two and a half million people in the past twenty years, and the city’s budget per person is 15 times smaller than that of Detroit. This doesn’t make it sound like a nice place to live. Yet, although it’s not paradise, the city has the highest quality of life in South America and has solved its problems better than any North American city I know. That’s because the people have treated their formidable social and economic and ecological needs not as competing priorities to be traded off among government departments fighting over budget, but rather as integrated, interlinked design elements with synergies to be captured. A brilliant design process, led largely by architects and by women, integrated from the start hydrology and landform, nutrient and waste flows, education and health, transport and land use, participation and dignity—and thus created one of the world’s great cities.

The heavy lifting was done largely by the private sector. In what’s widely considered the best public transport system in the world, for example, ten competing private bus companies are rewarded not for carrying more people, but for serving more kilometers of route, so they spread out and serve the whole city fairly.

Let me now illustrate how the four principles of natural capitalism fit together. Think about carpets. Carpet is typically made of oil. After ten or fifteen years it looks worn, so you have to shut down your operation, move out all the furniture, roll up the only-partly-worn carpet, and get rid of it. Each year millions of tons of carpets are sent to landfills, where they sit for ten or twenty thousand years—not a great use of oil or money or land. Meanwhile you lay down fresh carpet, glue it in, move back in, resume operations, and perhaps get sick from the fumes in the carpet glue. Does this sound like an intelligent design? Ray Anderson didn’t think so. As a result he’s been making Interface—a $1.5-billion company that makes carpet and interior-finish materials—into a natural capitalist company.

During 1994–2000, he added $165 million to the bottom line, gaining over a quarter of his total operating profit by wringing out waste through better resource productivity. He also developed Solenium®, a new product with unusual attributes. It contains no chlorine and nothing toxic. All climate impact of making, delivering, and maintaining it is certified to have been offset before it’s delivered. You can wash Solenium with a garden hose. It doesn’t stain, it doesn’t mildew, and it has excellent aesthetic and acoustic qualities. It also is four times more durable than a regular carpet but uses one-third less material, so seven times less carpet but uses one-third less material, so seven times less flow of material is needed to cover a square yard for a year—and then it can be completely remanufactured into an identical product, with no loss of quality.

This raises the obvious question, “Who wants to own a carpet anyway?” Don’t people just want to walk on it and look at it? If so, shouldn’t the manufacturer be leasing a floor-covering service instead of selling a carpet? That way there is mutual benefit from this durability and dematerialization. The answer is yes, and the way to do it is to deliver the carpet in the European fashion, as carpet tiles, under a service lease. Every month, the little elves come in the night and take away the worn carpet tiles, but only those that are worn, which are about one-fifth of the total. The worn ones are instantly replaced with new ones, so your floor always looks fresh, but now you’re replacing only one-fifth as much carpet. Multiply that by the previous factor seven saving, and you have 97% less material use. When enough of the worn tiles have come back, you remanufacture them, saving 99.9% of the raw materials originally used in the once-through carpet-selling model.

Now imagine that you’re a normal carpet maker, selling rolls of carpet. How are you going to compete with this company that uses a thousand times less raw material than you do, and ten times less capital, to produce a better service at a lower cost and a higher margin, and provides a tax-deductible operating lease to the customer? Answer: you’re not. This is an example of the sort of breakthrough competitive advantage that natural capitalists can gain. In addition, even though Interface manufactures less carpet, it employs more people to deliver the service than were displaced at the factory—substituting abundant people for scarce nature.

The next step, now underway at Interface and illustrating principle four of natural capitalism, is to reinvest in natural and human capital. The way Interface will do this could be to make its product out of corncobs derived from organic corn grown by poor black farmers in the deep South in a way that restores soil fertility. The farmers will also get paid for taking carbon out of the air and putting it back in humus where it belongs. It’s a reinvestment back into rural culture, economy, and community.

These innovations are good business: in the first four years on this new tack, Interface more than doubled its revenues, more than tripled its operating profits, and nearly doubled its jobs, all at the same time. And the workers are much more excited, because they no longer feel any contradiction between what they’re doing on the job and what they want for their kids when they go home. When that happens, neither the managers nor the competitors can keep up.

I was there when the designer of this remarkable Solenium product, David Oakey, wandered in with a dreamy expression, having just figured out how to do this impossible thing. He said: “You know, God must be an environmentalist. As soon as we figured out what questions to ask, it all fell into place, and we got every attribute we wanted, none we didn’t want, and a lot of cool stuff we never thought to ask for.” This is a typical outcome when you finally get the statement of the design problem right. It’s worth waiting for.

To sum up the prevalent practice that Interface is transforming: We take out of the earth, out of natural capital, substances that are grown or mined, and from that extracted flow we make a mixture of products and wastes. After the products are used, they are either thrown away or brought back to create value as what Dr. Michael Braungart calls a “technical nutrient,” or as compost to feed nature.

The trouble is that in this country, about 83% of what we extract is mined, and we grow only 17%, much of it unsustainably. The resulting flow of material, twenty times our body weight per person per day, is then about 93% wasted, either in extraction or in manufacturing, with only 7% going into products, of which about six-sevenths is consumer ephemerals, promptly thrown away after one use or no use. The remaining 1% ends up in durable products, 98% of which then are thrown away and 2% recycled or remanufactured. This system is thus approximately 99.98% pure waste—a huge business opportunity. Moreover, a lot of the waste is toxic, so when it goes back into nature, there being no other place for it to go, it harms the regenerative capacity we need in order to keep having the biotic resources and ecosystem services we can’t live without. This is a bad design. Let’s change it.

In a natural capitalist industrial system, we would grow more and mine less of what we take from nature. We would also extract a great deal less because of comprehensively improved resource productivity. This includes closing loops, recapturing resources in and after manufacturing, making products more durable, and dematerializing products—all of the activities that are rewarded by the “solutions economy” business model, which pays everyone for doing more and better with less for longer. As we design out waste, we also rigorously design out toxicity, so the small amount of remaining waste going back into nature is no longer harming regenerative capacity—which, on the contrary, we deliberately improve by reinvesting the financial profits that come from getting rid of the waste in the first place. That is how the four principles all link together.

Natural capitalism is consistent with orthodox market economics; it just takes economics seriously rather than literally. It rests not on environmental economics, which treats the earth as a minor external factor of production, but on ecological economics, which holds that (as Herman Daly puts it) “the environment is the envelope that contains, sustains, and provisions the economy.” Subject to that shift, natural capitalism uses all the methods and tools economists have developed; it just uses them correctly.

I use markets a lot. Creatively applied, markets are nifty. But they are meant only for the short-term allocation of scarce resources, and were never meant to be fair or wise. Markets make a wonderful servant, a bad master, and a worse religion. If we think they can substitute for faith or ethics or politics, we’re really in trouble. But properly used, markets can be very effective if they’re restricted to what they do well and not applied to things they can’t do at all.

We’re fortunate to live in a world in which over half of the one hundred or two hundred biggest economic entities are no longer countries but companies. Companies often have the leadership, management, skills, speed, resources, initiative, innovation, integration, and motivation to solve tough problems in a hurry. The companies we write about in our book are early adopters of the four operational principles of natural capitalism, and as a result they are gaining stunning competitive advantage and better short-term profits as well as happier customers and workers. They are proving what Edgar Woolard suspected when he chaired DuPont: he said, “Companies that take such opportunities seriously will do very well”—while, he added, “Those that don’t won’t be a problem, because ultimately they won’t be around.”

Maybe the biggest problem with capitalism—this extraordinary system of wealth creation built on the productive use of and reinvestment in capital, all four forms of capital—is that we’re only just starting to try it. But the early returns are very encouraging. I hope you will not only visit us at www.naturalcapitalism.org or www.natcap.org, but also send us your stories of what worked and what didn’t work, so that we can speed up our learning together about this new way of doing business as if nature and people were properly valued.

Amory LovinsAmory Lovins, a MacArthur Fellow and consultant physicist, has advised the energy and other industries for nearly four decades as well as the U.S. Departments of Energy and Defense. Published in 29 books and hundreds of papers, his work in about 50 countries has been recognized by the “Alternative Nobel,” Blue Planet, Volvo, Onassis, Nissan, Shingo, and Mitchell Prizes, the Happold and Benjamin Franklin Medals, nine honorary doctorates, honorary membership of the American Institute of Architects, and the Heinz, Lindbergh, Time Hero for the Planet, and World Technology Awards. He advises industries and governments worldwide and has briefed 19 heads of state. He co-founded and serves as Chairman and Chief Scientist of Rocky Mountain Institute (www.rmi.org), an independent, market-oriented, entrepreneurial, nonprofit think-and-do tank. Much of its work is synthesized in Natural Capitalism (www.natcap.org). RMI spun off E SOURCE (www.esource.com) in 1992 and Fiberforge, Inc. (www.fiberforge.com), which he chaired until 2007, in 1999.

Amory Lovins may be reached through Rocky Mountain Institute.

Rocky Mountain Institute is an independent, nonpartisan, entrepreneurial, nonprofit think-and-do tank in Old Snowmass, Colorado, founded in 1982. Its diverse staff of ~80 foster the efficient and restorative use of resources to make the world secure, just, prosperous, and life-sustaining. Half of the Institute’s $10 million budget is earned through programmatic enterprise, chiefly consultancy for the private sector—an effort that advances the goals, refines the content, and spreads the concepts of natural capitalism. The remaining revenue comes from foundation grants and tax-deductible donations. RMI’s work is noted for technical depth, vision across boundaries, creative use of market forces, and engagement with commerce and community (far more than with government; RMI doesn’t lobby or litigate). In seeking new solutions to old problems, its people strive for faith, hope, and clarity; their hierarchy of needs is typically to save the world, have fun, and make money, in that order. RMI’s Annual Report, thrice-a-year Newsletter, and hundreds of popular and technical publications (many free) are available from:

Rocky Mountain Institute
1739 Snowmass Creek Road
Snowmass, Colorado 81654-9199
(970) 927-3851
www.rmi.org

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