In the midst of all the administrivia, I want to get back to talking about what's actually important - green investing! So I think I'll start by explaining a piece of my model. This is a bit tricky, since information is really the only capital, and explaining my model may make me obsolete... that said, I think it's more important to be open source than to make a killing.
Biocapacity Says What?
I read about the biocapacity concept on the Global Footprint Network at first, but when I expanded my research, I realized the study has been around a long long time. Essentially, it's a combination of economics, science, and even psychology, as it measures how much we consume versus how much pollution we output.
For my fund, I'm using mostly macro level research. It's important to understand that I use biocapacity to NARROW MY ASSET POOL, not as a indicator that a country or investment is worth investing in. To that end, I'm interested in comparing one country's consumption and production to another's. In order to do the comparison, I obviously need two sets of numbers: "consumption" and "production".
Consumption: Where the U.S. Gets a Gold Star
The consumption, or footprint, is the easiest to measure, as it's a more tangible number for the most part. Most research doesn't include the negative externalities in the metrics, since it's fairly difficult to put a number behind an externality (economists have a million different ways of trying, but for the most part it's just a sketch of the reality). Instead, I'm left with a fair amount of easy numbers: carbon output, nuclear footprint, and some slightly extrapolated numbers in overfishing, deforestation, and crop footprint. The U.S. and China are the two biggest consumers on the planet. China's excuse is the 1 billion people. The U.S.? Well, we're just fat.
Production: Where Working in a Cubicle Doesn't Count
The production, or biocapacity, is a bit more difficult, but it's a measure of resource supply. What makes it tricky is that biocapacity is more of a moving target. Resources spontaneously dry up, ecological management can change capacity, and as global warming occurs, arable land is shifting year by year to unusable land.
The difference between these two numbers represent a country's reserve (when positive) or deficit (when negative). To compare apples to apples, these are done in global hectares per person (outside the U.S., a hectare means something). As you can see, there are some obvious logical problems than can occur with this. Primarily "emerging" markets are favored, as they either are primarily agricultural with a minimum of industrial waste, or have massive amounts of arable land to spare. This is a-okay with me, it's basically the model's way of saying "well, they haven't screwed it all up yet."
Smugly Model-licious: Currency, and Why I Need More of It
I've developed two distinct theories on using biocapacity metrics for investment purposes to fill the two basic ways to "invest in a country": currency and "the index." Currency is the purest way, in my opinion, since it's a direct reflection of a company or region's strength. It's also extremely liquid, and replete with speculators and the smartest of the smart, and probably the most efficient market on earth. I've linked currency directly with biological reserve, the theory being that a country that produces more than it consumes is better positioned for long term stability. This bears out on the micro level - take a company that can consistently profit versus one that is unable to keep up with its growth or overspends. Logical, right? As a long term play, I agree. That's why the model is designed to identify these countries and put them in the asset mix.
Smugly Model-licious: Not Your Momma's Index
The second part to my (infinitely wise?) model deals with indexes. Indexes are much more a function of a market's psychology than anything else - if a market perceives itself or the world perceives a market as profitable, the index tends to do strongly. Sometimes (often), this has nothing to do with reality. The technology boom of the 90s and subsequent crash of 2000 is a perfect example. The market thought, "this is great, free money!" The reality was, "what's an internet?" When the bottom falls out, it's a long and dangerous fall. As markets are also primarily information driven, it is impossible to know what a market will do without insider information. This includes our own market, S&P 500 and the Nasdaq Composite. We're finding this out, to our detriment, with the housing bust - Wall Street made billions, you lose your house. That's the way it works!
What an index IS good for is as a cross section for a country's public industries. And industry tends to be the primary polluter (as proven by the biocapacity studies) and consumer of natural resources. So, to narrow down the index pool to more "sustainable" industries, I used the biological footprint component to indicate which index should be included, and which was an over polluter.
In the end, my country list looks like the below. Obviously, there are a good many listed that either can't be invested in (no index, no active currency trading), or don't make the cut on the technical analysis side of the model (used to pick the investments and timing), but it at least gives you a good sense of how biocapacity works:
|Argentina||Congo Dem Rep||Lesotho||Paraguay|
|Central African Rep||Israel||New Zealand||Uruguay|
So this is a taste of some of the research and metrics that go into the fund. This, to me, is the fun stuff. I could debate it all day - what country should qualify, what "sustainable" really means. But this part of the fund is one of the primary factors setting it apart from other green based funds - it expands the idea of green beyond just energy and technology. It also gets you more diversified, helps spread out risk, and just makes a lot of logical sense. If green is a mindset, shouldn't investing green be global? Hell yeah.