This week’s Green Scene column in Crain’s Chicago Business: ‘Father of carbon trading’ predicts growth in clean-tech startups

Richard L. Sandor was ahead of the curve in identifying the next big trend in finance, so many entrepreneurs are taking note of his enthusiasm for growth in green technology startups, particularly in the Midwest.

Mr. Sandor, 70, is widely known for his trailblazing work in the 1970s, when he developed the first interest rate futures contract and also served as chief economist and vice president of the Chicago Board of Trade. More recently, he’s attempted to combine climate change concerns with financial forces.

Time Magazine called him the “father of carbon trading” after he designed and launched the Chicago Climate Exchange in 2003, the first financial exchange intended to encourage the reduction of greenhouse gases (GHG). Companies that joined the exchange traded GHG emission allowances and agreed to trim their emissions by 6 percent by 2010. The exchange stopped operating in 2010, but Mr. Sandor, as chairman and CEO of Environmental Financial Products LLC, is plowing ahead with developing new financial markets that focus on environmental issues.

In one current project, Mr. Sandor and his colleagues have been working on a water quantity exchange that’s aimed at encouraging participants to pay attention to water conservation.

Mr. Sandor, the author of “Good Derivatives: A Story of Financial and Environmental Innovation,” was also one of the founding board members of the Clean Energy Trust, a Chicago-based group that provides mentoring and other advisory services to entrepreneurs and start-ups in the renewable energy sector.

Crain’s met with Mr. Sandor recently to learn more about why he’s betting the Midwest — and Chicago in particular — will grow to become the next Silicon Valley of clean technology and other green businesses.

Crain’s: You’re engaged in so many financial activities and busy lecturing at the University of Chicago’s law school. Why did you decide to be part of the founding board of the Clean Energy Trust in 2010?

Richard Sandor

Mr. Sandor: I firmly believe the green sector will mimic the high-tech sector and the job creation that came with it. That road to sustainability will be led by entrepreneurs. All of the founding members of the Clean Energy Trust, including Nick Pritzker and Michael Polsky, thought: let’s provide a transparent book of technical assistance to financing, state and federal regulations and laws that would guide entrepreneurs and make it easy for them to start businesses here in the middle of the country.

We thought there was a latent demand for us to help young people get started. We want to be mentors. I’ve been a teacher for nearly 50 years so it fits with what I like to do. But the numbers are just amazing. We thought we’d attract 5-10 startups in the beginning at the Clean Energy Trust. Now we’ve got about 80 applicants. We were all very surprised at the number of entrepreneurs out there in this space. We’re in a very amazing culture here.

What’s your view of financing opportunities for entrepreneurs trying to launch or grow start-ups in the clean tech sector in the Midwest?

We’re not in the funding business at the Clean Energy Trust, but we found money (for entrepreneurs) in grants and state and federal sources early on. We haven’t even tapped into the great pools of capital yet. I perceive where there will be lots of equity investors between the coasts. If we build more companies like NuMat Technologies, I think the flow of capital will be enormous.

Right now there’s lots of startup and venture capital funding available. Eventually mid-level and full-level capital will come here. I predict that in the next 10 to 20 years Chicago will be a green tech capital for the U.S. We’re years ahead of where we thought we’d be at this time.

Are there any specific sectors in the local green economy that you view as having the broadest opportunity for entrepreneurs now and in the near future?

We’re seeing a lot of interest in batteries, with work being done at Argonne National Lab and elsewhere. Also, anything that fits the manufacturing sector and green tech innovations could be very successful here because the Midwest has a strong manufacturing base. If you look at Colorado, Minnesota and down to Louisiana — there’s a lot of mainstream manufacturing with a multi-trillion dollar economy and Chicago is in their geographical crossroad. The role is vast here for entrepreneurs to be a facilitator to sustainable manufacturing and sustainable transport.

We haven’t even begun to talk about agribusiness, sustainable farming and biofuels in the Midwest. There are people here who will create transformational businesses. If you believe there’s inventive activity that will come about in large scale, you can be sure it will be started by entrepreneurs.

What do you see as the most exciting trend right now regarding financing or other funding sources for startups in the green sector?

I see a lot of people who used to be traders who are now entrepreneurs in the green tech sector. The word is spreading about investment opportunities for people who could be the financing suppliers to many new green companies. I see an interesting arc of professional traders who were liquidity providers and will use their own equity to help start green businesses. They’ll also use their own human capital because they have a lot of knowledge of how to invest.

These traders tend to be very entrepreneurial and open-minded, especially as their markets change. The younger ones who are successful made the transition from the trading floor to electronic trading, and they will also make a transition to other new markets. The vitality in the Chicago trading community is going to translate into a sustainability movement.

If you were launching a startup today in the local green economy, what would that business look like?

I’d be looking in the transport sector. I’d probably look at something that bridges the post-fossil fuel era to a new era that will use natural gas. People exploring that in the transport sector will find there’s enormous opportunity. Also, anything that marries biology and transportation will be a winner, even things like algae-based fuel.

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