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What is a mission-driven business?
The recent USA Today article on carbon offsets reminded me how many people are still unfamiliar with the concept of a mission-driven business. We’re proud of our business model at TerraPass, and it occurs to me that our audience has grown so much recently that it’s a good time to reintroduce ourselves and let people know what we stand for. First some background and definitions. A mission-driven business is an organization for which the pursuit of growth and revenue naturally produces mission-related benefits. In the case of TerraPass, the relationship is easy to see. The more people we are able to reach and engage, the more awareness of climate change we can build. The more TerraPasses we sell, the more carbon we are able to reduce. The more partnerships we develop, the better we are able to introduce our positive environmental message to large corporations and their customers. Mission-driven businesses are a subset of social enterprises, an idea that has been around for about 20 years in academic and non-profit circles, and is now capturing the interest of a more mainstream audience. Muhammad Yunus’ Grameen Bank earned a Nobel Peace Prize last year. The bank, which has distributed almost 7 million micro-loans to poor women in the developing world, has been profitable for 27 of the past 30 years. All social enterprises generate funding from the delivery of a product or service in exchange for money. In contrast to traditional non-profit structures dependent on yearly grants, social enterprises attempt to sustain themselves by delivering goods and services and supporting themselves with the revenue. For example, after a 100 years of futile attempts to bring Western water engineering tools to Africa, social entrepreneurs created a product that successfully brought new thinking to water: a simple and affordable roundabout-powered pump that irrigates crops and doubles a farmer’s income. The farmer pays for these pumps, not a grant maker. For many social entrepreneurs selling in the developing world, success requires using unconventional thinking to break through price barriers. The Grameen Bank issues $2 loans that use social rather than legal enforcement to ensure repayment. Others have sold simple spreadsheet-based optimization software for grain mills. For U.S.-based social entrepreneurs, the challenge may be convincing customers to see the value in fair trade goods, or to put up their own money for micro-loans, or to purchase carbon offsets that they don’t have to. Carbon offsets and Consumer Packaged Good Mission-driven businesses must solve a real customer need. In some cases, the benefits are fairly easy to communicate. People who buy fair-trade coffee are already in the market for a cup of coffee. The slight premium for the fair-trade version is small compared to the total price being paid, and some consumers are happy to take the opportunity to promote social equity. For TerraPass, the challenge is the intangibility of carbon offsets. We’ve attempted to solve this by turning our offsets into a product that you can see, feel, and measure. Everything we sell comes with something tangible that helps you say, “I’m doing my bit.” Every TerraPass is marked with a verified quanity of CO2 reductions. TerraPass is not a donation. Rather, it is a measured quantity of CO2 reductions. The physical product helps communicate that to the purchaser. By turning these positive social benefits into tangible products, both TerraPass and fair trade vendors (such as the folks at World of Good) can sell a product that pleases the customer and pushes forward a social mission. Why overhead ratios are overrated One of the traditional metrics used to evaluate non-profit organizations is the overhead ratio. There are different ways of calculating the overhead ratio, but conceptually it is meant to indicate the percent of a organization’s funds that are applied to the organization’s goals. It is in some sense a measure of the efficiency with which a non-profit organization fulfills its mission. Unfortunately, the overhead ratio is a pretty poor way of measuring efficiency. The reason donors focus on overhead ratios is that such ratios are often the only available proxy for what donors would really like to measure: the amount of good being performed by an organization. But measuring good requires an objective standard of performance, which is often hard to come by in the non-profit world, through no fault of the organizations themselves. How would you measure the good performed by such outstanding organizations as Doctors Without Borders? So people look to measures like overhead ratios, which might tell you how good an organization is at spending money, but not what it actually achieves with its funds. Even as a measure of efficiency, the overhead ratio isn’t all that revealing, because often the only thing excluded from the core mission allocation is the salary of the fundraising team. Such a number simply doesn’t mean all that much. (GuideStar.org provides a very helpful primer on the uses and limitations of ratios.) Computing an overhead ratio becomes even more difficult for a mission-driven business. Fortunately, such ratios are usually not necessary for social enterprises, because it is fairly straightforward for consumers to compare the value of different services. Consider this thought experiment. Two carbon offset providers offer equivalent services, one at $20 per ton with 20% overhead and the other at $15 per ton with 40% overhead. Which one should you choose? Other things being equal, what do you really care about, the value of the service or the provider’s overhead? Thinking beyond tax status Mission-driven businesses are also profit-driven businesses. And being profit-driven brings a whole set of advantages that we took into consideration when we started TerraPass. In fact, we consulted with many nonprofit leaders who advised that we set up in a for-profit structure. Profit aligns us with our customers rather than with grant makers. Our focus is on delivering a great product, which means building trust, credibility, and quality. Profit allows us to hire and motivate great employees. Profit pushes us to keep our costs down. Profit allows us to attract investors and lenders, so that we can grow our business and — most importantly — fulfill our mission. But there’s a subtle point here that is easy to miss. A social enterprise could easily be “non-profit” or “for-profit” in the technical sense. These categories are tax designations that matter to the IRS, but are otherwise not necessarily indicative of an organization’s structure or mission. In the carbon offset industry, there are for-profit players and non-profit players, and all behave in pretty much the same way. Which makes sense — organizational behavior is determined by industry forces, not by tax status. You’ll see most members of our industry engaging in similar marketing practices, building similar web-based calculators, and pursuing similar corporate partnerships. Which isn’t to say that we’re all identical. I still feel that TerraPass offers the best value in the industry, and of course, I should feel that way. If I didn’t, I would be working hard to increase the value we offer. Ultimately, both you, the consumer, and the environment benefit from this dynamic. And that’s what mission-driven business is all about. Tags: Entrepreneurship, Mission-driven business, social enterprise, TerraPass business model
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Comments2.
Comment by Evan Marwell
@ Mar 7, 2007 5 AM
 This is all well and good but I have to admit that I was taken aback when i read the article the other day and found out you were a for-profit organization. The question i would like an answer to is how much of my terapass purchase goes to carbon reducing projects? I dont mind if you make a profit but i want to know what percent of the $ i give you goes to fund carbon reduction projects. You really should disclose this on your web site right along side the pricing for various terapasses. In addition, I think you should put the % that is supposed to go to fund carbon reduction projects into a separate account that cannot be touched for overhead or profit purposes. FInally, do you have a stated profit return target that you think is reasonable given your mission? 
Evan: It seems simple enough to do, but what would it tell you? Would we include the policy outreach expenses? Our marketing budget? What happens when we make a loss, does is become negative? What happens if we sell ads on TerraBlog? Our point is that if you can quantify what you are delivering to the customer, price of that good is much more informative measure of where your money goes. How did you answer the motivating question? Do you want low priced carbon at high overhead or high priced carbon at low overhead?
Evan, I would also point out that no organization discloses the information that you are asking for. None, not for-profit or non-profit. And your idea of putting the money into a separate untouchable account would be an accounting gimmick with no clear point (again, no organization, for-profit or non-profit, does this). We are audited by a third-party to verify our carbon purchases, which is far better guarantee that we are fulfilling our mission. Finally, the notion that part of the money gets used “for profit purposes” is part of the same misconception that I think drives a lot of the unfounded suspicion of for-profit enterprises. Namely, there’s this notion that for-profit enterprises make enough money to run their businesses, and then add a little something extra (which non-profits don’t) in order to achieve profit. Such a notion is false. All of us — for-profit and non-profit — try to make enough to cover our overhead and ensure our continued existence. If that weren’t the case, you would see non-profit enterprises putting for-profits out of business in all sorts of industries. 5.
Comment by Jon
@ Mar 7, 2007 8 AM
Evan’s question, “I would like an answer to how much of my terapass purchase goes to carbon reducing projects,” is a good one, and deserves an answer. I run a non-profit, and I know as well as anyone that we can talk this issue of transparency to death. There are plenty of non profits that disclose this information, and plenty that, when asked, would openly discuss the issue. The fact is, the more you guys at terrapass squirm, and avoid answering the question, the more suspicious the whole enterprise sounds. Do the right thing, be the first organization (for, or non-profit) of your kind to be open and honest about the percentage of our terrapass that actually goes to support carbon reducing projects. If you’ve got nothing to hide, you’ve got nothing to loose.
Jon, No one here is squirming — on the contrary, we’re quite proud of our model and the impact we’ve had, and we believe firmly that value is the appropriate metric by which we should be judged. We also believe in transparency, which is why we seem to be one of the few members of this industry to even engage people on this question. How many others can you point to who are willing to discuss these issues openly? Most are content to point to meaningless overhead figures and duck the issue entirely. I do agree with you on one thing, though — I’d be perfectly content to see the entire industry, including us, reveal its cost structure. This would be fine with us at TerraPass, because we know we’d compare favorably. Unfortunately, doing this unilaterally on our own would be a pretty dumb move. The result would be entirely predictable. People would compare our carbon base cost with other organizations’ overhead ratios — a figure that includes everything from carbon to phone bills to salaries — and draw entirely inappropriate conclusions. We know this is true, because engaged and well-meaning people make this mistake all the time. Journalists make this mistake. The good folks who put together the Tufts report made this mistake. It’s just asking too much to expect people to parse financial statements. Adam: Global Giving (www.globalgiving.com), for one, openly states that 90 percent (less transaction fees) of each donation goes directly to the project you contribute to. So what you’re saying is not true.
Jasmin — Given that Global Giving mainly appears to be running a web site that passes through funds to other charities, I would certainly hope that at least 85% of donations actually get passed through. Global Giving isn’t part of our industry, and doesn’t operate a retail business. They don’t run a customer service operation. The don’t fulfill purchases. They don’t pay for outside auditors. None of this is a criticism of their operation, by the way. They simply are in a different industry than we are. This is a great example of why overhead ratios are so misleading. The overhead ratio of an organization like Global Giving has absolutely nothing to do with the overhead ratio of organizations such as, say, the Red Cross or Doctors Without Borders. In fact, you would have to multiply Global Giving’s overhead ratio by the overhead ratio of the downstream recipient charity to determine the true overhead ratio of your donation through the site. If Global Giving passes through 85% and the downstream recipient also has a ratio of 85%, the effective ratio is now 72%. I again encourage people to check out the article on these issues on GuideStar’s web site. Adam: My feelings about your lack of transparency aside (though you make interesting points), what I’m saying is that it’s pompous to deal in absolutes. Someone will always prove the exception. 10.
Comment by jon
@ Mar 7, 2007 10 AM
Adam, GuidStar is a great resource, and we in the non-profit world turn to it often. That said, the article you refer us to reads, “at GuideStar, we believe that the ultimate test of an organization’s efficiency is how well it performs its mission.” Indeed, ratios are misleading, and are not always a good indicator of a group’s effectiveness. Yet, how are we, Terrapass customers, supposed to evaluate how well you are performing your mission if we don’t know what you’re doing with our money? Let’s put ratios aside, and explain what Terrapass would stand to loose by disclosing this information like so many other like-minded charities and for-profits? And this idea of yours “I’d be perfectly content to see the entire industry, including us, reveal its cost structure,” is, at best, a hollow statement. This idea of “we’ll do it once everyone else does it,” seems to run contrary to your mission, and general trail blazing ideals. Terrapass promises to do, what I think we can all agree is unique, and rather abstract work. How then is the layperson to be confident in his/her investment? How “inappropriate” could the conclusions drawn from this disclosure really be (you write, “we’d compare favorably”)? Since you’re clearly in favor of open discourse on the matter (something I appreciate) why not meet the issue head on? It’s disappointing, to be completely honest to you, one green-minded person to another. The more Terrapass talks around the issue, the more I loose the faith. Publish the numbers, and if they’re in line with comparables (and there are comparables, even in your niche industry), you’ll have made a honorable first step instead of sitting on your hands, waiting for someone else to do it. Adam, I totally agree with Jon and with much of what Evan had to say. Moreover, it seems that not only are you “squirming” but you’re becoming quite defensive about the transparency issue. And, I think you do a disservice to your “members” by assuming we/they would “draw entirely inappropriate conclusions” were you to be the first to reveal your cost structure. And, for your audience, I don’t think, “it’s just asking too much to expect people to parse financial statements.” That’s what we do. Why not be the first? Why not challenge the others to follow suit? You can always include the usual caveats, disclaimers and the same explanations you have included here. I, too work for a non-profit and would like to convince my board of directors to engage in a carbon neutral program for our next trade show. However, in light of the USA Today article, without more transparency TerraPass would not be their first choice.
Jasmin — I see what you’re saying. I left off an important qualifier in my previous comment: no organization in our industry reveals this info. That is an important distinction to make. It’s also the appropriate comparison set.
You ask: “Yet, how are we, Terrapass customers, supposed to evaluate how well you are performing your mission if we don’t know what you’re doing with our money?” You know exactly what we’re doing with our money. We’re using it remediate CO2. You know exactly how much CO2 we’re remediating, because we publish the precise amounts on our web site: http://www.terrapass.com/projects/portfolio.html Moreover, you know that you can trust these figures, because we’re audited by an outside party. Further, you have an extremely transparent point of comparison between different offset providers: cost per ton. TerraPass products generally cost $9 per metric ton (with slight fluctuations based on the specific product). Now, we certainly don’t feel that price alone is an appropriate metric for rating providers — quality is far more important — but other things being equal, price is a totally transparent benchmark of efficiency. This is the same position that, say, customers of Grameen Bank find themselves in. Microcredit is now a competitive industry. If you’re a poor woman in Indonesia evaluating loan options, you can compare them based on interest rate (which is the cost of the loan to the borrower). You certainly don’t care about the overhead ratio of the lending institution. You care about price (interest rate), and you care about quality (which might be reflected in intangibles such as repayment periods, customer service, etc.). Let me turn this question around. Rob, given that no one in the industry makes this information available, what criteria is your board of directors going to use to evaluate vendors? And how do you justify your claim that TerraPass is less transparent than other members of the industry? 14.
Comment by Yaguar Cielo
@ Mar 7, 2007 11 AM
Adam writes: “no organization in our industry reveals this info”. This is not entirely true. One USA-based, non-profit, offset site purchases 100% of it’s carbon credits from the Chicago Climate Exchange. I’ve asked them and I know that they purchase directly from the exchange and not through long-term contracts. So the price they pay is equal to the price on the CCX on the day of the purchase. You can see that price immediately, by visiting www.ChicagoClimateExchange.com. While there are additional transaction costs, they are very, very small relative to the price per ton of offset quoted on the CCX. For a simple approximation, add $0.25 to the CCX price per ton to account for transaction costs and you get this organizations margin right away. Simple, transparent, elegant, and non-profit. Also this organization is not supported by annual grants as you suppose but is revenue-supported just like TerraPass, only no revenue goes into the coffers of distant shareholders. It all goes back to the mission.
Hi Yaguar — This is interesting, but two points here: 1) There is no single price for carbon, even on the CCX. The vintage of the carbon also matters, although I admit that right now all vintages on the CCX are trading in a fairly narrow band. This is doubly important because vintage is related to quality. Unless the vintage is for the present time period, the offsets have questionable environmental value. 2) The last thing you should do is buy from an organization that simply purchases credits (or allowances) on the CCX. Unless the vendor is identifying specific projects from which it purchases — and sharing that information with its customers — there is absolutely no guarantee of offset quality. I don’t know to whom you are referring, so I don’t want to make any assumptions. But this is extremely important concept to convey. Purchasing CCX credits that aren’t associated with any specific projects is a practice known as “buying blind,” and you want to avoid this. I recommend that you follow up with your vendor and get some assurance that their offsets are maturity matched to the time of your purchase and that they identify projects prior to purchasing offsets. 16.
Comment by Yaguar Cielo
@ Mar 7, 2007 12 PM
There is no single price on the CCX, yes. However, for every purchaser that works through this other organization, they are told directly what day the purchase was made and all purchases are current vintages; 2007. That is enough to determine the exact price they paid per ton. Period. I’ve spent enormous time discussing CCX-based offsets with my provider and I’ve researched these matters at length on my own. Pretending that things are more complicated than they are does not help the average offset purchaser as much as it helps the average offset company. “Buying blind” as you call it is not a quality risk when done through the CCX. I’ve obtained the CCX-rule book. I know what the quality of their credits are and frankly it appears of a much higher quality on an aggregate basis than anything popularly sold from outside the CCX; i.e. Renewable Energy Credits. CCX credits represent real reductions against a legally binding baseline of emissions under a business as usual scenario. The risk you take as a company in purchasing undifferentiated CCX credits is more of a marketing risk than a quality risk because you can no longer show photos of the projects. However, you can rest assured that your donation actually resulted in measurable and current greenhouse gas reductions. Less than 5% of CCX credits are generated from offset projects. They rest come from genuine and legally binding carbon dioxide reductions. You should know, you purchase these undifferentiated credits too, don’t you? Under your “energy efficiency” projects? As always, thanks for the wonky-talk. Now let’s start walking the talk. Yours truly, 17.
Comment by Jon
@ Mar 7, 2007 12 PM
Adam, Yes, I know what “you say” you’re doing with my money, but how can I be sure? Unfortunately, in this day in age, faith in any institution is simply not an option. We need proof, Adam, is that so much to ask? As for your mention of your audit? Please. Enron was audited. I can see that this is where our conversation must end. I certainly don’t want to hog the mic, and I don’t see this dialogue going anywhere. You have turned it into a battle of semantics, and intelligent people like ourselves can keep this going indefinitely. Yet the fact remains that Terrapass refuses to provide it’s customers with, essentially, any real measure of accountability. And accountability is the key word here. I gave you my money, and I’d give you more, if you’d just show me what you did with it. Don’t ask me to trust you, or your audit. Don’t speak to me in conceptual terms, and don’t compare what you do with micro-lending—just prove it to me.
Yaguar, Your tone seems to indicate a certain lack of interest in these issues — carbon markets are all wonky talk, all the time — but I’m more than happy to oblige: 1) No, TerraPass does not purchase any undifferentiated credits on the CCX or any other exchange. We always identify individual projects — in the case of our industrial efficiency offsets, they come from landfill methane flaring — and we then execute our transactions on the CCX. None of our purchases are blind purchases, and in fact our third-party auditor would not recognize the validity of blind purchases, for good reason. TerraPass is actually the first company to make use of a provision of the CCX called “bilateral contracts,” which means that we enter into contracts with the project developers themselves, and then execute the purchases on the CCX. Sorry if this seems like gibberish, but this stuff actually is quite a bit more complicated than most people realize. 2) You take far more than a marketing risk if you purchase blind on the CCX. The problem is that because membership in the CCX is voluntary, there are no additionality guarantees with these offsets. More likely than not, in fact, the offsets aren’t additional. If a large company voluntarily joins the CCX, there is a very high likelihood that they would have made the reductions anyway. When you identify specific offset projects to purchase offsets from — as TerraPass does — you can apply additionality tests to those projects to ensure that your purchase is actually responsible for emissions reductions. It’s hard enough to identify projects with high additionality when you actually know what you’re getting. If you don’t know what you’re getting, well, you don’t know what you’re getting. I really can’t stress this enough. There are certainly reputable vendors in this industry other than TerraPass. But anyone who buys blind is not one of them. I encourage you to solicit opinions from other sources on this matter. 19.
Comment by Yaguar Cielo
@ Mar 7, 2007 12 PM
I can talk the wonk and I have a certain interest in doing so as an international environmental policy consultant. None the less, I don’t look at retail offsets or individual climate action as a wonky conversation at all. It’s a practical conversation about an issue of great magnitude. I highly suspect that making it seem complicated is one way that companies like yours protect yourself from the day when federal regulations are implemented and everything outside of these regulations becomes “voluntary”, when it could be called instead, “questionable”. As for CCX additionally requirements, you yourself have said there is no agreed definition of the term and therefore it is a non-starter to make accusations without definitions. Like I said, I’ve read the CCX-rule book and I’ve read the Trexler report and I have the necessary education to understand both. I know what Green-e does, and what the Center for Resource Solutions does, and I don’t think any of it holds up like the multi-million dollar platform of the CCX in terms of guaranteeing that credits represent real and verified reductions. As for checking with other parties, I know my stuff and I’ve consulted with other highly regarded scientists, policy-makers, and environmental consultants, most of whom agree that the CCX is the best available agency for retail offsets in the USA. None of them work for any offset organizations. Intelligent minds may disagree but it’s not that you are better read or well-educated. At some point you and TerraPass must accept this and stop attempting to weasel out of genuine criticism. -Yaguar
Jon, our verification report is how you can be sure: http://www.terrapass.com/projects/verification.html We do take accountability extremely seriously, and we agree that you should not take us at our word. That’s why we open ourselves up to a third party for our auditor; it’s why we are the only organization in the industry with a published verification report; and it’s why we have chosen as our auditor the Center for Resource Solutions, the leading U.S. authority on renewable energy certification. I don’t really follow how you can refer to this as semantics. You keep asking for proof, and we’re offering the best proof you could hope for — someone actually comes in and reviews all of our purchases and holds us to extremely stringent criteria for quality. Moreover, it’s someone with an enormous amount of credibility at stake and a ton of expertise in these matters. To make comparisons to Enron is just specious. It ain’t that hard to audit our operations. We’re a five-person company that does one thing: buy carbon. But if you don’t trust us or our audit, then I’m really not sure what I could possibly do to satisfy your demands for accountability. Certainly releasing our overhead ratio wouldn’t help.
Yaguar, I remain baffled by your tone, but I will nevertheless continue plugging gamely away. I highly suspect that making it seem complicated is one way that companies like yours protect yourself from the day when federal regulations are implemented and everything outside of these regulations becomes “voluntary”, when it could be called instead, “questionable”. I have to admit, I have no idea what this even means. You seem to be confusing the notion of voluntary membership in the CCX with the voluntary purchase of carbon offsets, which are two entirely unrelated activities. More generally, I must take exception to your statement that we make these topics “seem complicated.” We invest an enormous amount of energy in talking to our audience about serious carbon-related issues in a way that lay people can understand. We tackle these hard issues regularly in an open forum and in a way that no other offset provider does. The Trexler report singled us out for praise on our execution of our educational mission. Finally, we welcome federal regulation as a necessity in the fight against global warming. As for CCX additionally requirements, you yourself have said there is no agreed definition of the term and therefore it is a non-starter to make accusations without definitions. Er…no. There is very clear agreed-upon definition of additionality. Additionality refers to the notion that an offset should result in an emissions reduction beyond the business-as-usual case. This is completely uncontroversial. Further, it is quite easy to identify projects that are non-additional. This is also uncontroversial. There are tons and tons of projects out there that would have happened regardless of the existence of carbon offsets. None of these are additional. The challenge is identifying projects that are additional. These are the high-value projects that everyone wants to purchase carbon offsets from. Finding these guys is hard, and even though everyone agrees on the definition of additionality, not everyone agrees on which projects are truly additional. But this is certainly not the same thing as saying that all projects are created equal and no one can judge good from bad. Blind purchases on the CCX are not going to pass any rigorous additionality test. As for checking with other parties, I know my stuff and I’ve consulted with other highly regarded scientists, policy-makers, and environmental consultants, most of whom agree that the CCX is the best available agency for retail offsets in the USA. Well, we agree. That’s why we use the CCX as our trading platform. But that’s not the issue in question. The issue in question is whether buying blindly on the CCX is a way to buy highly additional offsets. The answer to that question is no. But I encourage you to put the question to others. Again, the question is not, “Is the CCX credible?” but “Is buying blind on the CCX a good way to bring about emissions reductions?” Intelligent minds may disagree but it’s not that you are better read or well-educated. At some point you and TerraPass must accept this and stop attempting to weasel out of genuine criticism. Yep, that’s us, always weaseling out of criticism by publishing it on our own web site and attempting to engage in substantive debate over these issues. Seriously, though, please watch your tone. There are real people answering these comments, and nothing we’ve said has warranted this kind of comment. We take these matters very seriously, so of course we’re going to have a thoughtful and vigorous response. 22.
Comment by Aaron A.
@ Mar 7, 2007 2 PM
Anyway… The thesis of many small-government advocates is that we shouldn’t pay taxes for programs that the market could support. And here we are, with companies like TerraPass that (will someday) earn a profit providing a public good. Offsetters like TerraPass clean up the planet without relying on anybody’s tax dollars. Prices are linked to CO2 production, rather than to income or geography or other irrelevant measures. Offset providers operate in a competitive atmosphere, which keeps the companies efficient, keeps consumer prices low, and provides a choice of projects to support. To me, that seems far better than relying on the government to decide who gets funded. Interesting thread. I think Yaguar’s most relevant point was that this “other” organization discloses the cost they pay for carbon credits, if not intentionally, at least by default.This seems to mitigate your claim that no one in the industry does this. Could you let us know, Adam, what you think about this once and for all? I, for one, would be much more pleased if I knew what portion of my money went to offsets, what portion went to TerraPass, and what portion went to your investors/lenders. If this information can’t be disclosed, then all else about project disclosure and audits doesn’t really do for me what a better understanding of your margin would. It’s not the overhead that worries me as much as the shareholders who profit off of my goodwill. How much am I paying them each time I offset my emissions? Thanks in advance. 24.
Comment by Aaron A.
@ Mar 7, 2007 4 PM
Mark said: The fact that [TerraPass] don’t reveal [their] margin worries people because it’s not a selling point Or because any company in a competitive industry walks a fine line between disclosing enough information to keep the public and regulators informed, and disclosing so much information that it helps competitors to steal their market share. I’m a financial statement auditor, and I frequently butt heads with my clients about things they don’t want disclosed. Geoff said: It’s not the overhead that worries me as much as the shareholders who profit off of my goodwill. How much am I paying them each time I offset my emissions? I don’t see why it matters. When I buy a bag of coffee beans, I don’t care how much goes into the shareholders’ pockets; what matters to me is that I get a good cup of coffee at a fair price. I do care about what the bean farmer gets paid, so I adjust my “fair price” accordingly. But the shareholders, I don’t give them a second thought. As for the owners, they’re putting their money into a start-up company in a largely-untested industry. If the company goes down the tubes, they could lose their entire investment. If the company does well, I think the owners deserve to make some money, as a reward for their faith in the company. 25.
Comment by Geoff
@ Mar 7, 2007 8 PM
Thanks for your responses, Adam, to all the questions and criticisms in this thread. You are, at the very least, extraordinarily articulate and committed to your business. It’s admirable. In regards to my question about the shareholders cut, since you say, “I don’t see why it matters”, I guess I could explain to you why it matters to me and others who have been TerraPass customers in the past. (1) It’s my money, (2) I have a choice. There are non-profits out there who are doing just fine in getting the word out and building partnerships who don’t funnel my offset dollars into distant shareholders pockets. They plow it all back into the mission, overhead included, of course. Also, I still haven’t heard what you think about Yasgar’s point regarding this other, nameless, company and their transparency regarding cost-structure. Since it’s clear to me who is talking, it looks like someone in the industry is making this info available. Seems like many of your customers would prefer you do the same. I don’t find this request at all surprising or unwarranted. This ain’t a bag of coffee beans nor is it micro-lending. This is all goodwill channeled through the most attractive and hopefully effective channels. The decals and magnets are nothing without the goodwill. Coffee is coffee. It’s good for what it is.
Geoff: Let me try and add my perspective, much less eloquently than Adam. 1) Of course you have a choice. We recognize that and we do want your business. We also think that we’ll have a much better chance of acheiving our mission as a private company, rather than a non-profit. Whether this will prove to be true is an open question. We have 42,000 members, enough we calculated today for standing room only in AT&T park. We’re aiming for millions. Time will tell whether we are more effective as a for-profit or not. It does not remove our responsibility to deliver high quality services to you and other TerraPass members and build a happy customer base. If we don’t do that, no aspect of our mission will be acheived. 2) We don’t think that overhead ratio provides any useful information. We would argue this even if we were organized as a non-profit. If you call the non-profit REC market standard maker CRS, they will tell you that the reductions sold by non-profits and for-profits are the same as long as they carry the same Green-e certification. If you don’t agree with that, then I would be curious what your answer to the motivating question in the post? Would you prefer vendor A at $20 per ton with 20% overhead or vendor B at $15 per ton with 40% overhead. Which one should you choose? We simply don’t view this as a “send us $10 and we’ll efficiently distribute 85% of it to windmils question”. There are now 46 companies selling carbon, all on a per-ton basis and we think the right metric for comparison is what your $10 actually accomplished. Did you reduce a quarter of a ton? A ton? Two tons? 3) Let me be more clear about our financial model with regard to shareholders. We don’t pay any dividends or marketing fees. Our investors allow us to operate at a loss, investing more in our mission with the hope of building a company of lasting value. 4) The very few numbers you publish as an organization guide your activities as a team. Our public numbers are the number of people that carry some version of a TerraPass (42K) and the amount of carbon reduced (250 million lbs CO2) In our opinon, managing to a low overhead ratio is a red-herring for acheiving our mission. I’m enjoying the discussion so please keep the comments coming. TerraPass has always marched to a slightly different step and we’re just excited to discuss this with everyone.
I think part of the confusion on this thread — or at least part of my confusion — is that everyone seems to be asking for something different. Mark and Geoff, you now both seem to be interested in overhead ratio or shareholder cut or something similar. That’s an easy question to answer: as Tom notes, we pay out nothing to investors. And as a for-profit, we don’t fundraise or write grant applications. So by some sort of the traditional metric that you seem to be interested in, all of your TerraPass purchase goes to the core mission. There is no cut for non-core activities. If this answer seems unsatisfying, I agree. Overhead ratios aren’t very enlightening. But the numbers are accurate. We pay out nothing to investors. And I don’t expect we’ll pay out anything to investors for many years (if ever, sadly for our benefactors). Start-ups don’t issue dividends. Of course, that’s not the question that kicked off this thread. The original question was the percentage of money that goes to purchasing offsets. This is not the same thing as overhead ratio, and it is also not a number that anyone else, for-profit or non-profit, discloses. I can understand why people want to know this, but you can also probably understand that it’s not really reasonable to hold us alone to this standard. (Yaguar claims to have backed out the numbers for one organization, and everyone is free to try to back out our numbers as well.) Marc, as for your contention that this isn’t a competitive market because we have a deal with Expedia…that’s a fairly unique view of how markets work. There are over forty providers of offsets. You don’t have to buy a plane ticket on Expedia. And if you do buy a plane ticket on Expedia, you don’t have to buy a TerraPass. And if low-cost providers like TerraPass are getting 80% of every sale (which, of course, we’re not), you can be very certain that lower-cost providers will come in and kick the pants off us. Once again, that is why price is a far better insight into value than overhead ratio. 28.
Comment by Geoff
@ Mar 8, 2007 8 AM
It’s an an ineffectual business plan for a for-profit company that does not pay back investors at an interest. Somewhere in your numbers, there must be a line item outflow of cash for investors that overtime includes a return. In the social capital world, which may be your world, these interest rates are typically more modest, and shouldn’t really do damage to your organization if revealed. At least not in my eyes. However, if after 3 million customers, and 5 years of business, you expect to pay back investors at a 20% or greater interest rate and/or give them significant equity in the company, things might start to get a little questionable. I wouldn’t want to reveal that either if I were you. As it is, inquiring minds are left to speculate and that might not be much better for you in the long run. Your choice. Good going with the 42,000 customers and Expedia deal and all. You appear to be leading the pack. I’ve heard of maybe 4 or 5 offset companies. Out of 46, that you would be one of those 4 or 5, speaks volumes about your early successes. I applaud your efforts.
Ok, I guess I’m assuming that ‘overhead’ has something to do with ‘profit’. I think you are saying ‘no’ because you are not profitable. Ok. But your salaries are ‘overhead’, and they could be very high. If you are making 500K a year each as an employee of the business, the overhead ratio would reflect that. No on pretty much all counts. Overhead is a traditional metric in the nonprofit world that tries to gauge how much of a donor’s funds go toward the organization’s program activities vs. how much are spent trying to raise more funds from donors. Salary for people engaged in program activities is not considered part of overhead. Obviously some charities have been criticized in the past for paying excessive salaries, but in general it is reasonable that salaries be considered a program expense. TerraPass pays its employees normal salaries (well, actually somewhat low), both because that’s what we can afford and because our investors wouldn’t allow us to pay ourselves $500,000. But the larger point here is that overhead is not just some number we get to define however we want. Someone asked how much money goes to investors, so we provided an answer: zero. Neither is it true that this zero payout is simply a reflection of the fact that we are unprofitable (although we presently are). Both for-profits and non-profits can run a surplus. They can then choose to invest that surplus back into the business. This is what TerraPass will do for many years, which is why the payout to investors will remain zero for the foreseeable future. And I have to completely disagree with you about the markets. When I walk into a restaurant and can buy nothing but Coke, i’m obliged to buy Coke for that transaction if I want that ‘kind’ of beverage. A competitive market doesn’t require that every choice be available at every purchase location. This would be an absurd definition of competition. You seem to be saying that unless every store, restaurant, and vending machine stocks both Coke and Pepsi, then the market for cola isn’t competitive. I think you’ll have a hard time finding an economics textbook to back up that definition of competition. And anyhow, contrary to your assertion, Expedia ticket buyers are not obliged to buy an offset from TerraPass. They can buy a ticket on Expedia and then go to any of several dozen online vendors to buy a carbon offset. I think I’m going to sign off on this thread now. It’s getting weirdly divorced from any meaningful relation to TerraPass or its business. In the real world, we don’t pay salaries of $500k, we don’t have 80% margins, and we do operate in a highly competitive market. All of these hypotheticals are kind of interesting to consider in the abstract, but ultimately not really relevant to what we do.
Hey Geoff — Good point. Investors are expecting capital appreciation, not dividends, from us, which means that none of our present members’ money is expected to go to investors. But you are right that capital appreciation is predicated on some notion of eventual profits. I hope we can get there. And I disagree that inquiring minds will speculate about this. I think that members will view offsets as they view all consumer purchases. They will look at price and they will look at value and then make a decision about where to put their money. This is exactly what they should be doing, and we just hope we can meet their expectations for price and quality. - Adam
No problem! Thanks for holding our feet to the fire. We invest a lot of time in these conversations because we think the effort is worth it. 32.
Comment by Aaron A.
@ Mar 8, 2007 12 PM
I think somebody is either confusing me with Adam Stein (TerraPass VP of Marketing), and/or thinks that I work for TerraPass. I’m not Adam, and I don’t work here. I’m just a happy TerraPass customer, and a firm believer in the ability of for-profit companies to fill society’s needs. Stepping back for a moment from the specifics of Terrapass, I suspect that this discussion would likely be a familiar one to anyone involved with for-profit social-good entities. Much of the conversation that has taken place here, to varying degrees, reminds me in a perverse way of the discussions about socially-responsible business among hardcore Wall Street Journal-type economists, where any deviation from the sole motive of maximizing immediate returns for shareholders is abhorrent. The same logic holds: for-profit behavior and social-good behavior are mutually exclusive. The criticisms here (implicit and explicit) have for the most part focused on aspects of Terrapass’ business behavior that, if Terrapass was an organization without a social-good goal, would go without comment: competitive secrets; employee compensation; returns for shareholders; etc. Behind these criticisms is (in my observation) a conviction that business behaviors — acts that would for any other company be seen as completely legitimate and ethical (or at least not-unethical) — are intrinsically incompatible with social-good behavior. This is a dilemma that nearly every for-profit social-good entity has faced. The logical response to an observation like this is that social-good businesses must be held up to a higher standard than normal businesses. That’s fine, and appropriate, as long as those higher standards do not undermine the very ability of the organization to survive as a for-profit entity. If people attacked Terrapass because it didn’t take aggressive steps to cut the carbon footprint of the company and its employees, such complaints would be entirely legitimate. Attacking Terrapass for simply behaving like a for-profit company strikes me as far less so. Personally, I would like to see more transparency as a general rule, but I recognize why Adam, Tom, et al have made the business choices they have. If we want to see for-profit companies behaving in a socially-responsible, socially-beneficial manner, there has to be a way for them to continue to behave like a for-profit company, too. It can’t be a choice of one or the other. 34.
Comment by Aaron A.
@ Mar 9, 2007 11 AM
Very well-put, Mr. Cascio. Getting back to the article, it rather seems like they’re trying to paint TerraPass as a fly-by-night operation. They’re not too kind about your for-profit status, which I can understand; over the years, we’ve seen many problems with the corporate model, specifically management’s insulation from paying for the company’s acts. This leads us to equate words like “corporate” with “fraudulent,” “greedy,” and “destructive.” What particularly surprises me, Tom, is that USA Today seem to use your and the company’s youth against you. 35.
Comment by Evan Marwell
@ Mar 9, 2007 4 PM
Wow. I never expected to start such a malestrom with such a simple question. Adam & Jon - I think you are missing the point. My guess is that I am one of your more typical customers - someone who is concerned about global warming and looking for a way to help make a difference. This is a critical point to understand as it implies that when I purchased my TerraPass I had on my “charitable giving” hat, not my “consumer” hat. When I choose which charities to give to I focus on the mission and effectiveness of the charity. When I bought my three TerraPasses I did so because I saw alignment with the mission I was trying to support and a perception that your organization was effective at pursuing the mission. Now I am not so sure. As I stated in my original post, I do not have an issue with TerraPass being a for-profit organization. However, I do want to know how much of my money is invested in actual carbon reduction projects. You suggest that revealing this will somehow put you at a competitive disadvantage. As a former entreprenuer and now a professional money manager, I can hardly see how this can be the case. In essence, I am asking you to report your “Cost of Goods Sold” - something every public company is required to reveal. Frankly, I think you could publish a quarterly income statement (again, like every other public company) and it would not have one iota of impact on your ability to find projects and sell TerraPasses. The only possible issue you might have is that it would increase the cost of carbon offsets for you because there would be transparency for sellers of what your average price is. But that is not even the point. If you are a mission driven business you need your customers to have faith that you are putting the mission first. Your refusal to answer these questions makes it hard for folks like me to have faith in TerraPass. Until today I was an evangalist for your organization - but now I am no longer sure what I am buying when i purchase a TerraPass. Show me that you are the best at what you do (publish your income statement and define cost of goods sold as the $ actually invested in carbon reduction projects) and I will have the knowledge that will allow me to become an evangelist once again. p.s. price per ton is a good measure if you are a consumer - not a charitable giver, which is, I suspect, how most of your consumers view your offerings.
p.s. price per ton is a good measure if you are a consumer I’m glad we agree. In fact, price per ton is a great measure. It contains all the relevant information about how much it costs for us to execute on our mission, and it provides a perfectly transparent comparison point between vendors. Perhaps professional money managers take into account cost of goods sold when making purchases, but ordinary people look at price and quality. Cost of goods sold is a balance sheet item calculated for the benefit of shareholders, not customers. We are focused on our customers. 37.
Comment by Evan Marwell
@ Mar 14, 2007 7 AM
Actually, cost of goods sold is an income statement item. In this case, your customers are clearly sending you a message that they would like to know this number. I am not trying to compare you to other vendors. I am trying to figure out how effective you are at deploying the money I am giving you. As a result, price per ton is NOT a good measure. I view terrapass as a charitable gift (as i expect most of your customers do) and therefore I care about how efficiently you are using the money i am giving you. As you did not respond to my points about how it would not harm you competitively to disclose this information, I can only conlude that you agree with my point of view and thus there must be some other, less acceptable, reason that you will not make the information available.
Evan, this is very, very simple: we have competitors who are delighted to pretend that their overhead ratio is the same thing as cost of goods sold. Overhead ratio includes salary, rent, phone bills, and all sorts of other stuff. Including these items in an overhead ratio allows organizations to make obviously absurd claims along the lines of “96% of funds go directly to projects.” Even though these claims are obviously absurd, journalists, academics, and consumers fall for them all the time. This is why it would be extremely harmful for us to start offering financial disclosures that no one else in the industry does. This is the reason — the only reason — we do not make these numbers available. TerraPass is not a charitable donation. We actively discourage people from thinking of carbon offsets as charity, as do other reputable members of this industry. When you buy green power from your utility, you are not donating to your utility — you’re buying green power. When you buy carbon offsets, you are not donating to greenhouse gas reduction projects. You are buying a reduction in carbon emissions to balance out your own carbon footprint. We could not be more clear about this. 39.
Comment by Yaguar Cielo
@ Mar 27, 2007 1 PM
Aside from the statement you make in this thread, Adam, I wonder where and how you “actively discourage” your buyers from viewing TerraPass as a donation. In the media, consumer offsets are almost always referred to as “donations”, whether or not the business is for-profit or non-profit. While you may not have the ability to control this message, I can’t help but think it helps your business to be seen more from a mission-driven perspective, than from a business perspective. This thread indicates that the combination of both may not be as appealing to your members as it is to your staff. Maybe you have research that counters the views expressed in this thread and that’s why you “encourage” members to look at this as a purchase and not a donation. I am simply curious how and where you do this. Thanks,
We actively discourage people from viewing their purchase as a donation by politely correcting them when they refer to it as a donation. We do the same with journalists and partners. We have no problem if people view us as “mission-driven” (I’m not sure what exactly would be wrong with this), but we certainly are up front about the fact that we are a business. I don’t gather that it matters to most people that we are a business, although I have no hard data either way. Some people love the fact that we are a social enterprise. Some people hate it. The latter are the ones who tend to comment on threads. Update: Just today I reviewed copy sent to us by a partner and asked them to remove the word “donate” everywhere it appeared. It’s just that simple. Post a comment |
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A little humor from a post over at realclimate.org
http://www.cheatneutral.com/
Some how I keep visualizing one of those oversized luxury SUV’s sitting in a traffic jam plastered with Terra Pass
CheersStickers.