SRI-Extra

Investing In A Green Economy - theme, sector or hybrid?

2010-04-12T02:55:00.005-04:00

Sustainable investment is an investment management theme that is growing. Sustainable investment is investment that fully considers all risks and rewards of a given investment. After the global financial meltdown, Madoff and Copenhagen in the past two years, how much better is sustainable investment understood by investors in London, New York, Stockholm, Amsterdam or Tokyo today? Billions of dollars of new investment in new technologies is needed to de-carbonize the global economy. In January the “2010 Investor Statement on Catalyzing Investments in a Low Carbon Economy” - issued by four investor groups representing more than USD 13 trillion in assets including INCR - called on Governments from their podium at the UN in NYC to take immediate steps to catalyse the development of a low-carbon economy and attract the necessary private capital. Their call even reached the Sundance Channel.

Do most institutional investors still fail to understand sustainable investment? Pension funds and institutional investors – with their advisors at private banks and hedge funds in wealth management centres like Geneva or Melbourne – are fiduciaries who should efficiently and effectively allocate and manage their assets. Looking at macro sustainability trends such as natural resources, urbanization and demographics change, how well are these funds and their advisors giving appropriate consideration to any factor which may materially affect the sustainable long term risk-adjusted performance of the Fund's investments, including environmental, social and governance factors, across all asset classes? Sustainable investment is opposed to the concept of externalities, the economic term for costs pushed onto society, and the planet. Nobel Prize-winning columnist Paul Krugman this week surveyed the “economics of climate change or, more precisely, the economics of lessening climate change”. Krugman describes externalities this way:

“What if you manufacture a widget and I buy it, to our mutual benefit, but the process of producing that widget involves dumping toxic sludge into other people’s drinking water? When there are “negative externalities” — costs that economic actors impose on others without paying a price for their actions — any presumption that the market economy, left to its own devices, will do the right thing goes out the window."

Some of that capital will come from High Net Worth [HNW] investors like those who manage their wealth through Switzerland’s established private banks and hedge funds. Returns are not guaranteed. In fact millions of Euros were thrown into the clean tech sector at companies that could never be competitive or commercially viable in the long term. But some high-risk, high return investors will be the first to back new technologies. We had a small but globally significant example in Vaud last week. The Solar Impulse first flight on 7 April in the commune of Payerne VD is a good example [see Wired video]: experimental technology co-funded by Swiss adventurer Bertrand Piccard with partners giving corporate funding for research and individuals providing project financing through subordinated loans. Seriously experimental - imagine sitting in that cockpit for an around-the-world flip? And of course, at the Geneve Auto Salon in February 2010, hybrids and electric cars were represented at most stands [seriously, a metallic green Ferrari 599 hybrid and I am meant to think it's green?!]. Actually the real pushing technology was in the dim and out-of-the-way green hall, away from all the flashy lighting and chick models. Credit Suisse posted a note on the "environmentally friendly stars was developed in Switzerland: The Lampo2 from the Protoscar think tank based in Ticino".

When we at SinCo design investment architecture for institutional investors, we design to integrate environmental, social and governance [ESG] factors. Major Swiss investor [and now Swiss big brother after UBS meltdown the past 2 years] Credit Suisse considers “Sustainable investment is no trend but a key sector for the future.” We disagree. Putting ESG into a bucket misses the innovation it offers. We prefer to describe sustainable investment as a theme – it is neither an asset class nor sector, but an approach to investment management that explicitly integrates all factors – including environmental, social and governance [ESG] factors – into the decisions.

Building Sustainability Indexes

2010-03-12T05:16:00.003-05:00

Building sustainability indexes is a specialist function for index architects. The Domini 400 Social Index has been running since 1 May 1990 as a benchmark for the obvious question: including ESG factors in selecting large US companies, how does it impact performance. The ETF tracks at iShares FTSE KLD 400 Social Idx Fd (ETF) (Public, NYSE:DSI). Over the years the DS400 has come to send many other messages, and practitioners know the strengths and weaknesses of this specific index, but it has established the role for the sustainability index. The purpose of an index must be clear in order to create focus for any sustainable investment approach. At SinCo we recommend that any index must be succinctly defined. Sharpening the sustainable investment focus is critical. Criteria matter. So does longevity. Many interesting variations will emerge in the design, development and ongoing execution of the index, and tensions within the mission and current programs may be expected. Maintaining focus prevails on the choice of work and work partners and the design of selection criteria. The Dow Jones Sustainability Index is now 10 years old [see the latest review with DJ here] and some of the people who helped build it like Alex Barkawi have moved on.

Our experience of sustainability indexes provides the empirical basis for design directions and development, interpreted by experts in sustainable investment and the role of indexes. The emergence of country-level indexes rather than international (for example DJSI Global) or themes indexes (for example, carbon or water). South Africa is an obvious example in emerging markets with the JSE SRI Index [up this year, together with Brazil (BOVESPA ISE) launched by the IFC in 2005, and India (S&P CRISIL/KLD/IFC), as well as emerging country examples in Egypt, Spain and South Korea, together with newer thematic indexes such as the Healthy Living Index (SAM) and international initiatives like the Carbon Leaders Index – CDLI (CDP/Innovest).

SAM Sustainable Healthy Living Fund is designed to invest from the global stock universe in the most attractive enterprises along the health value added chain. For this purpose those trends which influence the Healthy Living-sector decisively are investigated in the first step by means of macroeconomic analysis.
Carbon Leaders Index – CDLI (CDP/Innovest) The CDLI scores for the Global 500, Europe, FTSE 350, and S&P 500 companies are now used by index provider Markit to create a family of equity indices.

Index architecture must map to the investment case and the index proposition. We will cover the impact of sustainability indices separately, other than to say now that sustainable investment indexes have an impact, but a complex model is needed to assess the impact. Indexes (and indexed portfolios) are actively managed investment instruments that are constructed according to objective criteria and are compiled and marketed by financial services firms such as FTSE Group/Financial Times [www.ftse.com/Indices], Morgan Stanley Capital International Indexes [www.msci.com], Standard & Poor’s Indexes [www.sandp.com] and Dow Jones Indexes [http://www.djindexes.com/].

Index membership literally confers “investment grade” on firms because numerous managed funds are benchmarked to, or directly invested in, these indexes. Where the index is themed, selection into the “club” confers a certain halo effect or positive association for that company because there has been a dramatic increase in the scale of funds that directly track market indexes. Gaining and maintaining membership in an “index club” is often a critically important goal for company executives. As with any differentiating characteristic, companies seek to gain competitive advantage with investors, prospective employees, and other stakeholders, and a high ranking in an index can give them such an advantage.

When a company is ranked or included in an influential or prestigious index such as the Dow Jones Sustainability Index (DJSI) or the Fortune 100 Best Companies to Work For, the company will reference that fact, especially when that firm is looking to present credentials as being “world-class”. For example, Brazil petroleum major Petrobras [Petroleo Brasileiro SA (ADR) (Public, NYSE:PBR)] lists five accreditations on a full-page color advertisement in a magazine targeted at investors and company executives (Bloomberg Markets magazine, December 2009), including membership in the DJSI. On the other hand, exclusion from an index can encourage companies to pledge changes. When Daimler [Daimler AG (Public, ETR:DAI] and Bayer [Bayer AG (Public, ETR:BAYN)] were excluded from the DJSI STOXX, their reaction in the German business paper Handelsblatt on 8 September 2008 ranged from pledges to improve (“We will definitely intensify our efforts regarding sustainability”, according to a spokeswoman from Daimler AG) to surprise at being excluded (Bayer commented, “We are not happy about it and we will try our best to be included again, since this is increasingly relevant to us on a financial basis. However, it will be more and more difficult to achieve inclusion in this benchmark.”). Our experience is that ratings, rankings and indexes may be a powerful tool for driving forward sustainability and creates a signaling effect across sectors and stakeholders. At this time we do not delve into the detail of ratings, rankings and indexes. There exist many different approaches, and characteristics of each of the three may be quite different, offering different value propositions that the index leadership must address at the outset of their goal and objective setting stages. Indexes are a feature of any discussion, a reference point, and quite literally a benchmark. Sustainability indexes can be even more so.

Tobacco Investment Contingent Liabilities

2009-07-16T05:07:00.012-04:00

Walking into Great Westerford this morning on a crisp sunny Cape winter morning I was surprised to find huddles of smokers grabbing a puff on the steps. A beautiful day, puffing away. But maybe not that much different than those who need their 'morning cup of Joe' to start their day. The human habit of smoking is a fascination: humans choosing to buy a product directly linked to disease - including my two sisters whose own grandparents died from lung cancer and cardiac failure linked to chain smoking. Help explain how this logic stacks up: tobacco is a non-nutritious agricultural industry product driving farmers to farm cash crops not nutritious foods for sale to multinationals to sell to humans as aspirational good living to smoke and will in time directly lead to negative health impacts. Any investor integrating ESG factors must be investing away from tobacco. One may make an investment case and an ethical case. Either way, it raises all the classic considerations in sustainable finance and responsible investment: 1. whose money is it, 2. what is best practice investment analysis, 3. are all the investment factors covered [including environmental, social and governance ESG factors] and 4. what time horizon is long term? The decision to invest in tobacco must be a litmus test for any work on ESG architecture. Is it being discussed by the large ICGN or smaller PRI at their annual meetings this week in Sydney? Bill Gates and Michael Bloomberg in January 2009 put some of their personal fortune [USD 50m] into combating smoking, but I wonder if their endowments have? Any investment practitioner who is tasked with integrating ESG factors sooner or later will be faced with a tobacco name in the portfolio holdings or investable universe. In South Africa this morning, longtime investment writer Ben Temkin, originally a stalwart at Financial Mail and now at Business Day, covered his position on BAT, British American Tobacco, cross-listed in London LON: BATS and on Johannesburg Stock Exchange. Check the BAT investor presentations here for their take on the contingent liabilities, or the lack thereof. Thank you for smoking.

BAT is considered a "blue chip" investment name for many years and a large part of the Rembrandt/Richemont/Remgro story that is now playing out again as the Rupert family heading the companies consider re-bundling what they unbundled. A Business Day reader who follows Ben's Private Investor column that offers some investment thinking and breaks down the investment opportunities of the day, challenged him on the "fundamentals" that a tobacco firm offers as an investment opportunity. The reader challenges Ben by saying he has a declared bias against investing in tobacco, that if the same numbers reflected the financials of say, a retailer, that Ben would be making different recommendations. In effect the reader is making an ethical case: investor should suspect looking behind the numbers. Perhaps Ben has had a tobacco-related illness cause personal tragedy, similar to a money manager of a multi-billion dollar shop just off Wall St leading a large fixed income team; who invited his staff to bring all investment ideas forward but never bother to bring forward a tobacco deal on account of losing a parent to tobacco-related illness. Knowing that the product of a firm is directly linked to ill health does create an ethical crisis for its business partners, including investors. How they choose to deal with the ethical dilema is their liberty to choose. The Independent's Warner stated it plainly in 2006 "Jeremy Warner's Outlook: Investing in tobacco may be unethical, but it sure is lucrative, as Gallaher bears witness". What was it about 2006, articles pitching the sector were also on MSN Up in smoke – should you invest in tobacco? By Richard Hunter, Head of UK Equities, Hargreaves Lansdown July 11 2006, Businessweek VIDEO "Investing in Tobacco Stocks: How to play it" and a real pearler from "Investment U" pitching why one should invest in tobacco despite the liability and regulation issues Tobacco Stocks: “Smoking” Out Investment Profits From A Blue Chip Titan November 2006. As you ponder what to invest your money in, enjoy some of the wry humour in Thank You for Smoking [2004]. And try not to grin at the catchphrase "Nick Naylor doesn't lie, he filters the truth"..!

The investment case is a lot closer to the ethical case than people think. If one invests, like Warren Buffett, in the firm for its business and long term prospects, how may one look past the product and its effects? Why invest in a sector or firm in a sector where the sector has a large negative exposure? Back in 1997 a public health professor at the top-tier University of Michigan in the USA pushed for major institutional investor TIAA-CREF to back away from tobacco "Vote on TIAA-CREF tobacco investment policy". Also at universities, activist students are a big headache for tobacco industry, being business types, future leaders, and able to see through pseudo-sophisticated arguments, illustrated by the 2004 article on Edinburgh students "Students stub out tobacco investment". A 2007 paper illustrated the irony for Australian pension funds in "Australian pension funds and tobacco investments: promoting ill health and out-of-step with their members", opening with some solid paragraphs:

Calls for institutional investors to divest tobacco shareholdings threaten the industry's share values, publicize its bad behaviour and label it as a politically unacceptable ally (Wander and Malone, 2006). In 1990, US tobacco control advocates began urging government investment and pension funds to divest tobacco stocks as a matter of responsible social policy (Wander and Malone, 2006). Tobacco companies fought hard to counter the divestment push and eventually only seven US states divested their tobacco stocks (Wander and Malone, 2006).

Since 2000, transnational tobacco companies have sought to regain the public's respect and investor confidence by embracing the principle of ‘corporate social responsibility (CSR)’ (Hirschhorn, 2004). The appearance of British American Tobacco in eighth place on a Corporate Responsibility Index for 2006 published by the St James Ethics Centre suggests the CSR strategy has been at least partially successful (Chapman, 2006). Investment analysts continue to describe tobacco shares as a good buy (Dubose Tomassi, 2006). Incredibly, as late as 2004, five leading US medical schools held shares in the tobacco industry (Wander and Malone, 2004). The scope of current pension fund investments in the tobacco industry is indicated by a 2006 estimate that smoke-free legislation in England could add up to £20 billion (US $35 billion) to UK pension deficits (Simpson, 2006).

The irony of seeing nurses smoking by the hospital exit is analogous to the news in June 2009 from Canada that health insurer investment arms are investing in tobacco, which the tobacco industry proudly reported and were defended by the Candian Finance Minister as reported by CBC in June 2009. It appears Nigeria has banned future investment in tobacco. Personal habits are sometimes at odds with the societal good, or even one's personal good.

Ben's column title "Contingent Liabilities Take Shine of BAT" in Business Day 16 July 2009 offers a gentler version of the danger. As he summarizes in his conclusion:

Before you are tempted to buy the shares, however, read [this is always a smart thing for investors to do!] the nine pages on contingent liabilities and financial commitments in Note 30 of the 2008 annual financial accounts [statements]. It is a terrifying horror story, and its possible financial implications on future earnings are not quantified.

Any investor must assess the opportunities for risk and reward from placing money in the ownership or lending of a going concern today, expecting to earn a higher rate of return than some base rate - say the rate of inflation or interest on a cash account. So any investor in a tobacco firm must take a view on the cash returns to the firm in the forthcoming period, or the market's opinion about that return, depending on whether they are basing on fundamentals or relative measures and technical market movements [if you're a trader, it's a matter of seconds, if you're a deep value investors, a matter of years]. That means assessing all the scenarios for the firm. Which include the huge public healthcare costs that are attached say, in the US. Part of the Bloomberg Initiative's purpose to fight tobacco in low and middle-income countries (focusing on 15 countries) is exactly to avoid the future healthcare burden in countries that cannot afford it, literally. The future "settlements" from the tobacco industry of course have created the conundrum where the state government has a vested interest in the tobacco firm thriving and earning cash returns, in order that the tobacco firm pays the settlement into the future. Federal and state legislators have a vested interest in keeping tobacco in business. These are the so-called "Tobacco Bonds", applied and rated by Moodys at state level. Government has a vested interest in cigarettes because of the large excise duties and taxes levied on them, effectively creating a chunk of reliable cash revenues that are hard for politicians to become un-addicted to [see The Red tape Chronicles spotlighting the taxpayers interest in smoking teenagers and made of US state securitization of tobacco settlements in "Ten years Later Tobacco Deal Going Up in Smoke from Nov 2008]. New York state Public Interest Research group [NYPIRG], one of the publicly funded think tanks, outlines the case for state-level divestment in the US [Tobacco Divestment in New York State] in fighting against NY funds invested still in tobacco. Many of these arguments apply in emerging and frontier markets like Brazil, Bangladesh, Malaysia, Sri Lanka or South Africa, which is why the Bloomberg Initiative targets such countries. NYCERS, the activist pension fund active in sustainability and ESG investment, remains invested despite stopping new investment some years ago. We have no view on the efficacy of the "black box warnings" that tobacco companies must slap onto the packaging. Pharmaceutical companies detest that stigma, and food companies have wriggled at the prospect that some of their marginally nutritious foodstuff could deserve the same. Some of the drive to capture the full costs of tobacco is reflected in the litigation and the global regulations to prevent marketing and sale [cigarettes are sold, not bought] that the World Health Organization Tobacco Free Initiative helped drive in the late 1990s under Gro Harlem Brundtland, the former head of the UN sustainable development commission that coined the sustainability definition in 1987:

"Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts:
the concept of 'needs', in particular the essential needs of the world's poor, to which overriding priority should be given; and
the idea of limitations imposed by the state of technology and social organization on the environment's ability to meet present and future needs."

It is hard to reconcile this thinking with investment decisions channeling cash today into tobacco, yes? Sustainable finance is about comprehensively assessing explicit and implicit risks and benefits of investments: not just the ones that firms choose to write about, legislators bother to regulate, and lawyers cannot slide past. The investment case is a lot closer to the ethical case than people think. Integrating ESG factors - what is the total lifetime lifecycle cost of tobacco production and sales to humans? - is part of the holistic investment playing field with no externalities that we think all investors should play on. No costs should pushed onto society, and hidden costs should be exposed. Once all the costs and benefits, risks and returns are fully priced in, go ahead, puff away: thank you for smoking.

Earth Hour Bright in Darkest Africa

2009-04-06T09:37:00.014-04:00

8:30pm Saturday 28 March 2009 and NOT so dark at the bottom of Africa. Nor in Sydney nor London for that matter. Earth Hour South Africa, as the photo suggests, was looking a tad too bright! What change did we observe in our unscientific survey from Table Mountain overlooking the Cape Town CBD? The Cape Town provincial government and city offices were dark [yes, there may be other explanations than energy saving!]. The only visible change at 20h30 CAT [Central African Time] was the ABSA building logo going dark, perhaps because ABSA [JNB: ABSP] is now majority owned by Barclays [LON: BARC], and the degree of coordination was good.

What “beacons” kept shining vaingloriously under southern skies? From our perspective, not much about the city changed, with the amber glow of incandecent and the blu-ish light of neon strung around CPT as usual. After the speeches by African politicians and with South Africa representing Africa into the G20 and climate change negotiations heading to Copenhagen in December 2009, one hoped for major Parliamentary action. Underwhelming… What of the corporate players? Most easily spotted – there were others we did not spot – were some brands making the wrong statement in the African night sky:

FNB [First National Bank], which uses an iconic African acacia as its corporate identity
LG, the South Korean electronic goods manufacturer with the tagline “life’s good” which did trumpet its Earth Hour in Malaysia
Southern Sun, on top of the Cape Sun, touted green credentials last October
Nedbank, a billboard for the “green bank” storeys high downtown, which figures, because they had ZERO Earth Hour coverage on their busy wesbite.

Oops?! Nedbank [JNB: NED] must have been feeling awkward come Monday, what with having pitched their positioning on the JSE SRI Index in April 2008, hosting the Green Mining Awards, and being the bank with the affinity program for customers tied to WWF SA called Green Trust. Motivating a major global financial institution to action is a logistical mountain, as JP Morgan Chase Earth Hour PR illustrates in defining what it can and cannot do. Reminds me of the story from a mate in Corporate Responsibility at ANZ bank in Australia. As head of the Earth Hour project around 2007 she had plans in place to cut lights in the large ANZ [OTC:ANZBY; ASX: ANZ] headoffice building in Melbourne BUT could not get her facilities people to guarantee the huge neon signage crowing the building to go dark. Unperturbed, and in superb Aussie “can-do” fashion, she had on stand-by a colleague or two with a large hatchet and some rubberized boots! No way that light was shining at 8:30pm! One gets a sense for the drama watchng the video of Earth Hour Cape Town mayor Helen Zille doing the big switchoff, and the relief of "oh, it worked!". Things have moved on sufficiently that this year the ANZ-sponsored ANZ stadium, a major in Australia, voted to switch off its external branding lights. See the list of participating Australian banks.

Another icon for sustainability best practice in Africa is Woolworths [JNB: WHL], the premium retail store. It was rated best in class for sustainability, and signed to the WWF water neutral initiative, has a sharp Eco-Efficiency award programme for suppliers, and forthcoming Woolworths Sustainability Index is yet to be posted at http://www.woolworthsholdings.co.za/sustainability/sus_index.asp. Woolworths Earth Hour activity hooked directly to employees at head office in CPT encouraging a big switch off AND offering a discounted CFL swap - up to five bulbs. Stores tried some ideas, but emails to customers only focused on the weeks' special deals, so maybe they missed an extra step to magnify impact. The WLH notice read:

Woolworths supports Earth Hour: For one hour, millions of people will switch off their lights across the globe in support of Earth Hour to raise awareness on saving energy. Saving energy is an important part of our Good business journey and we encourage all colleagues to participate by turning their lights off for an hour. Earth Hour is a World Wide Fund for Nature (WWF) initiative. On 24 and 25 March you can change your incandescent light bulb for an energy saving light bulb, courtesy of Woolies and Eskom. This will save you money and help to reduce energy usage. This is a small way for each of us to participate in our Good business journey. Woolworths is targeting a 30% relative reduction in energy usage by 2012. When: 24 and 25 March from 09:00 - 13:00 Where: Woolworths house, foyer. Please note that we can only exchange a maximum of five light bulbs per person. Remember to support Earth Hour on 28 March from 20:30 to 21:30. P Consider the environment - do you really need to print this email?

Earth Hour is one of those tipping point type efforts, the ones where a small item at the right point of leverage creates some kind of systemic change. Gladwell made it common jargon with business types early this century. Think of the first time you saw a cellphone that was more mobile telephony than brick or a music player as seamless as the second generation iPod. In the same category we recommend to you Nudge. The current thinking person's book – Nudge: Improving Decisions About Health, Wealth and Happiness [good timing, boys!] – relies less on regulation but suasion as a driver. Earth Hour, one of the better things to come out of Australia, aims to use just an hour as a window to a different future, highlighting the a raft of environmental issues by reversing the glaring trend to burn energy to light up the planet [roasting marshmallows as in Madam & Eve is optional!, see cartoon above]. WWF is the enviro NGO which is held in high esteem globally, is behind the idea since the Australian affiliate moved onto it in 2007. WWF helped popularize it in the US, Europe and Africa through local affiliates. Even Brunei joined in this year with mosques covering ecology in the Friday sermon. Brunei was the sixth largest per capita CO2 emitter in 2004, and always worth a punt in your geography quiz - Q: which continent is Brunei on? The first-ever OPL cohort covered Earth Hour in our review of international awareness and advocacy tools on the inaugural WWF One Planet Leaders programme in Switzerland in 2007/8. Earth Hour 2009 aims to "reach more than one billion people in 1000 cities around the world, inviting communities, business and governments to switch off lights for one hour at 8:30pm on Saturday March 28 and sending a powerful global message that we care enough about climate change to take action".

Chicago Tribune included some beautiful shots, see Bern cathedral after 8:30pm CET. The ultimate photo-op would not be darkness at night, a reversal of the classic artificial “world at night” photo from the NASA project to plot urbanization which we often use to describe systemic approaches and regional differences to sustainability+investment and sustainable development. That photo replaces thousands of words. It reflects the sustainable development footprint and challenge, as well as being useful to quickly pinpoint critical footprints for Sinclair & Company in SA, USA and Switzerland. It is a little harder to pinpoint Harare, for example. Earth Hour works on local time, so the rolling blackout kicks in according to international timezones [an arcane system worthy of another blog another day] from 8:30-9:30pm local time.

Things Go Bump in the Dark

Certainly the WWF and Earth Hour South Africa team had great marketing reach, and some big brand names as participants. In Cape Town, the iconic Table Mountain went dark – in the same way that peer emerging market major Brazil had the lights on the Christ statue in Rio de Janiero go dark - see some great photos and comments on GlobalVoices. Unlike the Sydney Opera lights apparently, bad form, Oz. Pop radio DJ Fresh on 5FM had some useful suggestions for the young and virile with a dark Saturday night hour to kill.

Even the most exclusive CPT eateries interrupted diners to explain the lights would be cut for the hour – but that’s never a problem where an extra candle as to ambience and the grill is gas-fired. In the streets the “grass-roots” approach in this emerging market as always relied on the lamppost signs strapped up pitching the idea, in between the election posters. Random support came through using the local Idols to spread the word, as the SA Property blog did. The Earth Hour Facebook group had 859,516 members, and blog Greenmarket covered the myriad other electronic marketing approaches [never did get the BB download though...] including photo stream on Flickr. With all this global coordination reminding me of the all-time greatest worldwide brand – Y2K – one wonders how the branding specialists will one day hence come to rate Earth Hour as a global brand?

The UN SG endorsed the effort [but here the earlier comment regarding public offices and darknesses echoes[!]] and one of the fine old twentieth century institutions, Baden-Powell’s Scouts had action at community level. But what difference does it make? As a global phenomenon it was open to interpretation. In South Africa the Mail&Guardian Thought Leadership blog [the editors feeling a little lofty the day they launched it, mmm?] the hopes were high, but Bridget McNulty’s view from Signal Hill matched ours from the slopes of Devils Peak: underwhelming. In the most environmentally-sensitive city on the continent. Check some of the Comments to Bridget's posting Earth Hour: A Little Underwhelming... which reflect the ambivalence to this form of social action, and in the contradictions in creating change which in itself uses energy. Even 1970s era environmentalists at National Post add some contra-wisdom.

Enter the Investors

My interest as always is to probe: where are the investors? No, one will never find a line-item for compliance with Earth Hour in the Green Century Mutual Fund from Boston, or the GS Sustain index from London, nor the RIAA certification. Not even in the WWF International’s own green investment product run from international headquarters by Chiew Chong, the Living Planet Fund, offered for sale as an OEIC out of Luxembourg to European clients. Australian industry website Ethical Investor posted the event, But a rough poll of some leaders in investing integrating ESG factors had at best an ad-hoc, personal approach, as opposed to a coordinated, strategy one would expect from sophisticated knowledge-based service industries. A simple list of investment/financial Earth Hour participants in Africa were:

ABSA
Coris Capital
Coronation Fund Managers
Discovery
Investec
Liberty Group
Metropolitan
Momentum
Nedbank
Old Mutual
Sanlam
Santam

The Earth Hour event juxtaposed timeously with the Principles for Responsible Investment [PRI] annual assessment submissions due 31 March 2009. As my experience reflected when working with the PRI annual assessment 100-odd questions on making the six principles of the PRI happen, it is easy to put up some aspirations with guidelines and waving a flag. Many of the PRI’s key signatories share the discomfort. It is much harder, but yet so much more impactful, to measure the outcomes and net impact of the driven behaviour. Earth Hour is just an event. But maybe it should be a line-item along with the other 100 questions for investors. It does at least offer the advantage over the 100 other data-points: complete transparency and immediate accountability in real-time. Inaction leading to reaction from consumers, observers, and investors, with reputation sensitivity driving future action.

Earth Hour, as some beautiful photos attest, was no doubt a success. WWF has done well, and partly by not hogging the spotlight putting the issue above the WWF brand. It is obvious that the symbolism is not enough, as BusinessWeek suggests through it's guest commentator, with interesting Comments. Earth Hour points participants toward the major Copenhagen conference and the Species Report. It is but a moment, not even 10% of a day/night cycle. The next obvious anniversary date upcoming is Earth Day. More symbolism and action/inaction sure to follow. Like all ceremonies and rituals, sometimes useful for impact, but at least useful for planning the diary.

Will Earth Hour 2009 nudge the thinking further along the learning curve, and will the youth remember it when they next come to make investment decisions?

A thirtysomething trillionaire at the Zimbabwe Stock Exchange

2009-03-16T12:32:00.004-04:00

A thirtysomething trillionaire. Like Wired Magazine predicted Bill Gates would be back in 1999 [you recall how that ended!]. I do not even know how many dollars or euros or francs or rands it took, but the smiling moneychangers at the Zimbabwe - Zambia border posts had more than a few. A trillion is 10.12, a lot of zeroes!

Hyperinflation is what happens when politics believe their own hype, and command the reserve bank and treasury to print money which is not backed by real assets. It ruined the Weimar Republic in Germany in the 1920s, and Latin America in the 1980's. With hyperinflation, confidence is wiped immediately, and the irresistible force of geometric compounding swamps calculators as each unit of currency becomes worth decimals of what it once did. Zimbabwe’s president has bankrupted his country. But being better educated and able to manipulate the levers of power, Mugabe no doubt has his wealth offshore. Not in Switzerland, too close to those who hold him accountable, and as of Friday, a less secret place to stash the cash. No, his money is allegedly further east, probably in Singapore, Malaysia or Kong Kong. But also embarrassingly, Mugabe may have cash in the Isle of Man and land in the UK, according to Harvard Kennedy School Professor Rotberg who has covered the ZIM corruption since 2007 .

HK is where Mugabe's daughter is getting her degree. I have never met her and she may be the nicest person. Readers may recall that HK is where his wife allegedly took around USD50k cash - straight from the ZIM Reserve Bank - to go shopping, and where she managed to be famous for punching a photographer [the media is real outside ZIM]. The obliging HK administration declined to press criminal charges. Anyway, I am surprised Mugabe's daughter did not simply have her father order the university to issue her with one. But then, having driven past the University of Harare last week, one understands the head of state’s own family choosing to study elsewhere: it was impossible to see the campus buildings through the head high grass and weeds. Perhaps the student activists who reject the presence of the dictator’s child in class may create more of a challenge to “normal” than the is possible within Zimbabwe itself. If the university is anywhere decent, it will have more freedom of expression, and more accountability, than Zimbabweans have experienced in the past twenty years.

Like opinion polls to politicians or market prices to CEOs and their bankers, a currency’s worth is a relative score on the perceived health of a political economy. Which is why for the first time one may recall, the Chinese premier called upon the US to be fiscally responsible and to guarantee its good credit over the weekend around the G20 summit. Yes, the Obama USD 800 bn rescue package has a price tag, and the low interest rates and trillion-dollar spending will lead to a weaker dollar, just not today. The Economist has its own problems with it. SeekingAlpha website covered the hyperinflation effect for the US. The mighty Swiss france has become too strong for its banking and manufacturing industries, leading the Swiss to devalue their currency by intervening in the forex market. A short term strategy that “beggars-thy-neighbour”, but the CHF is small enough to slip by for now.

So where does “responsible investment” factor into the ZIM situation? In November 2008 when I visited London I recall a furore that Anglo and Barclays were making new investment into their ZIM country operations - ZIM Barclays does have the cleanest buildings. The ZIM regime is despised in a way I would think apartheid South Africa once was. But the convoluted and conflicted behaviour at a country level within the UN system, the lure of ZIM’s mineral wealth, and Mugabe’s “street cred” among African “liberation” politics including his ability to manipulate has kept him around way past his sell-by date. But how many country screens are excluding ZIM?

Few investment policies will even reference ZIM, partly because it is dwarfed by other major investable countries, and by its southern neighbour. Burma receives much more attention in the US, for example, with Chevron [NYSE: CVX] being targeted for action this shareholder season.

The 2009 resolution seeks greater transparency on how Chevron evaluates its human rights impact, especially in high risk countries like Burma. It calls on the company to report on its criteria for investment, continued operations in, or withdrawal form specific countries. The annual meeting is expected to take place in May 2009. The resolution was co-filed by the following institutions: Teamsters General Fund, AFL-CIO, Ms. Adelaide Gomer, The Maryknoll Fathers and Brothers, Mercy Investment Program, Newground Social Investment, Ursuline Sisters of Tildonk and the Unitarian Universalist Association. The International Trade Union Confederation (ITUC) and the International Federation of Chemical, Energy, Mine and General Workers' Unions (ICEM) have both endorsed this resolution, as has the Canadian Labour Congress (CLC).

The unintended consequence of Mugabe bankrupting the country is that it makes a micro-point of any global emerging markets exposure at a country level. Investors into Africa probably only have indirect exposure to ZIM by holding firms that are still ticking over in the country [see Financial Mail’s breakdown of ownership in ZIM brands].

Buy or Sell ZIM?

The investment policy for investors that integrate environmental, social or corporate governance factors [ESG] is the appropriate place to look for the response at a macro level. Major institutional investors now consider ESG factors, and CalPERS has an explicit approach to emerging markets investment. Perhaps the most well-known advocate of ESG in global investment is the Norway Government Pension Fund – Global, with NKr2.275bn [Eu258bn, USD329bn] in AUM. The Norwegian Global Fund, a sovereign wealth pension fund created from North Sea oil revenues, has a investment policy explicitly outlining ethical factors, and practices investment by having an ethical council screen investment opportunities. International investors saw this in action in the pages of the New York Times and Wall Street Journal in 2006/7 when Norway flagged Wal-Mart for exclusion, generating some diplomatic activity, and raising the profile of the ethical council. It also made a useful Harvard Business School case study, Norway Sells Walmart.Later in 2008, the fund published a report on child labour: corporate governance, children and the environment remain primary key issues. In last Monday’s FTfm the fund's "thorny path" was highlighted.

The easiest route is to disregard investment merits and divest immediately, and buy back quietly when the storm has passed. This approach only generates a better investment argument if the accompanying publicity will drag on the share price wherever it is traded. Shareholder activism is a public approach to have the company address the issue. A high profile investor when faced with a high profile problem may need to take this route – the Norwegian fund has addressed the costs of climate in a white paper in response to an NGO asking a pointed question. Environmental NGO Bellona recommended the fund exclude carbon emissions violators in a report to be submitted to Norway’s parliament 26 March. Shareholder activism is not limited to ESG factors, and in each year our experience at Sinclair & Company is that some have greater emphasis than others. In 2009, clearly executive pay has become the lightning rod – just ask Messers Goodwin or Liddey what their majority shareholders [UK or US taxpayers like you] think about fat cat salaries…

Shareholder engagement is an approach by investors “behind closed doors” approach less concerned with shareholder proxies but with suasion, and better explained in hindsight and ex-post facto. The most recent, 2007 SIF report identified increased activity in the USA covered through 31 December 2006.

The average level of shareholder support for resolutions on social and environmental issues increased 57 percent from 9.8 percent in 2005 to 15.4 percent in 2007, a record high. The total number of resolutions increased from 360 in 2005 to 367 in 2006. Institutional investors that filed or co-filed resolutions on social or environmental issues controlled $739 billion in assets in 2007, a more than 5-percent rise over the $703 billion in assets counted in 2005.

Engagement works in smaller, clubby circles of capitalism, where the connection between investors and companies, and the professional circles they move in, is much smaller and the prestige of the matter carries some weight. Some of the more effective conversations have come where advisors put publicly combative parties in a room, and as people and professionals new ways forward were sought. The UK, Brazil or South Africa are examples of these smaller investment circles of influence.

The shareholder activism has practical challenges. Pauline Skypala in today’s FTfm covers the recent handwringing on shareholder rights at the UK's National Association of Pension Funds [NAPF] conference last week. NAPF has been a proponent of integrating ESG factors, and is a conference of investors with a longer-term perspective. The influential Lord Myners, himself renowned to be frank, had institutional investors expressing “a lot of this [corporate governance] is rubbish”. How long investors should stay invested, whether all investors offer the same direction to a company, and when to extract investors from a situation are all practical challenges of implementing an investment strategy that [correctly] integrates governance into the investment equation.

The momentum of actions that seek to target at the country level are unpredictable, and may succeed in direct relation to the publicity, not necessarily the weight of arguments. Tibet is overshadowed by China’s massive bulk. Burma continues to attract attention of human rights activists and the investors that map to that [see GES Investment Services' briefing on Burma this month, March 2009], while countries which also have poor human rights records may feature less. It is so that ZIM attracts almost zero attention in the US while the Sudan/Darfur issue has generated major student, media and investor action. Acolytes of the sage of Omaha, Warren Buffet, have heard him explain his position on China National Petroleum Corp. [HK:0135, CNPC] because of Sudan [see Marc Gunther's 2007 Fortune piece], and they may not even know where ZIM is on a map.

ESG research providers have made available screening products that are not expensive to build and easy to pitch which focus on countries or companies that fail criteria of certain international initiatives or agreements. EIRIS has country sustainability profiles and convention ratings, and Riskmetrics ISS Innovest offers sovereign ratings in their screening boutique. Companies' own dilemna on whether to stay or go is newsworthy material for the media: should they stay or should they go? Divestment is a fairly blunt instrument. Unfortunately for the average ZImbabwean, lovely people, their country does not warrant the attention of the world, despite the country being mis-managed into -40% GDP tailspin. Divestment is a dramatic tool, with much scope for collateral damage. The investment decision is the least of matters.

White London, Grey Davos, Green Cambridge

2009-02-02T02:28:00.040-05:00

[SRI-Extra in 60secs > Snow falls on LDN and attracts some sustainability media thinking. Sort of. FA launches FAGreen in the US. Davos is WEF annual skiing vacation for politicos and financiers. Davos had better snow, and more hot air, but some pointed comments by Tutu and Putin. SA's Maasdorp covered impacts on Africa. Investment News suggests ESG is fast gaining acceptance in the US. Xshares launches Airshares. IFC-funded Who Cares Wins project closed with a summary report from OnValues, which included four recommendations for EM. IFC funded the project, and is active in ESG in investment in EM. Credit Agricole and Societe Generale merged asset management divisions. Obama says bank bonuses at this time are "shameful". MIT posts links to sustainability on campus, and at the B-school, MIT Sloan. GS]

Snow in London

Snow is dusting London and Paris this morning. It is enough snow to look beautiful, the sugar coating offering postcard photographers a once in decades opportunity. Fun at last for all those with Land Rovers. In Pennsylvania it's groundhog day [39% historical accuracy, 2009 predicts six more weeks of winter]. Funnily enough, a CNBC reporter jumped to make a climate change connection, CNBC Africa feed from Germany this morning's Business AM connecting a report on Lufthansa [Deutsche Lufthansa AG (ADR) (Public, OTC:DLAKY)] to the importance of sustainability in investment. I know aviation is a critical component, but that seems a bit of a reporter stretch, no? Maybe she could have connected to the Japan Airlines non-food biofuel-powered flight, that would have helped the segue a little [Japan Airlines Corporation (Public, TYO:9205)]. Here's hoping we will have smarter sustainability coverage from business journalists going forward, including a new on-line publication from Financial Advisor magazine, FA Green, launched by online editor Dorothy Hinchcliff. FA Green is targeted mostly at investment advisors in the US [see article on AirShares EU Carbon Allowances Fund (ASO) by Xshares, which rang the opening bell on 28 January]. The white snow will at least give our mates in the bleak City of London financial district something to look forward to, like building snowmen or a decent Calvin and Hobbes-quality snowball fight!

Lost in Davos

The snowfall may even help the bankers feel like they were part of the Davos circle for a few hours. Davos is the name of the town of Davos-Klosters in Switzerland and the abbreviated title for the annual World Economic Forum [WEF] gathering of politics and business. In 2009 SA's Maria Ramos was co-chair. It is a fun ride if you like schmoozing and skiing, and attracts attention of discontents. Davos is organized by the World Economic Forum, a Geneva-based organization set up by a millionaire Swiss businessman in the 1970's, with a fantastic view of Lac Leman over the UN Palais across to the Jura mountains in France. Davos offers much content at low cost for the major media, especially business media, so it received much coverage. As was widely reported, the role of finance and investment was supplanted by politicians. It is something of a lost year. Obama had no economic heavyweights there. Archbishop Emeritus Tutu [photo above] offered an interesting session on dignity as only he could, BBC reported Tutu said:

"we worshipped in the temple of cutthroat competition, and so some cooked the books, because the treasure is so great"

Bankers were no doubt an endangered species, with not a sorry in sight [see AP writer Brad Klapper report, note Forbes's comment and Schwarzman's pitch for less regulation]. The Bloomberg interview of Putin on 25 January by the female Bloomberg TV Moscow correspondent, Ellen Pinchuk, was gripping TV. Putin's slap down of Michael Dell was legendary. Bloomberg reported:

In the question-and-answer session after Putin’s speech, Dell Inc. Chief Executive Officer Michael Dell said he was surprised by the prime minister’s warning about excessive state interference and asked Putin how Dell could help Russia develop its information-technology industry. “You know, the trick is that we don’t need help,” Putin said. “We’re not handicapped. The people who really need help are the poor, the disabled, pensioners, developing countries.”

The ruble dropped 3.5% after Prime Minister Putin's comments. Soon we will see the movie adaptation of the play Frost/Nixon, so maybe I am a little more attuned to the challenges of being the astute interviewer face-to-face with a powerful person in a powerful emerging market country. She did well to discover his favourite "guilty pleasure" is ice cream, ever since Prime Minister Putin was a kid. Lots of it, apparently, but no mention of Ben & Jerry's. So if I ever meet him in person, we have at least one thing in common! Of all the river of Davos reporting, I enjoyed the note in Business Times in South Africa by WEF Young Global Leader, Leslie Maasdorp, vice chair of Barclays Capital and ABSA Capital, who spoke on the impact of the global financial crisis on Africa. His comments on the importance of a multi-polar world was expected, and he makes the good point that no new architecture or scope has been sharply defined for a "new world order". January 2009 is the worst ever January on record for the Dow, and the "January barometer" [if January is down, the year is down] suggests this year will be pear-shaped. Financials are down 25% in the US for the year [that's just January, folks!]. While many may wish for a "fairer economy" just keeping economies going may overwhelm all other priorities. Questions about the limits of corporate governance still lurk, including this morning's FTfm. Investment News overstates the US paradigm, "Investing according to strict environmental, social and governance principles is fast gaining acceptance among U.S. investors" BUT the positive trend maps our experience and forecasts.

Who Cares Wins Signs Off

Most useful for sustainable finance was the 2008 report summarizing the work of "Who Cares Wins", which unfortunately we could not contribute to because of prior commitments. The series of WCW papers since 2004 funded by the IFC, the Swiss Federal Department of Foreign Affairs and hooked to the UN Global Compact, have been useful in raising the profile of sustainability. Some papers have been better than others but the wrapping of the WCW project with an explicit conclusion is excellent project management, and good governance in this sector. On the eve of Davos fellow ESG consulting shop OnValues, based in Zurich, published the report as "a significant component of the Initiative's sponsors' media strategy during and following the WEF Annual Meeting 2009 in Davos this week." See the IFC PR.

Though the current turbulence in financial markets may tempt investors and companies to think of ESG issues as ‘tomorrow’s problem’, we believe that urgent and wholehearted action is warranted not in spite of, but precisely because of the market dynamics observed in the past months. ESG integration is about investors and companies taking a longer-term view, acknowledging the full spectrum of future risks and opportunities, and allocating capital as if they themselves were the beneficial owner.

The concluding paper offered some useful thinking for work in Africa and other emerging markets regions. The authors posit that in order to improve ESG integration in emerging markets investment, which was a special focus area of the WCW Initiative based on the direction of the IFC which has an EM ESG team [see IFC EM ESG projects] in Washington DC, four recommendations are important:

Include ESG issues in regular company meetings and engagement activities
Perform a systematic review of the ESG exposure of investments in emerging markets
Consider collaborating with other investors in requiring minimum ESG disclosure standards from local legislators and exchanges
Consider the potential for small allocations to frontier markets not only to deliver attractive returns but also to establish basic investability conditions (such as custody, efficient settlement services, etc.) and management awareness of material ESG issues.

In discussions through February I hope for some reaction from colleagues in EM in the sustainability + investment space to the request for better information. There is much to reflect upon. Moving changes in institutional investment are reflected by Société Générale and Crédit Agricole merging their asset management businesses to form Europe’s fourth largest operator with EUR638bn [USD837bn] under management. CA Cheuvreux had some solid ESG research [see 22/12/2008 The Green Road Out of Red], as did SocGen. One hopes their research capabilities are strengthened, not seen as overhead to cut. The consortium of funders behind WCW reflects the costs involved in some of these initiatives, especially where they are global. WCW was more useful because it tapped into thinking on emerging markets [EM] although mainly from the perspective of investors into EM from Zurich, London or Paris than actual investors in EM. A good exception was having Investec's Hendrik du Toit covering frontier markets at the July 2007 event in Geneva at the Credit Suisse private bank, Rue de Lausanne 17. All these projects must be funded, in cash or in-kind. One often forgets that the multitude of organizations and initiatives around the world are competing for influence, for money to support their efforts, and private and public sector institutions to collaborate with them. It is competitive. But it is also much harder to figure out on a consistent basis which organizations are achieving what. There is no "marketplace" or "stock exchange" valuing the work of international organizations and NGOs.

Pay for Performance

Scoreboards may be tough to read. Scores change in seconds, like market prices. We struggled to watch from 1am central African time [CAT] this morning the biggest one day sports event in the world, the NFL Superbowl in the US. A great game, but none of the famous Superbowl TV adverts. Wrong zone. Markets are like sports fans in that they like clarity, like knowing which is the champion. The increase in fantasy leagues, the recruiting of traders using poker games, and HSBC sponsoring the Lions rugby tour to South Africa in 2009, are just some of the examples of the metaphor and parallels. Boston-based online paper CSMonitor had a good item connecting pay-for-performance of businessmen and the NFL athletes, many of whom are superbly overpaid. All market players are not rational however: all the money in the world could not buy superstar Brazilian footballer Kaka from Intern Milan to Manchester City [GBP107m, USD147m - yes, million!]. The efficient market hypothesisticans must have been spinning...

Pay guidelines are a key request of pitches to the Obama administration as they reconfigure the rules of the financial game for Wall St. Apparently President Obama was pretty pissed about the bonuses, calling them "shameful" on this Huffington Post video. I wonder what President Obama may achieve if he were to invite to a frank airing of views behind closed [oak] doors a bunch of bankers pulling bonuses while firing employees.

In closing, an anecdote from another fine dinner in CPT on Friday. An architect was speaking about how climate impact is 70% caused by the built environment, and that developers will only look at economic cost/benefit-positive sustainability items. Apparently developers do not even care about longer term trade-offs, just the math until the sale to the property owner/manager. More reality from the frontlines on the challenges of getting longer term thinking into investment decisions. Seems like the Green Building Council has many yards to go in the industry. The conversation had me reflecting on my last lecture at MIT Sloan, their business school, back in December 2008 as well as meeting with a cross-disciplinary team at MIT focused on making sustainability happen on campus in Cambridge MA. Even when the thinking is advanced, and smart people are moving, putting basics together across different silos is a change management challenge of note. But MIT is making some good progress. See multimedia links were made available this week including Sustainability: Greening MIT's Campus and Beyond and the Professor heading up the B-school's efforts, Prof Sarah Slaughter, who has an engineering background, here speaking on sustainability. MIT Sloan are moving forward with some case studies for teaching sustainability + investment with Sinclair & Company in 2009. The title of Prof Sterman's lecture on the Sloan Review is about right: A Sober Optimist's Guide to Sustainability.
SRIX.GS

***
Who Cares Wins [WCW] events and milestones include reports for download at http://www.ifc.org/ifcext/enviro.nsf/Content/Publications_SustFinance:

2004 Annual Event; 'Who Cares Wins: Connecting Financial Markets to a Changing World'
2005 Annual Event; 'Investing for Long-Term Value'
2006 Annual Event; 'Communicating ESG Value Drivers at the Company-Investor Interface'
2007 Annual Event; 'New Frontiers in Emerging Markets Investment'

Blood-Tainted Milk in China and Country Contradictions

2009-01-26T14:55:00.019-05:00

[SRI-Extra in 60secs This past week [some] culprits in the tainted milk scandal in China were sentenced to death. The tension between doing good business and the right thing is real, settled in court and in the press, sometimes in death. The toxic milk powder scandal killed at least six children and sickened nearly 300,000 last year. What makes it a little awkward is that NZ-based mega-dairy Fronterra owns 43% of Sanlu. Human rights do impact business, and a Bill of Rights is a key component. In the USA the Centre for Science in the Public Interest will sue Coca-Cola [NYSE: KO] for claims on VitaminWater health benefits. Further exploration on forming an AfricaSIF reaffirmed the two classic challenges faced elsewhere in the world, 1. definitions of ESG, and 2. the matter of priorities of ESG. Ranking the issues of sustainability will differ from country to country, or city to city, company to company. FTfm covered GS Sustain and Sarah Forrest’s team in London, the GSAM Africa marketing person is in JHB this week. The Economist this week raised the Norwegian profile in their "Norway and the environment briefing, Binge and Purge” where they reference Oslo as “[h]ome to a green-minded people and government, Norway exports the dirty stuff to the rest of the world. The result is a contradiction”. Statoil does have 7.8kg carbon emission footprint per barrel versus industry average of 19kg, 37% of global average. At least Norway has been active since 1991, and is switching to cap-and-trade to offer a material and measurable drawdown of emissions. South Africa’s minister of finance, Trevor Manuel, gives the annual budget shortly, and one may make suggestions directly to his website Tips for Trevor. The Danes signed a wind power agreement in South Africa. FT released annual MBA ranking with Wharton on top. Today’s Business Day "Management Review” included two articles on climate change and sustainability, but the content was unfortunately stale. GS]

Blood-Tainted Milk in China and Country Contradictions

Business failure has drastic consequences. Greedy executives, incompetent managers, self-interested workers, any of these may break down the fair play of good business. The tension between doing good business and the right thing is real, settled in court and in the press, sometimes in death. This past week the culprits in the tainted-milk scare in China were sentenced to death. I wonder what sort of moral dilemma that creates for the social investment advocates in the US who rose up in alarm at the China-sourced milk scandal, who probably do not support the death penalty in their human rights approach. Principles will always be tested in practice. Obama has been smart to stay flexible. The news reports with photos of anguished parents struck a cord this week: the photo documentary at the constitutional court of death penalty in South Africa in 1985 seemed eerily similar to the newspaper photos from China. The toxic milk powder scandal killed at least six children and sickened nearly 300,000 last year. The legal trials target executives from the Sanlu dairy group and city officials accused of allowing the sale of milk adulterated with melamine or for covering up the scandal.

Steps to control melamine are being sorted by the centrally controlled economy. What makes it a little awkward is that NZ-based mega-dairy Fronterra owns 43% of Sanlu. The ructions on the event, and the death penalty, has caused political tensions in Kiwiland, despite the demands for the death penalty from affected parents. Pursuing the one company does certainly smack of victimization because 22 companies are implicated. Apparently, Fronterra was also a bit tardy in getting the info to US regulators in Washington DC as NZ bloggers report, see the timeline from BBC. Ah, the joys of being from a progressive country, like Fronterra, but owning a major stake in a company in a semi market-based system, like China. No word on the consumer alarm from September 2008 rolling into better labeling or food security upgrades outside of the blame-chain. No word on the next Fronterra sustainability report. The trials in China will continue. The sad reality is at least the bosses are accountable. More deadly than another banker being bumped for his greed, so maybe John Thain fired from Merril Lynch this week by Bank of America's Ken Lewis should breathe a sigh of relief. After forgetting to identify big losses, the anecdote about corporate excess - a million dollar office makeover at MER in Manhattan midtown in the midst of a meltdown - just helped make bankers look out of touch. Still. CNBC reports you can pick up some on Craigslist now!

SRI-Extra will cover more nutrition issues in 2009, including in the USA where Centre for Science in the Public Interest will sue Coca-Cola [NYSE: KO] for claims on VitaminWater health benefits, the lawsuit contending that the marketing for Coca-Cola VitaminWater product is 'deceptive' and makes 'unsubstantiated claims'. KO purchased VitaminWater maker Glaceau in 2007 for USD4.1 bn as they raced to catch up with Pepsi's non-carbonated soft drinks brands business, and counteract a poor nutrition profile of their brand portfolio.

Conversations in Johannesburg, Sandton and Cape Town over the past week have furthered the understanding of the opportunity [or not] for an African Sustainable Investment Forum, an AfricaSIF. It has reaffirmed the two classic challenges faced elsewhere in the world:

definitions of ESG, which cover sustainability, climate change, and which environmental, social and corporate governance [ESG] factors; and

the matter of ESG priorities, how climate change stacks up against say, jobs for under-employed, or houses versus human rights issues.

Ranking the issues of sustainability will differ from country to country, or city to city, company to company. Creating jobs trumps climate change as an issue. The survey of responsible investment in Peru in 2009 by Liliana at Duke University Fuqua Business School will offer some fresh facts to compare with the study in South Africa in 2007 with Neil [good news is he has just been appointed actiing director of the UNISA Center for Corporate Citizenship]. Balancing sustainability across a voting society raises many challenges. The question of definitions raised in SRI-Extra last week also had resonance in the FTfm coverage of GS Sustain and Sarah Forrest’s team in London. The question tends to make fund managers splutter, but in recent months, advocates of sustainable investment have been able to point to clearly unsustainable investment strategies, and indeed an unsustainable global financial system, as proof they are not just posturing. Sidenote: The Economist or FTfm page may throw up the latest Toyota advertisement campaign, AIM: zero emissions. Do you also think the people as trees is a little wierd in the photograph, something does not look right, yes?.

Constitution Hill

The SA constitution and its Bill of Rights was the freshest in the world when launched in 1996. 20-something rights are enshrined, including social and political rights. A visit to the Witwatersrand and the Constitutional Court on Constitution Hill with a fellow LLB from University of Natal [UKZN] helped illustrate the conundrum. The fine, architectural-award winning Constitutional Court complex was built on the remains of a notorious prison not far from the University of Witwatersrand or from the headquarters of SAPPI [SAPPI Ltd/JNB/SAP]. But on a typical summer blue sky and cumulus cloud afternoon, the parking lot with its head-high weeds and empty lot reminded me of a forlorn municipality office somewhere in Kwazulu-Natal, or a university during the summer break. Where were all the visitors? And why did the entrance to this most important component of democracy and the rule of law look worse than any of the world-class shopping malls along Oxford Road toward Sandton City? One wonders if the Constitutional Court should not have been added as an appendage to a shopping mall in a busy center to offer more foot-traffic, and bring the crux of the legal system to the people it is designed to empower? More people of every economic class were buying something to drink that afternoon, than visiting this iconic institution. No word on a listing of citizens’ duties to help make them the enshrined rights happen, starting with making the site more user-friendly, and picking up trash. Sadly, picking up after oneself is not just an SA problem, even Obama’s celebration was blighted by refuse left behind.

Country Contradictions

The Economist this week raised the Norwegian profile in their Norway and the environment briefing, “Binge and Purge” where they reference Oslo as “[h]ome to a green-minded people and government, Norway exports the dirty stuff to the rest of the world. The result is a contradiction”. The title alarmed me: sounded like my weight-loss program [which is a little behind schedule post Christmas 2008]. The Economist does offer some pithy reminders of what Norway has been doing since instituting a carbon tax in 1991, spending money on climate change mitigation technologies, including a novel one using fresh and saltwater. The Norwegians have even done a test on the merits of bridges versus mountains to assess the carbon impacts: bridges work best for over water, tunnels for under mountains. The pension fund divestment according to an ethical policy in 2006 led to a Harvard Business School case study Norway Sells Wal-Mart that I use at Kenan-Flagler Business School, although I am developing a more articulate example with University of North Carolina-Chapel Hill and MIT Sloan in 2009.

Statoil [StatoilHydro ASA/OSL/STL] does have 7.8kg carbon emission footprint per barrel versus industry average of 19kg, 37% of global average. But The Economist drives on the point similar to Bush’s White House, pointing out contradictions in making a positive action toward addressing environmental issues because the logic model is not buttoned-down and perfect. They attempt to offer some balance. The Economist article's online reader feedback forum matches some of the colourful language and comments in other media online around the world. It illustrates the power of the online version over the print version, although I remain solidly a hardcopy adherent, in solidarity with all the newsprints out there, including the New York Times saved by wealthy Mexican Carlos Slim last week.

Norway is switching to cap-and-trade to offer a material and measurable drawdown of emissions. This should make interesting reading for South Africa’s minister of finance, Trevor Manuel, a few weeks before his next budget [last year he pitched a carbon tax]. And Trevor may be listening. In a demonstration of Mr Manuel’s open-door policy and comfort in his shoes after ten years, one may make suggestions directly to his website Tips for Trevor. The most noteworthy or bizarre - or both – often are referenced in his speech, since 2001.

Activity in wind this week included further coverage of the Danish support for wind in South Africa, and treaties being signed. It is a fine profile for the Danish Wind Industry Association, worth EUR 4,7bn in 2007 to the Danes. Noteworthy in light of my comments last week about relative power of government ministers, the SA representative was the Minister of Energy & Minerals. The Darling wind farm is still in-between days. Jon mentioned that he came back from a hammering kitesurfing session the other day, but the windfarm blades were not moving…

World Rankings and Advertorials

FT released the 2009 FT MBA ranking. I prefer the recruiter driven WSJ version. The world’s top financial MBA, Wharton at the University of Pennsylvania dropped a note in the inbox, covering a trip to Antartica as part of a leadership program, Penguins, Leadership, and Thinking about the Planet. Prof Erik Orts of Initiative for Global Environment Leadership [IGEL] program tried to make the environment connection, and as expected, purchased carbon offsets [142mt through the Wharton Leadership Program Office. The group did not have a cakewalk, which is good, because hardship, physical hardship, is a powerful teaching tool. The Ghandi exhibit at Constitution Hill explained that Mahatma Ghandi made comments about how he achieved what he did in South Africa and then India were made possible after physical pain and isolation cleared his thinking. Every good cycle must have helped me, especially the ones that hurt the most.

The big accounting and consulting firms are moving strongly in the climate space, it certainly makes for a fertile consulting area in an era of shrinking consulting fee hours. The effort in the space is important, but perhaps the practice may be conflicted. Today’s “Business Day Management Review” included an article by the chartered accountants body president pitching “businesses must consider climate change in a strategic way and integrate sustainability into long term plans”. Of course, the media had to title it “Eco Warriors outlook will help the bottom line”. “Climate Change requires concerted action now” by Ajen Sita, head of assurance for Africa sub-area, Ernst & Young, unfortunately, has content so advertorial, it has the E&Y writer referencing CDP data from 2006, when CDP was in 2008, and CDP South Africa for the second year. Pretty weak reflection on BD, Wits and HBR all of which collaborate on the media item.

SRIX.GS

Sustainablity+Investment Wishlist for Obama, ESKOM externalities

2009-01-20T02:40:00.019-05:00

[SRI-Extra in 60secs > The Social Investment Forum's 9-point wishlist from the responsible investment industry to the Obama administration may have traction, especially the strategically important parameters for the financial markets, proxy access and even an innovation office for CSR. When will the environment not be an externality? New ideas and new actions are needed from politicians and business media, like Business Day’s editorial Monday 19 January 2009 on the end of environment as externality in power-generation investment, will help. Ignoring externalities creates false economy. Ignoring externalities is sub-optimal institutional investment. Just as in Australia or the US, every ton of low-grade coal burned by ESKOM in South Africa [120 million tons p.a. to March 2008, 130 Mt/p.a. to March 2009] has an environmental and social cost to the citizens of South Africa, and anyone downwind. It is sub-optimal to society and the institutions that power it. In the market-economy capitalist context, one needs to send demand signals to drive market solutions. We need a “mini-Stern” in Africa to state the climate challenge in real money terms, and the time value of money not spent now. Investment thinking on the continent needs an AfricaSIF that may promote integrating ESG factors while keeping tabs on the growth of sustainable finance. The trickle in specialist SRI mutual funds helps send signals, but it’s just a trickle. The “green” audience at UCT for the Humboldt conference “From Poznan to Africa” failed to connect directly their personal investment decisions to the environment issue studied scientifically. The hope of the environment as asset in investment decisions – sustainable finance made real at the intersection of sustainability + investment - will be realized one infrastructure project and one green collar job at a time, in the US or in SA. But looking hard at the cold, flat and crowded reality of 2009, expectations are way too high. GS]

Sustainablity + Investment Wishlist for Obama

The environment, though the proximate climate change issue, will command some attention in Obama's first 100 days. Perhaps, like in Whitehall [centre of UK government in London], the US may soon have an “office of climate change”. When I saw that title chipped into granite last October in London it immediately became a visual point of reference for me. Climate change was now real and to be taken into account. Environment seemed to be one step beyond being an externality. In Monday's Business Day editorial [South Africa’s leading business daily], the opinion on externalities comes close to what I hope to see in my lifetime as investment practitioner: the environment appreciated as an asset, and the word “externality” being retired forever.

In 2009 in the US, and probably in SA, some of the local and state-level climate change rules may finally make an appearance in a coordinated fashion. But as FTfm opined Monday, options are severely restrained. In a post-Poznan and pre-Copenhagen world, I agree that there is an international struggle over climate change on the horizon. Poznan failed because the Bush presidency was in final descent, the EU suddenly realized that their economies were looking pear-shaped, and the global financial crisis left any questions of financing mitigation and adaptation a long, long way from the top of the list [see The Economist's take by Emma Duncan]. The conference was also missing some key players. While environment ministers and the odd finance ministers were in attendance, energy and transport ministers and presidents were absent. Who will have more power to drive changes in energy generation policy: the minister drawing lines in the sand or the minister licensing a nation’s dollar-generating [but depleting] resources. It is a lot easier to count miners than waitrons, mines are more tangible than eco-tourists. South African Minister of Environmental Affairs & Tourism Marthinus van Schalkwyk , white Afrikaner and heir until he disbanded it of FW De Klerk's National Party, has been outspoken as lately as a representative opinion for emerging markets, both at the Poznan political meeting and in Washington DC. The NRDC and Climate Change Capital had him come and speak 13 January at "Emerging Strategies for International Climate & Investment Policy”, he referenced the SA government commitment to plateauing emissions in 2020-2025, before reduction, a sufficiently distant but plausible promise from a politician. The development vs environment dynamic is a real dichotomy for SA: the environment was spared emissions when ESKOM's brownouts left SA without electricity last January, and a slowed economy is the real reason there have been no brownouts in 2009.

"South Africa, the climate question is both an energy question and a development question. On the one hand, some 30% of households do not yet have access to modern energy services. On the other, the energy sector is responsible for some 80% of our greenhouse gas emissions, with electricity generation responsible for some 40%. Coal is the fuel used for 90% of our electricity supply".

Being on the ground, it is unclear how the demands of poor wanting electricity, and the current policy backgrounds, move South Africa to the goals mapped out, irrespective of how well the "technology, investment and policy" are mapped. The appeal for adaptation funding will be loud. But the fact that labour, society, government, business and policymakers are meeting minds is a strong positive. It certainly offers South Africa a place at the table with a coherent and articluate position representing Africa.

SIF’s Obama Wishlist

Many think-tanks and institutions have been pummeling Obama’s transition team with checklist and worklists [see the UPenn ranking of think-tanks ex-US, which includes four from SA topped by UCT’s Center for Conflict Resolution]. Net Impact used Facebook to leverage the power of their 10,000-plus MBA and professional network members to address an Open Letter: “…on how his administration can best support a sustainable social and environmental future for business”. The socially responsible investment community in the US represented by SIF urges the Obama Administration to take a number of steps:

Establish clear parameters and effective regulations for the financial system and stimulate transparent assessment of financial as well as environmental, social, and good governance factors;
Enhance access to the corporate proxy ballot so that long-term shareholders have a say in the nomination of corporate directors and in protecting shareholder value;
Support corporate responsibility or sustainability reporting by public companies;
Restate the consensus view that fiduciary duty may compel fiduciaries to consider environmental, social and governance (ESG) factors;
Assert global leadership in combating climate change, including through tax incentives and significant public investments in clean energy technology, energy efficiency, and green collar jobs and training;
Take a critical look at lending policies and create more accountability in the lending marketplace;
Create more opportunities for financially struggling homeowners to restructure their mortgages, helping them stay in their homes and out of foreclosure;
Endorse legislation that provides for socially responsible investing options in the federal government’s retirement plan;
Create an Office for Innovation in Corporate Social Responsibility to enhance and coordinate inter-agency CSR activities, allowing the federal government to become a state-of-the-art leader in CSR across its vast domestic and international arenas of influence.

The two most strategically important are the parameters and the proxy access, offering a strategic direction and a current execution of that to implement the change. Parameters are the larger discussion. FT on Monday argued that some more regulations are the least we should pay to avoid another meltdown. Perhaps fitting that Trinity Church Wall Street is hosting a global conference the day after the inauguration of the “Theology of Sustainability” where perhaps the sidelined Wall St bankers will enjoy “[r]e-imagin[ing] an abundant world measured not by personal consumption but by just and sustainable relations with nature and communities”. In our role at Sinclair & Company as advisors on integrating ESG factors into investment policy and practice, we are staunch supporters of governance and accountability in all its forms in any private or public sector climate. So here’s hoping the ninth idea on the SIF wishlist for an “Office for Innovation in Corporate Social Responsibility” gains traction, being based in part of the findings of the General Accountability Office GAO report on CSR in the US back in 2005.

Ignoring Externalities

Almost lost in the Obama buzz this week is the proposition that SA companies which have cash may dip into deals in Africa or abroad, inspired of course by the influential Rupert family maneuver to buy into Lehman’s private equity assets via the Reinert investment vehicle currently holding a large chunk of BAT shares after being spun out from Richemont. The BR covered the report by mergermarket, an international mergers & acquisitions (M&A) intelligence service. Mergermarket detailing M&A activity involving SA companies fell sharply in 2008, by 45.8 percent, to $14,4 billion (R143.4 billion) [this number conflicts with Thomson Reuters, which put the total M&A value involving South African firms at $24.1 billion]. The dominant British relationship was evident in that UK firms had 13 deals valued at $3.2 billion, or 76 percent of the overall value of inbound deals. UK's Vodafone Group $2.1 billion additional stake in cellphone network provider Vodacom was a large chunk. Which explains why the only Blackberrys being offered in SA by Vodacom are older Vodafone stock. And Oxfam is still seeking capital for its Cape windfarm project.

ESG in valuation is current but absent in investment analysis. Deloitte South Africa today presented their opinion about cap-and-trade [the Obama option] being more effective than a carbon tax [mooted by Finance Minister Manuel in 2008]. Business Day editorial hammering the short-termism employed by ESKOM in not building more alternative power-generation assets offered a good start to the week for a sustainability + investment practitioner. The Humboldt conference at UCT last week disappointed from a corporate investment or institutional asset management perspective: scientists were happy to cover the minutiae of their studies, but there was little assessment of the capital to bet on any direction. Perhaps more coverage by UrbanSprout will help, see 2007 Urban Sprout Carbon Calculator. Presenters did offer that a “mini-Stern” had been conducted in SA, but its absence from the financial lexicon in SA has not motivated investors as it did in Europe. The 2006 Stern report from the UK on the costs of climate change helped monetize the choices facing private, public and policy sectors; note also the Stern 2008 update confirming the situation is much worse than forecast. We need a “mini-Stern” in Africa beyond what was launched in SA in 2007, and the AfricaSIF that may promote it while keeping tabs on the growth of sustainable finance. Like the Norwegian SIF that last week finished a good valuation research piece as part of their Sustainable Value Creation Initiative [more on that initiative led by KLP's Jeanett Bergan soon]. Conversations with Jon and William later this week may move things forward another few yards.

At “From Poznan to Africa”, the room looked stunned when I posed the question of what each person in the room was doing about sending an investment signal by demanding more green investment. It was the same case I have made since the Environmental Leadership Program in 2004 in Philadelphia. To the self-selected “green” audience at the public meeting hosted at Kirstenbosch, it was as impactful: what is in your portfolio? How are you integrating ESG factors? Rows and rows of incredulous eyes stared back. That simple message – in the market-economy capitalist context, one needs to send demand signals to drive market solutions - is as powerful as Peter Bruce’s BD editorial on Monday. False Economy opined that there are no externalities; every ton of low-grade coal burned by ESKOM in South Africa [120 million tons p.a. to March 2008, 130 Mt/p.a. to March 2009] has an environmental and social cost to the citizens of South Africa [see Climate Change Corp's Dec 2007 article and article on ESKOM 2008 emissions]. ESKOM has announced an intention to build 100MW wind farm in the Western Cape. The “washed” coal is “better” quality, and it is exported. Millions of tonnes. Which in turn re-directs technical skills – an opportunity cost in a nation with a skills shortage - and which wears out infrastructure in a country where infrastructure is a top priority for investors, including pension funds targeting ESG as our 2007 study revealed.

Highest per capita Carbon Footprint in Africa

South Africa is the country with the highest per capita carbon footprint in Africa and one of the highest in all emerging markets. Ideas impacting SA’s direction are as strategically important as SIF’s 9-point wishlist is to Obama. As BD opines, “[i]nvestment in alternative energy [is] compellingly affordable” with the right policy direction [there are more than the two fundamental ones offered by BD], and the right incentives [see the mistake-riddled defence from Petrochemicals spokesperson in today's BD]. Like rewarding corporate and institutional behaviour that incentivizes lower priced power in environmentally sustainable way. Which is where by now – nearly three years after the launch of the PRI in April 2006 at the NYSE - one would have expected the “presence” of at least the African investors in ESKOM to have become apparent. A positive sidenote is the fund democracy of the largest pension fund in Africa, SA GEPF, currently advertising for pensioner trustee representatives.

The relative silence on ESG issues in proxy action and investment analyst meetings in Africa is as deafening as the audience at the Humboldt lecture. The odd uncomfortable comment may tip-toe around “ethical” issues – the usual comments on “sin stocks”, but not in the ordinary analysis. When last did you see a direct reference to climate change costs in the quantitative analysis of a power-generating utility in emerging markets [see ESKOM's reference to environmental externalities in 2006]? In the US, a client in Manhattan reports their carbon calculator integrating Carbon Disclosure Project [CDP] 2008 data on electric-power generating utilities is interesting to their fixed income team, ignored by the equity team. In SA, while the FM carried the chains of bankers nervous on the cover, perhaps it was fitting that Enviroserv Waste Management
advertised on the back cover.
SRIX.GS

Sustainable Finance Cold, Flat and Crowded

2009-01-20T02:11:00.022-05:00

Sustainable Finance

Investment is about the price you buy, the price you sell, and how long one holds in that position. You may be very smart, but the market may make a fool of you. And as investors from Benjamin Graham to Peter Lynch to Sir John Templeton to Warren Buffet have opined, there must be times when you have to be confident enough to be contrarian. Stand when the herd rampages off, and step away discretely when the thundering herd comes running back. So perhaps the smartest move is obvious for the smartest US president in a few years: either walk on water up to the Lincoln Memorial, or call a first presidential media conference to announce:

“Thank you fellow Americans, for believing in me, and voting for me to be here today. Knowing you expect everything of me is a wonderfully challenging, and not being one to disappoint you all, I quit. Now believe in yourself. I’m off to bodysurf in Hawaii…”

It is an understatement that expectations are high on the Potomac, and on planet earth. Obama must feel like Brazil come football World Cup time, Steve Jobs at Macworld or Ferrari at Monza. Friends and colleagues are trekking to Washington, DC for the inauguration, or to local celebrations like the African Celebration, and even heading up to Kenya to be live through the African American connection. It is mind-boggling to think his grandmother and aunt were packing for the flight from Nairobi. The epoch-changing event is building in intensity. One newspaper referred to Obama as the biggest celebrity in the world, the world’s best-known human. Symbolism is high ahead of the basic realities like administration. No pressure then, ‘ey?!

U2 and US

Sunday’s pre-inauguration concert at Lincoln Memorial introduced some of the celebrity. U2 singing for MLK made a strong picture. U2’s set of “Pride” written for MLK [today is Martin Luther King Day in the US] and sung with gusto during U2’s Rattle & Hum tour in the US in 1988, and the U2 theme song adopted by the Obama/Biden campaign, “City of Blinding Lights” with its sweet electric guitar hook. To have the greatest band in history playing on the steps where their icon MLK spoke for peace, and singing “Pride, In the Name of Love” was culture intersecting history. Live, and imperfect [like lead-singer Bono getting his math wrong!]. Being Bono, he went straight for the jugular of the issue of the day, dedicating “pride” and the reconciliation message also to Israel, and to Palestine. You can imagine the prime-time US producers holding their breath and fingering the tape-delay button. Maybe that is why Obama was not quite singing along [or maybe as a former nerd he does not quite have U2 cred?]. I expected that with the opportunity for a gospel choir, “I Still Haven’t Found What I’m Looking For” would have been selected, but perhaps that would not be sufficiently victorious. In true U2 style, in homage to America, they tweaked the lyrics just like they did at the NFL Superbowl concert after 9/11 in 2002. U2 has been as good to the USA, as the US has been to U2. Check Youtube for U2 Obama Inauguration and U2 NFL Superbowl 2002.

Cold, Flat and Crowded

What is the sustainable finance angle here? With a nod to Mr Friedman’s “Hot, Flat and Crowded” I suggest that the inauguration offers a “Cold, Flat, and Crowded” moment for sustainable finance and sustainability + investment. Expectations are high, but the grit of real details – like gravity – always will decide.

i. Cold
Firstly, cold. Cold because, like in many inaugurations before, DC is known for the odd cold snap: it should be around... Nothing like Woodstock, VT where the president would need a Subaru not a Cadillac as presidential limo, but worthy of spectators bundled up like Eskimos and letting loose those ugly Uggs. Maybe this will help curb the length of speeches. The Northeast in winter is a grim place to be. The choice events have money managers in the Caribbean, or at least Florida. Hard-working and budget-tight responsible investment types were warm but local in New York City for the Institutional Investor/SIF 3rd Responsible Investment Forum. Word is that the mood was grim with cut-backs and retrenchments all round, although the headline presentation from John Ruggie was important, and attendance was down. The venue [Union League Club in midtown] does help allow the creative mind to drift to higher thoughts for a while. Last year between conference calls with Credit Suisse I flipped though Walt Whitman’s “Leaves of Grass”. Somehow conferences always seem a little long though, but II/SIF in NYC is doable because the iconic Apple store and Trump Tower are both walking distance, depending on how you prefer your inspiration.

Cold because it is a grim time to consider yourself a professional focused on ESG as the cuts in research and analysis budgets cut loose whole skilled teams [Merril Lynch cut their SRI sales person in London this week]. Cold because having the oil price around USD40 removes the urgency that prices of USD125 brought to switching to cars like the one driven by CIA director Wolmsley, Republican and climate change advocate in the US, with the sticker “Osama Bin Laden Hates This Car”. Nice. Cold because in the steps to get the US economy breathing again and the frozen banks lending, cold, hard calculations will trump ambition, and investment as usual does not value the environment correctly. In investment calculations between 7 am and 7pm in London, Stockholm, Tokyo or Sao Paolo today, what price will fresh air be priced at, or West Virginian mountaintops, or rules that minimize the opportunity for oil tanker hulls being ruptured? What price for the environment? Ignoring externalities creates false economy. The trickle of mutual fund investment reported by Responsible Investor Monday in Europe is a helpful sign, but dwarfed by the investment as usual money. Investment data group Lipper Feri and Responsible Investor calculated total sales for the SRI sector in Europe for November were €784.2m ($1bn) to take the overall value of the sector to €35.3bn. Sales of non-SRI equity funds totalled €588.7m.

ii. Flat
Secondly, flat. The roads to DC policy makers and federal dollars to invest seem relatively flat and easy to travel. A good few friends have submitted their CVs online to the change.gov. Many in the sustainability+ investment space see in Obama the administration to ramp up the pressure for federal level action, beyond what in the US has been happening at State or institutional level. The Democrats, “progressives” and independents who voted Obama/Biden into office will have their list of wishes to be fulfilled. At least we hope they will be transparent, and welcome counter-points. Competing factions will arrive with their policy and investment demands. While the financial meltdown has swept away some of the more driven options for the new administration, it seems the prospect of infrastructure and “green jobs” means that some aspects of the climate change agenda and broader sustainable investment will happen. But perhaps in the first 1,000 days and not 100, days. An relevant sidenote is the similar pressure in 1992 when the first Clinton administration opened the door to “economically targeted investment” [ETI]. The results were apparently underwhelming, in the same way social and economic investments elsewhere around the world that have been overburdened in socio-economic-political expectations have under-performed, with exceptions as Tessa Hebb has written.

Flat because investors expect a small “Obama bounce” in the markets before the grim reality of America, Europe and Japan in depression comes back. The banks are still not right, Citi is now two mini-me’s, and RBS just got beaten up by Gordon Brown for “irresponsible risk-taking”. But there is hope that some of the clean tech and green collar jobs will yet come through. With a powerful funding mechanism and political will, and with so much infrastructure to build, green concepts have to form a part of the answer.

iii. Crowded
Thirdly, crowded. Crowded with people, and crowded with demands. People who come to spectate and people who come to be energized to work. The inauguration is an event for this age, especially the Y generation that helped elect Obama. Children will ask “Did you go? Were you there?” Raised on celebrity, and the celebrity of previous icons like JFK, this is their chance to be there and post their Youtube perspective of history. I wonder if anyone will track the number of Obama inauguration vlogs? The tone in the US is like an open air World Cup final, the Tour de France all in one day, and the global audience of an American Idol finale into one small location in America. The rock concert and speeches yesterday had around 600,000 live and millions watching on TV globally. The unique Obama CNN/Facebook hookup is a seminal moment for social media and means that the virtual world will have online community watching and interacting. Its crowded with colleagues from the international investment and policy space, including those who like the phrase “responsible investment”, not a favourite of mine [along with ‘ethical investment”] because for the professional practitioner, it raises issues of whose responsibility, for what, and for how long; as well as the implication that all other investors are “irresponsible” which mainly just generates a negative dynamic. Sustainability + investment, ESG factors or sustainable finance work better.

Crowded with interested people and potential players. Whether they voted last November or could not vote, many professionals and people with thoughts of a new context or with stars in their eyes want to be in DC in the moment. The image of the president-elect and his family onstage for the election victory in Chicago - not white but black, and successful and representing a fresh image of America - will be set down in collages beside images from Tuesday of the first black president raising his hand to accept the role of president. In the US where much of the sustainability/ESG/socially responsible investment space is covered by voters who are probably Democrats, the appeal is obvious. At last, one of their own. Or so it seems. Obama is closer to U2 than people appreciate. As Obama himself reflected, and like U2’s songs, he is in many ways just a plain canvas that the people use to tell their own stories on, and through. A plain canvas, whether U2’s striving lyrics or Obama’s open-ended rhetoric. World citizens too from the US, UK and elsewhere are in Washington DC, seeing something to shout about, including at least one of President Mandela’s children, Zindzi Mandela. If only Madiba were a little younger, to be able to fly there and appreciate another historical moment. Many of the sustainability and policy shops have people on the ground in DC, like The Nature Conservancy [TNC], WWF, World Resources Institute [WRI], and niche investors like Albright Capital or the IFC, although Al Gore’s Generation Investment Management acknowledged that DC is a backwater for investors when they re-located to New York last year to be closer to capital rather than policy. But perhaps the US government spending a trillion dollars changes the rules of the asset-gathering thinking?

Ignoring externalities creates false economy. As false as the rubbish mortgage lending and investment ratings that melted markets in Q3 2008. If Obama’s Nobel-prize winning energy minister can make that case to coal-rich US, the case for externalities globally will take a major step forward. Maybe, just maybe, it will be time to watch out for that walk on water.
SRIX.GS

The Russians Are Coming. Strutting Nuclear Power

2009-01-13T06:34:00.021-05:00

We knew it was coming. Then it was refused permission. But now, the Russians have arrived! Tuesday in the late afternoon sunlight it was quayside. Dark, blue, sharp - all latent power, metallic angles and drilled sailors in whites. The Russian nuclear cruiser Pyotr Veliky [Peter the Great], flagship of the Russian Northern Fleet, is tied alongside next to the container channel in Cape Town Harbour with a shiny red star on the bow. Battlecruisers like Pytor are some of the largest warships in the world, second only to aircraft carriers, and are similar in size to a World War 1 battleship.

The South Africa’s National Nuclear Regulator originally refused entry to dock in CPT, with good reason based on the Russian Navy's history, q.v. comment by the Russian Northern Fleet Chief Commander, Admiral Vladimir Kuroedov in 2004 “Pyotr Velikiy's reactor was in an extremely bad condition and could explode ‘at any moment’,” and the disaster of K-141 Kursk nuclear submarine.

The Pyotr Veliky captain’s orders must have been clear – sail to Cape Town, get to the V&A Waterfront, and do some shopping in the January sales. At least that's what we assume because news reports it was “deemed too big to berth at the V&A Waterfront” and I cannot recall other capital ships trying to turn right after entering the harbour... When the Russian Navy wants to strut their stuff, they are very subtle. Next time the Americans send their nuclear-powered aircraft carrier back, they’ll probably want to park it in front of the V&A clocktower! The Americans had the discretion to float gently in the Table Bay gales when the USS Theodore Rossevelt arrived in October 2008. On the other hand, maybe the US Navy was just exhausted having determinedly conducted shock-and-awe against red tape for years to make it happen.

Maybe the Russians saw a few too many Cape tourism photos, or South African parliamentarians are about to make another arms deal that will distract presidents and would-be presidents for years to come…let's hope not like THAT other one, the one Archbishop Tutu has requested an inquiry into. The military ship was being patrolled last night by a SA Navy inshore boat [see it near the stern, above], watching for any protesters or drunken seals. Local NGO The Anti-War Coalition did react to the arrival, as they did to the US carrier in 2008. Note also the Russian Navy flag, looks a bit like the Scots. Unfortunately, I will not be sneaking happy snaps up close.

Are there any other nuclear-powered ships from any other nations of the world that want to dock in CPT to check out the new FIFA WC2010 stadium at Green Point? Guys, maybe just read the WorldCupblog. Perhaps the approval for the visit from Pretoria is the SA government serious about creating jobs [part of the ANC’s election manifesto the past three elections, but…]. The last time a nuclear-powered ship wanted to dock in 2005 but was denied, a storm in a teacup brewed up:

“The ship [US aircraft carrier USS Harry S Truman] eventually sailed past, prompting an outcry from local businesses that would have benefited from the spending power of more than 6000 visiting sailors”.

Well, at least the American sailors in 2008 did play rugby! I wonder how many crew the Russians have ready to buy wine and biltong, how many play rugby, and oh, I would pay to see some Russian sailors try and haggle with a minibus taxi driver, hanging out the window calling destinations with thick Cape Flats accent… Maybe that’s why all hands were on deck astern for at least an hour in the twilight last night getting a briefing from the captain and/or liaisons.

Curious minds that you are, one expects the reader will want to know what it takes for a nuclear ship to dock in SA. The original dates were blocked by NNR for “specific criteria for the refusal related to a safety certificate from the Russian regulatory authority; a liability letter that provided only for international nuclear damage; and an emergency plan that was ‘not comprehensive enough’". Good to know that instructions to evacuate CPT will be issued in Russian. Pyotr Veliky sits in the harbour about 1.5km down the mountain from here – wonder how fast after "dear comrades, we regret to inform you..." I could whip the MTB out and pedal over Devils Peak?!

Nuclear Power

Nuclear-powered ships are really about steam boilers driving pistons. Similarly, nuclear-powered electricity generation remains a tough item in the ongoing debates about responses to climate change. There is a reason no nuclear plant has been built in the US in 30+ years, mostly due to "Not In My Back Yard" [NIMBY] and no financial firms willing to fund the huge capital costs. Nuclear power is under-covered in South Africa. In apartheid SA it had a powerful isolationist, screw-them component. Koeberg, about 50km up the cold West Coast from CPT, is the sole nuclear plant, French-built [Framatome] and commissioned in 1984. New construction on partly SA-developed technology ["pebble bed modular reactor"] was shelved. But in 2009 all bets were back on after ESKOM failed to provide electricity leading to bad waves of brownouts in SA in late 2007/early 2008. And with a large portion of the planet’s uranium, seems to make sense. For investors into the nuclear sector in SA though, about the only direct exposure would be via ESKOM fixed income instruments.

Business Report this morning included a headline “SA's next nuclear power plant to come on stream by 2019” indicating nuclear is back in the mix and moving forward. The SA government is doing it directly because quasi-government ESKOM fumbled so badly, and dropped out. The SA government plans around 6000MW by 2019, which is two years later than original plans. Instead of supporting the ESKOM funding, the SA government is doing its own thing because “government wanted to launch a process that differed from the utility's one-time proposal to ensure it could build up the fleet over time” according to Nelisiwe Magubane, the deputy director-general at the minerals and energy department. It is not clear where the government's energy versus environment trade-off has led, though both nuclear power and Environment Minister Marthinus van Schalkwyk have risen lately, according to BR. Meanwhile, NGOs like Earthlife Africa are trying to keep focus on getting power to poor people in SA.

Nuclear energy remains a challenging item for sustainability investors like Insight Investment, those integrating environmental, social and governance factors into investment policy and practice [ESG], see article "Nuclear in my ethical portfolio please" and typical nuclear screens by EIRIS. The nuclear opportunity has an easy investment vehicle in the US, the Market Vectors Nuclear Energy (ETF) (Public, NYSE:NLR). Also, Barron's had a main feature Blossoming of Nuclear Energy and table of nuclear stocks this week [12 Jan]:

Exelon, Entergy and other nuclear-power giants are set to surge, thanks to the Obama administration's plans for heavy investment in clean energy.

It is just seven days until the Obama inauguration. A friend with a solid global strategy in Boston he developed for State Street knew he would face heat from some sections of investors and stakeholders [Union of Concerned Scientists is based in nerd-heavy Boston] but he was willing to consider it as part of the solution, names like Hitachi, Westinghouse, AREVA. GE pitched nuclear in 2005 as part of ecomagination, with response from the likes of Treehugger.com in 2006 quite equivocal, but fast forward to NEI Notes' response to Obama's plans in 2009. The respected ESG investment house in the US Calvert now has a position of:

"Calvert's two newest funds, the Global Alternative Energy Fund and the International Opportunities Fund, may in select cases invest in companies with existing nuclear power if they are demonstrating leadership in developing alternative energy. Moreover, the Funds will not invest in companies that own or operate new nuclear power plants or do not meet Calvert's safety and security performance standards".

Gov. Schwarzenegger in California says nuclear "has a great future", and recent graduate students will have good nuclear jobs in the industry. The Russian gas cuts via Ukraine to Europe again this northern winter have re-ignited the nuclear option in Europe. The UK mapped a nuclear policy in 2007, which has been criticized for not including government funding. Big, big numbers are involved when constructing nuclear power generation plans. In the US a coalition of socially responsible investors [SRI] and environmental organisations, including Friends of the Earth, Public Citizen and the shareholder activists Interfaith Center Corporate Responsibility (ICCR), in 2007 argued new nuclear power plants cannot be cost-competitive with other electricity generation alternatives [see Why a Future for Nuclear Industry is Risky, 2007].

Where Did All the Nucleons Go?

The issue is the same as for coal or consumerism: what happens to the waste? Between 70 and 90 percent of the world's spent nuclear fuel is of U.S. origin. No doubt, the siting of nuclear plants is the dramatic, as the accidents in Three Mile Island or Chernobyl suggest. Nuclear accidents are as cruel for civilians as Israel/Gaza, just silent and longer-term disfiguring. But the bigger issue, and little reported story, is where the nuclear waste [radioactive for longer than Larry King will by interviewing in suspenders] will end up. Where do all the nucleons go?

After over 20 years of research in the US and billions of dollars of “carefully planned and reviewed scientific field work”, Yucca Mountain located 80 miles northwest of Las Vegas, Nevada, is the only site under consideration for a proposed repository to store 77,000 tons of high-level radioactive waste from U.S. weapons sites and commercial nuclear reactors. But protests about shipping and storing rage on in the litigious capital centre of the world. Opposition is fierce. Senator Reid has flatly refused EVER to let the nuclear waste be stored there. And what does "low-level radioactive emissions" really mean?

Where is all the nuclear waste stored today? The IAEA has been talking about global standards [ironically in CPT in 2007], and nuclear plants even qualify for environmental standards [ISO 14001, who knew?!]. But if France gets 80+% of electricity from nuclear power, is it sitting under the slopes of Chamonix? More research is called for. One immediately wonders about the French Legion heading into the Sahara or why the Paris-Dakar Desert Rally was switched to Argentina in 2009…

Where does radioactive waste go? The current concern with CO2 is important, nuclear may be part of the solution, but building more nuclear plants needs to happen in the context of the outputs. The by-product of coal-fired energy generation is CO2 emissions, and costing outputs may have caused at least one coal deal by Dynegy to flounder. Investors - especially institutional investors - must cost outputs so we have no externalities: pollution is a deferred cost, not an externality. Just like coal-fired power plants. Just like mines. Radioactive waste from mines is a current and present danger in SA, but you would be hard-pressed to find this costed ex-ante. Storing spent fuel at Pelindaba is the SA nuclear waste plan - which implies it is being railroaded or trucked to the hillside outside Pretoria. Mmm. But then Pelindaba allegedly suffered a terrorist raid that was hushed up, according to CBS 60 Minutes [I wonder if the brave manager who foiled the raid ever got his hospital expenses paid?]. Some American administration types included the issue a year ago in an WSJ editorial page article as part of a campaign for nuclear munitions abolition at the Hoover NTI conference, and pitched Bush's call for an international spent fuel and decommissioning facility.

In the US one has some confidence that watchdog NGOs like UCS and Environmental Defense and their nuclear engineers like David Lochbaum are watching the nuclear picture, being:

“vigilant in monitoring the performance of nuclear plants and their regulators—the Nuclear Regulatory Commission”. We continue to find and expose safety and security problems at individual plants, in industry standards, and in the failure of regulators to take effective action”

The “successes” tab on UCS’s website is useful to track their progress, as is the US nuclear plants interactive map that allows users to search for safety issues.

SRI-Extra reported [6 Sept 2008 Hypodermics Overboard] about the critical nuclear leak hidden by an employee, yip, sometimes you just need a Homer Simpson on deck. The only time I want to read “near-miss” is when reading about cricket [see Neil Manthorp's adventures in AUS].

Well, where does this leave nuclear waste in Russia? It does not strike me that the Russian political leadership is open to scrutiny and Duma hearings with NGOs testifying, although Sally Osberg stated at Skoll World Forum, 2008 that “[i]n Russia, we’ve gone from virtually no NGOs eight years ago to more than 400,000 today”. WWF Russia, the Russian branch of the WWF, is active and brave. While at UNEP FI in Geneva I worked with Boris Shevchenko, Evgeny Shvarts and Elizaveta Nikonova and UNEP's Alexander Gudyma in getting the PRI translated for the first time into Russian in 2007/8 as a small engagement. In January 2009 Russian courts are weighing the threat to rare Western Pacific grey whales of the Sakahlin 1 project, litigating ExxonMobil and Rosneft to halt the pipeline. But it was the Italians who had to offer to contribute money to dismantle another Russian ship in 2004. Maybe the Russians are better in 2008 than 1998, but until 1990 nuclear waste disposal included...

“the Soviet Navy routinely dumped radioactive waste in Baltic, the northern Pacific (primarily the Sea of Japan)and Arctic waters, sites on the Kola Peninsula in the Russian North [Siberia], and on the Shkotovo and Kamchatka Peninsulas in the Russian Far East; and by holding radioactive waste on storage ships servicing the Northern and Pacific fleets”.

No wonder the Japanese wanted fresh southern African fish!. Nice. And maybe a reason why Russia claimed the Arctic in 2007? Ten years ago in 1998, around the time of the Russian bond defaults, academics reported

“[e]conomic hardships over the past decade have rendered Russia's radioactive waste handling capabilities inadequate. A severe shortage of radioactive waste storage space, coupled with a lack of funding allocations for new storage sites, has led to a difficult situation for Russia”.

The arguments for nuclear waste treatment are few and far between, lost in the calls to include nuclear power in the investment portfolio for "climate change friendly" power generation options. Lost like actual demonstrated carbon capture and sequestration [CCS] technology, the other "wonder technology". When Pyotr Veliky sails tomorrow, I hope it honours for Cape waters, and for every oceans, what a good few slobs on Table Mountain paths have not lately: when you leave, leave only your footprints.

SRIX.GS

Looking Back in Zapiro

2009-01-08T11:15:00.014-05:00

Being back in South Africa after seven years it is time to start catching up, on the society, the way of business, the political economy. Catching up on the past year is always easier in December/January. It is the time of year-end reviews and dovetails with the summer season similar to double issues in July/August in the northern hemisphere. The business dailies become anorexic and the writers eke out a few stories to tide us over. It is a good time to sneak in a qualified audit oipinion or a remote annual general meeting. One needs not really catch up on sport because those headlines come through in bite sized chunks, like the RWC 2007, Natalie du Toit at Olympics, the fumbling Bafana Bafana, or the first-ever test series win in Australia!

But what to read first? I flipped past the Financial Mail [FM] double issue, after reading the call for leadership by the editor, and the winners and losers. Yes, of course I would rather start with the sharp incisive wit of Zapiro. What better way to understand the SA psyche? As my old history teacher taught us, the political/editorial cartoonist is a brave wo/man. But with so much material, it must be a fulfilling job, although prone to recycling, with some of the craziness in the world, and in South Africa, repeating year on year [Israel/Gaza etc]. This cover [above] from Zapiro's September 2007 release of weekly cartoons refers to the SA health minister renowned for alcoholism and denial HIV/AIDS programmes. Allegedly she claimed that some vegetables potion is better than AIDS anti-retrovirals, and allegedly she bumped other liver donors so she could be operated upon sooner, faking the reason for her organ damage to hide alcoholism. Another fine Zapiro cartoon from January 2002 has a wealthy couple strolling into "Davos", reflecting the perception of hobnobbing by politicians and businesspeople at the annual WEF event in Switzerland while the poor are nowhere to be seen. That would test the humour of a few CSR, NGO and UN types I have met along the way who would be flattered to be invited...

Zapiro must have lasted as long as he has because, as his book The Mandela Files attests, he has serious credibility, and the odd endorsement from the icon Nelson Mandela himself: “Very exciting and quite accurate”. Would make a neat endorsement for one’s work, no? He is frank in interviews, and has been at the center of media freedom debate raging in SA. Zapiro was privileged to have the Mandela Foundation launch the book as part of Madiba's 90th birthday. The Mandela Files is available in the US from end April 2009, you may pre-order on Amazon. Check out the Zapiro bibliography here. Even the titles will make you smile...

I have always wondered how Zapiro managed to keep being published - his wit is cutting, and politicians have thin skins - and it turns out his Mum was active in the anti-apartheid struggle, as was he, starting out making posters for the UDF here in Cape Town and getting detained for the privilege. He also designed the poster for the End Conscription Campaign [ECC], which I remember well from high school when weighing the joys of being conscripted into an apartheid army while wanting to serve my country. Like Helen Suzman, in the rush to re-write South African history after 1994, a good few stories about ordinary people as activists have been lost along the way.

As one academic put it during a panel discussion at a Zapiro book launch late 2008, one may disagree sometimes with the Zapiro cartoon, but never with the write to publish it. The head of the ANC has taken a dim view of the September 2008 Zapiro cartoons in response to the winding Zuma rape courtcase - which became two as Zapiro responded to legal injunctions - and is suing Zapiro for ZAR7m. I wonder if Zuma becomes president in April which newspapers will be brave enough to continue printing the cartoons of the president depicted as having a shower over his head [refering to Zuma's claim that a shower washes away HIV/AIDS in court during his rape trial]. Yes, he said it.

Lounging at the Book Store
I am also delighted to find some independent bookstores, which I will support regularly. FM just covered the small but strong segment of independents in Small Bookshop Miracles. On Sunday we browsed The Book Lounge just down the mountain at the top end of the city, open for just over a year now. The bookies running it were good quality, so we’ll be back.
I had a little time to browse the "sustainability" and "business" sections too. I did pick up Choice Not Fate, the recent Trevor Manuel biography of the the well-regarded South African Finance Minister, by Pippa Green [yes, he has a wikipaedia entry]. The title Choice Not Fate seems like something I may understand based on my own lifepath, and timely, seeing as we drove past L'Ormarins in Franschhoek the afternoon Mr Manuel was marrying his longtime girlfriend and financial rockstar, Maria Ramos. we noticed the paparazzi at the gate [a first for me in SA]. The wealthy Rupert family owns L'Ormarins. I forecast that Mr Manuel will see in the new cabinet, then be recruited away to the World Bank or IMF or such. More about the bio later.

Private Equity in Africa
I am still catching up on how the South African context has moved relative to other emerging markets and developed markets over the past seven years, and where institutional investment is integrating environmental, social and governance factors [ESG] in 2009. In my investment consulting I am looking to cover alternative asset classes too, so I look forward what the private equity/venture capital conference has to offer on 12 Feb here [South Africa Private Equity Congress, 12th February 2009, Table Bay Hotel, Cape Town] to move forward my work in private equity in Africa for 2009. Perhaps I may learn more about the IFC work in sustainability in PE [the IFC called for money managers for a small US$50m PE fund in 8 low-income countires back in November 2008], and perhaps connect with Steve Beck (former CEO of Geneva Global) who has started an Africa social PE fund and is currently fundraising for capital for Springhill Equity Partners. My hopes are high, especially looking for "Western LPs"! : "Meet and network with an increasing number of Western LPs who are looking to South Africa as a potential place of investment".

Rates of Return

2009-01-03T07:07:00.004-05:00

Portfolios have now locked in the performance numbers for 2008. Funds were just wrapping up a little window-dressing of holdings at year end, re-balancing before illiquidity forces funds to hold tight, and watching for any bad news from around the world. Portfolio managers around the world will look back glumly at the hammering most portfolios took in the second half of 2008, and look forward to 2009 with gritted teeth. The major indexes flip through the story: S&P 500, Wilshire 5000, Dax, KOSPI, NIKKEI, ALSI 40, FTSE100, BOVESPA, DJSI Global. Only Tunisia was up [10%] for the year – nice work from North Africa! See Reuters FACTBOX-Final major global market losses and gains for 2008

Forecasts trend to the negative, including some that leave one cold, like today’s Factories hit by worst slump in 28 years. Moneyweb’s dry humour delivered the understatement of the year: JSE vs world markets in 2008 - It doesn't look pretty [!]. Large cap growth index tracker Vanguard FTSE Social Index Inv (MUTF:VFTSX)was down in the mid $0% range. One of my favourite small-cap growth equity mutual funds run from Boston by Mat Patsky, Winslow Green Growth(MUTF:WGGFX), was hit 62% for the year. The glass half-full: well, unlike another great fund, at least it is still standing in 2009… See Matt's comments on green investing from Feb when he was ooking forward to poitive net inflows. "When this bear market ends, be prepared for a fast and furious partial recovery," S&P's chief investment strategist Sam Stovall writes in his 2009 outlook. Historically, the S&P 500 has recouped, on average, 33% of its bear market losses 40 days after a bottom.

But at last the annus horribilis for money managers around the world has ended. Being one comfortable as an outlier, I am happy to see the glass half-full, but making the right bets and managing the volatility will be harder.

In Africa’s money management capital, Cape Town [CPT], New Year’s Day 2009 was sunshiny and blue-skied, and well-celebrated as usual, as the NYT reported. The beaches were full, and the Table Mountain cableway had a 600m queue of patient tourists mostly pale, but grilling nicely in the full African sun. You could hear the sizzling. Spreadsheets covered in red have mercifully been archived with just the year-end report backs to pension fund trustees and financial advisors to come before 2008 can be boxed as “the year of the market meltdown”. The pendulum will no doubt swing to over-regulation, and we may look forward to the finesse of the sledgehammer of politicians trying to predict and protect market players from themselves, at least until the next crisis resulting from too much regulation.

The summer weather at the bottom end of Africa and the usual European-style year-end shutdown of the holiday season eases the pressure and keeps one sane. In CPT the type-A investment professionals will be out early or late, on MTB trails in Tokai, running Table Mountain [I bumped into the CEO of Investec Asset Management, one of the big four, the other day]. Water options include wind- or kite-surfing on Sunset or surfskiing from Three Anchor Bay. As one money manager in San Francisco [CPT’s American twin city] commented, at least an hour of exercise per day is necessary to blow off the pressure of needing to be right with major decisions every working day. The major national business dailies' [Business Report and Business Day, as well as FT distribution] print editions are closed through Wed 7 Jan as a reflection of how things slow down. Just the web and the informed few in conversation in business class on aeroplanes or in Plettenburg Bay and similar holidy spots keep the pulse of business conversation throbbing. The success of the SA cricket team in Australia, up 2-0 in the 3 Test series and winning in Australia for the first time has lifted the mood many. A miracle comeback in Perth and a beyond miracle comeback in Melbourne have written the players as legends. If only more people were at their workstations so we could remind our Australian colleagues of the arrogance the past 13 years or so… The final test in Sydney offers the chance to go no.1 in ICB rankings.

Hugh Wheelan put out a thoughtful piece in Responsible-Investor.com just before Christmas, reflecting some of the conversations we have been having about the impact of the meltdown and ESG investment research as ongoing concern and business unit [see What’s the future for ESG broker research? SRI team cuts and the merger of EAI and PRI demand clear future research incentives by Hugh Wheelan, December 22nd, 2008] “a worrying development for those concerned that ESG research, still a relatively new and growing discipline, could become ‘mainstreamed’ for cost rather than content reasons”. Ironically, the cuts at Deutsche Bank ESG research in London have come as calls for more corporate governance research has flooded in.

I expect more testing of where the sustainability meta-theme intersects with “business as usual” in 2009. My philosophy that sustainability is a meta-theme, over-arching and impacting all facets of economic life on this planet, implies I am less perturbed by the coming or going of specific business units with “sustainability” tags. Like many others, my BS filter often blinks red when talking with so-called experts in sustainability, or some initiatives, or companies spinning the same old stuff through the “greenwashing” cycle [see Corpwatch's bimonthly greenwash awards]. A comment in an excellent Fast Company article from “artiste” architect Steven Holl rings true in my work as an investment architect. Some of the sustainability stuff is ugly!

One facet of his work that he actually downplays, however, is his interest in sustainable architecture. "I'm sorry to say, but 85% of so-called green firms make some of the ugliest buildings that were ever made," he says, in a typical excess of candor. "So for God's sake, I don't want to be categorized with them."

It is hard to put a value on a life, but the ROR for one woman’s life is high. The biggest news in the city was the passing of a political legend in SA, Helen Suzman. Ms Suzman was renowned for many years in the whites-only SA parliament as the sole representative of the opposition Liberal Party standing up to the National Party and the apartheid machine from 1961-1973, at least from the inside. The fact that she was female, English-speaking and Jewish must have caused endless indigestion for chauvinistic Afrikaners dreaming of a great white nation. In one of those ironies, in seeking to break down racial barriers Ms Suzman represented Houghton, an elite enclave in Johannesburg’s leafy suburbs, not far from where I enjoyed some years in the mid-1990’s, and an excellent fitness center at Old Eds. I never had the pleasure of meeting her, but her lifetime journey and steadfast integrity to her cause remains a remarkable life lived well. 91 good years. Beyond her signal achievements in life, two parallels to the conceptual and contextual work in sustainability + investment come to mind: firstly, the dogged nature required moving forward with the expectation of being a lonely traveler on the journey, and secondly, respect of her rivals. Her former opponents were forthright in their praise in media coverage, although maybe all of them mellow with age, knowing their fight are now decades old, and as older people, they are more collegial than competitive. Major South Africans have been forthright in their praise, and fittingly the icon on democratic South Africa offers the simplest and best admonition: Nelson Mandela described her as “a remarkable South African woman”. South African flags will fly at half-mast on Sunday January 4th 2009 in honour of anti-apartheid veteran Helen Suzman.

Emerging Markets…Brutal BRICs?! II/II

2008-11-26T14:52:00.011-05:00

In the week that began with Citi [C] becoming the US government's latest shareholding, JPMorganChase [JPM] was pitching their core competency as a lender, and Goldman Sachs [GS] was looking to stretch their sustainability advantage branding their research and investment products. JPM was busy offering a full page advertisement in WSJ Eastern edition A5 Tues 25 Nov pitching to the WSJ readership on their commitment to lending [“Our Business Is Lending. And That’s Exactly What We’re Doing”], including “in a responsible way”. Yes, I can only imagine what my mate who taught me how to build a BS filter for company ESG claims, the KLD research director in Boston, will say about that one!

Goldman Sachs was taking the front foot in the FT Mon p.3 with the first above-the-line hardcopy advertisement I have seen for GS Sustain, a fair advertising budget commitment to go above-the-line. Of course GS hedged bets by burying the ESG lead in the body, the sub-title “innovative thinking finds innovative companies”, and one has to mine the paragraph further for “a unique global equity strategy that brings together ESG (environmental, social and governance) criteria, broad industry analysis and return on capital to identify long term investment opportunities”. But GS now fronts their homepage with GS Sustain. Clearly someone is taking a big bet, and perhaps with freefall markets, a good time to try something completely different.

GS Sustain has a colourful history. It's strong underpin is from the GS sell-side in London via the work dating back to 2003 of Anthony Ling in the Energy Equity Research team, and then taken forward by Sarah Forrest, Marc Fox and colleagues. Sarah is now an Executive Director for Global Investment Research. After finally establishing a coordinated framework in early 2007 – GS Sustain – which launched to plaudits from the usual UN Global Compact types and affiliates in Geneva last July, the GS Sustain brand has been slowly building. Like IBM, no presenter looks dumb when quoting GS – a false security to be sure – but expedient for now. Indeed, in my MBA865 seminar at Kenan-Flagler Business School, Sustainability in Investment Strategy at Chapel Hill last week, one of the most informed students referred to “it’s Goldman Sachs!” as the GS halo in the ESG space proves to light the way for less skeptical inquiry of how sustainability plays in. Clearly GS benefits from being one of the two last i-banks standing, [mostly!], and may push for competitive advantage on sustainability matters in the FT, the print daily which positions itself in US as more global than the WSJ or NYT Business Day as a major business daily. Companies, as they do with any positive third party assessment, but especially when it is a major i-Bank brand, are only to happy to tout their standing in any competitive assessment, such as BG Group [LON: BG] a natural gas company.

I was first alerted to the new GS Asset Management product built off the GS sell-side’s GS Sustain framework in Manhattan at the Sustainable Investing 2008, People. Plant. Profit. on September 23-24th, 2008 at The Harmonie Club, New York City. At that time the product was available offshore only, but now institutional US clients may access it. The conference was hosted by Financial Research Associates, LLC for the first time, as a new conference publisher entering the sustainability space, with assistance from SIF.

In the next two weeks I will be having a more solid look at GS Sustain GSAM product as forward planning for when it has run a year at least and we may start recommending the strategy from an informed understanding to the benefit of asset owners and multi-managers. I like that GS Sustain is in the game, for sure, but a close examination of some of the underlying criteria makes me cautious based on my past experience of ratings that are built on "box checking". The framework looks good, but underlying data, and assumptions like memberships of an initiative or international organization sending signals about sustainability, may be sub-optimal. I am cautiously positive, and our recommendation at Sinclair & Company to investors is to observe closely, and stress-test the ideas before becoming convinced. I have not reviewed the strategy in detail since hearing about it in late Sept, partly because the most impressive aspect of the Sustainable Investing 2008 event had me moving to other thinking. Other than Tim Smith’s usual excellent chairmanship [when not chairing SIF, he is in Boston as Senior Vice President at Walden Asset Management], was the compelling speech by Joe Keefe CEO of PAX over lunch, one of the best expositions on where ESG/sustainability investment is in 2008, and where it may go, an extract of which is here.

And of games, well, it just would not be right to cover emerging markets and London in the same story, and fail to mention Saturday's smashing game the Springboks played against England which CNN titled "Springboks Thrash England at Twickenham". Rugby, like life, rewards grit as well as grace, with patience a coaching watchword lately. So comprehensive, the Brits found time to boo their team. Yikes! The tackles, the tenacity and the touch South Africa showed against England in their backyard, racking up the Roses’ biggest ever loss at home, was a fresh reminder of the entrepreneurial and rugged nature of the boys from the bottom end of Africa.

Sarah is an Aussie, so she would have enjoyed it, and the headliner from The Australian "Springboks Outclass England at Twickenham". The boys from Goldman are credited with the BRIC moniker coined the term ‘BRIC’ in our Global Economics Paper, ‘Building Better Global Economic BRICs’, published on November 30, 2001. Maybe they had seen Bakkies [“bricks”] Botha make a tackle sometime before, like the try-saving one he made on Saturday? [sidenote: should every rugby player hope for a wikipaedia entry?!]. Yes, I know, South Africa has the ability to play sublimely one week [has Australia recovered from 50-odd thwack at Ellis Park, their biggest ever Test loss?] to the slack - only one Tri-Nations title in all these years. But as I pitched at the Paris UN PRI Board meeting in Nov 2007 - to the sullen looks from the Englishman directly after Springboks won in Paris [and a smile from the Frenchmen] - nice to see EM on top. A small smile for EM slips out when running through the scoreboard from Saturday: Emerging Markets 42 vs. Developed Markets 6.

The England coach called it “brutal” and “a lesson”. Pretty much sums up the financial meltdown for EM and the rest of the world too, and the bleak '09 outlook. Enough said.

SRIX.GS

Emerging Markets…Brutal?! Not For Sissies! I/II

2008-11-26T10:40:00.017-05:00

It has been a rough spring in emerging markets in the South [this photo is from April, obviously]. The emerging markets, as simplified and represented by the BRICS moniker [Brazil, Russia, India, China, South Korea and South Africa], have been bounced out the back of the financial services meltdown wagon. The benchmark indices catch you up on the story quickly, and the forex cross-rates quickly offer the impact - Brazilian ranches, Russian dachas or South African wine estates are cheap right now for payers in USD! Yes, as a fixed income manager mate in Cape Town will attest, this creates a serious challenge for his vacation strategy – which weakened forex rate best matches the exotic destination he would like to visit in January?!

Back in February, Goldman Sachs BRICS team spoke of the de-coupling hope…

“…expect GDP growth in the BRICs to be lower this year than last, the structural changes in these economies-and indeed in the world economy-are likely to make the impact of the global slowdown less severe than in the past…one of the key underpinnings of the BRICs' strength: capital flows”

BRIC is the original acronym coined by the GS EM team in NYC, although BRICS is my preferred acronym, and ChIndia the population-weighted current favourite on CNBC. And whether local or foreign, how tough the investment forecasting game is may be illustrated by reflecting on conclusions like…

“Overall, the deterioration in capital flows that we anticipate this year is manageable, and we remain bullish on the BRICs currencies. We expect appreciation of 8% against the USD in China, 4% against the USD/EUR basket in Russia, and 5% against the USD in India. In Brazil, we think the Real could strengthen over the next three months, but it is likely to weaken later in the year.”

The personal finance regulars in WSJ Tues covered the sad EM tale with their “SmartMoney” screens, from being up 50% p.a. in China in ‘06 and Brazil in ‘07, now down about the same magnitude in ‘08, with the Fidelity Latin America fund down -65.6% YTD @ 20 Nov. Yikes! No wonder Fidelity is letting go staff in BOS to trim expenses. Interesting as always to note the pricing – of the no-load funds, the passive tracking option from Vanguard [Vanguard Emerging Markets Stock VEIEX] proves to be cheapest as always, with 40bps annual fee. And like Wal-Mart soaring in these tough depression days as consumers know where to purchase lots of cheap stuff, maybe Vanguard will gather assets even as the regular 401k contributions have to go somewhere. But retirement advisors, a growing advisory service category according to FRC, will need to be longer-term orientated to recommend emerging markets to US clients in 2008. Like Africa, EM is not for sissies! Donald Hanna, MD and Global Head of Emerging Markets Economic & Market Analysis at CITI in New York, offered a bleak look at where EM may be for ‘09 in a presentation in BOS last Thurs. His take on Brazil and South Africa seemed fair...hard times ahead.

Standard Chartered, a bank and a solid emerging markets play based on their strong network in Middle East and Africa, is raising around USD3 bn through a rights issue and just hosted an Investor Trip to its banking operations in India, Abu Dhabi and Dubai from 17 to 20 November 2008. Standard Chartered has a network of over 1,750 branches and outlets in more than 70 countries across the Asia Pacific Region, South Asia, the Middle East, Africa, Europe and the Americas and employees about 75,000 employees from 115 nationalities. Their branding tied to marathon running and cricket hints at their EM exposure. Although without an in-house money manager [I pitched them on joining the PRI in EM project back in Dec 07], nor with direct exposure to toxic US mortgage assets or developed markets financial services, the tough times ahead imply the need for more capital on hand. STAN has some good programmes in EM, as the programme head Mariannne Mwaniki covered last July at for the Global Compact 4th annual Communication on Progress (COP) workshop at the Palais des Nations in Geneva.

Many EM banks did not have direct exposure to sub-prime. But similar to our experience in the South African market, where banks and money managers were prevented from reckless exposure by capital restrictions allowing only 15% offshore investment and hence no major exposure to the developed markets contagion, the resulting flight from risk – perceived or real – has smacked the forex rates and JSE as investors pulled back cash from every accessible liquid markets. At STAN I like some of the work done to play in local communities, for which STAN has won acclaim. STAN have used the IFC Equator Principles guidelines on STAN project finance in developing countries since their inception and adopted the revised Equator Principles 2 (EP2) in June 2006. I think EP2 is solid, but I know NGOs like Banktrack.org have their doubts, and I look forward to research to check in on progress on the ground from a former Boston College Center for Corporate Citizenship colleague now at HKS.

In the STAN [Standard Chartered PLC, LON:STAN] core banking business, the opportunity “at the bottom of the pyramid” makes sense: improving access to sustainable financial services plays an important role in empowering people, both socially and economically, and grows the STAN client base. In Q1 '08 STAN’s Robert Tacon was elected to head UNEP FI, the UNEP/financial sector initiative that organizes conferences and publishes pamphlet [see basic PPT from Seoul July '08 here]. It was a pity when he left in later this year, although I am not sure really what happened there… STAN’s above-the-line campaign, including the FT US print on p.8 of Mon 24 Nov US edition, makes clever connection to their business + community approach with a board room morphing into a well. Solid brand positioning is their reward for a clear marketing message.

STAN is not in Eastern Europe, Latin America, nor the Far East. When we last spoke in his role in sustainability at STAN, Rob's view was that it was:

Look at what organization sets itself as objective, for example, is environmental and social factors on the agenda?
And if it is, then how is it implemented?

His opinion was that companies that take into account ESG will do better. The aim of training is to show why ESG is important, as a long run issue, while in the short term is about reputation. But the benefits to organization need time to manifest itself, it also depends who they are investing for. In EM, he confirmed, it is very hard to convince people, far more difficult to crack sustainability in many respects.

At least STAN has not copied Barclays which has basically shattered investor confidence by rushing to the “Medici” in the Middle East for cash, apparently GBP 7bn [USD 11bn], rather than UK government money with strings. STAN is tapping existing shareholders first. Barclays, which itself bumped up EM exposure by taking a controlling interest in ABSA, one of the big four in South Africa, managed to upset all shareholders with their plan. But being stuck up a creek without a paddle, the investors apparently agreed Mon to let Barclays proceed, knowing that the whole Board is up for a vote next April. Do not be surprised when the door swings the other way at the first next opportunity. George Dallas, the director of corporate governance at F&C Asset Management [and former head of S&P’s CG effort before that was frittered away so needlessly like other ratings agencies], was piqued on Mon. F&C had “reluctantly” voted for the capital raising, but George was quoted as saying "We think that this amounts to a clear and egregious abuse of pre-emption rights. We object that the consequences of voting against this particular transaction would make a bad situation worse". F&C sees "environmental, social and governance [ESG] issues as fundamental drivers of long-term corporate performance, a principle that is central to F&C’s philosophy as an asset manager", and sell their responsible engagement overlay [REO] service.

The Barclays meeting was a fun example of live capitalism right up there with Gordon Gecko’s Wall St address. Shareholders at the 200-strong gathering were still asking questions after 2 hours when Marcus Agius, the bank's chairman, closed the meeting and one shareholder was apparently checked by security guards as he approached the stage. Chairman of Barclays? It too is not for sissies!
SRIX.GS

Big Green, Green Collar Jobs

2008-09-13T10:48:00.019-04:00

Dartmouth College is one of the eight Ivy League schools in the US. “Big Green” is smaller and less well-known than the Harvard or Yale. It's motto sums it up: Vox clamantis in deserto ("the voice of one crying in the wilderness"). The red brick and white column campus with greens is set in the small town of Hanover, N.H. in the Upper Valley along the Vermont/New Hampshire border with a tight-knit community of an outdoor orientation [and a reputation for partying the cold winters away]. They even say the Dartmouth rugby team is half-decent.

Big Green

Tuck Business School is a top ten school where hyper-competitive Wall St types go to advance their careers, but also home to a solid Net Impact chapter and the Allwin Initiative. Tuck ranked 1st in the WSJ ranking, 15th in the FT Global ranking. The aims of making the B-school education current and contextually relevant in a multi-polar world has helped Allwin Initiative find a solid niche in the crowded syllabus and competing agendas [see IFC GBSN]. This offers a pertinent example of the current reality of the prevailing stakeholder approach to modern business: business thrives in stable societies with healthy environments. In a global world, every corner starts to matter. Pat Palmiotto administers the AI program, which includes a Nonprofit Board Fellows program and consulting opportunities in places like South Africa, getting MBAs the coalface experience they need to look less like McKinsey-types in suits, and more like 21st century business leaders. I have attended a few in the last five years, and the day always offers a handful of sharp insights and new colleagues in the sustainability field.

Thayer School of Engineering building is next to the B-school, and playing in engineering offers a strong competitive advantage for the AI. The challenges of fitting onto one planet without a “Mad Max” ending in a century or two will require some very smart creators of widgets and some very smart sellers of widgets. One Planet Leaders included a broad range of reference material on it, including from the WWF. MIT Sloan enjoys the same advantage. It was at AI in January, 2005 is where I first had an in-depth conversation with the first sustainability person at Wal-Mart, well before Lee Scott’s post-Katrina re-awakening [see 21st Century leadership speech] that running a good store may include being responsible to your consumers and staff. Businessweek covered the thrid year of AI in 2005. The most recent AI drew 300 Tuck students, nearly ¾ of the class, a reflection of great leadership by the Tuck Net Impact chapter, a stacked agenda, and the right kind of band playing!

Green Collar Jobs

Big green also describes the report this week that “green investment” may create 2 million jobs. “Green collar” is the catchy phrase floating around efforts to identify the positives of the sustainability field, where innovation attracts new business models and new ways of managing resources that covers the “green” or environmentally-friendly means of conducting business. In New Hampshire, as in emerging markets like Malaysia and Brazil which I visited over the summer, has a mix of rich and poor. You do not have to drive far [in the state car, the Subaru!] down one of the winding roads to find the reality that much of New Hampshire has rural poor. The state’s politics reflects the mix: McCain ’00 handily beat Bush ’00. The people are hardy, talk straight, and need decent jobs.

The U.S. may create 2 million jobs over two years by investing in a rapid green economic recovery program, according to “Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy,” a report prepared by the Political Economy Research Institute at the University of Massachusetts-Amherst under commission by the Center for American Progress. $100 billion green investment package would create nearly four times more jobs than spending the same amount of money within the oil industry, and reduce the unemployment rate to 4.4 percent over two years.

This being the height of political season in the US, talk of jobs in a tough economy matters [although the buzz around Sarah Palin’s hockey-mom lifestyle distracted from real social and political issues for a while]. Some of the green collar talk may simply be re-branding. No-one would think of calling “green collar” the guys I remember seeing late at night or on early morning runs in Durban, South Africa, guys who would be manfully struggling up a hill pushing a shopping trolley [carts] loaded up with cardboard boxes or soda cans. No-one would tell them they are part of the sustainable solution, they simply knew collecting enough stuff that some scrap collector paid them rands and cents for would put food on the table. Making their own jobs. It is not unreasonable to project a raft of new types of jobs, and more jobs, where the environment comes to have a value it should always have had, and “externalities” is a term that goes extinct. Brazil ranks high in aluminum can recycling - who knew, there is an international ranking - recycling 95% of canswhile the debate on enviromental footprint of cans vs bottles rages on in the US.

Scrap and waste management is never going to be a glamorous industry, but waste management services in the US is up over 40% over three years, outstripping the S&P500 of around 3%. The mafia-tainted wranglings in Naples ensured garbage remained an ugly word early this summer. Garbage rotted on the streets in the heat for weeks, before crisis politics saw the trash shipped by rail to Germany. The city of Hamburg accepted the waste management contract and its issue for 1,000 euros per ton. The look of things to come?

Hamburg, a city of 1.8 million, produces 1 million tons of garbage a year, 700,000 tons of that from private households. Fiedler says about one third is recycled by compost plants and scrap processors. Incineration work costs 250 to 350 euros (392 to 550 dollars) per ton.

New York City ships its garbage to South Carolina. Radioactive waste floated around the world until a German magazine covered dumping in Africa.

The “big green” in waste management in the US, Waste Management Inc, up 10% over 5 years, but share price has been choppy. WMI, has had its hands full with labor union challenges of late. But the firm has been moving forward into the gap sustainability introduces for them: more firms are seeking ways to reduce waste, process it in a more environmentally-friendly way, and potentially earn back revenue from the energy of biomass power generation. WMI was able to roll out a new sustainability service business, franchising their skill in waste management and the software that sits behind it.

Ranking Green

Good quality analysis of “green” or “environmentally-friendly” business will become increasingly relevant as more and more firms tout “green” credentials, just like their safety records. Media-driven ranking tables remain a key measure for a meritocracy as a market-capitalist society aims to be. Firms watch rankings like the Fortune Most Admired and Best Companies to Work For, universities watch the US News & World Report college rankings, and students wait anxiously for their GMATs or SATs, a standardized academic test which determines who goes to Ivy Leagues and public elites like Michigan and Chapel Hill, and who does not. MBAs are all to familiar with GMAT scores. Years in the industry, including a few at leading research shop KLD in Boston, helped my BS filter pick up greenwashing or the PR spin that investor relations would seek to push. Alonovo.com presented a new approach to the business model, doing better with Amazon.com.

Word this week of a new rating shop seeking to develop a US News standard ranking of “green” companies bears watching, partly for who is involved, and what the results of the ranking reveal. As a forthcoming article for Responsible Investor on the practical problems of ESG integration describes, the frequency and currency of the data upon which major ESG analysis is made remains a weakness. Equally challenging is that no objective assessment of sustainability, and therefore performance attribution integrating ESG factors, is available. Money management is a competitive business, and scores must be kept, and for scores, we need goalposts standing clear and tall. Investment professionals manage around USD 70 trillion of “other people’s money”, excluding sovereign wealth funds. Practitioners in investment centers like Boston, Sao Paolo, Cape Town and Zurich are feeling compelled to integrate more sustainability thinking into their investment decisions.

Evaluating sustainability is seldom forward looking: GE’s US$10 billion ecomagination businesses have only recently been rewarded with ratings [Greenorder built the brilliant ecomagination campaign in 2005, the 2007 report keeps score], GE itself increasing objectives for 2012. Lagging analysis of company sustainability performance remains a major barrier to comparing and contrasting investment ideas. ESG data collection itself remains a competitive advantage, on top of the added value from analysis, so perhaps a new ranking will use advertising-supported dollars to fund new ways of coverage, or deeper coverage, or both. Quality research is expensive, and becoming more expensive: on 10 September Credit Suisse announced plans to charge new clients for access to its research analysts. Money managers must trade-off deeper understanding with the added costs of idea R&D. But perhaps a leading media journal may harvest the fields of “green” claims in advertising to fund better research. That would make a good use of the Google business model [advertising-drives revenue] to green business. In this, Google’s tenth year, that would match the GOOG motto of “do no evil”! GOOG is up 300% since the IPO via Dutch-auction, still a favourite listing of a company removing the usual payoff to Wall St insiders, not the usual old boys' i-banking launch.

My experience with the Business Ethics 100 taught that crisp, clean data fed through a rigorous and objective criteria based on sustainability philosophy will reveal mostly the better companies, but also some anomalies. Enter the political index committee stage right. Then the oldest cynic, or the index chair, or the person who’s name is on the firm’s door may affect the outcomes. A ranking must include some external review, perhaps an advisory board of some ilk, and a transparent process that may not necessarily reveal so much it may be gamed by big-spending corporations, but offers confidence in the approach. Perhaps a surprise winner will pop out the top as Green Mountain Coffee Roasters GMCR did for BE100 in 2006 – a year before their first-ever CSR report!

Okapi

Finally, a positive note from CNN on a “mythical” animal in Africa. The American Museum of Natural History in New York next to Central Park [yes, the same one Stiller fumbled around in Night at the Museum] was where I first saw the giraffe-relative, the okapi, in the diorama from 19th century exploring. A basic modern technology, the camera-trap, brought good news that it still exists in the wild. Smart animal, it uses its amazing camouflage to remain scarce from humans. In another positive role for zoos [see SRI-Extra 14 August on the hotel zoo in Manaus], the Bushmeat and Forests Conservation Program at the Zoological Society of London had the funding to place cameras in the Virunga National Park in the civil war-torn Democratic Republic of Congo. While fashion magazines are reeling from reduced advertising in tough economic times, perhaps they should ditch trotting out the full-page '90s supermodels like Naomi Campbell and Claudia Schiffer, for a beautiful natural creature with these characteristics...

The okapi's face and long legs resemble those of the giraffe, their closest-living relative, but they look more like horses with long necks. The average height of their shoulders is 1.6 meters (5 feet, 3 inches). They have a short, dense, velvety coat and dark prehensile tongue long enough to clean their own eyelids and ears.

Over the Horizon II/II: Hyperdermics Overboard

2008-09-06T23:32:00.012-04:00

The past week has had me pondering the role of whistleblowers, and the ethics of average people looking to do business. The Year of the Whistleblower [2002] seems more than just five years ago, but that was when Enron, Worldcom et al were still fresh in our minds [see excellent Business Week article 2002 Year of the Whistleblower: The personal costs are high, but a new law protects truth-tellers as never before]. Aside from Homer Simpson, I know no employees at nuclear facilities, but there is someone I would love to talk with. Media reported the sentencing of the nuclear plant engineer in Eerie, PA who fudged reporting of a six-inch steel core corroded by acid to within millimeters of a breach of a nuclear plant owned by FirstEnergy Corp. No luminous fish have been found! AP reports from Ohio:

Jurors on Tuesday convicted a former nuclear plant engineer of hiding information from government regulators about the worst corrosion ever found at a U.S.reactor. Prosecutors said Andrew Siemaszko and two other workers lied in 2001 so the Davis-Besse plant alongLake Erie could delay a shutdown for a safety inspection. Months later, inspectors found an acid leak that nearly ate through the reactor's 6-inch-thick steel cap.

What was he thinking? The fracture leaked again during patching in January of this year [where was Homer?!], and the company aims to request another two nuclear operating licenses.

Front page this week was news that a Halliburton man admitted to millions of dollars of bribes [US$180m] to win natural gas contracts in Nigeria in the 1996-2000 period, when current US Vice President Dick Cheney was CEO. The man faces years in prison, but no word on the Nigerian side of the deal, nor the living conditions of the man’s wife and children and their gilded lives his lifestyle must have afforded. Coverage of the case makes for fascinating reading, including the indirect path to the case, following on an unrelated case in France that led investigators in France, the US and Switzerland to hunt down the frauds. Bribing officials subjects executives and their companies to prosecution under the U.S. Foreign Corrupt Practices Act. A French magistrate began looking into the matter in October 2003, uncovering shell corporations in Gibraltar and bank accounts in Switzerland. U.S. investigators joined the hunt in January 2004, according to Halliburton SEC filings, all of this monitored by accountability activists. Perhaps the SEC investigation will pick up further interesting stories... Elsewhere, whistleblowers face an uncertain future. Merck & Co. has agreed to pay $650 million to settle two long-standing lawsuits involving whistleblowers over Medicare pricing practices and related marketing activities. But Wyeth had a suit brought on vaccine training dropped. The landmark Sarbanes-Oxley Act of 2002 gives those who report corporate misconduct sweeping new legal protection. An executive who retaliates against a corporate whistleblower can be held criminally liable and imprisoned for up to 10 years. But this week the US Department of Labor, charged with enforcing the federal law protecting corporate whistleblowers at publicly traded companies, was revealed to have been dismissing complaints on the technicality that workers at corporate subsidiaries are not covered. It was left to Vermont Democrat Sen. Patrick Leahy, who helped craft the whistleblower provision as part of the Sarbanes-Oxley corporate governance act [2002], to say the law was meant to cover workers in corporate subsidiaries. "Otherwise, a company that wants to do something shady, could just do it in their subsidiary". [reported in WSJ 4 Sept 2008].

Then there is the case of sailors and the decisions they make, over the horizon. I hiked another piece of the Appalachian Trail this week with an ex-merchant marine officer who spent some time on coastal freighters carrying crude oil up from the Gulf of Mexico to New York and Boston harbours in the 1970’s and 1980’s. You have time on a hike to think, aloud or alone, and to talk or not talk, as the rhythm of your footfalls and your thoughts dictate. The path is steep to the alpine zone about 3 miles up. As we hiked boulder by boulder, we talked through his experience of sailors making decisions over the horizon, in “international waters” where no-one may see, and where no-one may care what happens, and law is in the eye of the beholder. This is a long way from the moves by food companies this week that pledged not to use cloned livestock meat nor milk, a voluntary action responding to a survey by Center for Food Safety. Of course, my local VT favourite, Ben & Jerry’s, is represented by Unilever, the Anglo-Dutch parent, but in a reflection of how far things have come, includes Kraft, Wal-Mart and Tyson Foods.

What is the business case for maritime pollution? Stories of marine pollution are disappointing. Yes, they make me angry. In 1975, the US National Academy of Sciences [NAS] estimated ships dumped 14 billion pounds of garbage at sea. BILLION. Weak enforcement of the United Nations/International Maritime Organization International Convention for the Prevention of Marine Pollution (MARPOL) fails to prevent ships to illegally dump waste oil from bilge and storage tanks into the ocean. A 2001 study from the [NAS) reports that:

Approximately 10–25% of commercial ships violate MARPOL and discharge more than 65 million gallons of waste oil at sea each year, nearly 3 times the amount spilled in catastrophic oil tanker accidents.

One of the stories the ex-officer described shipping of oil north along the US East Coast. After delivering the different grades of oil to NY or Boston the grades of aviation fuel, gasoline, heater and heavy oil, the ships would head south to the South for the next pickup. All the freighters were of similar design, and their tanks had a small inefficiency where a trace amount of oil remained behind that could not be sucked out. Before loading the next load of grades of oil, the ship would pump out the old using seawater. Pure oil, intentionally pumped directly out into the ocean, would jet out of the tanks for a few minutes until the tanks were cleared. The practice was usual. For every one of the loads.
For every one of the ships.
For years.

After a year-and-a-half of advocating, the EU is finally sanctioning this practice. Apparently, the shipping companies and the sailors who manned them needed some kind of bureaucrat to write some kind of regulation to deter the activity. It is likely however, that thousands of gallons of commodities are spewed over the side when no-one is looking over the horizon, when no-one is looking. The impact of business-as-usual is accumulative, and must be making the oceans more dirty, not more clean, according to Oceana.

The pollution of the sea from hydrocarbons (crude oil, fuel, petrol, oily waste, etc.) is a global problem that entails between two and ten million tonnes of these products reaching the sea each year. Although the bulk of public attention is focused on the oil slicks caused by major oil tanker accidents, chronic dumping of these substances – in other words, the residue from ordinary maritime traffic – is three times higher. Washing out the tanks of oil tankers, dumping bilge water and minor spillages on board or in port are the main sources of hydrocarbon pollution of marine origin.

A mid-July, 2008 investor conference call with ExxonMobil and sustainability investors illustrated some of the challenges we face in the sustainability+investment practice integrating ESG factors into investment practice. Scheduled to cover ExxonMobil Environmental/Climate Change initiatives and reporting with the VPs for Safety Health & Environment and Public Affairs, while the PPT slide deck covered a range of issues, no answer was available live nor within 24 hours on what number of tankers shipping XOM oil, and what percentage of tankers, are double-hulled and which are double-skinned. Of these tankers, how many transport XOM oil in environmentally sensitive harbor areas like San Francisco, Valdez etc? Perhaps this is unsurprising from a company that still fought the Exxon Valdez case through 2008, all the while touting corporate citizenship and their technologies for hybrids in full-colour multimedia advertisements. The XOM climate change webpage has not been updated since 29 Feb. 2007. Maybe Gabelli's new green theme investment may offer some answers: Gabelli's eponymous firm is making more noises about exploring the alternative energy and green space. The CEO of Gamco Investors said in a Bloomberg Television interview that he is launching a hedge fund to invest in environmentally-friendly companies. This week the DJSI announced its revisions for 2008, and Alex Barkawi, MD for Indexes at SAM that calibrates the index, commented that "there remains significant room for improvement and thus wide scope for a continued strong sustainability momentum". WSJ even posted a full page congratulatory advertisement on p.C7 tucked in the Money & Investing section, in black & white.

Integrity is not cheap. A working definition of integrity is what one does when no-one is looking. Perhaps it was because I was getting a little more fatigued near the top of Mt Lafayette on the Bridle Path 9 mile loop in Franconia Notch State Park past Falling Water, but I could not understand why sailors and engineers on ships would try and be “company men” by taking short cuts to save “the company” some amount of dollars. The “Company Man” fascinates me: how the average worker calculates the risk and returns of their actions, and expects what they do for “The Company” is good for them vicariously through the company. The sailor that has seen crewmen eject pollutants overboard after regulations direct it is illegal, by the authorities and their company which sought to comply with the rules, and be tacitly and explicitly rewards with a nudge, a wink or a pat on the checkbook by their bosses. There are some happy endings, including this report from the NJ Star-Ledger:

Federal authorities will collect $4.75 million in fines and payments from a Danish company that admitted responsibility in federal court in Newark Thursday for illegally discharging oil sludge and oil-contaminated bilge water into international waters in 2006.

In another report from 2000 in Canada, a military patrol plane first documented a 12-kilometre long slick while on routine surveillance in mid-October, 1999, leading to the successful prosecution of a Singapore-flagged vessel owned by a Scots firm. Identifying cuprits is made somewhat easy by oil having a particular "fingerpint" based on where it originates from. Ahead of the last weekend of summer this year [these dates are officially established in the US, summer is officially over!], the Labor Day weekend, there were dramatic media reports that prime beaches in New Jersey were shut in part in Avalon due to medical garbage washing up on shore. The sizeable legal community in the NY/NJ/PA tri-state area will no doubt be bringing in experts to inflate to the right economic costs. Avalon was named by National Geographic Adventure magazine as one of the nation's 10 best places to live, work and play. TV captured the hapless Mayor valiantly trying to sound more on top of this mini-disaster than FEMA following Katrina, while seeming friendly enough to attract the beach crowds his local businesses relied upon. Early on the investigation expected that someone dumped medical waste off the coast, as had been cleaned up many times before. Turns out a 30-year veteran dentist had taken his boat out and dumped the junk over the side. The dentist is from a once grand section of suburban Philadelphia, Wynnewood, an early stop on the R5 from 30th St Station on the way out to Villanova. What was he thinking?

The dentist is charged with unlawfully discharging a pollutant and unlawful disposal of regulated medical waste. Each charge carries a maximum prison term of five years. Fines could total $125,000 if he is convicted on both counts. No word on the environmental costs, nor ruined walks at sunset along a clean beach. At least this nasty little incident offers some very pointed, local sound-bites for the Net Impact conference at Wharton 13-15 November [the Investments track continues to build nicely].

What was he thinking?

***
Update: Suzlon are now reported to be speeding their integration plans for the German wind firm REpower they purchased to speed the technology transfer. Perhaps they are seekin solutions to the high speed/high load failures reported on 2.1MW turbines by Deere & Co. and Edison Mission Energy.

Over the Horizon I/II: Green Ships

2008-09-06T17:13:00.011-04:00

On a clear day you can see the Cape. Well, not quite, but it feels that way. In early Fall, when the cold air is crisper, you may look out from one of the Boston financial district’s few skyscapers at the bay-wide view. The vista from the main boardroom at private wealth manager Atlantic Trust offices in Boston offers fantastic views of the Charles River and the rolling tree-covered suburbs of greater Boston stretching to Winchester, Arlington and Newtown. Across the floor, the view is of Boston bay dotted with 34 small islands, the bay tracked with small craft wakes, the busy ferries [including the airport water taxi] and the few steady large ships. Logan Airport lands and launches jets on 2 minute intervals. The Atlantic Ocean is hardly seen to roll waves toward shore, at the far end of the view [see also the real-time harbor hazeview shots]. Cape Wind, the offshore wind farm buffeted by local politics, is too far away to see, over the horizon in Nantucket Sound.

The maritime shipping industry has many players. A large portion of the industry remains in the hands of privately owned firms and patriarchs [just two shipping firms are in the FTSE4Good ethical index], and like the fishing industry, directly links into the livelihoods of villages and individual entrepreneurs from Anchorage to Zanzibar. Investment bank, Jeffries, will host their 5th Annual Shipping, Logistics & Offshore Services Conference on September 16-17, 2008 in New York with more than 60 companies in crude tankers, dry bulk, gas & chemical carriers, inland barges, logistics, product tankers, offshore services and offshore supply vessels. Shipping still moves the bulk of global trade; it literally carries globalization's hopes. The prices of shipping have soared lately, driven by increased operating costs because most ships are oil-powered, and oil has jumped from US$10 to 140 and back to 100 in the space of 2 years. FT reports Brazilian iron ore miner Vale this week notified Chinese steel mills of a 20% price hike midway through the 2008/9 contracts, following a negotiated 96% price increase by Australia producers, citing transportation costs. So the German Gerolsteiner water and Costa Rican-grown Starbucks coffee will surely follow prices north. Personally, I wonder what mixed freighter is shipping back the cubed meters from the Geneva apartment, and where it is dropping its ballast water?

A “green” ship was one of the most interesting items I picked up at the excellent interactive sustainability program offered by World Wildlife Fund in Gland. Switzerland in 2007-2008, the One Planet Leaders [OPL] program. One colleague in the cohort presented a digital animation of a projected container ship in 2025, “the E/S Orcelle, Wallenius Wilhelmsen Logistics' visionary concept car carrier with a ‘zero emissions’ capability which carries no ballast water on board” [“E/S" = environmental ship, nice touch!]. Originally unveiled by Wallenius Wilhelmsen Logistics at the World Expo 2005 in Japan, the E/S Orcelle

“was designed for the year 2025 using only renewable energy sources, including the sun, wind and waves as well as fuel cell technology, to meet all its propulsion and onboard power requirements”.

The privately-held firm was motivated not by activist sustainability investors like CalPERS, Walden, AP2 or Winslow Green, but by the impetus of enlightened owners and rare talent, seeking to attract the brightest new maritime engineering minds of Gen X and Y with their greater concerns for sustainability. The “green flagship” plays with design concepts in the same way as concept cars at auto shows, hoping that some – like the Chevrolet Volt – may attract sufficient interest to be built, against expectations of engineers and marketers calculating costs and benefits using extrapolations of current states of play. Like Steve Jobs and Apple, sometimes one does not need focus groups; just build a cool widget that works. In a similar way to a current engagement we are am working on in Geneva, Wallenius Wilhelmsen Logistics in 2007 launched the Orcelle Fund as the philanthropic arm of that supports the development of alternative energy initiatives aimed at making shipping more sustainable [pitch for grants here], funded by the award money that Wallenius Wilhelmsen Logistics received as the 2007 recipient of the Thor Heyerdahl International Maritime Environmental Award, named for a legendary seafarer of recetn times. The Orcelle Fund is a grant-awarding body will provide seed capital for high-risk development projects for alternative maritime energy sources and energy-efficient technology. Last week W&WL launched M/V Aniara claiming "the world's largest and most environmentally adapted car and truck carrying ship" in Bremerhaven, Germany built at the Daewoo Shipbuilding and Marine Engineering yard in Korea.

Another development this week was news of a solar ship. Driven less by concerns of environment than saving on the high operating costs of bunker oil today [NYKK reported 11% increase in Q2, 2008], Japan's largest shipping company outfitting its ships with solar panels for propulsion. Nippon Yusen KK announced plans to spend $1.37 million to have Nippon Oil Corp develop a 40-kilowatt solar panel system, with 328 panels, for its ships to be finished in December, 2008, to provide 0.2% of the ship's power from solar. NYKK want to have a finished commercial system that produces 2% by 2010, at similar costs. NYKK expects to reduce ships’ carbon dioxide output by as much as 2 percent, equal to 20 tons a year. Unsurprisingly, the lead client is Toyota. Hopefully, that will include Sir Paul's next Lexus hybrid, so Huffingtonpost.com will not be covering his embarassment!

The maritime industry has a material impact on the sustainability solution. The European Community Shipowners’ Association (ECSA) produced a paper earlier this year with the support of the International Chamber of Shipping (ICS), describing the industry as the “backbone of globalization” (Climate Change and Shipping ECSA Position Paper, January 2008) estimating that shipping carries some 90% of world trade. European shipping makes up 41% of the global total. Estimates in 2006 by the International Energy Agency (IEA) and the Stern Review on the Economics of Climate Change that the industry’s global share of CO2 emissions is around 10%, compared to 76% from road transport, and 12% from aviation. The industry is seeking sustainability solutions, including the upcoming Seatrade Sustainability Seminar in Singapore next month. This week the EU pressed with a new warning that the International Maritime Organization (IMO) must act quickly to find consensus of ways of reducing carbon dioxide (CO2) emissions. IMO’s Marine Environment Protection Committee (MEPC) is meeting in London next month. See also the Green Atlantic for Sustainable Development. My impression is that the environmentally sensitive Scandinavian countries like Sweden, Denmark and Norway are near the forefront of sustainability moves, but players from other countries prefer business as usual. Pressing the regulatory angle to the political spectrum is the SustainableShipping Forum in late October in Washington D.C. ACI’s 3rd Green Shipping conference agenda is how ship owners and managers are now driving environmental programs forward. Pressure at an international level has added a line item to the signature coding for each ship to now include their status on “green” criteria. The ISO 30000 series standards cover ship recycling management systems.

I am awaiting news of a green shipping-themed private equity fund from my brother-in-law in NY. A former colleague has stepped out to seek his niche in developing this theme for private equity owners, similar to Green Maritime Partners [read the comments to the IHT posting for a priceless illustration of the sustainability paradox we deal with on sustainability+investment engagements]. There is a market. Perhaps from cool new inventions like the ship-scale kitesurfing [see MV Beluga Skysails] Under German captain Lutz Heldt the vessel completed a 12,000 mile round-trip maiden voyage from Bremen, Germany to Venezuela, the United States, and then to Norway [see video], arriving on March 13, 2008 well-reported by Treehugger.com. The ship was at sea for nearly two months, giving the “skysail” concept ample opportunity for testing and tweaking. Inventors are exploring other examples of “windships” are being explored, with modular sailing rigs for larger vessels.

So once my mate Lodewyk has practiced not face-planting while kitesurfing off Cape Cod, he has a new place to take his MIT-quality engineering skills!