A Week in Politics, a sage’s birthday week

They say a week is a long time in politics. The week of 25 August 2008 must rank as one of the longest in the US for a while. The US media moved from the Georgian crisis to the immediate spectacle of politics played out in primetime. The tension, drama and hope of the Democratic Party played out to a climax on Thursday night at the Mile High Stadium in Denver, Colorado after months of preparation, drawing the greatest numbers ever to watch a political convention since Nielsen started tracking in 1960 [also bigger than American Idol, Beijing Olympic opening and the Academy Awards - confirming Obama as celebrity?]. The Democratic Party is one of the two dominant political parties in the US, the majority party in the elected government legislature, but not in the executive office of president since Bush vs Gore in 2000. The presidential election happens on Tues 4 November, as it does every four years. For all its warts, it is hard to argue against the US as being in the top tier of democracies around the world in 2008. The past 500 days since Obama and McCain announced has seen the candidate fields whittled down to the two majors in a demonstration of democracy in action, sometimes ugly, sometimes pretty.

For the first time ever, and because one senses something of great importance in the shifting tides, I watched the entire acceptance speech by a candidate. Barack Obama spoke late Thursday night, covered live on the public television station, a great scoop for PBS. The Democratic Convention this week reinforced my reminder, since coming back from the year sojourn in Europe and travels in emerging markets, that the US remains a nation of competitive individuals where marketing remains a core competency, perhaps a birthright. Earlier this week I smiled when I drove by the iconic US marketing icon in Cambridge MA: the classic American image of young kids selling lemonade at a streetside table with hand-scribbled signs. Taught from a young age, the average American is a able to pitch ideas directly, especially to a camera. To watch the political event, with TV-scripted moments, is to watch a masterclass in events management only slightly less well-planned than the Beijing closing ceremonies. The Obama speech apparently drew the largest ever TV audience [38m] and was carried live on public service television. PBS is one of America’s great institutions, along with Prairie Home Companion! In a taste of Americana for me, I was invited over to watch with a small gathering of Democrats in a small town in New Hampshire not far from Dartmouth University, the local Ivy league university. NH is a state that the ’04 model McCain impressed. It also has the most impressive state motto: “Live Free or Die”. Mmm. No wonder this state liked the guy who the Russians most dislike!

For the generation that sees sustainability as the defining challenge and opportunity of our time, the Obama speech seemed to leave a little missing. I missed the live Al Gore speech for his party earlier, where he did offer some pithy observations, including:

...it just so happens that the climate crisis is intertwined with the other two great challenges facing our nation: reviving our economy and strengthening our national security. The solutions to all three require us to end our dependence on carbon-based fuels.

Sustainability will be best met by a government with a leadership agenda, like I have seen in Singapore or Iceland. One hopes that the government at federal and state level in the US may wield their fiscal directing power, direct investment capital, and enormous procurement and services footprint to move forward adoption of climate smart policies and improving the sustainability footprint of business as usual. Obama floated his 10 year plan, but he seemed to flip it out, not drive it in as Kennedy did for the Apollo program to the moon. Maybe Gore distracted him from the need for making his own case for sustainability as generational imperative, and in prime-time. Both the McCain and Obama campaigns have been seeking to influence impressions of how green they are, delivering on-campus debates by their advisors and visiting salon-type situations in major cities like New York in the past months, none of which bumped the US$20/month bike commuter credit through Congress and Senate this summer. On the grandest stage opportunities exist for “green” stories next to stories of economic, educational and discrimination stories. Floating into view was this journalistic pearl of eccentric Brits driving restaurant-by-restaurant across Europe in their bio-diesels!

The tone was substantive. The image was poignant. Obama is a celebrity, the next big thing from 2004 now the most interesting prime time phenomenon. The orator did seem to authentically present the American experience, the itinerant lifestyle, the making it happen in spite of challenges, of the step up from education made possible by scholarships and loans. As an outsider, he does seem to represent the American brand, and the opportunity in this country of all countries where the story is possible. Being different remains a challenge for humans, as even the fascinating BBC show reveals in describing socialization of growing kids bbc.co.uk/childofourtime. Diversity is a reality and a strength for those who understand how to encourage it in their lives, and their experience. Both major Democratic candidates seemed to offer diversity this year, on race or gender basis.

The week ended with a striking counter-move from the other major party. The Republican candidate John McCain selected a female running mate in part to pick up disaffected female voters in a bold move, with unclear risk/return payoff for his campaign. If nothing else it swept away the analysis of the Obama speech from the Friday morning talking heads, and recovered the attention lost for the week’s drama in Denver. The long week has a snappy ending. All candidates are striving to be the “change”. Like definitions of “sustainability” by some fine greenwashing marketing types, the follow-on questions haunt the statement: change from what to where by whom?

So my week’s tutorial in the US political marketing game ended pointedly. I left the US in 2007 before Fox had launched their long-awaited business channel, FBN. When I flipped over to FBN on this Friday morning, I was greeted by a familiar face from CNN International I watched for international news during my law school days, Richard Varney. His smooth British accent has more sharp American intonations that makes him sound New York. But it was what he said that illustrated the direct political action that Fox is renowned for in the US: strong right-wing, Republican support. Varney invited comment from some suited talking head after the announcement of Palin by trying a long-winded, roundabout hook by using language like “since the news was announced and she spoke it seems to me that the market may have responded positively and the market has responded”. Politics certainly moves markets, as the response to the Russian tank adventures illustrated [see SRI Extra 23 Aug 08] and the WSJ reports the Russians major firms seeking debt financing in September as usual will face increased costs from skittish foreign investors. I had just flipped over from CNBC [certainly not a Democratic mouthpiece] where the on-air anchors reflected no great movement attributable, and reflecting that the impending Hurricane Gustav held greatest market-moving potential for closing business especially oil & gas in the Gulf of Mexico. While maybe one should not be surprised, I was. Maybe I was hoping for business news from FBN, and maybe it exists in other 3 minute segments between advertisements. FBN seemed handily placed to cover the VP pick, re-running an FBN 25 June interview with Palin where she espoused opening ANWR [note how industry nailed the winning URL, anwr.org. But the blatant put was more than even Kudlow on CNBC may be expected to give. But not on Friday. The week ends with space for more news on the sustainability theme as tackled by the Republican platform this coming week [although the official Republican policy position discredits “global warming”], and with a larger dump of salt needed for any FBN coverage.

Less sound-bite like, but the new focus of all campaigns, is the economy. In the tiny village of Woodstock VT the major business owners are nervous of a slump, and over-stretched by borrowings in the good times. The US Treasury Secretary Hank Paulson continues to struggle with major financial system components: the Freddie Mac and Freddie Mae challenges. One may reasonably argue this challenge is the perhaps greater challenge than becoming most popular person voted for by more Americans. Integrity Bancshares of Alpharetta Georgia became the 10^th bank failure of this risky season this week, the FDIC picking up the pieces again. They will not be the last. A renowned value fund manager at a solid SRI shop Ariel Funds in Chicago has let go of Citi, even choosing to book the loss the portfolio rode down with C 42% since the fund first purchased the stock. More spicy, was it’s dropping of Moody’s, saying “it lost confidence in some of the company’s ratings”. Late, but frank. No word on how the ESG ratings shops like Innovest, KLD or ISS [the latter the only listed entity through Riskmetrics] have suffered the same loss of confidence. Warren Buffett discussing financial services firms impressed with the wisdom of his circumspection on CNBC last Friday.

QUICK: When people start looking around to find the next potential Bear Stearns, Lehman Brothers is the name that comes up again and again. Should people be concerned about what's happening at Lehman?

BUFFETT: I don't think it's appropriate, really, to talk about financials.

QUICK: Financials, in particular, banks.

BUFFETT: No. I think that--I really think that's inappropriate to talk about them.

Banks run a juggling operation, and have limits for minimum capitalization of 5%, incredible leverage, meaning more than 9 of ten balls is in the air at any time in the borrowing/lending cycles. The FDIC has increased to 117 the banks they identify as in danger of failing, largest since 2003. Saturday 30 August is the birthday of Warren Buffet, born in Omaha, Nebraska (1930). In February 2008, he was ranked by Forbes as the richest person in the world, worth about $62 billion. I like his frugal living style and the fact that he lives in his old house and drives his old car, squeezing by on an annual salary from his investment company of about $100,000. His wealth will transfer to the Bill & Melinda Gates Foundation, which he announced in 2006.

In 1988, Buffett said:

"I don't have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It's like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GNP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don't do that though. I don't use very many of those claim checks. There's nothing material I want very much. And I'm going to give virtually all of those claim checks to charity when my wife and I die."

After the recent dusting off of histories of China, Russia, Malaysia and Brazil to update my reading of the major moving parts in geopolitics, I find myself looking forward to a bit more time with a business librarian soon, the unsung hero of many MBAs. Though the future may be as different as Obama text-messaging his VP pick versus McCain using the old media-leak standard, I prefer to know more about the history of business to interpret the future of business, especially dramatic changes intercepting ESG factors like asbestos or clean water. Machiavelli’s “Il Principe” remains a standard for a reason. The interpretation of business past to the future is the art with the science. And as Buffet is credited as saying, "If past history was all there was to the game, the richest people would be librarians."

Silver and Gold II/II: Mining Gold in Beijing and Guinea

Gold, silver and bronze dominates the business and leisure time in this second week of the Olympiad in Beijing. The digital coverage of the games [didn’t they stop being games when they went professional?] has demonstrated the power of the digital broadcasting technology to best effect: multiple channels, more facts, crisp video, split screens. In the US, NBC has nevertheless been encouraged to try Hulu next time.

Sports Illustrated duly created the iconic cover photo of Michael Phelps’ eight gold medals, Jamaica suddenly dominates sprints with some athletes butch, some elegant like Bolt [at least before the finishing tape], and the omnipresent, adoring Chinese crowds waving their flags, most enthusiastically for their young [young] female gymnasts. Sometimes, it all felt a little too perfect and we remember Spielberg's decision hundreds of viewing hours ago.

The CFA for investors and fellow performance measurement practitioners in other industries rejoiced: metrics dominate. Slide rules, cameras and software algorithms measuring rules and distances, metrics tracking winners, including in medals count for best Olympic nation: do you prefer the "podium index" ranking using the medals/GDP ratio [see Medal Exchange, go Belarus!], or who won the most [total medals, or gold only?]. The US TV channels rank by total, but organizers/majority Gold medal winners China rank by golds. At least one of Phelps’ medals - and so the record-breaking nature of the eight set - relied upon the split-second timing of Omega. 0.01 of a second is nothing but millimetres. Nothing!

Review the photoframes at the SI gallery, leaving the public images to a private photographer who was smart enough to put in a camera the night before, for some reason Omega declined to release underwater video images and left their marketing reputation for clinical chronography out there. But the infallibility of technology led us to trust that the Omega machine measured it right, and measured the winner to be Phelps who gambled his eight by chopping his stroke to get in the extra half-stroke, a big gamble as any butterfly swimmer will attest. If Mr. Phelps or his native Baltimore were a country, he/it would rank 8th on golds, above Japan at end of the penultimate day. It makes a fine poster. The Phelps brand together with the Coach will do business in the same way Armstrong/Carmichael did after his seven Tours de France. I am not sure if Mr. Phelps chewed his gold medals to test their softness and hence veracity. The old test of quality is now mostly a photo-op, especially as the IOC long ago switched to gold-plating silver medals to turn them into gold [the IOC Olympic Museum in Lausanne is a must, just a short boat ride up Lac Leman from Genève].

From "Blood Diamonds" to "Blood Medals"?

At the end of the penultimate day of the Olympiad, neither Guinea nor Senegal show up on medals rankings [note: I chose the CIA weblink for Guinea, I enjoy this as the closest I get to the world of CIA spooks and Jason Bourne!]. The IOC and BOCOG have managed controversy off the media pages, so there was never any chance of the bloody gold investigative report becoming a headliner.

"Blood Medals", would be a stretch, but the gold merchants sleep a little less easy after Associated Press writers in Geneve [Brad Klapper] and Senegal filed a compelling story on 10 August while I was in Brazil. AP IMPACT: Kids working in African gold mines covers where that gold may come from, and it’s not all pretty. The AP coverage was carried by all the US media majors like Washington Post, USA Today as one of their "top stories", ABC News, IHT/New York Times and of course Google and Yahoo, as well as some conservative media. The ABC headline must have made a few jewellers blood run cold: "Child Labor Rife in African Gold Mines: Gold Mined by African Children Finds its Way Into Luxury Goods". The AP journalists had to fight hard just to bring the story to light, overcoming Swiss court action by protagonists Decafin SA attempting to prevent the story reaching the press. Seriously, how would you argue investigative journalism of a supply chain probably including child labor is “not in the public interest”?! Decafin may or may not have stories to hide, but they will have fresh in their minds how billion-dollar international financial player and Swiss business icon, Credit Suisse, suffered an embarrassing lapse sourcing footballs as promotional items for the Euro2008 football tournament without ensuring it met best standards for social responsibility. In 2008, some ten years after the Nike saga, someone in the 5,000 person Zurich head office on Paradeplatz of the 2008 EUROMONEY "Best Bank" award did not have an intern triple-check the supplier?

The players in the gold industry may be edgy for good reason, and not because the US Justice Department chasing UBS has them worried about privacy issues. No, it is more like the public interest and marketing impact on luxury goods consumption. Global Witness has taken credit for directing their considerable attention at the minerals/diamonds supply chain from 1998. The movie “Blood Diamond” [2006] and the blood-stained image of actor Leonardo DiCaprio fading to an unbearable lightness on a rocky African plateau is a thousand Hollywood hours ago [the scene was actually shot in my home province, KwaZulu-Natal]. Blood Diamond was another social drama/action film [bracketed with Syriana, The Constant Gardener, Michael Clayton] building on the popular cultural interest in a globalized world and whether the impacts of consumption decisions in New York affect lives in say, Namibia [insert developed and emerging monikers as you prefer]. The Kimberley Process was an effort to tidy up the impressions and the actions of sourcing diamonds, aiming to block out “conflict diamonds” from countries or regions in Africa where civil wars were being funded by proceeds from diamond sales, in a similar way to poppy/heroine [Afghanistan] and coca/cocaine [Colombian] trades elsewhere.

The diamond industry worked hard and continues to work hard to get the news out through Diamondfacts.org - they prefer the euphemistic "conflict diamonds" for obvious reasons. But it is hard when companies doing business must deal with country-level initiatives. When I bought the engagement ring diamond in December 2001, I did want a South African diamond for my American wife, but could not be guaranteed where it was from. Yip, no "fair trade diamonds". One of my single biggest credit card transactions, and nobody knew where it came from? Really?! The diamond industry does have some kind of sustainability play forthcoming. An Australian friend was one of the few who checked. When she went into the diamond store in 2007 with the nervous future husband, she asked the Melbourne jeweller point-blank: how do I know this is not a blood diamond? Fiancé was spotted leaving the premises... No doubt, Tiffany’s, De Beers [especially now they have retail stores - but none in Africa?!] and other purveyors of rock/mineral luxury items were pleased to see the issue of mining and sourcing disappear behind in the rear-view mirror.

Firms that were ahead of the curve will be pleased to know we are developing a case study with Kenan-Flagler B-school for use in MBA 865: Sustainability in Investment Strategies and similar MBA curricula covering sustainability [see SRI Extra April 19, 2008 CSI on Campus]. TIF explains their approach in their latest 10K as:

Purchases of Rough Diamonds . Until Fiscal 2003, the Company did not purchase rough (uncut and unpolished) diamonds. Since that time, the Company has established diamond processing operations that purchase, sort, cut and/or polish rough diamonds for use by Tiffany. The Company now has such operations in Canada’s Northwest Territories, Belgium, South Africa, Botswana, Namibia, China and Vietnam. Operations in South Africa, Botswana and Namibia are conducted through joint ventures with third parties. The Company will continue to invest in additional opportunities that will potentially lead to additional “conflict-free” (see below) sources of rough diamonds. In Fiscal 2007, approximately 40% of the polished diamonds acquired by Tiffany for use in jewelry were produced from rough diamonds purchased by the Company. Conflict Diamonds. [p.18]

Increasing attention has been focused in recent years on the issue of “conflict” diamonds. Conflict diamonds are extracted from war-torn geographic regions and sold by rebel forces to fund insurrection. Allegations have been made that diamond trading is used as a source of funds to further terrorist activities. Concerned participants in the diamond trade, including Tiffany and non-government organizations, seek to exclude such diamonds, which represent a small fraction of the world’s supply, from legitimate trade through an international system of certification and legislation. It is expected that such efforts will not substantially affect the supply of diamonds. [p.19]

The AP story is old-school journalism, including hauling gear through the African bush over the course of the year to six mines and more than a hundred interviews [see the transparency offered via the EDITOR'S NOTE], as well as some bullying by the corporations. The multimedia delivery of the story helps draw the connection one wants investors in the 21^st century to draw: it matters HOW you make your money, and investment analysis without ESG is incomplete, and unsustainable.

If you wear a gold ring on your finger, write with a gold-tipped fountain pen or have gold in your investment portfolio, chances are good your life is connected to these children.

Oxfam/Earthworks and a string of partners have been moving forward their No Dirty Gold campaign since 2003. I hope I bring the sustainability+investment component of institutional and retail investors to the campaign. The human scale is one important facet, but for me the other compelling stakeholder that may not be interviewed is the environment. The process for extracting gold is not renowned for being enviro-friendly. Like the exploration of gold reefs, and the extraction and supply piecemeal through bush mines themselves, I expect this story will live longer as the questions surrounding the gold supply chain return to agitate and irritate the conscience. Especially at private banker watering holes next to the Rhone.

I appreciate the frustration that Tiffany & Co. [NYSE: TIF] feels. I have a positive view of Tiffany informed by their pro-activity [see Responsible Mining] and interaction with the investment and ESG ratings communities in their regular business. Their website promise of "sustainability: our most important design" is a stretch for me, though. On March 29, 2005 KLD Research & Analytics, Inc. announced that TIF was added to KLD’s Domini 400 Social^SMDS 400 Index) Index (citing their "chain of custody" and "zero tolerance" approaches, as well as positive diversity profile).

"I can't overemphasize how complex this problem is," said Michael Kowalski, Tiffany's chairman. "There is a desire to deal with this. But the question is how?"

The No Dirty Gold campaign has more good work to do, starting with the brands framing the shores in Genève like Cartier on Rue de Rhone. If firms felt the Kimberley Process was tough on the diamond industry, gold may prove to be beyond them, in a whole new paradigm. Sort of like Mr. Bolt’s sprinting in Beijing.

Silver and Gold I/II: Mining in the Ukraine, .ru?

Mining calls for brave workers, and brave investors. As a native of a country where mining is a primary industry [which country is not, it is just how much technology is deployed to dig, and how much the world wants whatever lies beneath?], I empathize with tensions between digging and not digging, jobs versus environment, leasehold versus royalties. Despite the multi-year surge in commodity prices which offered boom time for all mining firms the past five years, sustainability remains a mega-theme, from the long range thinking on political access to the few remaining ore bodies profitably extracted, to the basics of managing mines safely. Anglo Platinum’s [JNB:AMS] CEO Ralph Havenstein, apparently left in 2007 at parent company Anglo American’s insistence due to the company’s appalling safety record.The socio-geo-political connections were drawn to a blunt point by the world's greatest band ever in their track Silver and Gold, on their opus Rattle and Hum September 1998, referencing the role of business with countries with less-than-optimal socio-political regimes, like the old apartheid regime in Pretoria.

The warden says "The exodus sold."/ If you want a way out.../Silver and gold, silver and gold [more lyrics below].

Mines are long term ventures. Even environmental problems one inherits when purchasing an existing mining claim may be dealt with over the longer lifetime of an ore body, anywhere from 10-40 years. Remediation efforts may be more easily monitored in a Google Earth world. The work of the Extractive Industries Transparency Initiative [EITI] has been influential in concentrating the minds of mines listed in Europe. Although the holding companies and financial structures are above ground, mines and miners are inextricably tied to the earth itself. All mines are long-term investments, more like a hard asset class.

So how are the major Russian-owned or -listed firms with ownership and equity exposure in the non-Russian world walking the line this week? Nervousness must be the after-effect in the aftermath of Mr. Putin/Mr Medvedev’s deployment of the under-employed Russian military in the Caucasus these past weeks. It certainly met Mr. Murdoch’s goal of mingling more politics in the business pages of the WSJ with institutions walking a fine line. Fair to suggest that the military action changes the case study model answers for ROI [return-on-investment] for the Baku-Tbilisi-Ceyhan pipeline, and review the EIAs if it is cut [the BTC was described as the worst pipeline in the world]. I am not sure how to interpret the alleged internet attacks by Russia on Georgia though [see FutureTense 15 August 2008, the denial of service attacks - which flood targets with malicious data - allegedly curtailed Georgia's ability to spread its message and communicate with the outside world]. While the Olympic Russian and Georgian [read Brazilian] women’s beach volleyball teams were made to play nice in the spotlight of the false friendship of the Olympics, geopolitics and investment time horizons were playing out for real somewhere between the Baltic and Tbilisi. Well, I guess if you are signed on to a sport where some misogynist has you play in glorified underwear, chances are you are not holding the winning hand, yes?

Buying a WSJ page, .ru?

If your country’s ruler is able to move markets with a few comments like Putin did leading to the Russian markets wiping off US$60bn in a day after comments about a certain firm...

Speaking at an industry conference this week, Putin, Russia's former president and now prime minister, spoke five sentences critical of one of his country's big steel companies, Mechel, and its billionaire chief executive, Igor Zyuzin. In a sign of Putin's enduring power in Russia and around the world, that criticism came with a price: about $1.2 billion per sentence in lost shareholder value. IHT 25 July 2008

...paying for a full page B&W spread in the US’s major business paper [WSJ A11 Tues 19 August 2008] must have seemed like the least a Russian mining company may do [estimated advertising cost US$ 30-50k for Wall Street Journal US edition]. Market Vectors Russia ETF (RSX) is down 36% from its June 2008 high of US$59. The Russian action in Georgia has made all types of people, and investors, nervous.

Foreign investors have pulled billions of dollars out of Russia in response to its invasion of Georgia. Official figures show the sharpest fall in the country's foreign currency reserves for a decade [US$16.5bn], since the 1998 defaults. Marketplace.org Friday August 22

The expensive TV advertising campaign for investing in Georgia these past months on CNN International and other media has unfortunately just evaporated into goodwill fresh air. The upside? Well, the name-recognition pitch will no longer be required, everyone knows Georgia is the parking lot for Russian tanks, just next to Armenia [postscript: see some fresh interactions on GlobalVoices.org after the announcement].

Nothing makes a portfolio tank [more puns?!] like having a major sunk hard asset investment disappear from the quarterly statement at some state-decreed fire-sale price. Never has Norilsk Nickel's [JSC MMC Norilsk Nickel (ADR)(OTC:NILSY)] decision to buy a piece of the heartland been made to look like such a brilliant idea; Norilsk Nickel bought Stillwater Mining Company in Montana in 2003, the US's only palladium producer. Making the proactive step of trying to pitch themselves as the winning mining bet for investors rattled by Russia's actions this past week was a good start "A Global Leader in Metals Mining"- pointing a long way from centuries of Caucasus in-fighting but relying on the pages of the WSJ and news clips to describe mines “from Siberia to Montana”. Apparently the Board pitched a Putin ally for the Board [Putin ally put forward at Norilsk Nickel; APJuly 29, 2008]. But the arresting factoid that undermined their effort comes in the suffix to their web URL, “.ru”, the Russia acronym. Before launching a compelling story for being a diversified world-class player, maybe the more capitalist, and less country-specific, URL suffix “.com” is the better advertising and business spend. I am no Russia expert, and as always defer to the personal stories and local analysis you will find well below the hyperbole at the national level, I analyze and opine imperfectly from a distance. I look forward to more fact and more substance in thinking through investors purportedly integrating sustainability into investment thinking in Russia.

Norilsk Nickel has a dedicated page on Sustainable Development, but which focuses on local and regional Russian priorities. perhaps the exposure to mining from the US to Russia to South Africa has helped them become sensitized. The forthcoming CDP coverage in Russia in 2009 may help, and I still hope to explore moving ESG forward with the PRI in EM Project in 2008/9. The evidence is mixed on whether ESG integration is a foreign concept in Russia. Russia was covered in the current EM Disclosure Project, a total of 12 companies, 4 in Materials [metals & mining]. Perhaps on account of the materials sector's exposure to ESG issues, the sector had the most thorough reporting, meeting all five disclosure criteria [see below] with 9 companies, including GMK Norilsk Nickel and Polyus Gold listed in Russia [expect more in future posts on the EM Disclosure Project: Sustainability reporting in emerging markets: Transparency and Disclosure, an analysis of the sustainability reporting in selected sectors of seven emerging market countries by a research consortium led by Calvert AM, SIRAN et al, January 2008].

The work of major money managers seeking firstly, investments in this emerging market, and secondly, capital from local investors [not the billionaire Russians banking in Genève every Summer], is always a balancing act: sustainability investors into the region like Fortis, Allianz and the former ABN Amro AM must be deft traders in only the most liquid names while meeting sustainability theme objectives. Reports from 2006 seem to imply the geopolitical playbook green-washed the re-valuation and re-configuring shareholding of the Sakhalin project using environmental factors as a pretext dating back to 2006. Royal Dutch Shell plc (LON:RDSA) and its partners, Japan's Mitsui and Mitsubishi, were bumped. No word on the Sakhalin Project's environmental performance in 2008 from the Russian EPA. As the people and geography promise, there is a lot of the Russian Federation to enjoy. I appreciated a recent hitchhiking story from Vladivostok to Moscow [as well as some raw capitalism in merchandising Toyotas on the 6,000 miles of the Trans-Siberian Highway]. One day I would still like to make the overland trans-Siberian rail trip, although the 7,100-km 2008 Transsyberia rally offers a competitive route to Ulan Bator - note how Porsche’s HNW sales strategy pitched to the hydrocarbon billionaires the specially adapted US$100k Porsche Cayennes racing across the steppes [after 2 privateers placed one-two in 2006], and now flood the results table. But as an investor, if you did not beat the hot money reaction to the Georgia invasion, you may still want to re-assess your terminal values of the DCF [discounted cash flow] calc on those mines in the Ukraine…

-----------------------------------------------------------------------------------

EM Disclosure Project: Sustainability Disclosure Questions (criteria)

1. Company has public disclosure of sustainability issues? Any disclosure of ESG-related information in any corporate literature or on the company website (this does include basic corporate governance information reported by the company).

2. Company has a separate section of its website and/or annual report addressing sustainability issues? Disclosure of ESG related issues in a dedicated or separate section of the company website or annual report.

3. Company has a current (last 2 years) and stand-alone Sustainability report? Disclosure of ESG related issues in a stand-alone report. The report can be online so long as it is also downloadable. Disclosure can also be included within the annual report.

4. Company references the GRI framework for its stand-alone report? ESG disclosure includes any reference to the use of the GRI reporting framework.

5. Company has sustainability goals and benchmarks? ESG disclosure includes sustainability goals and benchmarks. The company has to disclose both goals and benchmarks (not necessarily in relation to the same indicator) to get a 'yes' for this question. With regards to benchmarks - this can be as simple as disclosure of any performance metrics, e.g. CO2 emissions.

--------------------------

/ Rattle and Hum
// Silver & Gold

In the shithouse a shotgun
Praying hands hold me down.
If only the hunter was hunted
In this tin can town, tin can town.
No stars in the black night
Looks like the sky fall down.
No sun in the daylight
Looks like it's chained to the ground, chained to the ground.

The warden says "The exodus sold."
If you want a way out...
Silver and gold, silver and gold.

Broken back to the ceiling
Broken nose to the floor.
I scream at the silence
It's crawling, crawls under the door.
There's a rope around my neck
And there's a trigger in your gun.
Jesus, say something!
I am someone, I am someone.

Captains and Kings in the ship's hold
They came to collect
Silver and gold, silver and gold.

I seen the coming and the going
Seen the captains and the Kings.
Seen their navy blue uniforms
Seen them bright and shiny things, bright and shiny things.

The temperature is rising
The fever white hot
Mister I ain't got nothing
But it's more than you've got
These chains no longer bind me
Nor the shackles at my feet
Outside are the prisoners
Inside the free (set them free).

A prize fighter in a corner is told
Hit where it hurts - For Silver and Gold
You can stop the world from turning around
You just gotta pay a penny in the pound.

The Rubber Time

Manaus, Brazil is the gateway to the Amazon, the earth's rich biosphere and carbon sink. Today Manaus counts around 2,2m inhabitants with a primary language of Portuguese, is a major port, and has 20 storey blocks along bumpy roads similar to other parts of Brazil, a busy airport shuffling TAM Airbuses dropping businesspeople and tourists. It has facilities by global majors like Samsung and Sony, and is an important industrial centre for the manufacture of electrical and electronic goods for all of Brazil. Headlights may be optional however, although the 60km/h sections to the airport do instill sufficient fear in taxi-drivers who, as in elsewhere in Brazil, seem to been training to fill Filipe Massa's shoes at Ferrari...

Manaus, whose name originated from the Manaos Indians that inhabited the region, is situated on the left bank of Rio Negro (Black River), close to the "meeting of the waters" with Rio Solimões, the Amazon’s actual name. The grand old opera house is a famous excess of the boom times, a European vestige worthy of Gabriel Garcia Marquez in equatorial America from the Rubber Time circa 1910-1950, when the indigenous Amazonian rubber tree and demand from industrializing world made rubber the commodity that oil and coal are today for Chindia [China and India]. Wikipaedia offers the “rubber boom occurred largely between 1879 to 1912, and afterwards experienced a revival from 1942 to 1945 during the Second World War.” Legend and intrigue connect it to my visit a week ago in SE Asia. Apparently two Englishmen – the local Amazonian guide looked at me with steely eyes when explaining this part for some reason – smuggled samples of the tree and started rival plantations in Malaysia, with easier land and labour…moving manufacturing to Asia, sound familiar? Today the major rubber markets include Kuala Lumpur, London, New York, Tokyo, Bangkok, Shanghai and Singapore, not Manuas nor Sao Paolo, as well as dubious looking electronic Inter-Continental Rubber Exchange (IRE). Futures contracts with different quality specifications are also offered on the Kuala Lumpur Commodity Exchange (KLCE), the Shangai Futures Exchange (SHFE) and the National Multi-Commodity Exchange of India (NMCEI).

Downstairs in this elegant old hotel, Hotel Tropical Manaus, is a regional pensions conference, the ABIPEM 2^o Seminario Norte, 13-15 De Agosto, produced by the state and municipal authorities in Manaus and Amazonia and their respective pension funds, ManuasPREV and AmazonPREV. Delgates were identified by suits and nifty eco-friendly hessian notebags, not the de rigeur bikini or Speedos around the pool. After a meeting last week in Rio with PREVI, the largest national fund and PRI in EM stakeholder, I was curious to see how sustainability+investment plays out on the cusp of the jungle. Citizens seem aware of environmental responsibility, and positive about the environmental record of the current governor [uncorroborated this, but the public impression tells its own story]. So where or how is the so-called "universal owner" theory being discussed, or promoted? Universal owner speaks to the role of public pension plans as having combined investment and public objectives, holding the whole market as is typical of large funds with passive strategies at low cost, and having the longer time horizons of long-term investors [greater than 10 years. The conference sponsors include multinationals like Schroders and UBS with regional players like Banca Cruzeiro do Sul, Bradesco, Banco de Brasil, CAIXA, PanAmericano and BANIF Investment Bank. UBS has a fairly forward approach to sustainability, although adoption and implementation in-country is mixed, so I look forward to learning more about their approach in Brazil with in-country branded firm, UBS Pactual, how it relates to sustainability+investment and initiatives at head office in Zurich. Experience of similar firms as ESG architect suggests the Brazilian tail may wag the Swiss dog.

The hotel venue offers more food for thought on making sustainability practical in 2008 and beyond. Hotel Tropical sits on the posh side of town in Ponta Negra suburb close to the confluence of the rivers, laid out in a friendly compound fashion with a sprawling estate, and the website references social responsability [sic] and environment on its homepage [strangely, English translations seem to be a little off in Brazil]. How quickly environment slips away in the stakeholder hierachy is evident in the text. The text covers guests and other humans, the environmental footprint disappears after the cursory “nowadays, it is not possible anymore to think of the future of mankind and not to consider environmental and human rights responsibility”. Time to re-think. Perhaps tellingly, the investor webpage is “under construction”.

The hotel was clearly designed by an architect without energy efficiency front of mind. Tropical Hotel Manaus is a self-described ‘eco-resort” despite its massive eco-footprint courtesy of 24 hour air-conditioners to handle the humidity, luxurious proportions [the hallways are marble-lined, long like something out of The Shining, and red carpeted, measuring about the width of the average Holiday Inn Express room]. No wind nor solar power, no recycling bins obvious. Windows seem thick though, CFLs are evident outdoors, and being riverside, the water treatment plant may be decent – no info, so anyone’s guess.

A major positive contribution is the zoo. After a sub-optimal experience at another so-called “eco-lodge” upriver [my experience in Brazil is that “eco” has fluid meanings], we toured the hotel zoo with the friendly and enthusiastic biologist who showed us a selection of local animals, and there was no doubting the passion she has for the creatures. A significant realization for me was that most were posted with signs saying “endangered species”. The zoo doubles as city amenity [a busload of kiddies in blue uniforms were noisily trooping through their live lessons!], a classic private-public partnership type typical in emerging markets where profit and social motives blend easily. The zoo holds about 10 cages with rescued animals from homes and traders, including a sad jaguar [Portugese "onca pintada", Panthera onca] and a depressed woolly monkey with an impressive prehensile tail. a cage is tough living for the animals to be sure, especially down the river from where they should roam were it not for deforestation, encroachment and human hunters, but I support such a zoo for educational value hosting only rescued animals.

It seems human rights are well covered compared to biodiversity rights. On the back of the biologist’s hotel -issue polo shirt was a SA8000 logo proclaiming the hotel rated to this global standard developed by Social Accountability International (SAI) for “ensur[ing] that workers of the world are treated according to basic human rights principles”. I understand the role of social responsibility ratings, but the juxtaposition of a 5 star non-enviro-friendly hotel and the CSR claim was jarring. The gap between some international ratings and the reality of the due diligence on the ground has caught my attention before, and here was an example of a such gap - like the absence of "fair trade" or "shade grown" food products in stores and even at the airport. A rough space comparison suggests that two hotel standard double-occupancy rooms on the second floor were the size of the jaguar cage where the impressive feline paced the wire mesh fence footprinting the fine sand with it's hand-sized paws. More puzzling was the walkway between cages was LARGER than the actual cage size itself. Who else would be up for hatching a plan to highlight and find funding to upgrade the cages using tourist taxes, and to reduce the ratios? Maybe "human monkey eat one gaioba, buy one for the monkey outside" or "big cage for human, bigger cage for endangered species outside"?

That sums up the Manaus experience, a city on the edge of the great jungle with its natural wonders, defined by the dark waters of the mile-wide river. Poor houses jostle next to each other by the river, then some grander colonial type buildings, then the newer gated communities for the industrial workforce. A potholed road features in photos in this morning's paper with Olympic coverage, stories of achievement, and claims by political rivals of nepotism. But Manaus being built in the European style with its emerging market resources, will have no bike lanes for the hard-riding Thursday night 8-man peleton on the three-lane roadway, no comfortable shady parks with fountains. It is more a city built bit-by-bit as its former glory suggests, with a progressive public leadership that diversified the industrial base away from rubber into the industries today, including Honda’s second largest motorbike factory, Harley-Davidson's only ex-US manufacturing [see SRI-Extra earlier today Harley-Davidson in Amazonia] and electronics. This frames the question architects of built environment now struggle with in for a like the US Green Building Council: building new kinds of cities with a smaller sustainability footprint, but building them while they’re still being lived in, with limited resources in any given budget period, by a heterogeneous voting population all trying to get ahead. And the Tucuxi and the Boto Dolphin (the River Dolphin) never can make it up to the voting booth...

Harley-Davidson in Amazonia

Building the HOG in the jungle, who knew?! The most startling statistic from Manaus is that in 1998 Harley-Davidson, Inc. (NYSE:HOG) opened a new assembly facility in Manaus, Brazil, which is its first manufacturing plant that is not in the United States. The winter weather makes for a fair comparison with a hairdryer-in-your-face Pennsylvania August summer day like the major facilities for HOG in York, PA [it is equatorial so the whole north/south winter/summer seasons thing is a tossup]. The leased local facility is a fraction of the size of the PA facility owned by the firm [30,000 square feet vs. >1,3m] and is the exception to the HOG distribution model in Latin America: motorcycles sold in Brazil are assembled and distributed by the Manaus subsidiary, while the company supplies all products sold in the Latin America region directly to independent dealers from its U.S. operations. No tours though, that will have to wait for next time I am back in the US with some time in WI, PA or MO.

The period from factory opening to date has been a bumpy flat stretch for HOG shares, up barely 0.11% from 3 Jul 1998 – 1 Aug 2008. Ouch! With run-up’s [Q1 2000 and Q1 2007] peaking before the tech 2001 and sub-prime 2007 crashes, perhaps HOG should be pitching its stock, reflecting the underlying forty-something free riders riding the widgets, as a leading indicator for market corrections. The numbers on sub-prime still amaze me - Merrill is off 62% since Aug 07, Citi 58%, AIG 62%, Wachovia 61% - and the chart is bad, just bad...

A browse of HOG’s most recent [2007] 10K and their self-reported “investment risk factors” [p.15] makes for an interesting read of the companies own SWOT [strengths/weakness/opportunities/threats] analysis. Unlike what all our B-school case studies taught us, the distinctive patented HOG exhaust throb is down to four on the list with the rest of the brand. Two ESG factors, labour relations [including employee benefits for its 9,755 employees] and corporate citizenship are explicitly covered, perhaps with memories of the Q1 2007 strike still fresh. The looming shadow of the sub-prime and possible prime fallout [credit and financing risk for HOG and its customers] stalks the second tier of risk factors. But no mention of the sustainability meta-theme and its impact on purchasing of heavyweight motorcycles, not even as alternatives to SUVs as macho status symbols. I would have thought the Tahoe/F150/Hummer to HOG transfer would be an easy trade for a frustrated macho in Wisconsin, Texas or PA.

The environment is tucked down in legal end of the filings Commitments and Contingencies [p.46]

• [“The Company is subject to lawsuits and other claims related to environmental, product and other matters”], Environmental Matters [p.47] and
  
• Item 3. Legal Proceedings [p.21].
  

The language is suitably vague courtesy of their lawyers and accountants [“ground water remediation may continue for some time beyond 2012”]. But it seems the cash cost to the planet just in PA ranges from US$8m to US$28m [“involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility”], and HOG having pushed excess liability of course to a third party company, Ultimaster “for certain claims related to environmental contamination present at the date of sale, up to US$20.0 million”.

Now sitting here next to the black-brown water of the Rio Negro in Manaus stretching four miles wide chopped by the easterly wind heading to Peru, one wonders:

1. What is the environmental footprint of Harley Davidson’s only manufacturing facility in America outside the US in the context of local laws and regulations, and compared to the US standards, in this world-class biosphere?
   
2. What should the local pension fund investors conference in the Tropical Hotel Manaus here today be asking this prestigious, welcome manufacturing partner today in calculating the complete and integrated investment analysis profiles, including ESG factors?
   

Institutional owners account for 81% of equity. Whether in Brazilian Real or US dollars, I doubt clean water effluent nor deforestation upriver was factored into the US$40-42 trading range today on the NYSE.

Responsible Investment in Emerging Markets and CalPERS’s new 8 principles in EM

In Kuala Lumpur a few thousand airmiles ago, my feature presentation on Responsible Investment in Emerging Markets covered three segments, firstly the State of RI in EM, secondly the Future of RI looking to 2012, and finally the Challenges and Opportunities for RI in EM thru 2012 by invitation of The International Corporate Social Responsibility Conference 29th-31st July, 2008. The state of RI in EM in 2008 reflects the broader RI movement history. Responsible investing has grown over the past 30 years in piecemeal fashion driven by issues – think napalm, apartheid, SOX and NOX, Darfur - and waves of investors from institutional and retail segments, as Steve argues in our forthcoming paper [Lydenberg & Sinclair, forthcoming Journal of Business Ethics, 2008]. Indeed, sometimes the changes at micro level are curious - one SRI fund tracked out of Boston (Dreyfus Third Century-DRTHX) has been seeing big inflows these first weeks of August. The main focus of RI has been and remains on equities - the stocks of large, publicly traded corporations. This emphasis on equities is perhaps accounted for by the emphasis within the early RI movement on changing corporate behavior in positive ways and the desire of religious investors to avoid companies involved in morally questionable lines of business. It also skews away from where much of the ESG investor action in EM happens, in fixed income, family-owned small/medium enterprises [SMEs], and company capital projects.

Malaysia has since 2006 required all listed companies to report on their corporate responsibility policies and programs to Bursa Malaysia, the Malaysian Stock Exchange, and the Malaysian Treasury has been active in describing listing CSR requirements. But listed equities always only form a small portion of economic and business activity, especially in SE Asia where family wealth and private companies, as well as parastatal companies, form a major component of capital ownership and business activity. If sustainability or CSR aims to cover more ground, asset classes from the investment horizons outside of equities must be covered. Currently we are scoping a more comprehensive view on private equity and high net worth investor activity.

Demand for ESG in investment analysis coverage in developed countries has led to increased and improved supply [off a nothing base]: mainstream investment houses, such as Société Générale, F&C Asset Management, HBOS, Citigroup Smith Barney, JP Morgan Chase, Merrill Lynch, UBS and Goldman Sachs have in recent years established in-house research teams that conduct analyses for their investor clients on such issues as climate change, renewable energy, water, human rights, nutrition and diversity. Some of it is eased along by the Enhanced Analytics Initiative [EAI], but as a mate reports even this year in 2008, the EAI offering for EM investors is thin. I agree with Marcel Jeucken of PGGM, the second-largest Dutch pension fund, that there is “low hanging fruit in EM from an ESG perspective” [Responsible Investment Landscape Report: Asset Managers, 2008]. PGGM considers EM from a human rights perspective including covering “oppressive regimes” [undefined], and they reportedly cover fully 1,000 EM companies of the 4,000 companies universe screened. EM is sometimes regarded as an illiquid asset class, based on the volatility and some settlement challenges.

Direct and Indirect

In my EM session, one sensed the audience leaned forward when I covered the roles of investors within a country and into a country, foreign versus local capital, a truth in tension in EM. The 1997 Asian currency meltdown was a “where were you when…” moment in the region’s history ["Soros" remains a four-letter word]. The ‘97 crisis, as one local expert explained; “took away not just the investor focus and funds but internal drive as well”. What foreign investors think, and do, is important to Malaysian investors. Today the regional rivalry with Indonesia, Singapore, Thailand and similar countries is real. The conceptual framework I developed for the PRI in EM Project [now being taken on by my former intern, Narina Mnatsakanian, recruited from KPMG Netherlands] on investors directly or indirectly into EM was usefully adapted for the Malaysian presentation.

The graphic [see above] illustrates the role of portfolio flows in EM, and three points of investor exposure – including the third category where GE fits in, noting that for the first time ever, in fiscal 2007 more than 50% of GE’s revenue came ex-USA. Going forward, the relative power of family wealth, private companies and company capital investment including M&A must be factored into the thinking. The EM Investor framework explains the relative roles of foreign portfolio, local portfolio as well as company supply and demand chains across borders into EM. For example, in February 2007 California Public Employees’ Retirement System [CalPERS] committed US$400 Million to a new private equity vehicle focusing on global emerging markets in Eastern Europe, Latin America and Asia.

I explained our experience of ex-country investors sitting in San Francisco, London or Zurich who use a tool like the MSCI Barra EM Index as universe and benchmark for their EM exposure. The last public data had Malaysia represented 3.052% with $79,193 market cap and 58 companies, the ninth largest allocation and fifth of five ASEAN countries in the top 10. Malaysia is a major component of an EM perspective. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The embargoed website lists the MSCI Emerging Markets Index as of June 2006 consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. In the UN context of course, Taiwan’s massive market cap [US$ 688bn at 31 Dec 2007] was wished away to cater to the China politics.

The perspective of foreign investors may be as influential as sovereign ratings agencies, and of course they are self-reinforcing. This week the price of South Africa’s long delayed electricity grid upgrades just got a lot more expensive when all three ratings agenices downgraded ESKOM debt, forcing the treasury to promise to underwrite it and the path to the World Bank to be trodden once again.

Eight Principles

In the institutional investment space, whatever US giant CalPERS does is watched closely, slightly less than more paparazzi friendly targets in California, like Britney Spears or Jack Nicholson… Noteworthy for EM investors, in December 2007 the CalPERS Investment Committee moved away from a negative-screening-on-country approach in existence since 1989 toward a new principles-based approach to investing in the emerging markets in lieu of the existing country list and permissible equity market analysis adapted from the FTSE All Emerging Index [evidence of CalPERS market power and the competitive nature of the index business that they chose not to use the industry de facto standard, MSCI EM Index]. Apparently, the time and resource costs out-weighed the ESG benefits - former CalPERS analysts admitted the policy consumed hundreds of hours of staff and consulting time. In April 2007 when the review was announced, Mark Anson — CalPERS’ former chief investment officer and then chief executive officer of Hermes Pensions Management Ltd., London [he returned stateside a year ago citing personal changes], wrote in an e-mail to Pensions & Investments “I am encouraged by statements of Chuck Valdes and other board members to review the emerging markets policy. Emerging markets are the most dynamic part of the equity markets, where change is rapid and investors must be both prudent and flexible to achieve the best possible long-term returns.” Media also reported the emerging markets list had cost the fund 2.6 percentage points annually in performance — or $401 million in opportunity costs — from Aug. 1, 2002 through Dec. 31, 2006. Together with busloads of citizens from targeted EM countries, clearly an unwieldy but well-intentioned effort that attracted debate over the years, as far back as 2002.

The new approach, GLOBAL PRINCIPLES OF ACCOUNTABLE CORPORATE GOVERNANCE, was reported by Cal PERS as “continues CalPERS’ policy of being a positive influence for improved practices in emerging markets, while increasing the opportunity set for CalPERS’ managers”. The eight principles cover a mix of ESG factors, including the major of political institutions, illustrating a delicate crossover of investor and the public sectors [extracts below]:

· A. Political Stability – including what I rate as the more important factor, Civil liberties: 3. Independent judiciary and legal protection:

· B. Transparency – including elements of a free press necessary for investors to have truthful, accurate and relevant information [biggest ticket item for me] and stock exchange listing requirements [more on the Brazilian experience at BOVESPA next week].

· C. Productive Labor Practices.

· D. Corporate Social Responsibility and Long-term Sustainability - Includes Environmental sustainability and the Global Sullivan Principles of Corporate Social Responsibility [see new website at http://www.thesullivanfoundation.org/gsp/default.asp].

· E. Market Regulation and Liquidity – including “little to no repatriation risk”.

· F. Capital Market Openness .

· G. Settlement Proficiency/Transaction Costs

· H. Appropriate Disclosure

The document introducing “The Global Principles of Accountable Corporate Governance” describes the framework by which CalPERS puts into action its proxy voting responsibilities in addition to providing a foundation for supporting the System’s corporate engagement and governance initiatives. The aim is “to achieve long-term sustainable risk adjusted investment returns”. It is unclear how this objective will be measured, and over what time horizon. CalPERS does break new ground in developing their own approach that does not naively map to a smorgasbord of acronym international initiatives, similar to the Fins and Danes. CalPERS also offers some material on their universal owner perspective, namely “[CalPERS] has chosen to adopt the term "shareowner" rather than "shareholder." This is to reflect a view that equity ownership carries with it active responsibilities and is not merely passively "holding" shares. Perhaps the strongest takeaway for any investor is the quote from CFA Institute’s take on Corporate Governance: “For corporate governance structures to work effectively, Shareowners must be active and prudent in the use of their rights. In this way, Shareowners must act like owners and continue to exercise the rights available to them.” (2005 CFA Institute: Centre for Financial Market Integrity, The Corporate Governance of Listed Companies: A Manual for Investors)

How decisions on the eight principles are made, and indeed the relative weightings on decisions [for example, when would a country perspective on China trigger a review?], may reflect the pragmatism necessary in investment in general, and especially in ESG. I look forward to the first review of the new principles based approach next year, and comments from similar institutional investors I met this year in Singapore, Rio de Janeiro, Cape Town, London, New York, Boston and Dubai. As many before us have learned in sustainability+investment, the pragmatic trumps the politics.