SUSTAINABLE INVESTMENT, SOCIAL MEDIA AND THE KINETIC SOCIAL LICENSE TOOPERATE

Weekly Viewpoints on Sustainable Investment 

In this week's note some reflections from a week's work in Washington DC which gave a sense for where the investment aspects of sustainability are right now, and challenges for financing sustainability trends, as well as some catch ups with colleagues doing interesting work. I hope this commentary and analysis encourages you in your good sustainable investment work. 

IFC Sustainability Forum 18 June 2013

IFC SUSTAINABILITY SUMMIT
At the invitation of IFC's sustainability team responsible for Commdev (promoting stakeholder investment in sustainability issues), I was an invited stakeholder for two back-to-back events in the political capital of the world's dominant economy: the IFC Sustainability Forum (aimed at a trends conversation, hosted at the suitably imposing Renaissance Hotel) and the IFC Sustainability Exchange (a multi-stakeholder listening and reframing format, squeezed into IFC's headquarters on Pennsylvania Ave). I took up the invitation partly because of the good systemic work that I see the IFC having the opportunity to influence, and to be a voice presenting the developing markets viewpoint and representing our work at AfricaSIF.org promoting sustainable investment in Africa. As always, instant commentary is via twitter, where I helped out the @IFC_org by tagging the events - #sustysmt2013 and #ifcsustyx2013, see http://commdev.org/sustainabilitysummit. The heavyweights on the first day's IFC Sustainability Summit topic spoke to the season of change I have spoken of before that I sense in the industry, it was headlined "Dealing with Uncertainty". The humility of admitting that the future cannot be forecasted is a good starting point, especially in a town better know for hubris and talking heads. But few speakers helped frame ways to get one's hands around the uncertainty. The IFC team did well to get some major voices in the room, albeit World Bank President Kim only as video message, and the question sessions were good, and the weaving role by moderator Jon Lukomunik worked well. Looking around the room though, and listening to sidebar conversations, the voices seemed a little narrow, missing was a broader voice from South America, Eastern Europe, the Middle East, Africa and South East Asia. Little did the speakers know that the stock markets would have a mini-meltdown come Thursday that reminded everyone how thin the progress out of the global financial crisis is, and the discontent on the streets of Brazil, the darling of emerging markets, reflecting the gaps between how things may appear, what politicians may describe, and what is happening on the ground with ordinary citizens. The political economy continues to shift investor reference points. This month Goldman Sachs changed their 2013-2014 GDP forecasts, revising down the outlook for the Euro area, China, Russia and Turkey and upgrading Japan’s. No word on Brazil...

INVESTING IN FRONTIER MARKETS

SinCo has worked on projects with the IFC since 2009, but perhaps the IFC deserves a quick primer. IFC's role is private sector investment in developing countries - originally through project finance (loans) but over the years increasingly in various equity products, bonds and financial market investments (for the latter IFC typically lends to a Bank or PEF who then on-lend to sub-projects - this is now a sizable part of IFC's business). For all of these, IFC are usually a long term investor and work with the client over sometimes many years on developing their E and S management / sustainability systems in order to meet development objectives. A significant amount of conversation covered agri-business sector and oil, gas and mining sectors. IFC clients range from junior exploration companies to the majors such as BHP-Billiton, Rio-Tinto and Anglo-American. As of June 2012, IFC had a portfolio of emerging market investments of US$31.4 billion, of which US$9.8 billion is in equity. In the year ended June 2012, IFC committed more than US$15 billion of debt and equity investments in 559 transactions, of which US$2.1 billion was equity. Since inception, IFC has invested approximately $19.3 billion of equity in more than 2,100 emerging markets transactions, with more than 1,340 exits. Why would IFC be hosting a global think session for sustainability in developing countries? IFC has an important promoter role to play, demonstrating that sustainability makes sense for investors, and for channeling investment to corners of the world where commercial investors are too skittish to invest in. The influence flows in 2 ways: as technical advisory through support for sustainability at company portfolio or regional levels, and as actual investor in equity or fixed income of portfolios and companies. In the field of sustainable investment, IFC has influence on the terms of sustainability through their IFC ESG standards (the basis for industry initiatives like the Equator Principles as well as private equity reporting for PE firms managing money for IFC, OPIC, and others), and directly where IFC's own asset management company (IFC Asset Management Company, LLC) is investing capital, with around US$4.8 billion of assets under management in five funds. AMC funds co-invest alongside IFC’s investments but has independent fund governance, for example AMC’s Board has majority independent members and separate fund investment committees. IFC s investments are typically limited to 25% of the total capitalization of the company or the project IFC equity ownership is typically limited to 20%. IFC does not take control positions.

EVERYTHING IS PUBLIC
Transparency was a refrain across speakers. The powerful, democratic tool of social media in sharing information (both accurate and inaccurate, fair and snarky) is critical for doing businesses in developing countries. The statistics on cellphone penetration is legend. If information is power, then sharing information is about using that power with equity. A term that had resonance was "information equity", talking of a fair deal when all stakeholders voices are reflected, captured and monitored over time. I have inserted into our most recent investment value chain analysis in recent papers for the IFC / POA (see Defining Momentum project page http://www.sincosinco.com/project-sustainable-returns.php) and WWF / GEPF ( see Shuffling Feet report on Navigating Muddy Waters page http://www.sincosinco.com/portfolio-climate-risks.php) some perspective on making sustainable investment happen in the context of pervasive social media and the demand for transparency. In this new Twitter-enabled context, we operate investment decisions within the overarching paradigm of maximum transparency, as a primary lens for building credibility. The ultimate defense may be to "wiki-leaks" proactively because there is no more any internal/external divide, as has so dramatically been demonstrated by young Mr Edward Snowden (future Iceland asylum seeker?). 

SOCIAL LICENSE TO OPERATE
Social media is the social license to operate (SLTO). The role of social media is that it monitors SLTO and offers a grassroots communication channel that encourages (forces) companies, politicians, administrators, investors and other actors to be mindful of treating people fairly. It is not static. The SLTO changes over time. This insight from Rio Tinto's T.Malan was an important one and which many speakers added to. It is also not comforting. Hard-won stakeholder reputation and agreement is not fixed in stone, in coal or gold. It will change, meaning stakeholder mapping and monitoring needs refreshing on some regular cycle, some suggest annually is enough. The point was reinforced in the most granular session which focused on the IFC Commdev Financial Valuation Tool (FVT) widget, basically a strategic planning and valuation tool relying on a ex ante discounted cash flow analysis to value the "investment" opportunity set for stakeholder actions based on the positive/negative cash and time-flow effects on development of site projects. A new Wharton case study using Newmont in Ghana has a helpful context for FVT. No company seems to be using FVT across all projects, although Anglogold Ashanti (NYSE:AU) presented its use in their Geita mine, along with network power/influence analysis. From my perspective, FVT is not being used to explain to mining company institutional investors how company mine investments in sustainability are being made, something I hope we can help change. Anglogold claim mine operators are spending 60% of their time on sustainability issues, that 40% of projects are affected and 25% result in material cost over-runs. And a final word to Vale, the Brazil global miner. Their global public affairs hushed the audience into thoughtful silence by reminding us that mines make profits but also losses, and in the fullness and fairness of sharing the development of riches from rocks, more conversations should include situations that generate profits as well as losses, not only the former. The framing makes sense to investors, but politicians. Too often rights are disconnected from responsibilities. We do well to keep them related, with rights comes responsibilities.

Do good work on sustainable investment that matters.

Graham Sinclair

Principal

@esgarchitect

SinCo

Sustainable Investment Consulting

www.sincosinco.com

@SinCoESG

Based on my work, experience and interactions, all views and opinions expressed are those of the author and do not reflect the named individuals, institutions or SinCo, it's clients or services providers. No mention suggests endorsement. This commentary does not constitute investment advise. Issued by SinCo to professional investors and stakeholders for information only and its accuracy/completeness is not guaranteed. All opinions may change without notice and may differ to opinions/recommendations expressed by other business areas of SinCo. SinCo may maintain positions and trade in collective investment instruments referred to. Unless stated otherwise, this is not a personal recommendation, offer or solicitation to buy/sell and any prices/quotations are indicative only. SinCo may provide sustainable investment architecture and other services to, and/or its employees may be directors of, companies referred to. To the extent permitted by law, SinCo does not accept any liability arising from the use of this communication.

© SinCo 2013.  All rights reserved. Intended for recipient only and not for further distribution without the consent of SinCo. SinCo reserves the right to retain all messages. Messages are protected and accessed only in legally justified cases.

THE STATE OF SUSTAINABLE INVESTMENT: AWKWARD TEENAGER YEARS?

Weekly Viewpoints on Sustainable Investment 


In this first of a new series of my weekly notes, I reflect on my conversations on the state of play in London with European colleagues in the investment industry operating in theme of environmental, social and governance (ESG) factors in investment decisions. I hope these comments and analysis encourage you in your good sustainable investment work.

Good audience for Responsible Investor RI Europe 2013 in London 11-12 June 2013. PHOTOCREDIT SinCo2013

STATUS QUO

What is the state of play in sustainable investment? It is a common question posed to me by colleagues when I meet, or ask when I travel back. All professionals are tracking their progress, and that of the vocations. Partly it is driven in by the long term insecurity of an investment theme that has very much had to fight for recognition amidst a crowded investment belief system, and has had to strive for credibility. I was asked by Hugh Wheelan [@hughwheelan] and team at Responsible Investor to lead the panel covering ESG in frontier and emerging markets for the RI Europe 2013 conference (I will cover the panel in next week's note, see some instant analysis at #RIEurope2013). Being live in London provided an opportunity to explore the mood of experienced colleagues, and take the temperature of where things are at. 

RI EUROPE 2013

The superficial data points at the event speaking to the health of the industry are what they are: for another year, RI Europe had around 300 people in one place, 66 as content providers (the most impressive being Dr Paul Woolley, Chairman of the Paul Woolley Centre for the Study of Capital Market Dysfunctionality at LSE and former GMO head for London). It was at a newish, somewhat snobby hotel, with around 15 stalls of vendors presenting their wares. In my conversations on the state of sustainable investment with peers, I was exploring reactions to some of the comments by Erika Karp, Head of Global Sector Research at UBS based in New York. Erika announced her 31 July exit the previous week in the last of her weekly notes which have been one source of inspiration. Referencing her strategy/tactics approach and "The Art of War", Erika described "The war has indeed been won for proponents of long-term corporate excellence as business models for the future need to evolve to address the greatest issues of our day...Now the warriors of the past three decades can move along with the mainstream….as will I." Erika's comments jive with an overall tone that a change is happening across the industry, something that I flagged back in December 2012. But I am not as bullish that it is all onward and upward. Some of the peers we have been working with the past decade are cycling on to new seasons. a few have cashed out. Sustainability is not necessarily a welcome addition to conversations with investment professionals, but more of the concepts can fit into strategic, operational, reputation, legal and business model risks. Conversations on ESG factors happens much more easily in a broader range of conversations. New ESG functions have been created or configured, for example the new role being recruited for at Harvard Management Company in Boston to tackle sustainability for their US$31 billion endowment. Expanding sustainable investment means expanding ESG research and ratings. The industry consolidation the past 2 years continues. For example, sustainability rating agency Sustainalytics has just hired a new head of relationships in Germany and MSCI ESG has added to their servicing staff in London. And yet, large parts of listed equities portfolios have little coverage and/or fundamental equity coverage that includes ESG issues in recommendations. 

STARBUCKS SELLING WELL

The red-eye from New York arriving at the world's busiest airport first thing in the morning always leads to a manic experience on the first, long day. One colleague suggested I do not so much drink caffeine, but am secretly fueled by it. Not so much anymore, but on the 30 hours mission in London, it was necessary. Mostly fair trade, organic coffee (unlike that served on United). And definitely necessary in the afternoon when panelists droned on in dysfunctional fashion, meandering over talking points even they were not convinced of. The late afternoon double espresso dash to the nearest Starbucks included face-slapping cold drizzle (that sorted out the jetlag for a few hours, the upside of inclement weather England?!). Mr Schultz will be pleased to know that the Starbucks messages of corporate responsibility were reliably posted on the wall and the long queue confirmed meeting a societal need. But the volume of trash generated remains an Achilles heel for Starbucks and a philosophical challenge to fast food retailers' sustainability ethos in general, given few customers chose to bring their own cups. One longtime sustainable investment colleague from Northern Europe voiced a concern that many have been expressing in different ways, that sustainable investment has lost it's way, and that one's efforts may not be amounting to much. It is a big question. For me it partly explains the emergence of the "impact investing" sub-theme, as well as my future work in real economy investments through infrastructure and private equity as growth capital. Industry initiatives are being more critically assessed as they seek to re-boot, for example GRI, PRI, the SIFs and the Equator Principles have each been re-formatting their programs and organizations. Rumblings of discontent remain. A pattern I have observed is that colleagues with many years in the profession start to seek greater impact from their work, and want to know that progress is being made as a whole. For some, stepping into different asset management and research roles is the next step, for others it is moving into work at - and for - companies. The state of play questions - why and how - are often raised by new voices. Sometimes the comments are as naive as from my MBA students who have not done the background readings. Sometimes the comments can be cringeworthy. For example, in the panel on "Real Assets" I cringed at a newbie rattling on about subjective epiphanies, without the wisdom of the decades of academic research, industry experience or philosophical. It is like hearing your hometown's ills being categorically described to you by tourists. The room was polite though unsettled. As the panelist opined about his personal epiphany fellow panelists started to look like they had left the toaster on.

TRANSATLANTIC

I wrote this note on the return leg at 37,000 feet over the Atlantic en route Manhattan for The Conference Board conference on "Ethics and Shareholder Value Summit" that I helped shape over the past six months. The fact that a company trade group is hosting this event with panels using the voice of investors (for example "Investor Panel: Why Corporate Governance and Ethical Practices Make a Difference to Shareholders"), suggests the state of play for sustainable investment is healthy. The event comes just weeks after The Conference Board "Summit on Sustainability", where Erika Karp described a "stellar "win". My view remains that companies remain more fearful of their customers than their investors (unless they're an aggressive hedge fund). In deciding on how best to describe the state of play and the progress by the 4 key actors - companies, researchers, policy makers, and investors - perhaps the better explanations come through explaining the progress of each separately. Sustainability will progress, fail or succeed in each stakeholder category in inter-related but different ways. In my experience, investors are conservative. Companies may be moving, especially larger multinationals competing globally, as demonstrated by this week's release of the Interbrand Green reputation rankings on the "best green global brands". But for sustainable investment, the situation is mixed. In Europe, my sense is of an industry that has figured out a lot, has much of its basics right, but is also at the risk of being buffeted by the economics of investment and research. The greyness of a broad theme like sustainable investment with its own vernacular and a dearth of finite edges contributes to this sense of instability. New investment products are being launched, but softly. Research is expanding, but is really just catching up with where investors have always expected it to be, and career professionals in sustainable investment are not secure. Sustainable investment remains at a "teenager" stage, sometimes speaking well, at other times not a welcome presence, prone to fits and starts. How it turns out requires a whole lot more bad hairstyles but hopefully few wardrobe malfunctions.

  

Do good work on sustainable investment that matters.

Graham Sinclair
@esgarchitect

Principal
SinCo - Sustainable Investment Consulting
www.sincosinco.com
@SinCoESG

Based on my work, experience and interactions, all views and opinions expressed are those of the author and do not reflect the named individuals, institutions or SinCo, it's clients or services providers. No mention suggests endorsement. This commentary does not constitute investment advise. Issued by SinCo to professional investors and stakeholders for information only and its accuracy/completeness is not guaranteed. All opinions may change without notice and may differ to opinions/recommendations expressed by other business areas of SinCo. SinCo may maintain positions and trade in collective investment instruments referred to. Unless stated otherwise, this is not a personal recommendation, offer or solicitation to buy/sell and any prices/quotations are indicative only. SinCo may provide sustainable investment architecture and other services to, and/or its employees may be directors of, companies referred to. To the extent permitted by law, SinCo does not accept any liability arising from the use of this communication.

© SinCo 2013.  All rights reserved. Intended for recipient only and not for further distribution without the consent of SinCo. SinCo reserves the right to retain all messages. Messages are protected and accessed only in legally justified cases.


UPDATED 15 July 2013: Text edits, paragraphing, hyperlinks, caption.