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.

Air conditioners in Singapore, drunken Tree Shrews in Malaysia

The best invention ever? The air conditioner. My Singaporean friend smiled as he offered this declaration by a Singaporean statesman on my first visit to Singapore and Malaysia this week. Choon is a good man, works in Pharma in SE Asia, sometime rugby player and U of Michigan Ross School MBA alum. I was invited to Malaysia to cover my EM work for CSR and SRI experts at The International Corporate Social Responsibility Conference 2008 jointly organised by the EUMCCI, OWW Consulting and RUSS Consulting, 29th-31st July in a feature presentation on Responsible Investment in Emerging Markets. The region must be one of Carrier or LG or Dakine’s best sales areas. I expect few expats from cooler northern climates in the financial district’s highrises would last long over their XLS spreadsheets without a steady 72F/19C! But what of the climate impact? I’m still waiting on word of how many units are sold without CFCs, and like any competitive and emerging society, I suppose many may be serviced by solo entrepreneurs in small shops doing the best they can, with or without ISO certifications. The climate impact of the air conditioner business post Montreal Protocol, from manufacturing to consumption patterns, maybe worth a paper from my old mate at UNEP working in the Global Environmental Fund.

Walking the streets of SIA and KL has added colour and texture to my understanding of the SE Asia region beyond three letter airport acronyms. Singapore has always been pitched as the goto for investment in the region, and Malaysia has been interesting for me ever since the massive investments in post-apartheid South Africa in 1994/5. It has the similarities with affirmative action and economic empowerment and the tied destiny in the 1997 Asian flu that whacked the South African rand as traders rushed to quit any EM exposure and the ZAR was so liquid [regularly in the top ten most traded currency]. SE Asia is understandably complex, and research rewards the curious, but one needs the street-skills typical of EM. How to explain the site of a bay of waiting cargo ships, the mixed low and high rise properties, curry for breakfast, white bean hot drink, wakeboard center open until 11pm on Saturday night, and dainty bakery items my mum would be proud of baking [I was reprimanded for taking a photo - since when did baked goods become so competitive?!]?

One needs to be on the ground in SE Asia to properly assess performance, especially for understanding environmental, social and governance [the ESG in sectors report is a good illustration Taking Stock — Adding Sustainability Variables to Asian Sectoral Analysis]. The usual pitches by the hotel and the airport to being green were in evidence. The “onsite” argument view was confirmed in conversation with a respected colleague and expert in the region, a former i-bank analyst heading ASrIA. The data is there, what is and is not being done. But one needs to dig for it [the blunt tools of questionnaire and engagement letter are ignored], and the data or its information is not necessarily well-organized. Covering ESG performance in SA Asia may benefit those with the raw data and local knowledge to analyze it. The information asymmetry benefits locally based players in the ESG space, like Fortis, Aberdeen and Lazard. As a former HSBC guy turned business journalist at Channel 7 explained, sharing a story of how his team, in trying to sort lending exposure post the 1997-meltdown, posted his own people to stake out a factory for a couple of days to see how it was really doing, counting movements of widgets to assess inventory, as opposed to the smiling handshakes of the planned visit which hid the real activity driving the factory cashflows.

The International Corporate Social Responsibility Conference 2008 was hosted at Hilton Kuala Lumpur with its four storey window overlooking twisting highway and lush treescapes a few kilometres from the city center of the Lake Gardens. Day One was CSR focused, Day Two on RI, with Day 3 trying to square the circle with the WBCSD workshop. I was most interested in understanding what was actually being done on the ground by local firms. Geoff Williams at OWW Consulting and other local partners have done good work presenting this conference with CSR and SRI days back-to-back, with the WBCSD workshop tomorrow hopefully putting investors, corporate CSR and company development people in the same room. This is another stop in the project to assess the presentation of the sustainability proposition by companies to investors. I met Geoff when I was leading the PRI in Emerging Markets Project at UNEP FI, where Geoff was a positive in building momentum in the region [expect more on the PRI in EM project in future posts]. Geoff, myself and two academics from the local university covering sustainability, USM, will be moving forward on a mapping survey on RI later this year, building on my work with the similar mapping in SA last year – we’ll be keeping lead author in SA, Neil Eccles at UNISA Centre for Corporate Citizenship, looped. I prefer to work collaboratively. Old PRI colleagues at NZ Super amongst others will be supporting the survey. Universiti Sains Malaysia [USM] is positioning itself as the leading sustainability university in Malaysia (in Asian fashion, it has its own USM song). The survey will cover attitudes to RI in Thailand, Korea, Singapore and Malaysia from asset owners, investment managers and service providers. While not groundbreaking, if we build with the appropriate rigour, it may form the basis for a decent view on the state of play, comparison and contrast to the South African State of Responsible Investment study in 2007, and I will look to replicate it in Latin America and Eastern Europe in 2009.

My connecting WBCSD and OWW was important to increase the EM exposure for the WBCSD Business Theme valuation project by getting to Malaysia, and closing the gap between corporate and investor perspectives. Ten CEOs were expected for the workshop on Thursday, and a representative sample of investors [I will cover the project in more detail in Q4 2008]. The WBCSD project will explicitly cover the perspective of multinational companies, local operations of MNCs, as well as local EM country champions. I look forward to the South Africa event at the JSE in November. As with any of these initiatives that I deal with across the sustainability theme – and there are too many of them – I continue to make the case for real, on-the-ground input and activity from an EM perspective.

In my presentation on Responsible Investment in Emerging Markets, by show of hands, there were just five investment professionals in the hall. Most of the 250 delegates were corporate CSR, NGO, academic or public policy people, except for the likes of Anne-Maree O’Connor from NZ Superannuation Fund, Colin Melvin, CEO of Hermes Asset Management (UK) which manages the £35 billion British Telecom Pension Fund, Kris Douma, Head of Responsible Investment Support & Active Ownership at Netherlands based Mn-Services [we met at the Institutional Investor event in Amsterdam in March], which manages €65 billion and Alexis Krajeski, Governance & Sustainable Investment expert, F&C Investments, (UK) which invests more than £100 billion in Socially Responsible Investments [now moved from Boston to London]. YK Park, project Director at ASrIA, covered the Carbon Disclosure Project [CDP] work – ASrIA acts as regional partner for CDP, for example the 2007 CDP5 report. ASrIA has played a key role in opening doors for investors from outside the region. I was hoping YK would offer more information on how the CDP data is being used by investors and CDP members. Understanding the investor impact – and increased use of CDP data – must be measured for a sense of CDP’s impact, a project I have motivated CDP to move on globally in 2008/9.

To hook my insights on EM and ESG in “Responsible Investment: the experience in emerging markets“, I used a little fact I picked up from the BBC Tuesday night to act as metaphor for my speech, see “Malaysian tree-shrew is heavyweight boozer” BBC 29 July 2008. The connection was to the fact that scientists had only just discovered some rather unique behaviour of the small forest creature, how they measured behaviour, and how tracking it over time gives us metrics on how it thrives, including whther it will still be around in 2012.

A tiny tree-shrew that lives on alcoholic nectar could - pound for pound - drink the average human under the table – Proceedings of the National Academy of Sciences . Malaysia's pen-tailed tree-shrew waits until nightfall to binge on fermented nectar from the bertam palm. Insights into how humans' alcohol tolerance first evolved.

The photo was used to reflect 3 messages on “Responsible Investment: the experience in emerging markets“: context, facts, and metrics. My view is that, to understand where RI is and where it may go through 2012, one must appreciate firstly, the socio-economic context of each country [attitudes toward sustainability and ranking of ESG factors will vary], secondly, facts are important and data is available but may need better discovery with better analysis in that cultural context, and finally, the importance of measuring where RI in EM is going, including understanding the appropriate metrics over time per region or country. The message fits the intersection of sustainability and investment where I work. While outside the geographic coverage [Brazil and UK] of the Natural Value Initiative on biodiversity headed by Annelisa Grigg and my former UNEP FI colleague Susan Steinhagen, I think the shrew fits neatly into the fundamental question: how may investors better quantify the biodiversity value of ecosystems? How much is the scientific discovery of this behaviour worth? How much is each shrew worth?

The audience was typically Malaysian (or so my hosts tell me): in the Q&A session – for the first time ever in my public speaking career - no questions! In a region where culture dictates no losing face and reticence amongst strangers, at least in general session, 250 polite people stared back at me. I smiled. This is what you learn when you fly halfway around the world…

Citi From Leader to Laggard in One Olympic Cycle, keeping the spotlight on

Citi’s [NYSE: C] current saga captured pithily by WSJ on Friday [Citi's Status With Environmental Groups Takes Hit By CLINT RILEY February 9, 2007; Page C3] reminds me of the yawning gulf between being an Olympic or World Cup winner one year, and an also-ran four years later. Rainforest Action Network has majored on Citi’s role as a leading financial institution, potentially tipping the scale from business-as-usual to sustainability, by giving Citi slacker rating despite Citi doing some reasonably good things like ranking on the Environmental Protection Agency's Climate Leaders Program , although interesting to note neither as a charter member nor with GHG limits. RAN's executive director will meet Mr Prince on Valentine's Day for more.

Either RAN has majored on a minor, or Citi has lost its way even while the awards and recognitions based upon Citi's words and early actions still cast a warm glow. No more easy points from NGOs?

The modern Olympics and most World Cups rotate on four-year cycles. It makes the prize incredibly more meaningful, although at the risk of creating a news gap: Lance Armstrong never won Olympic Gold.

WSJ reports that Citi took three years to move from first to last, at least in the estimation of one active NGO.

Rainforest Action Network [RAN] and other environmental groups say they now consider Citigroup a laggard, compared with other big banks, such as Bank of America Corp. and those in Europe. That thinking comes despite the firm's adoption of lending and disclosure policies for environmentally sensitive projects that meet or exceed goals in international agreements such as the Equator Principles, voluntary guidelines based on World Bank and International Finance Corp. policies that are considered a financial-industry benchmark.

RAN is best known in my world for the sharp-witted Victoria’s Dirty Secret campaign that a gifted creative friend in Pennsylvania I met through the Environmental Leadership Network, Libby Kleine Modern, helped to turn to eye-catching graphics. Nothing like juxtaposing some kind of thong with a chainsaw! RAN has a reputation as an outspoken NGO with young talent willing to risk all – even allegedly defecating in the shrubs outside a shareholder meeting [a stunt which crossed them from “stakeholder to engage” to “other”, according to a friend in the SRI community].

I have often used RAN as a reality check for corporates, along the line of my ongoing thesis question - which are you more afraid of: the activist consumer, or the activist shareholder? A simplifying question that clarifies the issue for insulated company types high up on air-conditioned buildings with soft seats is “would you like to engage in dialogue with investors with ESG considerations now, or when RAN comes abseiling past your CEO’s window with a pail of green paint?”.

Backdraft
I never under-estimate the real-life challenges of educating and sensitizing large corporates to how small and seemingly fragmented issues can have major impact when championed by a motivated NGO. As the largest financial services firm in the world by market-cap - depending on where BAC is on the day - Citi will have all the political dynamics of a UN security council resolution, especially when dealing with such "light" issues as climate change. Citi has had some good people on the investments side dealing with ESG, including Mary Jane McQuillen in NYC and Mike Tyrell in London. MJ has been a stalwart for developing SRI competency at Citi and NYSSA, before Citi AM was spun off to Legg Mason in Q1 2006 [she’s now “Director of Social Awareness Investment at ClearBridge Advisors (formerly known as Citigroup Asset Management), a unit of Legg Mason”]. The non-ESG types at Citi In London suddenly found Mike’s team useful when Citi’s utilities analysts were puzzled by gyrating Utilities sector market prices around May 2006 when the ETS mis-pricing played out and the value of carbon credits plummeted from mid-EU20’s to low EU-teens, upending prices factoring in the easy money. Mike and his team have recently updated [January 2007] the seminal “Crossing The River” paper I referenced on SRI-Extra in 2005.

One can only wonder what it was to be a fly on the wall at Citi when the TXU issue blew onto the front page of the WSJ last July As Emission Restrictions Loom, Texas Utility Bets Big on Coal - Planned TXU Plants Raise Global-Warming Concerns; Rivals Try New Technology, Rebecca Smith, Wall Street Journal 21 Jul 2006. Probably not a banner day for their PR, IR or ESG teams, never mind the CSR unit.

Another CFA caught in Citi’s backdraft somewhere between leader and laggard is Fred Wellington at WRI. WRI teamed with Citi in June 2006 on a report entitled “Investing in Solutions to Climate Change” that identified twelve companies set to benefit from global warming by offering products and services in four areas of climate change mitigation. I hope to catch up with Fred soon, but I imagine he must be equally disappointed, whatever his opinion of RAN. Fred was quoted by Bill Baue of SocialFunds.com as saying "Citigroup is clearly a leader on a number of environmental issues. This report represents another area where they see competitive advantage in integrating environmental issues into their business while meeting a demand from their clients". A good thing Fred couched the endorsement with "on a number". Must be his wily experience both inside and outside large money management firms.

Such is Citi’s challenge of being a large institution. Those to whom much is given, much is expected. With people and capital deployed in different investment teams, across different asset classes, in different time zones, now being made to re-engineer toward a sustainability mindset even while making a dollar within today’s rules of the game. Direction must come from the leadership [as even McKinsey will suggest], and the CIO is critical. Citi has not been a happy place to engineeer change: against the backdrop of a share price that over five years has trailed the S&P500 by over 500 bps [C: +17.39% vs SP500: +23.51%], BAC has topped C for market capitalization, and aided by BAC's acquisitions, blown away five year price appreciation [BAC: +74.87% vs C: +17.39%] - although January was a stunner for C. All-in-all, not a pretty atmosphere to engage in re-engineering the internal plumbing.

My work as ESG architect and SRI strategist is substantially easier when dealing with asset manager boutiques, versus large, conglomerated money management firms. Valerie Cook Smith, Citigroup Vice President, Environmental Affairs acknowledged how difficult it is dealing with a sprawling international firm’s corporate citizenship footprint when we shared a cab ride last October. Valerie was a fellow Net Impact panel member at the Net Impact Annual Conference in Chicago.

One may anticipate the enormous challenge of advising a Wall Street firm with operations on all continents – executing ESG criteria consistently down the investment value chain will require a top-notch effort over a 18-36 month timeframe. Valerie is a Net Impact Board member so she is attuned to NGOs, and especially the San Francisco activist community. Her MBA is from a top 10 B-school [UNC-Chapel Hill’s Kenan-Flagler] which has a respected Center for Sustainable Enterprise [a top 10 Beyondgreypinstripes.org school] where I enjoyed leading a seminar on responsible investment and ESG analysis to 40-odd MBAs last weekend.

But I wonder how influential Valerie or Mike or MJ were able to be when the corporate finance team floated the TXU deal, the red flag to environmental activists in this instance? Ahhh, to join the Valentine's discussion...


A Pachyderm's Memory
NGOs will keep the Citigroup sustainability investing initiative - and the Citi corporate effort - honest over time. This is something I noticed time and again in the SRI research business at KLD: companies being caught in the spotlight when determined research analyst asked the simple but tough questions like "have you executed on your promises?" and then scored the company accordingly. One can argue both directions on why the Exxon Valdez 1989 oil spill should still be captured in a research note. But it is only the company that benefits. A bored reader may always skip over an analyst’s paragraph on what the reader considers historical [XOM of course has helped to keep the disaster more material than necessary: it is still fighting against some of the damages awarded, fully 18 years after the event, and the oil is still causing problems Study says Exxon Valdez oil lingering in Sound].

Organizations, especially matured businesses with long and/or loose internal EHS [environmental, health & safety] policies and performance, benefit from short attention spans. Experts and analysts do not. NGOs may be under-resourced, but they develop a truffle-sniffer's nose for spin, and their mission focus generates a fair dose of doggedness. I submit that nothing and no-one is more tenacious than a mission-driven person, with a beef and a laptop. Throw in the Internet, international relationships fostered at college, some rudimentary networking ability, basic research skills, and broadband, and you may or may not have a corporate reputation threat for very little money and a long time.

This is exactly why the one-year anniversary date for the PRI [27 April 2007] is important. I reasonably expect that the PRI [www.unpri.org] will generate some coverage, and I have encouraged James and the PRI team to use that tailwind. Of course, it is unclear whether the NYSE is as interested as April last year, although their engagement with Euronext may suggest sensitivty to Euro-sensitive issues like carbon. I noted with interest that Wall St hosted President Bush a few days back. Aside from graciously attributing the fair economic condition to his policies, President Bush offered the mixed signal of cheering corporate America while indicating the need for trimmed executive compensation. I am not sure how much applause that one got on the street with median $600k bonuses in 2006.

With a PRI anniversary, so too will come a re-examination of the whole issue of ESG in investment, along with the "who's who" that have already signed on. There has been talk of ejecting more names from the PRI - at least one organization has been "downgraded" to date, and UNEP is keen to keep the appearance of running a credible program with meaningful standards. Frankly, I am all for dropping the passengers, making sure the cohort stays near the sharp end of the field, stretching for improvement, not just hanging on.

Bottom line for Citi and other majors: with many not-for-profit, for-profit and thought leaders using NGOs as early warning systems, it is important to always maintain the initiative by staying proactive in engagement. Citi must have some substantive internal messaging ready by mid-April, even if it decides not to be external. The authenticity will be available, invaluable if a respected NGO requires some material representation. If the ongoing imbroglio with the Bartiromo and HNW unit, or the shuffle of Ms Krawcheck, proves to be distracting, Citi may at least lean on some hoped-for forthcoming positive commentary on their ESG effort.

Using External Rhythms to Drive Internal Disciplines
In working with money mangers on their ESG architecture, I strongly recommend the ESG project remain clear on the annual anniversaries of stakeholder initiatives and high-profile events by influential NGO's and SRI networks [CERES, INCR, PRI, IGCC, ICCR]. ICCR's annual shareholder advocacy agenda is a particularly useful resource, see [www.iccr.org/shareholder/proxy_book07/07statuschart.php]]. In my experience, NGO’s are willing to offer points for material efforts. A proactive approach for Citi may be to shadow the quarterly information flows around investor conference calls or reporting to SEC. With minimal internal changes, the ESG initiative may map internally to regular investor reporting.

For the money manager and its corporate parent, a regular reporting tempo with a simulated audience helps to generate the internal disciplines from behind the security of an internal process. It also teams the ESG approach with colleagues' regular processes, reducing the peculiarity factor. But if/when Citi needs to adopt a more market-facing, investor- and NGO-friendly approach, the corporate behavior and reporting pattern will already be imbued in the firm's DNA.

The actions and activities of each business unit and each asset class need to map to the overall sustainability and ESG approach. Citi is finding out the hard way. Champion status [in the minds of all NGOs] can slip away effortlessly in the course of an Olympic, four-year cycle.

As a sobering reminder to Citi and their measures of greatness - whatever RAN's opinion - an anecdote from the peleton: while Lance Armstrong is respected for his seven straight Tours de France victories, in his only Olympic podium, Lance shared it grimly with his self-professed arch-rival Jan Ullrich [Sydney 2000] BUT from one step lower on the Time Trial podium than Jan. Jan had also won the Road Race Gold. No Olympic Gold, together with Lance's lack of victories in Spring Classics cycling races, means he ranks as a great bike rider, but in a cohort with others, and below a consensus all-time legend like Eddy Merckx.


Afterword
Talk of World Cups reminds me: this summer in France I hope to enjoy some fine Rugby Union at the sixth Rugby World Cup. The Springboks may or may not show up [such is the sad state the Boks ended last season, despite the gritty win at Twickenham]. It will also be the fifth iteration of the All Blacks ongoing saga of being the tournament favorites who manage to self-destruct before they can lift the Webb Ellis trophy. A knowing wince by Hamish, a Kiwi at the Boston Sports Club [BSC] South Station Spinning class the other Wednesday, reminded me of the New Zealanders’ national torment each fourth year brings...