PRIVATE EQUITY IN AFRICA AND LEADING SUSTAINABILITY FROM CAPE TOWN

Weekly Viewpoints on Sustainable Investment 

In this week's note a view on private equity in Africa and academic research on sustainability in Cape Town. 

John Oliphant, Head of Investments and Actuarial at the Government Employees Pension Fund of South Africa, gives morning keynote to kick off African Investment and Funds Management Forum at Johannesburg Securities Exchange 23 July 2013

PRIVATE EQUITY AS GROWTH CAPITAL

Private equity is an important asset class in frontier markets with growing economies. There are 2 types of private equity, firstly financial engineering (made famous by the novel based on the Nabisco deal in the 1980s Barbarians at the Gate: The Fall of RJR Nabisco), and secondly growth capital, financing high growth medium-sized companies' expansion. In many frontier and emerging markets PE is more often growth capital than financial engineering because capital is in demand, medium sized companies may be high-growth, and debt markets are no appetite for gearing. So what of PE in Africa, is it helping to grow investment in the continent? Certainly PE in Africa is different in several ways. Firstly, a sizeable chunk of the capital for PE has been supplied by development financing institutions (DFIs), finance arms tied to governments such as Canada, The Netherlands, UK, France or the USA. Secondly, due in large part to the large chunk of assets being supplied by Limited Partners (Investors), at least one-in-two dollars in assets of the fund invested by General Partners (Fund Managers) are filtered for ESG factors. This implies the private equity asset class in Africa is a leading category integrating ESG factors. Thirdly, Africa remains on the margins of the investment universes of many global investors and for the private equity asset class. Africa makes up just 2% of global GDP, 1% of financial markets capitalization, but 13% of population, including a large portion of young citizens. While Africa has gone from being considered a hopeless continent to a hopeful continent, the reality beneath the hype is that most sovereign ratings reflect risk concerns, the absolute size of economies is small, and the available deals are limited. Fourthly, the patchy governance of financial markets in some African countries fail to provide a firm footing for investors worried about the rules of the game, and with doubts about ever seeing their capital again. Finally, the perception arbitrage exists - some benefit from the vacuum of accurate, fresh and plentiful data-points, others are frustrated by it. Today have clean data on companies operating in Africa is the comparative advantage, not even the analysis of it.

Tracking PE demands hard to get data. industry surveys and reports are useful, although LPs and GPs may be exhausted from providing responses! Helping to add some real new data has been the RisCura Bright Africa report. A recent Financial Times feature on PE head at RisCura Fundamentals explained the value of better metrics tracking valuations and deal pricing. A final comment on PE in Africa. My experience suggests that more capital will be flowing, but the timing is unknown. PE fund managers like Carlyle have been putting heaps of CO2 into the atmosphere at 37,000 shopping the Africa story and their new fund. It is a marathon. On the other hand, GEPF has committed $500m to two PE Pan-African funds investing outside South Africa (PAIDF II and PIC pan-Africa ex-South Africa) as John Oliphant explained at this week's Africa Investment Funds and Asset Management Forum 2013 AIFAM2013 at the JSE (see tweets on #AIFAM2013).

GOOD WORK PUTTING SOUTH AFRICA ON THE SUSTAINABILITY ACADEMIC MAP

I was privileged to be invited to join last Friday’s Ph.D research workshop hosted by University of Cape Town Graduate School of Business to learn and share on research in the sustainability theme. The theory of business is examined in multiple ways. Some have been over-research as academics strive to carve out their niche and their legacy. Other areas are under-researched, sometimes because the data does not exist (often the case in developing markets). You are reminded its academic when an early question is: “what is theory”?! Insights from Professor Tima Bansal, Canada Research Chair, Richard Ivey School of Business, University of Western Ontario, Canada, were compelling, including future research work on time, space and scale and their impacts on business (I was invited but unable to attend the University  of British  Columbia  (UBC)  Faculty  of  Law and  the  Responsible  Investing  Initiative seminar: It’s Time: The Temporal Dimensions of Responsible Investing on 20-21 June 2013). Firstly, Tima's appreciation for Ralph Hamann for his good work in promoting academic work in sustainability. Ralph has helped spur my further thinking on research methods, assumptions and frameworks, been a great supporter for different projects including the Access to Nutrition Index (www.accesstonutrition.org) and spoke at the launch event series for AfricaSIF.org in 2010 VIDEO. He has been responsible for exposing African researchers to leading academics, including Professor Jonathan Doh from the Villanova Graduate School of Business, my MBA thesis advisor and co-author. A good man for sustainability in Africa, Secondly, Tima reflected her ongoing academic work with Andy Hoffman, and their ongoing academic debate on if/how sustainability can only thrive as its own field versus it needs to be an element of the major functional business areas. This debate reflects the similar questions I have been asking, and have revisited in recent conversations with sustainable investment practitioners in London, New York, Boston and Washington DC. 

Thirdly, the critical path for academic careers demands publishing articles in a limited number of journals. It is both a qualifier, and a bottleneck. Any new academic research ideas or approaches must be vetted by “incumbent thinkers”. It does not seem to be a place for innovation. The emphasis is on extending current theory, not for understanding phenomena. But the positive news is how there is now a “thick pipeline” of qualitative research explicitly exploring the environmental implications of business and its operations. Finally, Tima's insights on the leading journal American Management Journal were helpful, especially her promotion of research from frontier markets and developing countries seeking to write academic papers with lessons that are generalizable from, for example, Kenya. Academic contributions to moving forward sustainable investment are critical. I hope the Journal of Sustainable Investment and Finance grows. Just this week I pulled in the new (unpublished) work by Andreas Hoepner et al at University of St Andrews on ESG in China using RepRisk data that won the FFR research award in September 2012. Ahead of the PRI event in October, the role for a PRI Academic Network is being explored by Robert Harding at PRI and Dominique Douf. The objective of the PRIANA is to support the work of the Principles for Responsible Investing Academic Network (PRIAN) by fostering a network of scholars, investors, practitioners, policymakers, regulators and students interested in responsible investment (RI) and environmental, social and governance (ESG) issues in Africa. We need so much new thinking, new systems thinking, and good research. Let’s hope the research pipeline grows, for academics and PE fund investors.

Do good work on sustainable investment that matters.

Graham Sinclair

@esgarchitect

linkedin.com/in/grahamsinclair

Skype: graham_sinclair

SinCo - Sustainable Investment Consulting

SinCo designs ESG architecture for long term sustainable investment that matters. 

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. Reprinting or republication of this report on websites is authorized by prominently displaying the following sentence, including the hyperlink to SinCo, at the beginning or end of the report. "ESGextra Weekly Note is republished with permission of SinCo."

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.

Tobacco Investment Contingent Liabilities

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

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

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

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

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

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

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

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

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

"Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts:

1. the concept of 'needs', in particular the essential needs of the world's poor, to which overriding priority should be given; and
2. the idea of limitations imposed by the state of technology and social organization on the environment's ability to meet present and future needs."

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

Earth Hour Bright in Darkest Africa

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

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

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

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

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

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

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

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


Things Go Bump in the Dark

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

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

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


Enter the Investors

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

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

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

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

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

A 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."