Emerging Markets…Brutal BRICs?! II/II

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

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

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

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

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

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

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

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

SRIX.GS

Over the Horizon I/II: Green Ships

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

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

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

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

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

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

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

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

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