Monday, March 16, 2009

A thirtysomething trillionaire at the Zimbabwe Stock Exchange

A thirtysomething trillionaire. Like Wired Magazine predicted Bill Gates would be back in 1999 [you recall how that ended!]. I do not even know how many dollars or euros or francs or rands it took, but the smiling moneychangers at the Zimbabwe - Zambia border posts had more than a few. A trillion is 10.12, a lot of zeroes!

Hyperinflation is what happens when politics believe their own hype, and command the reserve bank and treasury to print money which is not backed by real assets. It ruined the Weimar Republic in Germany in the 1920s, and Latin America in the 1980's. With hyperinflation, confidence is wiped immediately, and the irresistible force of geometric compounding swamps calculators as each unit of currency becomes worth decimals of what it once did. Zimbabwe’s president has bankrupted his country. But being better educated and able to manipulate the levers of power, Mugabe no doubt has his wealth offshore. Not in Switzerland, too close to those who hold him accountable, and as of Friday, a less secret place to stash the cash. No, his money is allegedly further east, probably in Singapore, Malaysia or Kong Kong. But also embarrassingly, Mugabe may have cash in the Isle of Man and land in the UK, according to Harvard Kennedy School Professor Rotberg who has covered the ZIM corruption since 2007.

HK is where Mugabe's daughter is getting her degree. I have never met her and she may be the nicest person. Readers may recall that HK is where his wife allegedly took around USD50k cash - straight from the ZIM Reserve Bank - to go shopping, and where she managed to be famous for punching a photographer [the media is real outside ZIM]. The obliging HK administration declined to press criminal charges. Anyway, I am surprised Mugabe's daughter did not simply have her father order the university to issue her with one. But then, having driven past the University of Harare last week, one understands the head of state’s own family choosing to study elsewhere: it was impossible to see the campus buildings through the head high grass and weeds. Perhaps the student activists who reject the presence of the dictator’s child in class may create more of a challenge to “normal” than the is possible within Zimbabwe itself. If the university is anywhere decent, it will have more freedom of expression, and more accountability, than Zimbabweans have experienced in the past twenty years.

Like opinion polls to politicians or market prices to CEOs and their bankers, a currency’s worth is a relative score on the perceived health of a political economy. Which is why for the first time one may recall, the Chinese premier called upon the US to be fiscally responsible and to guarantee its good credit over the weekend around the G20 summit. Yes, the Obama USD 800 bn rescue package has a price tag, and the low interest rates and trillion-dollar spending will lead to a weaker dollar, just not today. The Economist has its own problems with it.
SeekingAlpha website covered the hyperinflation effect for the US. The mighty Swiss france has become too strong for its banking and manufacturing industries, leading the Swiss to devalue their currency by intervening in the forex market. A short term strategy that “beggars-thy-neighbour”, but the CHF is small enough to slip by for now.

So where does “responsible investment” factor into the ZIM situation? In November 2008 when I visited London I recall a furore that Anglo and Barclays were making new investment into their ZIM country operations - ZIM Barclays does have the cleanest buildings. The ZIM regime is despised in a way I would think apartheid South Africa once was. But the convoluted and conflicted behaviour at a country level within the UN system, the lure of ZIM’s mineral wealth, and Mugabe’s “street cred” among African “liberation” politics including his ability to manipulate has kept him around way past his sell-by date. But how many country screens are excluding ZIM?

Few investment policies will even reference ZIM, partly because it is dwarfed by other major investable countries, and by its southern neighbour. Burma receives much more attention in the US, for example, with Chevron [NYSE: CVX] being targeted for action this shareholder season. 
The 2009 resolution seeks greater transparency on how Chevron evaluates its human rights impact, especially in high risk countries like Burma. It calls on the company to report on its criteria for investment, continued operations in, or withdrawal form specific countries. The annual meeting is expected to take place in May 2009.  The resolution was co-filed by the following institutions: Teamsters General Fund, AFL-CIO, Ms. Adelaide Gomer, The Maryknoll Fathers and Brothers, Mercy Investment Program, Newground Social Investment, Ursuline Sisters of Tildonk and the Unitarian Universalist Association. The International Trade Union Confederation (ITUC) and the International Federation of Chemical, Energy, Mine and General Workers' Unions (ICEM) have both endorsed this resolution, as has the Canadian Labour Congress (CLC). 

The unintended consequence of Mugabe bankrupting the country is that it makes a micro-point of any global emerging markets exposure at a country level. Investors into Africa probably only have indirect exposure to ZIM by holding firms that are still ticking over in the country [see Financial Mail’s breakdown of ownership in ZIM brands].


Buy or Sell ZIM?

The investment policy for investors that integrate environmental, social or corporate governance factors [ESG] is the appropriate place to look for the response at a macro level. Major institutional investors now consider ESG factors, and CalPERS has an explicit approach to emerging markets investment. Perhaps the most well-known advocate of ESG in global investment is the Norway Government Pension Fund – Global, with NKr2.275bn [Eu258bn, USD329bn] in AUM. The Norwegian Global Fund, a sovereign wealth pension fund created from North Sea oil revenues, has a investment policy explicitly outlining ethical factors, and practices investment by having an ethical council screen investment opportunities. International investors saw this in action in the pages of the New York Times and Wall Street Journal in 2006/7 when Norway flagged Wal-Mart for exclusion, generating some diplomatic activity, and raising the profile of the ethical council. It also made a useful Harvard Business School case study, Norway Sells Walmart.Later in 2008, the fund published a report on child labour: corporate governance, children and the environment remain primary key issues. In last Monday’s FTfm the fund's "thorny path" was highlighted.

The easiest route is to disregard investment merits and divest immediately, and buy back quietly when the storm has passed. This approach only generates a better investment argument if the accompanying publicity will drag on the share price wherever it is traded. Shareholder activism is a public approach to have the company address the issue. A high profile investor when faced with a high profile problem may need to take this route – the Norwegian fund has addressed the costs of climate in a white paper in response to an NGO asking a pointed question. Environmental NGO Bellona recommended the fund exclude carbon emissions violators in a report to be submitted to Norway’s parliament 26 March. Shareholder activism is not limited to ESG factors, and in each year our experience at Sinclair & Company is that some have greater emphasis than others. In 2009, clearly executive pay has become the lightning rod – just ask Messers Goodwin or Liddey what their majority shareholders [UK or US taxpayers like you] think about fat cat salaries…

Shareholder engagement is an approach by investors “behind closed doors” approach less concerned with shareholder proxies but with suasion, and better explained in hindsight and ex-post facto. The most recent, 2007 SIF report identified increased activity in the USA covered through 31 December 2006. 
The average level of shareholder support for resolutions on social and environmental issues increased 57 percent from 9.8 percent in 2005 to 15.4 percent in 2007, a record high.  The total number of resolutions increased from 360 in 2005 to 367 in 2006.  Institutional investors that filed or co-filed resolutions on social or environmental issues controlled $739 billion in assets in 2007, a more than 5-percent rise over the $703  billion in assets counted in 2005.

Engagement works in smaller, clubby circles of capitalism, where the connection between investors and companies, and the professional circles they move in, is much smaller and the prestige of the matter carries some weight. Some of the more effective conversations have come where advisors put publicly combative parties in a room, and as people and professionals new ways forward were sought. The UK, Brazil or South Africa are examples of these smaller investment circles of influence.

The shareholder activism has practical challenges. Pauline Skypala in today’s FTfm covers the recent handwringing on shareholder rights at the UK's National Association of Pension Funds [NAPF] conference last week. NAPF has been a proponent of integrating ESG factors, and is a conference of investors with a longer-term perspective. The influential Lord Myners, himself renowned to be frank, had institutional investors expressing “a lot of this [corporate governance] is rubbish”. How long investors should stay invested, whether all investors offer the same direction to a company, and when to extract investors from a situation are all practical challenges of implementing an investment strategy that [correctly] integrates governance into the investment equation.

The momentum of actions that seek to target at the country level are unpredictable, and may succeed in direct relation to the publicity, not necessarily the weight of arguments. Tibet is overshadowed by China’s massive bulk. Burma continues to attract attention of human rights activists and the investors that map to that [see GES Investment Services' briefing on Burma this month, March 2009], while countries which also have poor human rights records may feature less. It is so that ZIM attracts almost zero attention in the US while the Sudan/Darfur issue has generated major student, media and investor action. Acolytes of the sage of Omaha, Warren Buffet, have heard him explain his position on China National Petroleum Corp. [HK:0135, CNPC] because of Sudan [see Marc Gunther's 2007 Fortune piece], and they may not even know where ZIM is on a map.

ESG research providers have made available screening products that are not expensive to build and easy to pitch which focus on countries or companies that fail criteria of certain international initiatives or agreements. EIRIS has country sustainability profiles and convention ratings, and Riskmetrics ISS Innovest offers sovereign ratings in their screening boutique. Companies' own dilemna on whether to stay or go is newsworthy material for the media: should they stay or should they go? Divestment is a fairly blunt instrument. Unfortunately for the average ZImbabwean, lovely people, their country does not warrant the attention of the world, despite the country being mis-managed into -40% GDP tailspin. Divestment is a dramatic tool, with much scope for collateral damage. The investment decision is the least of matters.

Monday, February 02, 2009

White London, Grey Davos, Green Cambridge


[SRI-Extra in 60secs > Snow falls on LDN and attracts some sustainability media thinking. Sort of. FA launches FAGreen in the US. Davos is WEF annual skiing vacation for politicos and financiers. Davos had better snow, and more hot air, but some pointed comments by Tutu and Putin. SA's Maasdorp covered impacts on Africa. Investment News suggests ESG is fast gaining acceptance in the US. Xshares launches Airshares. IFC-funded Who Cares Wins project closed with a summary report from OnValues, which included four recommendations for EM. IFC funded the project, and is active in ESG in investment in EM. Credit Agricole and Societe Generale merged asset management divisions. Obama says bank bonuses at this time are "shameful". MIT posts links to sustainability on campus, and at the B-school, MIT Sloan. GS]


Snow in London

Snow is dusting London and Paris this morning. It is enough snow to look beautiful, the sugar coating offering postcard photographers a once in decades opportunity. Fun at last for all those with Land Rovers. In Pennsylvania it's groundhog day [39% historical accuracy, 2009 predicts six more weeks of winter]. Funnily enough, a CNBC reporter jumped to make a climate change connection, CNBC Africa feed from Germany this morning's Business AM connecting a report on Lufthansa
[Deutsche Lufthansa AG (ADR) (Public, OTC:DLAKY)] to the importance of sustainability in investment. I know aviation is a critical component, but that seems a bit of a reporter stretch, no? Maybe she could have connected to the Japan Airlines non-food biofuel-powered flight, that would have helped the segue a little [Japan Airlines Corporation (Public, TYO:9205)]. Here's hoping we will have smarter sustainability coverage from business journalists going forward, including a new on-line publication from Financial Advisor magazine, FA Green, launched by online editor Dorothy Hinchcliff. FA Green is targeted mostly at investment advisors in the US [see article on AirShares EU Carbon Allowances Fund (ASO) by Xshares, which rang the opening bell on 28 January]. The white snow will at least give our mates in the bleak City of London financial district something to look forward to, like building snowmen or a decent Calvin and Hobbes-quality snowball fight!


Lost in Davos

The snowfall may even help the bankers feel like they were part of the Davos circle for a few hours.
Davos is the name of the town of Davos-Klosters in Switzerland and the abbreviated title for the annual World Economic Forum [WEF] gathering of politics and business. In 2009 SA's Maria Ramos was co-chair. It is a fun ride if you like schmoozing and skiing, and attracts attention of discontents. Davos is organized by the World Economic Forum, a Geneva-based organization set up by a millionaire Swiss businessman in the 1970's, with a fantastic view of Lac Leman over the UN Palais across to the Jura mountains in France. Davos offers much content at low cost for the major media, especially business media, so it received much coverage. As was widely reported, the role of finance and investment was supplanted by politicians. It is something of a lost year. Obama had no economic heavyweights there. Archbishop Emeritus Tutu [photo above] offered an interesting session on dignity as only he could, BBC reported Tutu said:
"we worshipped in the temple of cutthroat competition, and so some cooked the books, because the treasure is so great"
Bankers were no doubt an endangered species, with not a sorry in sight [see AP writer Brad Klapper report, note Forbes's comment and Schwarzman's pitch for less regulation]. The Bloomberg interview of Putin on 25 January by the female Bloomberg TV Moscow correspondent, Ellen Pinchuk, was gripping TV. Putin's slap down of Michael Dell was legendary.
Bloomberg reported:
In the question-and-answer session after Putin’s speech, Dell Inc. Chief Executive Officer Michael Dell said he was surprised by the prime minister’s warning about excessive state interference and asked Putin how Dell could help Russia develop its information-technology industry. “You know, the trick is that we don’t need help,” Putin said. “We’re not handicapped. The people who really need help are the poor, the disabled, pensioners, developing countries.”
The ruble dropped 3.5% after Prime Minister Putin's comments. Soon we will see the movie adaptation of the play Frost/Nixon, so maybe I am a little more attuned to the challenges of being the astute interviewer face-to-face with a powerful person in a powerful emerging market country. She did well to discover his favourite "guilty pleasure" is ice cream, ever since Prime Minister Putin was a kid. Lots of it, apparently, but no mention of Ben & Jerry's. So if I ever meet him in person, we have at least one thing in common! Of all the river of Davos reporting, I enjoyed the note in Business Times in South Africa by WEF Young Global Leader, Leslie Maasdorp, vice chair of Barclays Capital and ABSA Capital, who spoke on the impact of the global financial crisis on Africa. His comments on the importance of a multi-polar world was expected, and he makes the good point that no new architecture or scope has been sharply defined for a "new world order". January 2009 is the worst ever January on record for the Dow, and the "January barometer" [if January is down, the year is down] suggests this year will be pear-shaped. Financials are down 25% in the US for the year [that's just January, folks!]. While many may wish for a "fairer economy" just keeping economies going may overwhelm all other priorities. Questions about the limits of corporate governance still lurk, including this morning's FTfm. Investment News overstates the US paradigm, "Investing according to strict environmental, social and governance principles is fast gaining acceptance among U.S. investors" BUT the positive trend maps our experience and forecasts.



Who Cares Wins Signs Off

Most useful for sustainable finance was the 2008 report summarizing the work of "Who Cares Wins", which unfortunately we could not contribute to because of prior commitments. The series of WCW papers since 2004 funded by the IFC, the
Swiss Federal Department of Foreign Affairs and hooked to the UN Global Compact, have been useful in raising the profile of sustainability. Some papers have been better than others but the wrapping of the WCW project with an explicit conclusion is excellent project management, and good governance in this sector. On the eve of Davos fellow ESG consulting shop OnValues, based in Zurich, published the report as "a significant component of the Initiative's sponsors' media strategy during and following the WEF Annual Meeting 2009 in Davos this week." See the IFC PR.
Though the current turbulence in financial markets may tempt investors and companies to think of ESG issues as ‘tomorrow’s problem’, we believe that urgent and wholehearted action is warranted not in spite of, but precisely because of the market dynamics observed in the past months. ESG integration is about investors and companies taking a longer-term view, acknowledging the full spectrum of future risks and opportunities, and allocating capital as if they themselves were the beneficial owner.
The concluding paper offered some useful thinking for work in Africa and other emerging markets regions. The authors posit that in order to improve ESG integration in emerging markets investment, which was a special focus area of the WCW Initiative based on the direction of the IFC which has an EM ESG team [see IFC EM ESG projects] in Washington DC, four recommendations are important:
  1. Include ESG issues in regular company meetings and engagement activities
  2. Perform a systematic review of the ESG exposure of investments in emerging markets
  3. Consider collaborating with other investors in requiring minimum ESG disclosure standards from local legislators and exchanges
  4. Consider the potential for small allocations to frontier markets not only to deliver attractive returns but also to establish basic investability conditions (such as custody, efficient settlement services, etc.) and management awareness of material ESG issues.

In discussions through February I hope for some reaction from colleagues in EM in the sustainability + investment space to the request for better information. There is much to reflect upon. Moving changes in institutional investment are reflected by Société Générale and Crédit Agricole merging their asset management businesses to form Europe’s fourth largest operator with EUR638bn [USD837bn] under management. CA Cheuvreux had some solid ESG research [see 22/12/2008 The Green Road Out of Red], as did SocGen. One hopes their research capabilities are strengthened, not seen as overhead to cut.
The consortium of funders behind WCW reflects the costs involved in some of these initiatives, especially where they are global. WCW was more useful because it tapped into thinking on emerging markets [EM] although mainly from the perspective of investors into EM from Zurich, London or Paris than actual investors in EM. A good exception was having Investec's Hendrik du Toit covering frontier markets at the July 2007 event in Geneva at the Credit Suisse private bank, Rue de Lausanne 17. All these projects must be funded, in cash or in-kind. One often forgets that the multitude of organizations and initiatives around the world are competing for influence, for money to support their efforts, and private and public sector institutions to collaborate with them. It is competitive. But it is also much harder to figure out on a consistent basis which organizations are achieving what. There is no "marketplace" or "stock exchange" valuing the work of international organizations and NGOs.



Pay for Performance

Scoreboards may be tough to read. Scores change in seconds, like market prices. We struggled to watch from 1am central African time [CAT] this morning
the biggest one day sports event in the world, the NFL Superbowl in the US. A great game, but none of the famous Superbowl TV adverts. Wrong zone. Markets are like sports fans in that they like clarity, like knowing which is the champion. The increase in fantasy leagues, the recruiting of traders using poker games, and HSBC sponsoring the Lions rugby tour to South Africa in 2009, are just some of the examples of the metaphor and parallels. Boston-based online paper CSMonitor had a good item connecting pay-for-performance of businessmen and the NFL athletes, many of whom are superbly overpaid. All market players are not rational however: all the money in the world could not buy superstar Brazilian footballer Kaka from Intern Milan to Manchester City [GBP107m, USD147m - yes, million!]. The efficient market hypothesisticans must have been spinning...

Pay guidelines are a key request of pitches to the Obama administration as they reconfigure the rules of the financial game for Wall St. Apparently President Obama was pretty pissed about the bonuses, calling them "shameful" on this Huffington Post video. I wonder what President Obama may achieve if he were to invite to a frank airing of views behind closed [oak] doors a bunch of bankers pulling bonuses while firing employees.

In closing, an anecdote from another fine dinner in CPT on Friday. An architect was speaking about how climate impact is 70% caused by the built environment, and that developers will only look at economic cost/benefit-positive sustainability items. Apparently developers do not even care about longer term trade-offs, just the math until the sale to the property owner/manager. More reality from the frontlines on the challenges of getting longer term thinking into investment decisions.
Seems like the Green Building Council has many yards to go in the industry. The conversation had me reflecting on my last lecture at MIT Sloan, their business school, back in December 2008 as well as meeting with a cross-disciplinary team at MIT focused on making sustainability happen on campus in Cambridge MA. Even when the thinking is advanced, and smart people are moving, putting basics together across different silos is a change management challenge of note. But MIT is making some good progress. See multimedia links were made available this week including Sustainability: Greening MIT's Campus and Beyond and the Professor heading up the B-school's efforts, Prof Sarah Slaughter, who has an engineering background, here speaking on sustainability. MIT Sloan are moving forward with some case studies for teaching sustainability + investment with Sinclair & Company in 2009. The title of Prof Sterman's lecture on the Sloan Review is about right: A Sober Optimist's Guide to Sustainability.
SRIX.GS

***
Who Cares Wins [WCW] events and milestones include
reports for download at http://www.ifc.org/ifcext/enviro.nsf/Content/Publications_SustFinance:
  • 2004 Annual Event; 'Who Cares Wins: Connecting Financial Markets to a Changing World'
  • 2005 Annual Event; 'Investing for Long-Term Value'
  • 2006 Annual Event; 'Communicating ESG Value Drivers at the Company-Investor Interface'
  • 2007 Annual Event; 'New Frontiers in Emerging Markets Investment'

Monday, January 26, 2009

Blood-Tainted Milk in China and Country Contradictions



[SRI-Extra in 60secs This past week [some] culprits in the tainted milk scandal in China were sentenced to death. The tension between doing good business and the right thing is real, settled in court and in the press, sometimes in death. The toxic milk powder scandal killed at least six children and sickened nearly 300,000 last year. What makes it a little awkward is that NZ-based mega-dairy Fronterra owns 43% of Sanlu. Human rights do impact business, and a Bill of Rights is a key component. In the USA the Centre for Science in the Public Interest will sue Coca-Cola [NYSE: KO] for claims on VitaminWater health benefits. Further exploration on forming an AfricaSIF reaffirmed the two classic challenges faced elsewhere in the world, 1. definitions of ESG, and 2. the matter of priorities of ESG. Ranking the issues of sustainability will differ from country to country, or city to city, company to company. FTfm covered GS Sustain and Sarah Forrest’s team in London, the GSAM Africa marketing person is in JHB this week. The Economist this week raised the Norwegian profile in their "Norway and the environment briefing, Binge and Purge” where they reference Oslo as “[h]ome to a green-minded people and government, Norway exports the dirty stuff to the rest of the world. The result is a contradiction”. Statoil does have 7.8kg carbon emission footprint per barrel versus industry average of 19kg, 37% of global average. At least Norway has been active since 1991, and is switching to cap-and-trade to offer a material and measurable drawdown of emissions. South Africa’s minister of finance, Trevor Manuel, gives the annual budget shortly, and one may make suggestions directly to his website Tips for Trevor. The Danes signed a wind power agreement in South Africa. FT released annual MBA ranking with Wharton on top. Today’s Business Day "Management Review” included two articles on climate change and sustainability, but the content was unfortunately stale. GS]


Blood-Tainted Milk in China and Country Contradictions


Business failure has drastic consequences. Greedy executives, incompetent managers, self-interested workers, any of these may break down the fair play of good business. The tension between doing good business and the right thing is real, settled in court and in the press, sometimes in death. This past week the culprits in the tainted-milk scare in China were sentenced to death. I wonder what sort of moral dilemma that creates for the social investment advocates in the US who rose up in alarm at the China-sourced milk scandal, who probably do not support the death penalty in their human rights approach. Principles will always be tested in practice. Obama has been smart to stay flexible. The news reports with photos of anguished parents struck a cord this week: the photo documentary at the constitutional court of death penalty in South Africa in 1985 seemed eerily similar to the newspaper photos from China. The toxic milk powder scandal killed at least six children and sickened nearly 300,000 last year. The legal trials target executives from the Sanlu dairy group and city officials accused of allowing the sale of milk adulterated with melamine or for covering up the scandal.

Steps to control melamine are being sorted by the centrally controlled economy. What makes it a little awkward is that NZ-based mega-dairy Fronterra owns 43% of Sanlu. The ructions on the event, and the death penalty, has caused political tensions in Kiwiland, despite the demands for the death penalty from affected parents. Pursuing the one company does certainly smack of victimization because 22 companies are implicated. Apparently, Fronterra was also a bit tardy in getting the info to US regulators in Washington DC as NZ bloggers report, see the timeline from BBC. Ah, the joys of being from a progressive country, like Fronterra, but owning a major stake in a company in a semi market-based system, like China. No word on the consumer alarm from September 2008 rolling into better labeling or food security upgrades outside of the blame-chain. No word on the next Fronterra sustainability report. The trials in China will continue. The sad reality is at least the bosses are accountable. More deadly than another banker being bumped for his greed, so maybe John Thain fired from Merril Lynch this week by Bank of America's Ken Lewis should breathe a sigh of relief. After forgetting to identify big losses, the anecdote about corporate excess - a million dollar office makeover at MER in Manhattan midtown in the midst of a meltdown - just helped make bankers look out of touch. Still. CNBC reports you can pick up some on Craigslist now!


SRI-Extra will cover more nutrition issues in 2009, including in the USA where Centre for Science in the Public Interest will sue Coca-Cola [NYSE: KO] for claims on VitaminWater health benefits, the lawsuit contending that the marketing for Coca-Cola VitaminWater product is 'deceptive' and makes 'unsubstantiated claims'. KO purchased VitaminWater maker Glaceau in 2007 for USD4.1 bn as they raced to catch up with Pepsi's non-carbonated soft drinks brands business, and counteract a poor nutrition profile of their brand portfolio.


Conversations in Johannesburg, Sandton and Cape Town over the past week have furthered the understanding of the opportunity [or not] for an African Sustainable Investment Forum, an AfricaSIF. It has reaffirmed the two classic challenges faced elsewhere in the world:

  1. definitions of ESG, which cover sustainability, climate change, and which environmental, social and corporate governance [ESG] factors; and
  2. the matter of ESG priorities, how climate change stacks up against say, jobs for under-employed, or houses versus human rights issues.

Ranking the issues of sustainability will differ from country to country, or city to city, company to company. Creating jobs trumps climate change as an issue. The survey of responsible investment in Peru in 2009 by Liliana at Duke University Fuqua Business School will offer some fresh facts to compare with the study in South Africa in 2007 with Neil [good news is he has just been appointed actiing director of the UNISA Center for Corporate Citizenship]. Balancing sustainability across a voting society raises many challenges. The question of definitions raised in SRI-Extra last week also had resonance in the FTfm coverage of GS Sustain and Sarah Forrest’s team in London. The question tends to make fund managers splutter, but in recent months, advocates of sustainable investment have been able to point to clearly unsustainable investment strategies, and indeed an unsustainable global financial system, as proof they are not just posturing. Sidenote: The Economist or FTfm page may throw up the latest Toyota advertisement campaign, AIM: zero emissions. Do you also think the people as trees is a little wierd in the photograph, something does not look right, yes?.



Constitution Hill


The SA constitution and its Bill of Rights was the freshest in the world when launched in 1996. 20-something rights are enshrined, including social and political rights. A visit to the Witwatersrand and the Constitutional Court on Constitution Hill with a fellow LLB from University of Natal [UKZN] helped illustrate the conundrum. The fine, architectural-award winning Constitutional Court complex was built on the remains of a notorious prison not far from the University of Witwatersrand or from the headquarters of SAPPI [SAPPI Ltd/JNB/SAP]. But on a typical summer blue sky and cumulus cloud afternoon, the parking lot with its head-high weeds and empty lot reminded me of a forlorn municipality office somewhere in Kwazulu-Natal, or a university during the summer break. Where were all the visitors? And why did the entrance to this most important component of democracy and the rule of law look worse than any of the world-class shopping malls along Oxford Road toward Sandton City? One wonders if the Constitutional Court should not have been added as an appendage to a shopping mall in a busy center to offer more foot-traffic, and bring the crux of the legal system to the people it is designed to empower? More people of every economic class were buying something to drink that afternoon, than visiting this iconic institution. No word on a listing of citizens’ duties to help make them the enshrined rights happen, starting with making the site more user-friendly, and picking up trash. Sadly, picking up after oneself is not just an SA problem, even Obama’s celebration was blighted by refuse left behind.


Country Contradictions


The Economist this week raised the Norwegian profile in their Norway and the environment briefing, “Binge and Purge” where they reference Oslo as “[h]ome to a green-minded people and government, Norway exports the dirty stuff to the rest of the world. The result is a contradiction”. The title alarmed me: sounded like my weight-loss program [which is a little behind schedule post Christmas 2008]. The Economist does offer some pithy reminders of what Norway has been doing since instituting a carbon tax in 1991, spending money on climate change mitigation technologies, including a novel one using fresh and saltwater. The Norwegians have even done a test on the merits of bridges versus mountains to assess the carbon impacts: bridges work best for over water, tunnels for under mountains. The pension fund divestment according to an ethical policy in 2006 led to a Harvard Business School case study Norway Sells Wal-Mart that I use at Kenan-Flagler Business School, although I am developing a more articulate example with University of North Carolina-Chapel Hill and MIT Sloan in 2009.


Statoil [StatoilHydro ASA/OSL/STL] does have 7.8kg carbon emission footprint per barrel versus industry average of 19kg, 37% of global average. But The Economist drives on the point similar to Bush’s White House, pointing out contradictions in making a positive action toward addressing environmental issues because the logic model is not buttoned-down and perfect. They attempt to offer some balance. The Economist article's online reader feedback forum matches some of the colourful language and comments in other media online around the world. It illustrates the power of the online version over the print version, although I remain solidly a hardcopy adherent, in solidarity with all the newsprints out there, including the New York Times saved by wealthy Mexican Carlos Slim last week.


Norway is switching to cap-and-trade to offer a material and measurable drawdown of emissions. This should make interesting reading for South Africa’s minister of finance, Trevor Manuel, a few weeks before his next budget [last year he pitched a carbon tax]. And Trevor may be listening. In a demonstration of Mr Manuel’s open-door policy and comfort in his shoes after ten years, one may make suggestions directly to his website Tips for Trevor. The most noteworthy or bizarre - or both – often are referenced in his speech, since 2001.


Activity in wind this week included further coverage of the Danish support for wind in South Africa, and treaties being signed. It is a fine profile for the Danish Wind Industry Association, worth EUR 4,7bn in 2007 to the Danes. Noteworthy in light of my comments last week about relative power of government ministers, the SA representative was the Minister of Energy & Minerals. The Darling wind farm is still in-between days. Jon mentioned that he came back from a hammering kitesurfing session the other day, but the windfarm blades were not moving…



World Rankings and Advertorials


FT released the 2009 FT MBA ranking. I prefer the recruiter driven WSJ version. The world’s top financial MBA, Wharton at the University of Pennsylvania dropped a note in the inbox, covering a trip to Antartica as part of a leadership program, Penguins, Leadership, and Thinking about the Planet. Prof Erik Orts of Initiative for Global Environment Leadership [IGEL] program tried to make the environment connection, and as expected, purchased carbon offsets [142mt through the Wharton Leadership Program Office. The group did not have a cakewalk, which is good, because hardship, physical hardship, is a powerful teaching tool. The Ghandi exhibit at Constitution Hill explained that Mahatma Ghandi made comments about how he achieved what he did in South Africa and then India were made possible after physical pain and isolation cleared his thinking. Every good cycle must have helped me, especially the ones that hurt the most.


The big accounting and consulting firms are moving strongly in the climate space, it certainly makes for a fertile consulting area in an era of shrinking consulting fee hours. The effort in the space is important, but perhaps the practice may be conflicted. Today’s “Business Day Management Review” included an article by the chartered accountants body president pitching “businesses must consider climate change in a strategic way and integrate sustainability into long term plans”. Of course, the media had to title it “Eco Warriors outlook will help the bottom line”. “Climate Change requires concerted action now” by Ajen Sita, head of assurance for Africa sub-area, Ernst & Young, unfortunately, has content so advertorial, it has the E&Y writer referencing CDP data from 2006, when CDP was in 2008, and CDP South Africa for the second year. Pretty weak reflection on BD, Wits and HBR all of which collaborate on the media item.

SRIX.GS

Tuesday, January 20, 2009

Sustainablity+Investment Wishlist for Obama, ESKOM externalities

[SRI-Extra in 60secs > The Social Investment Forum's 9-point wishlist from the responsible investment industry to the Obama administration may have traction, especially the strategically important parameters for the financial markets, proxy access and even an innovation office for CSR. When will the environment not be an externality? New ideas and new actions are needed from politicians and business media, like Business Day’s editorial Monday 19 January 2009 on the end of environment as externality in power-generation investment, will help. Ignoring externalities creates false economy. Ignoring externalities is sub-optimal institutional investment. Just as in Australia or the US, every ton of low-grade coal burned by ESKOM in South Africa [120 million tons p.a. to March 2008, 130 Mt/p.a. to March 2009] has an environmental and social cost to the citizens of South Africa, and anyone downwind. It is sub-optimal to society and the institutions that power it. In the market-economy capitalist context, one needs to send demand signals to drive market solutions. We need a “mini-Stern” in Africa to state the climate challenge in real money terms, and the time value of money not spent now. Investment thinking on the continent needs an AfricaSIF that may promote integrating ESG factors while keeping tabs on the growth of sustainable finance. The trickle in specialist SRI mutual funds helps send signals, but it’s just a trickle. The “green” audience at UCT for the Humboldt conference “From Poznan to Africa” failed to connect directly their personal investment decisions to the environment issue studied scientifically. The hope of the environment as asset in investment decisions – sustainable finance made real at the intersection of sustainability + investment - will be realized one infrastructure project and one green collar job at a time, in the US or in SA. But looking hard at the cold, flat and crowded reality of 2009, expectations are way too high. GS]


Sustainablity + Investment Wishlist for Obama

The environment, though the proximate climate change issue, will command some attention in Obama's first 100 days. Perhaps, like in Whitehall [centre of UK government in London], the US may soon have an “office of climate change”. When I saw that title chipped into granite last October in London it immediately became a visual point of reference for me. Climate change was now real and to be taken into account. Environment seemed to be one step beyond being an externality. In Monday's Business Day editorial [South Africa’s leading business daily], the opinion on externalities comes close to what I hope to see in my lifetime as investment practitioner: the environment appreciated as an asset, and the word “externality” being retired forever.

In 2009 in the US, and probably in SA, some of the local and state-level climate change rules may finally make an appearance in a coordinated fashion. But as FTfm opined Monday, options are severely restrained. In a post-Poznan and pre-Copenhagen world, I agree that there is an international struggle over climate change on the horizon. Poznan failed because the Bush presidency was in final descent, the EU suddenly realized that their economies were looking pear-shaped, and the global financial crisis left any questions of financing mitigation and adaptation a long, long way from the top of the list [see The Economist's take by Emma Duncan]. The conference was also missing some key players. While environment ministers and the odd finance ministers were in attendance, energy and transport ministers and presidents were absent. Who will have more power to drive changes in energy generation policy: the minister drawing lines in the sand or the minister licensing a nation’s dollar-generating [but depleting] resources. It is a lot easier to count miners than waitrons, mines are more tangible than eco-tourists. South African Minister of Environmental Affairs & Tourism Marthinus van Schalkwyk , white Afrikaner and heir until he disbanded it of FW De Klerk's National Party, has been outspoken as lately as a representative opinion for emerging markets, both at the Poznan political meeting and in Washington DC. The NRDC and Climate Change Capital had him come and speak 13 January at
"Emerging Strategies for International Climate & Investment Policy”, he referenced the SA government commitment to plateauing emissions in 2020-2025, before reduction, a sufficiently distant but plausible promise from a politician. The development vs environment dynamic is a real dichotomy for SA: the environment was spared emissions when ESKOM's brownouts left SA without electricity last January, and a slowed economy is the real reason there have been no brownouts in 2009.
"South Africa, the climate question is both an energy question and a development question. On the one hand, some 30% of households do not yet have access to modern energy services. On the other, the energy sector is responsible for some 80% of our greenhouse gas emissions, with electricity generation responsible for some 40%. Coal is the fuel used for 90% of our electricity supply".
Being on the ground, it is unclear how the demands of poor wanting electricity, and the current policy backgrounds, move South Africa to the goals mapped out, irrespective of how well the "technology, investment and policy"
are mapped. The appeal for adaptation funding will be loud. But the fact that labour, society, government, business and policymakers are meeting minds is a strong positive. It certainly offers South Africa a place at the table with a coherent and articluate position representing Africa.


SIF’s Obama Wishlist

Many think-tanks and institutions have been pummeling Obama’s transition team with checklist and worklists [see the UPenn ranking of think-tanks ex-US, which includes four from SA topped by UCT’s Center for Conflict Resolution]. Net Impact used Facebook to leverage the power of their 10,000-plus MBA and professional network members to address an Open Letter: “…on how his administration can best support a sustainable social and environmental future for business”. The socially responsible investment community in the US represented by SIF urges the Obama Administration to take a number of steps:
  1. Establish clear parameters and effective regulations for the financial system and stimulate transparent assessment of financial as well as environmental, social, and good governance factors;
  2. Enhance access to the corporate proxy ballot so that long-term shareholders have a say in the nomination of corporate directors and in protecting shareholder value;
  3. Support corporate responsibility or sustainability reporting by public companies;
  4. Restate the consensus view that fiduciary duty may compel fiduciaries to consider environmental, social and governance (ESG) factors;
  5. Assert global leadership in combating climate change, including through tax incentives and significant public investments in clean energy technology, energy efficiency, and green collar jobs and training;
  6. Take a critical look at lending policies and create more accountability in the lending marketplace;
  7. Create more opportunities for financially struggling homeowners to restructure their mortgages, helping them stay in their homes and out of foreclosure;
  8. Endorse legislation that provides for socially responsible investing options in the federal government’s retirement plan;
  9. Create an Office for Innovation in Corporate Social Responsibility to enhance and coordinate inter-agency CSR activities, allowing the federal government to become a state-of-the-art leader in CSR across its vast domestic and international arenas of influence.
The two most strategically important are the parameters and the proxy access, offering a strategic direction and a current execution of that to implement the change. Parameters are the larger discussion. FT on Monday argued that some more regulations are the least we should pay to avoid another meltdown. Perhaps fitting that Trinity Church Wall Street is hosting a global conference the day after the inauguration of the “Theology of Sustainability” where perhaps the sidelined Wall St bankers will enjoy “[r]e-imagin[ing] an abundant world measured not by personal consumption but by just and sustainable relations with nature and communities”. In our role at Sinclair & Company as advisors on integrating ESG factors into investment policy and practice, we are staunch supporters of governance and accountability in all its forms in any private or public sector climate. So here’s hoping the ninth idea on the SIF wishlist for an “Office for Innovation in Corporate Social Responsibility” gains traction, being based in part of the findings of the General Accountability Office GAO report on CSR in the US back in 2005.


Ignoring Externalities

Almost lost in the Obama buzz this week is the proposition that SA companies which have cash may dip into deals in Africa or abroad, inspired of course by the influential Rupert family maneuver to buy into Lehman’s private equity assets via the Reinert investment vehicle currently holding a large chunk of BAT shares after being spun out from Richemont. The BR covered the report by mergermarket, an international mergers & acquisitions (M&A) intelligence service. Mergermarket detailing M&A activity involving SA companies fell sharply in 2008, by 45.8 percent, to $14,4 billion (R143.4 billion) [this number conflicts with Thomson Reuters, which put the total M&A value involving South African firms at $24.1 billion]. The dominant British relationship was evident in that UK firms had 13 deals valued at $3.2 billion, or 76 percent of the overall value of inbound deals. UK's Vodafone Group $2.1 billion additional stake in cellphone network provider Vodacom was a large chunk. Which explains why the only Blackberrys being offered in SA by Vodacom are older Vodafone stock. And Oxfam is still seeking capital for its Cape windfarm project.

ESG in valuation is current but absent in investment analysis. Deloitte South Africa today presented their opinion about cap-and-trade [the Obama option] being more effective than a carbon tax [mooted by Finance Minister Manuel in 2008].
Business Day editorial hammering the short-termism employed by ESKOM in not building more alternative power-generation assets offered a good start to the week for a sustainability + investment practitioner. The Humboldt conference at UCT last week disappointed from a corporate investment or institutional asset management perspective: scientists were happy to cover the minutiae of their studies, but there was little assessment of the capital to bet on any direction. Perhaps more coverage by UrbanSprout will help, see 2007 Urban Sprout Carbon Calculator. Presenters did offer that a “mini-Stern” had been conducted in SA, but its absence from the financial lexicon in SA has not motivated investors as it did in Europe. The 2006 Stern report from the UK on the costs of climate change helped monetize the choices facing private, public and policy sectors; note also the Stern 2008 update confirming the situation is much worse than forecast. We need a “mini-Stern” in Africa beyond what was launched in SA in 2007, and the AfricaSIF that may promote it while keeping tabs on the growth of sustainable finance. Like the Norwegian SIF that last week finished a good valuation research piece as part of their Sustainable Value Creation Initiative [more on that initiative led by KLP's Jeanett Bergan soon]. Conversations with Jon and William later this week may move things forward another few yards.

At “From Poznan to Africa”, the room looked stunned when I posed the question of what each person in the room was doing about sending an investment signal by demanding more green investment. It was the same case I have made since the Environmental Leadership Program in 2004 in Philadelphia. To the self-selected “green” audience at the public meeting hosted at Kirstenbosch, it was as impactful: what is in your portfolio? How are you integrating ESG factors? Rows and rows of incredulous eyes stared back. That simple message – in the market-economy capitalist context, one needs to send demand signals to drive market solutions - is as powerful as Peter Bruce’s BD editorial on Monday. False Economy opined that there are no externalities; every ton of low-grade coal burned by ESKOM in South Africa [120 million tons p.a. to March 2008, 130 Mt/p.a. to March 2009] has an environmental and social cost to the citizens of South Africa [see Climate Change Corp's Dec 2007 article and article on ESKOM 2008 emissions]. ESKOM has announced an intention to build 100MW wind farm in the Western Cape. The “washed” coal is “better” quality, and it is exported. Millions of tonnes. Which in turn re-directs technical skills – an opportunity cost in a nation with a skills shortage - and which wears out infrastructure in a country where infrastructure is a top priority for investors, including pension funds targeting ESG as our 2007 study revealed.


Highest per capita Carbon Footprint in Africa

South Africa is the country with the highest per capita carbon footprint in Africa and one of the highest in all emerging markets. Ideas impacting SA’s direction are as strategically important as SIF’s 9-point wishlist is to Obama. As BD opines, “[i]nvestment in alternative energy [is] compellingly affordable” with the right policy direction [there are more than the two fundamental ones offered by BD], and the right incentives [see the mistake-riddled defence from Petrochemicals spokesperson in today's BD]. Like rewarding corporate and institutional behaviour that incentivizes lower priced power in environmentally sustainable way. Which is where by now – nearly three years after the launch of the PRI in April 2006 at the NYSE - one would have expected the “presence” of at least the African investors in ESKOM to have become apparent. A positive sidenote is the fund democracy of the largest pension fund in Africa, SA GEPF, currently advertising for pensioner trustee representatives.

The relative silence on ESG issues in proxy action and investment analyst meetings in Africa is as deafening as the audience at the Humboldt lecture. The odd uncomfortable comment may tip-toe around “ethical” issues – the usual comments on “sin stocks”, but not in the ordinary analysis. When last did you see a direct reference to climate change costs in the quantitative analysis of a power-generating utility in emerging markets [see ESKOM's reference to environmental externalities in 2006]? In the US, a client in Manhattan reports their carbon calculator integrating Carbon Disclosure Project [CDP] 2008 data on electric-power generating utilities is interesting to their fixed income team, ignored by the equity team. In SA, while the FM carried the chains of bankers nervous on the cover, perhaps it was fitting that Enviroserv Waste Management
advertised on the back cover.
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