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Fuzzy Signalsextracting the signal from the noise |
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Fuzzy Signalsextracting the signal from the noise |
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Remember all those folks who said renewables would never be a real-deal? Well, it's pretty close to official: clean energy tech is "big business." Global investments in renewable energy set a new record of $30 billion in 2004, according to Renewables 2005: Global Status Report a new report by the Renewable Energy Policy Network for the 21st Century (REN21). Highlights include:
48+ countries have a renewable energy policy, including 14 developing countries. Targets range for 5-30 percent by 2010-12 for shares of electricity production.
Blending biofuels into vehicle fuels have been mandated for 20 states and provinces worldwide including three key countries: Brazil, China and India.
The key to market success is government leadership. The market leaders in 2004 were Brazil in biofuels, China in solar hot water, Germany in solar electricity, and Spain in wind power.
Grid-connected solar photovoltaic (PV) was the fastest growing technology, increasing in existing capacity by 60 percent per year from 2000-2004. More than 400,000 rooftops in Japan, Germany, and the United States have solar PV. Wind power capacity is second, growing by 28 percent led by Germany.
Ah, the boring and mind-numbing stuff of regulations. A big yawn for many of us. Yet new legislation can be the soft infrastructure that rebalances the rules of the game in favour of sustainable practices. Hence all the hubbub around the REACH legislation (Registration, Evaluation, Authorisation of Chemicals) in Europe, which was passed as a proposal today in the European Parliament. This is the "controversial law that will force industry to register and test thousands of potentially harmful chemicals." According to the Financial Times,
Reach will force companies to demonstrate that about 30,000 substances already on the market can be used and produced without posing a threat to human health and the environment. They will have to register the substances with a new EU chemicals agency and, in many cases, will have to pay for extensive tests to establish whether a chemical is safe or not.
After years in the works, REACH proves that the EU is capable of working on a very complex and comprehensive piece of legislation. Its impetus was increasing public concern over the many toxic substances that now populate the ecosystem of our everyday lives -- tiny substances in our clothes, appliances, computers, and in household dust. Concerns over a rise in allergies, and other environmental health related diseases, have been linked in people's minds to these chemicals. And scientifically speaking, there is a body of evidence that may prove this as well. The truth is we don't really know much about the afterlife of these chemicals, and how they might recombine with other nasties circulating in our air, waste piles, and water.
Environmentalists are not claiming a victory, however. The legislation was significantly watered down after intensive business lobbying, which claimed (as they always do) that these regulations would be too onerous on industry, and will put Europe in a competitive disadvantage in global markets. This is also just the beginning: the law now has to be passed by the individual European parliaments.
By all means, let's develop efficient and non-bureaucratic approaches to regulation. This is just common sense. But the argument that this will impinge on the performance of European companies, well, this is getting to be so old logic -- a short-sighted, tiresome and outdated meme. The zero-sum business lobby approach to these issues also has to be a problem we address soon. Why does regulation automatically mean a bad thing? Sure costs are added but these might be nothing compared to other medium and longer term costs that would be suffered without legislation. A longer view makes us see that the regulation of chemicals is inevitable. Better now than later.
In the meantime, companies will benefit from this regulation in three ways.
Improving public image: Chemical companies have taken a PR beating of late, so this can only help them help themselves. (Except this little bit about "claiming victory for diluting the legislation." The public might see companies more favourably if they were proactively building a better future than protecting their untenable position.)
As for putting Europe behind the global eight ball (a reference to the game of pool, for the uninitiated), this is also hyperbole. In fact, the dirty little secret in the global regulatory game is that Europe is setting many of the standards for large corporations and commerce.* Recall the famous blocking of the GE-Honeywell merger, the first signal of the EU's growing power. This was a wake-up call to Washington, which had little of its lobbying muscle in Brussels. (Alas, it does now.) As we wrote about in the Role of Regulation, another path-breaking piece of legislation foreshadowing REACH this August was the Waste Electronic and Electric Equipment (WEEE).
The reason companies are complying to EU regs is simple. Most companies still produce for mass markets. Retooling factories for different product specs is expensive. Since the EU is larger than the US in sheer numbers, it's just easier to adopt the higher standard because this means the products will be acceptable in many more markets versus building a business model around the lowest common denominator. This is a great example of how regulations can raise the bar. Yet as much as we applaud REACH, we're going to have to go further. We haven't even begun to see the true costs of these chemicals yet from a health or environmental point of view. That tipping point has yet to come. My bet is that REACH will be a catalyst. It will show companies the value of retooling their industrial processes to a more sustainable manufacturing paradigm, and then much like the voluntary company compliance we're seeing with Kyoto, they will just make this business-as-usual.
Most Americans belittle the EU as this inept highly bureaucratic, old world club with very little power and clout on the global stage. This is certainly true when it comes to military matters and classic realpolitick, the conventional benchmarks from which we judge superpower status today which come from the past's "might makes right" interpretation of how the world works. While this will never go away completely, we're arguably entering a different world where "soft power" and "cooperative advantage" matters just as much if not more -- and this is where Europe has been quietly leading.
*References: This is well argued in The United States of Europe by journalist TR Reid, which I recommend as an easy and entertaining overview of Europe's emerging global role and why it's an important experiment in governance to watch.
Of all of the big hairy systemic issues out there these days, I keep bumping into the question of sustainable finance. From whatever lens one takes -- macro or micro, public sector or private sector financing, driven by ODA or ROI -- the task of understanding money flows is critical for a more sustainable future. 'Cause like it or not, money flows frame the parameters of possibilities in our era.
With this in mind, I found myself at the TBLI Conference in Frankfurt, Germany early November (2-4th). The labour of love of Robert Rubinstein, this was the seventh Brooklyn Bridge TBLI event, which is practically middle age for a conference, not to mention testimony to Robert's ability to consistently attract leaders in the SRI (Socially Responsible Investing) and CSR (Corporate Social Responsibility) sectors. The next conference will be held in Bangkok, an encouraging signal that this field is spreading beyond the Western markets.
For my part, I ran an interactive workshop on the "Future of SRI". This was a strategic conversation designed to get people thinking differently while introducing some of the tools for strategic foresight, namely scenario thinking. This was Robert's idea because in his words "the SRI mafia needs to think more out-of-the-box and challenge their assumptions" about the future. I happily agreed to do this, notwithstanding the overtones of thuggery that might prevail (lucky for me, while leery of what "interactive" meant, the attendees were great and creative to boot!)
Seriously though, this community is important to watch because they are the ones focused on revamping our market metrics to include the other forms capital -- environmental and social -- and a longer term view. At the same time, the SRI community is also vulnerable to suffering the similar fate of other movements (i.e. fragmentation of effort, dogmatic insularity, and working at cross purposes) if there is no strategic dialogue about what success looks like and how it can be achieved. Just look at environmentalism, and the point is clear.
Conference Highlights
About 400+ people came (see website for list). They were asset fund managers, SRI research analysts, high networth individuals, the private equity folks, local blue-bloods (yes, I met a real German Count), foundations, reps from faith groups and associations, academics, social entrepreneurs, plus a range of consultants and hangers-on (that would be me). Perhaps it was the location, but despite this diversity, the gestalt was unmistakably old world banker. On the surface at least. For underneath those conservative navy-blue suits and serious-looks were some bone fide change-makers, a good reminder that they come in many different sizes and shapes.
No one theme or headline emerged from the conference; it wasn't really designed to be cumulative in message, with lots of different topics and workshops, and no synthesis at the end. Nevertheless, here is what stands out in my mind:
Of the keynote talks, the peak oil meme was ably presented by Jeremy Leggett, scientist and CEO of Solarcentury in the UK ("The two great oversights of our time: peak oil meets global warming.")
Michael Eckhart, President of SolarBank and President of the American Council On Renewable Energy (ACORE) talked about the use of bonds to finance solar energy, which made a lot of sense. ("Financing Solar Energy: Why it is more difficult than it seems, and possible solutions".) These kind of financial innovations, while not sexy to some, will be critical.
Rana Kapoor, CEO of Yes Bank in India, talked about the business case for sustainable investments in emerging markets, a promising model and company to watch. I'm struck by the number of Indian business leaders who just get this; and they seem skilled at explaining -- in natural, practical, timeless terms -- the interdependence between business and society. We should get these guys to give tutorials to their peers at Davos next year.
In my session. the key strategic question in our session was around the difference between SRI as a movement and SRI as an industry. While having these lines blurred was useful in the early days, as this field matures there should be a clear boundary distinction. The motivations, tools, approaches and strategies are quite different depending on what side of the line you're on -- activist or asset manager. To generalize, activists believe we need to work outside of the money system to bring about change because the parameters are corrupt and the problem; whereas the analysts and SRI industry players believe the solutions are best found by working within the rules of the game. A classic strategic and deep worldview difference.
Different cultural attitudes to financing and money were raised as important areas to understand more deeply. The impact of China, India, and Islamic finance were specifically mentioned. More broadly, how the role of money changes over time is something to be explored with a "long view" in mind. For instance, the word "wealth" used to mean "well-being" just a hundred years ago, instead of being rich in cash. Can we imagine a world where we go back to this broader definition of wealth?
Scale seems to be the word of the day. Most conventional bankers won't look at anything -- a product idea, an innovation, a service -- unless they can see how it can scale. No mass market, no mulla. This puts at a serious disadvantage innovations which may not have an obvious scaling potential, but still deliver much value at the local level. How do we unlock these industrial age production mindsets? How do we overcome this dilemma?
The conventional wisdom is that SRI will be mainstream in ten years; that SRI will be fully integrated into a broader basket of measures when evaluating the risk profile of a corporation. The term SRI will likely disappear. So might the whole SRI industry, which puts some of the champions in an interesting conflict of interest. To provoke discussion, I said " So, you want to disappear, because this means success, but then you don't have a business. To which one person rejoined, "being acquired by a bigger institution isn't such a bad exit strategy." Fair enough. Planned obsolescence is becoming a normal strategy beyond the tech world.
Other financial instruments shouldn't be overlooked either. While the public equity side (stock-markets) get all the attention, private equity is just as interesting and may be the place to focus, because they have more degrees of freedom with their money. Lots of high net-worth individuals and funds are looking to invest differently: in ethical ways and for reasons beyond the bottom line. The trouble is private equity is still poorly understood (especially by asset managers) and the sector is shrouded in some mystique (some of which is cultivated). But expect SRI hedge funds, and almost every other financial product or service, to follow soon.
A strategy to ensure the best case scenario for the industry: if SRI was widely seen as a positive change agent by addressing a global problem. Having SRI legitimized by leading economists and thinkers (e.g. a Noble Prize winner would be nice) would also help. At the same time, people felt more bottom-up action and pressure on policy-makers and leaders was necessary to get "beyond the business case." Changing business school education to include SRI training, together with a more "postmodern view of the role of the corporation in society", was seen to be important as well, especially since finding the right talent is going to be a constraint in this field.
The worst case scenario imagined SRI disappearing because it had failed. As a professor argued, in terms of relative returns, SRI is showing poor performance compared to most benchmarks. If this trend continues, the SRI market will shrink and then become discredited. Another detrimental driver: governments could determine that SRI is not socially responsible from a fiduciary duty perspective. Apparently an investigation is happening in the US now along these lines. Lastly, there is a fear that SRI investors and the development/aid community are on a collision course in terms of how they perceive solutions.
Mapping the Big Picture
Everyone is talking about money flows now. This is the good news. There is a growing sense that the rules of the game need to be reviewed and renewed. That some outdated assumptions, too buried underneath the complexity of our systems, need to be surfaced and challenged. The symptoms, however, are obvious. Money is flowing either too much, or too little, or "leaking" in all the wrong places. A dream project would be to map these money flows and see if this helps us spot new opportunities while identifying the bottlenecks.
Contrary to what people may think, the pools of capital are out there, abundant and wanting to flow in different ways to different places. But some pieces of the puzzle are missing. Indeed, the problem is not just the know-how, but the know-what to invest in. At the same time, too many choices at a time of uncertainty creates paralysis. In economist-speak, the evaluation costs become too high. The safe options then become too easy to resist.
What's clear is that the context has shifted for many investors, and they need help redrawing the picture and connecting the dots. We need new social ingenuity to bridge the gap between the gatekeepers of capital at the top and the many innovators at the bottom. Inventing better analytical tools, creating new intermediaries that broker these worlds, aggregate and broker activities are the categories I'd focus on.
At the end of the day, we should be encouraged that markets are not laws of nature, but social constructions, so it's within our abilities to make design changes if we find the courage, ingenuity, and wisdom to do so. The trillion dollar question is how do we realign these money flows so that they are more equitable and effective?
Resources
My presentation is found on the TBLI website (not up yet) here(PDF 1.1 MB). One warning: this isn't a futurist's picture of SRI, but a structure from which to have a strategic dialogue around. In other words, no glib predictions or easy answers are provided.
You can also read Gil Friend's excellent earlier post on the Future of SRI, which I found helpful in preparation.
For other reports I found interesting:
A largely optimistic view, "The Future of Socially Responsible Investment: Thought Leader Study" by Coro Strandberg (May 2005) from Vancouver, BC. Yeah for the hometown!
Paul Hawken's critique "Socially Responsible Investing: How the SRI industry has failed to respond to people who want to invest with conscience and what can be done to change it" which can be found at the Natural Capital Institute (2004) in the San Francisco Bay area.
Many thanks to Brooklyn Bridge and to the participants. And many thanks to the people I interviewed in preparation for this conference, including: Amy Domini, Angela de Wolff from Lombard Odier Darier Hentsch & Cie, Eric Breen from Robeco, and Max Keiser founder of Karmabanque and Hollywood Exchange, and Stacy Herbert.
I stumbled upon a book of essays by philosopher Harry G. Frankfurt, The Importance of What We Care About. In it, there is an essay called "On Bullshit", which of course was the reason behind this impulse buy. "Say Anything" by Jim Holt in the New Yorker. The bullshitter opts out of this game altogether. Unlike the liar and the truthteller, he is not guided in what he says by his beliefs about the way things are. And that, Frankfurt says, is what makes bullshit so dangerous: it unfits a person for telling the truth. Frankfurt's account of bullshit is doubly remarkable. Not only does he define it in a novel way that distinguishes it from lying; he also uses this definition to establish a powerful claim: “Bullshit is a greater enemy of truth than lies are.” If this is true, we ought to be tougher on someone caught bullshitting than we are on someone caught lying. “Deeper Into Bullshit,” G. A. Cohen, a fellow of All Souls College, Oxford, If the bullshit of ordinary life arises from indifference to truth, Cohen says, the bullshit of the academy arises from indifference to meaning Frankfurt “conduct of civilized life, and the vitality of the institutions that are indispensable to it, depend very fundamentally on respect for the distinction between the true and the false.” Simon Blackburn observes in “Truth: A Guide” (Oxford; $25),