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Forest Impact Bonds:

Lisa Genasci —  January 4, 2012 — Leave a comment

We have been thinking a lot about Social Impact bonds and how the concept might apply to conservation finance, which is something about which we ponder a great deal.

Why not a Forest Impact Bond, issued against promised aid streams from sovereign development banks wanting to mitigate climate change and/or promote forest conservation?

These could work in circumstances where communities are key to protecting High Conservation Value forest.

FIBs would be focused on impact-driven community development (schools, livelihoods, health, education) but linked also to real conservation outcomes.

Time is slipping as we try to establish the best way to protect ourselves at scale from climate change, manage and protect our forests for future generations.

The multiple challenges around forest conservation is something we’ve written about previously in this blog here and here.

In essence, the problem is how to compensate governments and landholders for the huge rewards they reap cutting trees from native tropical forests; how to balance development with conservation.

Since 57 percent of the world’s forests are located in developing countries, it is hard to make the economic argument that these areas should not be developed for the benefit of the national population.  Indeed, timber revenues represent the major, sometimes only, export commodity of a country.

The Commission on Climate and Tropical Forests has estimated  that 17 percent of greenhouse gas emissions – an amount equal to the transportation sector – are from deforestation.

At the same time, the scale of financing required to halve deforestation will reach US$30 billion annually by 2020, the U.S.-based commission estimated in the same report.

Only turning to the global capital markets will provide sufficient funding to meet the challenge deforestation presents today.  That strategy could include the use of bonds, which would allow the desperately needed investment at scale.

Communities and Livelihoods the Key to Conservation

Key to this discussion is that not only do governments and landholders need to be compensated for not chopping forests for timber, but local livelihoods are also often linked to forests.

Nearly 90 percent of the 1.2 billion people living in extreme poverty worldwide depend on forests, which provide them with building materials, food, coffee, cocoa, medicinal plants and income from other sources.

Without access to the forests not only do many of these people lose livelihoods but they also may lose their crops to droughts or floods as climates change with deforestation.

Thus communities living in and around forested areas are key to their protection.

Still, even with access to forests, local populations who face the immediate need of supporting their families often don’t recognize the value of conserving forests for the longer term because they cannot meet their immediate needs for food, housing, clothing and education, among others.

Thus, local communities need both education on the value of long-term forest conservation to their own lives (livelihoods, water etc) and help establishing alternative and sustainable income sources.

At the same time, battling to defeat poverty, poor nations argue they cannot be expected to forfeit income from economic activities that lead to deforestation, particularly since there are global  benefits from developing world forest services – carbon, water etc.

They have argued collectively that if global powers want to preserve the rainforests and their natural services provided then those must be paid for.


Rainforest Bonds Not a New Conversation

Indeed, for many years now there has been talk of rainforest bonds, which would help pay the large upfront capital expenditure required to invest in development, livelihoods, conservation to maintain the forests.

Under conventional thought, either forest carbon revenue or other sources of income such those generated by sustainable timber, agriculture or ecosystem service markets (water, biodiversity for example,) would repay investors.

But the conversation around REDD carbon has stalled with regulatory uncertainty. Additionally, in Asia certainly, we are a long way from any scalable ecosystem markets, while the significant upfront investment needed to promote agriculture as an alternative or to build local livelihoods to protect forests is just not available philanthropically.

And that’s just it…the bond conversation has gone on for years with significant players like the Prince’s Rainforest Trust and others eventually pulling back given the difficulties in identifying revenue streams that would work.

Turning to Forest Impact Bonds

So why not step back entirely from the conversation around how to make forests pay and look instead to the large sums promised by sovereign development banks at Copenhagen (US$4.5 billion) and other aid that has yet to find a home for want of knowledge of how to invest those funds with surety and with impact.

And that’s not surprising. Over the past two decades, substantial funds have flooded into Indonesian conservation  (usually to secure national parks or protect wildlife and its habitat) without corresponding transformational change. Over the same period, deforestation has only accelerated, fueled by burgeoning consumption, population explosion and massive urbanization.

So the problem remains, how to ensure that limited funding for conservation is spent with measurable and significant impact? How to balance development and conservation and raise the funds from global capital markets to pay for both?

Indeed, we must increase the availability of performance-linked finance to protect forests for local communities and local governments, in order to maintain them for global biodiversity and as carbon sinks.

In 2007, a similar discussion emerged in the UK around improving social outcomes and reducing uncertainty of funding for social services.

Shortly thereafter, London-based Social Finance introduced the concept of social impact bonds, which target funds to specific projects with measurable results.

If the identified targets are reached, the UK government saves on social programs and those savings are used to repay bond investors, in certain cases with interest. If targets are not reached, bond investors lose out as they would in any junk bond investment.

Turning to the U.S, in last year’s  budget speech, President Obama announced that he had set aside US$100 million for social impact bonds and at the same time two Boston-based companies have recently been established to apply the UK social impact bond concept to the U.S. context.

Why could this innovative approach to generating social impact in the UK and the U.S. not work also to protect forests in Indonesia, targeting communities and livelihoods but at the same time generating extra and measurable impact in conservation?

Given the argument above, and the lack of current appetite for REDD+ and other forms of eco-securitisation backed by forest assets or credits, might we then apply the social impact bond example to community development initiatives in a country like Indonesia?

In this scenario, international government funds, funds from multi-laterals with an interest in combating climate change and conserving  forests for future generations pool funds in an SPV that are then allocated to community development initiatives with specific parameters and measures of impact.

The key would be to persuade the local government to join what would essentially be billed as a development initiative but with additional conservation benefits.

The SPV funds would be available to repay investors in the event that the community development programs, livelihood initiatives, the conservation targets achieve desired results. In this way, the pooled funds are used only if they have been effective and only after impact has been achieved and quantified.

Country funds would likely have to be established separately, with their own fund administrators (local country officials?)  and project monitors.

An initial pilot would likely include just one country – Indonesia perhaps – and one specific target: perhaps livelihoods and education around several conservation areas.

For in-country implementing partners we could draw on local NGOs to support conservation (research and protection) and identify appropriate targets. Microfinance institutions could support business initiatives where appropriate and rural development organizations would help build agricultural businesses that local communities in Indonesia want to generate income.

Legal organisations would need to be employed to help sort out land-titling to establish a legal basis to land ownership. Education NGOs could be employed to boost local knowledge around conservation, while healthcare providers could support rural health development.

This would then be associated by local communities, along with improved education, for example, with conservation of their local forests.

So rather than trying to pry an uncertain financial return out of forest services or REDD+ (although if these markets develop in the future, certainly these could be added to SPV funds) we are trying  to achieve only effective allocation of government/multilateral resources  and measurable impact.

At the same time, however, there could be a return on investor depending on the effectiveness of the programs., while a tranche structure with different risk/return profiles could be used to simultaneously appeal to both groups.

The difference with the UK Social Impact Bond, of course, would be the potential for shared savings. Although it would be important to have local governments as key participants, it is unlikely their own development investments would make this worthwhile.

Who would buy Forest Impact Bonds?

There is growing interest on the part of institutional investors in markets where there are environmental and social as well as financial returns or where there are at least screens for negative impact.

According to Eurosif, total SRI assets under management increased dramatically from €2.7 trillion to €5 trillion, as of December 31, 2009. This represents spectacular growth of about 87% since 2007.

The sense is that when environmental social and governance issues start to affect share price or impact bottom lines boardrooms will take note.

Increasingly, SRI is a mainstream criterion in equity analysis and several stock exchanges have launched tradable indices that track SRI companies or ESG alongside financial performance.  And ratings agencies are emerging to rank companies on their ESG performance.

At the same time, part of the consideration around forests is that they have long carried appeal to institutional investors.

According to an article in The Banker from 2007, more than US$30 billion globally is invested in forest assets, although mostly through funds and largely in the US.

These investments generally offer competitive returns with low or negative correlation to traditional asset classes making them a counter-cyclical hedge.

In Summary…

  • A FIB is a contract with the public sector in which it commits to pay for improved environmental and social outcomes
  • On the back of this contract, investment is raised from investors motivated perhaps not only by commercial but also by environmental and social returns.
  • This investment is used to pay for a range of social outcomes such as poverty alleviation of local communities, improved health and education, all tied to and contingent on conservation of an area of high-conservation value local forest
  • The financial returns investors receive are dependent on the degree to which outcomes improve i.e, they may receive part or all of the initial investment back, and in some cases additional financial returns.
  • A FIB shifts emphasis from paying for inputs and outputs to paying for impacts
  • In its purest form, a FIB has a risk profile more similar to an equity investment than a debt investment

I’ve been thinking recently about Fiduciary responsibility and what that has come to mean over the past two decades of rapid growth.

I’ve been thinking about how and why the interpretation that has crept into investment culture over that period – simply to maximize rates of return  – has slowed an appreciation of investment that doesn’t cause social or environmental harm.

It goes without saying that this has also slowed investment that promotes social good as well as generating returns.

I’ve also been thinking that by itself  this narrow interpretation ignores both business risk and opportunity  – neither of which should be ignored considering the dictionary definition of fiduciary duty:  to act prudently.

Writing in a Capital Institute blog, Stephen Viederman, former president of the US-based Jessie Smith Noyes Foundation, argues that foundations should align program work with investment strategy – something that is all too rare.

“Foundation fiduciaries have an obligation to seek  ‘good’ and ‘competitive’ returns, not necessarily to maximize them,” he says.

Part of the problem has been the accompanying  “myth of financial underperformance from ‘social investing,’ a myth that still lies at the heart of the problem for finance committees who conveniently forget that two-thirds of traditional active managers underperform their benchmarks every year,” Viederman says.

“Yet the profit-maximizing argument–that you will underperform if you do sustainable investing–comes up time and time again in conversations and is never examined by the people who are making it.”

Indeed, most investors are not considering the business risk associated with investing, for example, in a power company, a textile operation or mining business in a region that is water scarce.

Most ignore the reputational risks associated with investing in factories or plants that are polluting, overly consumptive of resources, or engaged in bad labor practices.

“All investments are about the future, but most investment decisions are made on retrospective data, which as fund offerings make clear, are not predictors of future earnings,” says Viederman.

“We need to ask about …  ‘predictable surprises,’ which include climate change, the BP Gulf disaster and the financial bubble among others. …Any institutional investor who ignores them is in breach of their fiduciary duty. To be prudent, as in the prudent person, is in its original meaning, to be farseeing.”

The ADM Capital Foundation launched a web portal, China Water Risk, in October to provide investors and companies with information about water scarcity and pollution in China.

Part of the thesis behind the initiative is that better investment decisions produce better returns in the long run and these usually come with more information – and not the information investors traditionally have sought.

But, certainly, few could disagree that the regulatory environment is changing to reflect resource consumption and that water pricing in the near future will reflect scarcity.

Few could disagree that NGOs are increasingly sophisticated in exposing pollution incidents (see my blog posts on IPE’s Ma Jun and Apple, on Greenpeace’s Dirty Laundry and other reports) and that local protests in China are growing around pollution incidents.

Workers are no longer content to suffer exposure to hazardous chemicals silently, or work extraordinarily long hours without proper compensation.

All are, potentially, a drag on profits. Would it not then make sense for fiduciary duty to include analysis of  such risk?

Fully Risk-Adjusted Returns (FRR), as they might be called, should certainly not be lower as a result, indeed given the current and future challenges the world faces, they could even be enhanced by additional information.

For those who missed this, one company that is looking to consider the impact of production is PUMA, which earlier this year announced the results of an unprecedented environmental profit and loss screening.

This was a big step toward assigning economic value to resources consumed and to emissions. The value assigned was also a step toward determining the true cost of production of PUMA apparel and shoes.

Results from PUMA's Environmental Profit and Loss Analysis

The analysis showed that raw material production accounted for the highest relative impact of Greenhouse Gas Emissions and water consumption within PUMA’s operations and supply chain.

According to PUMA’s report, the direct ecological impact of company operations translated to the equivalent of 7.2 million euros of the overall impact valuation. An additional 87.2 million euros was distributed along the four-tier supply chain.

Thus, the overall environmental impact of GHG and water consumption amounted to 94.4 million euros. That compares to a third-quarter net profit of 82 million euros.

“By putting a monetary value on the environmental impacts, PUMA is preparing for potential future legislation such as disclosure requirements,” the company said.

“By identifying the most significant environmental impacts, PUMA will develop solutions to address these issues, consequently minimizing both business risks and environmental effects.”

Finally, a new and important report from IESE Business school, “In Search of Gama, an Unconventional Perspective on Impact Investing,” steps into the discussion with questions such as:

  • By focusing exclusively on the creation of financial wealth for individuals are financial markets destroying value for society?
  • Is social responsibility a component of investment that is necessarily detrimental to financial return?
  • Should changes be made in the taxation and supervision of financial transactions to account for financial markets’ responsibility to society?

Clearly, business as usual is no longer smart business and change is imminent. Considering the impact of investments and reconsidering how we make investment decisions will be the way forward.

Let’s start  by redefining fiduciary responsibility, considering Fully Risked Returns. Clearly, returns may actually be enhanced either when viewed through the lens of an appropriate risk framework/weighting or in reality as a result of a superior business environment.

Concern is growing globally about water resources and the potential for conflict in regions where they are scarce. But are investors and businesses in Asia adequately factoring water into risk assessments?

A recent Neilson study showed that worry about water shortages has overtaken global warming as the top issue, with 75 percent of respondents identifying this as something they worry most about. That represents an increase of 13 percent over the previous year.

And the concern is not without basis. Worldwide, almost 1 billion people lack access to safe drinking water while 70 percent of industrial waste in developing nations is dumped untreated into waterways, further limiting what is often already stretched supply.

Yet investors and leaders of industry may not be paying attention, considering water challenges simply an environmental problem rather than a fundamental business risk.

In China, the water landscape is particularly stark. We hear much about that country’s economic growth averaging 10 percent over the past 20 years, the massive and wholesale transformation of the economy at rapid pace, but not so much about the horrendous cost to the environment that already weighs heavily on GDP .

We hear much less about the dead and dying rivers, the over-pumped aquifers, the creeping desertification in previously agricultural areas, the thinned soil from over-use of pesticides, the power plants without adequate water to function, the massive and growing health care costs from poisonings and escalating cancer rates.

We hear very little about the growing numbers of protests nationwide linked to pollution incidents.

The government is clearly concerned.  The official response in China has been  a tightening regulatory environment, and a move toward real pricing of the precious resource, or the investment opportunities that an inevitable clean up will bring.

The recently approved, 12th five-year plan for the first time features climate change and energy, sets lower growth targets for the country and favors investment in industries that promote pollution clean up and cleaner processes generally.

Clearly, there are thus significant ramifications across a broad range of industries in China but are investors prepared? Are they staying ahead of the water risk curve, engaging in the due diligence and mitigation efforts needed to survive the inevitable and seismic shifts around water?

China Water Risk (CWR) is ADMCF’s redesigned follow-on from Asia Water Project, the pilot initiative launched 18 months ago to inform investors and companies of both risk and opportunities around water crisis in China.

This initiative, which launches later this month at www.chinawaterrisk.org, is designed to influence capital allocation to industries in China located in water-appropriate regions, with solid mitigation strategies built around water.

A brief portrait of water in China tells the back story.

Per capita global water resources are 6,280 cubic meters on average but people in China have less than 1/3 of that amount at 1.816 cubic meters.

So, the country with 20 percent of the world’s population has access to only 7 percent of global water resources, while an estimated 300 million people in the country are without access to safe drinking water.

And this is not just a problem for rural areas in China. In 2007, research showed that 60% of China’s cities faced water scarcity and 110 cities faced serious water shortages.

Despite already limited access to water in china, horrendous levels of pollutants are allowed to spill untreated into waterways and seep into aquifers from agriculture and industry in China.
Last year, the Ministry of Environmental Protection said serious pollution violations numbered on average 10 every month.
In all, an estimated 90 percent of urban groundwater is contaminated with pollutants and the quality of 40 percent of that is getting worse, according to China’s Ministry of Environmental Protection.

Pollution of groundwater follows from the low urban sewage treatment rate, which was only 73 percent in 2009, according to a recent article in China Business Times. Hundreds of new sewage treatment plants have been built nationwide in recent years and sit idle because of the high cost of operating them.

The Beijing-based Institute for Public & Environmental Affairs in its water pollution map (an inspiration for China Water Risk and a CWR partner) lists hundreds of violations by sewage plants.

According to the Ministry of Environmental Protection, 77 percent of 26 key lakes and reservoirs, 43 percent of 7 major river basins are considered unfit for human contact.  Meanwhile, 19 percent of monitored rivers and basins, 35 percent of lakes are reservoirs are believed unfit even for agricultural or industrial use.

The World Bank has warned of “catastrophic “ consequences for future generations if the government does not act to solve quickly the acute water shortage and pollution problems. The report urged new pricing, management and regulatory strategies.

In China, agriculture has been by far the largest consumer of water at 62 percent, and the largest polluter, with pesticides and fertilizers responsible for about half of contamination of waterways.

With water scarcity becoming more evident, waterways increasingly unfit for irrigation coupled with the fact that China holds only 7 percent of the world’s arable land, food security has by all accounts become of national concern.

Part of the problem around agriculture and food security in China has been that regions south of the Yangtze account for 33 percent of the country’s total farmland and 83 percent of the country’s water resources. North of the Yangtze, however, lies 67 percent of national farmland but only 17 percent of water resources

Exacerbating the problem, the country is the globally the largest consumer of pesticides and this has contributed heavily not only to aquifer and waterway pollution but to depletion of farmlands.

Meanwhile, as environmental and labor regulations tightened in the West pushing up prices at home, Foreign Direct Investment has flooded into China, fueling the factories, building the industry that is now feeding, clothing and housing the world.

Last year, FDI was estimated at $105.7 billion, surging 17.4 percent over the previous year. This is also helping build a huge middle class and affluent consumer market in China that is expected to almost triple to 400 million by 2020.

According to a September HSBC report, already next year China will replace Japan as the world’s largest consumer of luxury items – something unthinkable just a decade ago.

A joint report published in 2007 by the World Bank and the Chinese government estimated the combined health and non-health cost of outdoor air and water pollution at approximately $100 billion a year, or about 5.8% of China’s GDP.

Water pollution, meanwhile, worsens China’s severe water scarcity problems, with the overall cost of water shortages estimated at 1% of GDP.

The weight on economic growth is certainly of concern to Beijing, but equally concerning is the growing discontent in China related to pollution incidents and scarcity. In 2005, the last year for which government figures have been released, there were an estimated 50,000 protests nationwide related to pollution incidents.

This comes in response to significant growth of so-called cancer villages, or clusters of cancers invariably located near heavily polluting factories, fast-growing rates of urban cancers and outbreaks of illness or poisonings related to drinking polluted water.

Many of these protests have been centered around specific polluters and in several instances have forced factories or power plants to close. This then involves not just reputational risk but threatens serious economic losses for polluters.

There are also additional considerations around political risk.  Concern is that as climate change potentially exacerbates the country’s water shortages, the government sees the need to exert further control over domestic water resources with far-reaching consequences.

Of the 261 International rivers globally, 15 originate in China, including the Mekong, Ganges, Brahmaputra and Indus rivers. These international rivers span 16 nations and China has no formal agreements or treaties regarding the use of these rivers with any of its neighbors.

What is patently clear, is that no investor or business leader can step into China without carefully considering the water challenges facing each industry and then positioning to mitigate risk.  At the same time, don’t investors and business leaders want to position themselves to take advantage of potentially huge opportunity?

Last week we spent some days plowing through one of the most important areas of tropical rainforest in Borneo,  central Kalimantan’s Sabangau, looking for Orangutans, gibbons, Langurs and other primates as well as learning about the ecology of the peatland habitat.

For two days we started at 4:30 am in the dark, wearing headlamps, looking for the elusive apes. Although boards (built on a former logging railway) run for some kilometers through the 45-hectare grid within which the researchers we were visiting spend most of their time, much of the forest walking was through deep peat swamp that occasionally reached mid-thigh! See the photo above of  intrepid ADM Capital partner Robert Appleby taking the measure of the peat’s depth!

The walk, more often a run, as over hours we chased to reach the spot where a gibbon grouping or orangutan had been spotted by the Dayak or foreign teams working the forest, was often a challenge but incredibly rewarding nonetheless.   Seeing the majestic creatures in the wild was truly breathtaking. The gibbon photo above was taken by the OuTrop crew.

We were visiting Oxford Primatologist Dr. Susan Cheyne who along with other senior wildlife conservationists leads a team of young researchers working out of an old logging camp situated in the designated Sabangau “Natural Laboratory” about an hour and  a half by road, boat and foot from Palangka Raya. The Laboratory sits within the 500,000 hectare Sabangau National Park, which actually is not yet officially a national park.

This year ADMCF has provided support to Dr. Cheyne through Oxford University’s Wildlife Conservation Unit (WildCRU), which also backs the conservation and research effort. Dr. Cheyne and her team monitor the distribution, population status, behaviour and ecology of the forest’s primates, carry out biodiversity and forestry research, and work with local partners to implement conservation solutions.

The team is sponsored in Indonesia by the Center for International Cooperation in Sustainable Management of Tropical Peatland (CIMTROP), which is responsible for conservation of the important 50,000 hectare peatland forest.

That involves mostly ranging and firefighting, although there is also an ongoing effort to dam the many canals built through the forest that were used to transport the illegal logs to the river and are now drying up the swamp. Estimates are that the peatland, as deep as  19 meters in some spots, is sinking with the lowered water table and this of course threatens the trees and amazing wildlife, which is just beginning to recover from logging.

Sabangau was turned over to conservation  in the late 1990s after Orangutan Tropical Peatland Project (OuTrop) research managed to document the incredible biodiversity of the forest and establish clear records of substantial populations of primates, clouded leopards and other endangered species.

Previously Sabangau was a logging concession, although luckily it was only selectively cut. More destructive though was the illegal logging that followed in the late 1990s – when the canals were cut through the swamp and more of the forest was chopped. Still, the research team has shown that surprisingly primates are returning to the peatland forest, which also has regenerated well.

Estimates are that the Sabangau previously hosted populations of about 14,000 orangutans and 40,000 gibbons and now numbers of each are at about half that amount, according to Dr. Cheyne.

Along with Dr. Cheyne, two other senior OuTrop primate researchers work from the Setia Alam camp: Simon Husson and Helen Morrogh-Bernard, who were among the first to identify the orangutan populations in  Sabangau and set up the camp with CIMTROP early last decade. OuTrop has been excellent at attracting paying volunteers and research interns to help survey the primates and biodiversity in the peat forest. Each individual seems to play a strong role in helping to build a portrait of the unique ecology of Sabangau. Certainly, more help is always needed for this important work, which is critical to inform conservation and indeed learn about the behavior of the animals.

To illustrate the importance, previous research establishing that the populations of apes lived in the forest was enough to persuade the Indonesian government that the area should be conservation forest. Now, new research is showing that adult male orangutans might need much larger range areas than previously believed, while gibbon family groupings perhaps also need more dispersal space in order to establish healthy populations.

The teams also believe that because food (flowers and fruits)  in the acidic peat swamps is not as plentiful as in regular tropical forest, apes may develop sophisticated mental maps of so-called “destination trees” and return to these in season to maximize their travel efficiency. The concern is that if these large feeding trees disappear so will the feeders.

Out of curiosity, we visited Block C of the Mega-Rice project. Which was indeed a sorry sight: So many kilometers of barren land subject to annual and devastating fires on the peatland where nothing now grows but scrub.

In the last days of the Soeharto era, Indonesia’s corrupt leader apparently handed logging concessions equal to about 1.4 million hectares to two sons and declared an ambitious plan to convert the Kalimantan peatland forest into rice padi, to be farmed by migrant workers from Java. The idea was to make Indonesia self-sustainable in rice production.

But the Project was a failure because acidic peatland was completely unsuitable for growing rice. Huge canals were built in the peat, ostensibly to control water-levels but instead drained the once-flooded swamps. Of course, the sons profited handsomely from the logging concessions, which many believe was the real motivation behind the Project.

In a major drought in 1997 the peat dried out entirely, caught fire and burned for months. This resulted in a smoke haze that covered much of south-east Asia and released huge amounts of carbon dioxide into the atmosphere. Burning forests in Indonesia are largely responsible for the country’s designation as the world’s third-largest emitter of greenhouse gases.

The former Mega-Rice area continues to burn annually during the dry season and is considered one of the world’s biggest environmental disasters. Luckily the Project was stopped before the Sabangau Forest itself was drained and cleared.

A Greener Apple: SCMP Op-Ed April 7, 2011

When Apple announces profits for the second fiscal quarter this month, analysts expect record figures amid a slew of new products. The previous quarter was already a record for Apple, which posted revenues of US$26 billion and profit of US$6 billion. The question we should ask, then, is: does a company with a solid reputation for being on top of its game have a responsibility to manufacture without excessive environmental and social cost?

The well-documented poisoning of workers and violation of environmental regulations at some of Apple’s key suppliers shows there is an obvious gap in environmental and socially responsible management throughout the company’s supply chain.

Over the past nine months, Chinese environmental organisations have pushed global and local IT brands to recognise social and environmental problems within their supply chains and resolve them. Among the 29 brands targeted, Apple was the only company to be evasive, if not completely unresponsive.

Recently, Apple admitted that 137 workers were poisoned but continues to place the blame with the supplier, Wintek.

Throughout their lifecycle, from material extraction to production, and from consumer use to disposal, electronic products have the potential to affect human health and the environment through the release of chemicals and energy consumption. Printed circuit boards and battery production, in particular, create heavy metal pollution.

Part of the problem, of course, lies with the consumer, whose demand for cheap goods means the purchased item doesn’t reflect the true cost of production – the toll on the environment,and on public and worker health.

Furthermore, information technology companies continue to produce goods that have obsolescence built in – meaning we consume endlessly, looking for the latest product. Who should bear those costs? In the case of poisoning and pollution incidents, the violating supplier has a responsibility, as does the government department where a lack of supervision may have caused the incident.

However, a company such as Apple cannot avoid its own responsibility either. Amid economic globalisation, Apple has not retained any of its own factories and even the production of parts as small as screws has been outsourced. That does not mean pollution and occupational injuries during the manufacturing of Apple products have disappeared.

We must remember that suppliers who violate environmental standards and ignore workers’ health do this to cut costs. Analysis of the distribution of profits in the supply chain for the iPhone 4 has shown that, for each iPhone 4 selling for US$600, Foxconn and other Chinese assembly companies receive only US$6.54. Apple’stakings for each iPhone 4, on the other hand, is up to US$360.

With power comes responsibility. Is it really fair for Apple to grab most of the profit yet shirk responsibility for environmental pollution and worker poisonings in its supply chain?

Apple claims that “we require that our suppliers provide safe working conditions, treat workers with dignity and respect, and use environmentally responsible manufacturing processes wherever Apple products are made”. But environmental protection groups have found that Apple has seriously violated its own promises. Yet, the company is deeply involved in supply chain management – from the choice of materials to the control of dust levels in the production process.

At present, China’s environmental-information disclosure is expanding, meaning that many companies’ environmentalviolation records can be acquired by the public. Brands have already started using this information to ensure suppliers are not in violation of local environmental laws.

Apple needs to change its opaque supply chain and social responsibility management system, and work to overcome problems in its supply chain

Ma Jun is director of Beijing’s Institute of Public & Environmental Affairs

Greenpeace photo of worker and wastewater textile discharge

 

 

 

 

 

 

 

 

 

 

That trendy shirt or pair of jeans, the underwear we buy these days mostly comes with a “Made in China” label.  When choosing clothing presumably we think first about style and second about price. Can we afford the style and quality? We rarely think about the environmental or social cost of the item, the “true” cost of manufacturing a coveted dress.

We don’t know about the dye that washes into the local rivers where the item is made, the chemicals spreading downstream from manufacturing plants, contaminating water supplies and making local people sick. We want, we can afford, we buy. But should we without knowing how our clothes are made and the damage they do in the process?

Last year, according to the American Apparel and Footwear Association, Americans spent about $340 billion on clothing and shoes, accounting for 75 percent of the global market. Of that, 99 percent of shoes and 98 percent of clothing was made abroad, where environmental and social laws are less stringent and enforcement of those that do exist is significantly looser.

The trouble is, many of the clothes we wear, particularly the cheapest, are highly polluting to produce at the low cost-point. According to the World Bank, 17 to 20 percent of industrial water pollution comes from textile dyeing and treatment, and there are at least 72 toxic chemicals in our water that originate solely from textile dyeing. Of these, 30 cannot be removed.

That’s a real problem for the textile industry: In China, Polluted water causes 75 percent of diseases and over 100,000 deaths annually, the World Health organization has said. Meanwhile, cancer rates among villagers who live along polluted waterways are much higher than the national average.

Estimates are that 70 percent of lakes and rivers in China are polluted, as well as 90 percent of the groundwater. In all, an estimated 320 million Chinese do not have access to clean drinking water – more than the entire population of the United States.

It used to be that clothing was made close to home, so we knew when a textile mill or garment manufacturer was polluting the local water or air and U.S. mill towns experienced some of the same problems China now faces, with local rivers often fetid and colored by dye. With greater awareness of the hazards, then years of battling, government regulatory authorities set tougher environmental and labor standards to make sure production wasn’t exploitative or damaging to our air and water. Manufacturers were forced to comply, installing capture equipment on smokestacks and treating any wastewater before pumping it into rivers.

But that made clothing more expensive to produce and then with the opening of China in the mid-1970s and the growing availability in the 1980s of cheap labor along with manufacturing capability, most of the production process gradually shifted there. Eventually, environmental and social laws were put in place in China too but often local enforcement is limited and corruption rampant.

That has meant many factories and textile mills have been able pollute at will. When they have been fined for violations, the fines are often insignificant relative to profit. That, and the fact that an abundant migrant labor force comprised of some of the hundreds of millions who previously lived below the poverty line and were willing to work for cheap, meant clothing could be produced at prices that didn’t factor in either the real cost of labor or the environmental damage.

Those costs were left for future generations to cover in health care, clean-up and other forms of support.

The result is that we are all now hooked on the irrationally cheap. Prices on fabric and clothing imported to the U.S. have fallen 25% since 1995, partly due to the downward pricing pressure brought by discount retail chains, according to an article in the Wall Street Journal.

Still, in China, the future is now. While migrant workers, now with a better standard of living, want fair wages and benefits such as health insurance, the Chinese government recognizes that the holy grail of economic growth at the 10 percent plus levels seen over the past two decades is unsustainable if the rampant environmental degradation continues apace.

Unrest has been growing across the country, particularly around perceived labor and environmental violations, with tens of thousands of mostly small protests annually, many of them unreported.

Besides the cost of cleaning up contaminated water, land and air, pollution will cost China billions in additional health care, lost productivity and early mortality, dragging down growth, the government recognizes.  The World Bank in a 2007 report estimated China’s environmental costs at around $100 billion a year, or about 5.8 percent of GDP, including the impact on mortality.

So any way you look at it, those clothes we like to buy in abundance, and have been taught in recent years to purchase and throw away without thought because prices are so cheap and styles constantly new, are a real problem for the environment, for workers who make them and ultimately for China’s economy.

In a report released in December, Greenpeace recounted time spent in two textile industry towns in Guangdong province:  Xintang, the “Jeans Capital of the World,” and Gurao, a manufacturing town 80% of whose economy is devoted to bras, underwear, and other clothing articles.

Greenpeace testing found five heavy metals (cadmium, chromium, mercury, lead, and copper) in 17 out of 21 water and sediment samples taken from throughout Xintang and Gurao. In one sample, cadmium exceeded China’s national limits by 128 times.

Xintang, known as the “Jeans Capital of the World”, produces over 260 million pairs of jeans annually, equivalent to 60% of China’s total denim production, and 40% of the jeans sold in the United States each year.

Gurao, “the capital of sexy,”  in 2009 produced 200 million bras, or enough for every third woman in China to have one. But this prosperity has come at the cost of the degradation of the local river, the Xiao Xi.

Villagers told Greenpeace that the dirty, fetid river is no longer fit for drinking or laundry. Fish no longer live in the river and people living nearby complain that they must endure the stench from the wastewater. When the river overflows, their yards and homes are flooded by wastewater.

Unfortunately, Gurao and Xintang are not unique, representing just 2 out of 133 textile manufacturing cluster towns where there exists unregulated or at least tolerated hazardous chemical use and release – all in the name of economic growth and jobs.

True, the rise of China over the past few decades has been startling, and the achievements not to be forgotten. In no other time in history has one government accomplished a similar feat: Pulling some 300 million people out of poverty. The questions remain, however, around the price of that transformation and how the government will choose to address this looking forward.

Indeed the 12th five-year plan, unveiled in March, includes provisions for reform that involve working to rebalance China’s Economy and improve livelihoods.  The government is keen to shift the growth model from export and investment driven to domestic consumption drive, and will focus on the quality of economic growth, not just the growth rate itself, perhaps reducing GDP targets to around 7 percent. There will be additional investment in alternative energies and a push toward promoting less-polluting industries, with a shift away from more polluting producers.

As wages rise in China, however, this is a trend that is already underway, with some of the dirtiest factories moving to Bangladesh, Pakistan and Vietnam, where regulations are even lighter and costs less. Once again, rather than cleaning the supply chain and charging higher prices to reflect cleanup costs and higher wages, some brands are just looking further south.

Luckily, this is not universally the case. There are retail brands that are looking to improve their own supply chains and influence the industry more broadly.

In March a coalition of retail companies, apparel and shoe manufacturers, fashion houses, non-profits, and the U.S. Environmental Protection Agency launched a new organization that seeks to reduce the environmental and social impacts of the clothing industry worldwide.

The Sustainable Apparel Coalition (SAC), which includes Wal-Mart, Hanes, J.C. Penney, Nike, Gap Inc, H&M, Levi Strauss, Marks & Spencer, and Patagonia, among others, will help to develop improved sustainability strategies and tools to measure and evaluate sustainability performance. The group of thirty organizations began working on this informally last year.

The group announced it was developing a database of the environmental effects of every manufacturer, component and process in apparel production, with the aim of using the gathered information to give the garments a sustainability store.

Part of the problem for the apparel industry is the complexity of the supply chain. There are many bits and bobs that go into producing our clothes and each piece may be produced in a different factory and then assembled in yet another. That means accounting for the environmental impact of any one item of clothing, tracing the zippers, the buttons, the natural fabric, the dyed fabric, is quite a feat.

Still, for the new coalition, tracing the various parts that make up one jacket or pair of trousers is the goal, along with conveying that information to the consumer. The idea is that eventually there is a label that allows shoppers to see how well their coveted item of clothing is produced and learn about its impact on both the planet and people.

And as consumers we all have a responsibility to think about how much and how we consume. Are our expectations around price and how long we use an item of clothing unrealistic?

The following blog post was written by Sophie Le Clue, director of ADMCF’s environment program:

Two weeks ago I attended Seaweb’s annual seafood summit in Vancouver. Aptly named ‘Responsibility without Borders’, it was attended by more than 700 industry representatives, NGOs and academics, from 30 countries.

These constituents gathered to discuss the different aspects and perspectives of the world’s fisheries.   In a previous blog (Catch it if you Can) I focused on the worrying situation facing our oceans as a result of intense and industrialised overfishing. 

A fairly bleak picture was painted, with huge environmental impacts and fisheries’ collapse imminent if we carry on business as usual. Not to mention the more immediate demise of certain fish species such as sharks, blue fin tuna, orange roughy and chilean sea bass.

However, with both a heavy industry and NGO presence, the summit showcased the progress that is being made in fisheries management, including improved traceability, the reported recovery of some stocks and on a slightly alternative note, the sustainability of eating seafood when compared to livestock – more on that later.

Ray Hillborn pointed out that not all capture fisheries are unsustainable – and that fish stocks in aggregate are stable rather than declining, based on data from N America, Europe, Australia and New Zealand.

Partnerships with NGOs and constructive engagement appeared to be a driving force behind the sustainable seafood ‘movement’ and the improvements that are emerging.

There was however a notable gap – which as you may have guessed, is the implication of seafood production, consumption and fisheries management in Asia and in particular, China.

A question raised at the summit hit the nail on the head, :– how can you keep growing sustainable seafood production/consumption without engaging the world’s largest seafood producer and market – the answer posed was simply – you can’t.

According to FAO, China is by far the largest fish-producing country, with production at 47.5 million tonnes in 2008.  This represents 17% of the world’s capture fisheries and 62% of world aquaculture production of fish, an impressive figure considering that aquaculture represents 46% of the total fish food supply globally.

Already the world’s largest seafood market, China is touted to become the world’s largest seafood importer by the end of the decade.

Annual per capita fish consumption globally is on the rise – 12.6kg/capita in the eighties has risen to 17.2kg/capita by 2009. China accounts for most of the global increase in per capita consumption and its consumption is 55% higher than the world average at 26.7kg/capita. Interestingly, Hong Kong with its relatively small population of nearly 7 million, appears to have a voracious appetite for seafood with per capita consumption estimated at over 64kg/year.

Unfortunately FAO statistics indicate that room for optimism is limited.  Of global fish stocks it estimates that : 32% are over exploited, 53% are fully exploited,  12% moderately exploited and  just 3% underexploited – not leaving much room to satiate the world’s expanding population and appetite for seafood.

It’s all the more fitting then and indeed a sign of the times, that for the summit’s tenth anniversary, Seaweb has elected for the first time to host the event in Asia – with China’s neighbour, Hong Kong Special Administrative Region, as the selected venue. 

Food glorious food : land versus the sea

Returning to the livestock issue and the comparative impacts of land versus sea-based food production, Ray Hillborn hypothesised that the comparative environmental cost of fish is lower than land-based livestock.

Whilst this is not a reason to take an eye off the sustainability issues facing our oceans, – it warrants some thought, especially for the voracious meat eaters among us.

Mr Hillborn presented the findings of a review he undertook recently of existing research and it makes for interesting reading.  As he points out, the actual numbers he unearthed are not so important in terms of accuracy, but the scale is significant – there are clearly significant environmental costs associated with meat production (Box 1).

On energy efficiency, a paper by Peter Tyedmers (albeit ten years old) was presented, also showing quite clearly the inefficiency in food production on a sliding scale, with meat production being the worst (Box 2) – queue obvious implications for climate change. Hilbourn was nevertheless at pains to keep reminding us that fisheries do have environmental impacts.

Annual production Box 1. The environmental cost of food production
Water use (km3) / yr Fertilisermillions of tonnes / yr Pesticides  thousands of tonnes /yr AntibioticsTonnes / yr Soil loss millions of tonnes /yr Greenhouse gases/yr tons CO2 per tonne live weight
Beef 619 12 76 1998 307 11.3-18.3
Chicken 178 13 79 5085 318 1.4
Pork 598 20 121 4994 487 2.3-4
Capture fisheries ? 0 0 0 0  
Atlantic cod trawl and gill net 0.9-3.8
Atlantic herring purse seine 0.07-0.36

 

Box 2. Energy efficiency and food production
Production method Energy efficiency (%)
Mussel farming (Scandanavia) 10*
29 North Atlantic fisheries 9.5
Carp farming (Israel) 8.4
Turkey farming (US) 7.7
Tilapia pond culture (Zimbabwe) 6.0
Swine (US) 5.6
Eggs (US) 3.8
Chicken (US) 2.9
Lamb (US) 2.0
Beef (US feedlot) 1.9
 * as an example this means for every 1000 cals of energy put in, you get just  10 cals out

On aquaculture, although there are justified concerns over environmental impacts and   feeding fish with fish (a common practice for many farmed species such as salmon),   it was useful to be reminded that the alternative for using fishmeal for aquaculture is to use it for chicken, beef and pork.

The problem with this is the efficiency of conversion to protein – significantly less protein is produced per unit of input compared to fish. Better then to use fishmeal for fish?

The takeaway for me, is not to eat more fish (unless it is sustainably sourced) given the state of our seas and fisheries.  

But, considering the highly industrialised methods of land-based food production and the associated environmental degradation, energy inefficiency, climate change and biodiversity impacts – then vegetarianism or at least consuming significantly less meat is an option that more of us should seriously consider, and one that we should educate our children about.

Health and safety issues in livestock production, for both workers and consumers, as well as ethical concerns given the inhumane nature of industrialized animal husbandry are another story and provide yet further justification for us to ponder the ‘less meat’ route.

And of the meat we eat? – as consumers we can vote  as we buy – by purchasing organically farmed and locally grown organic food  – for those who need persuading,  I recommend watching the documentary ‘Food Inc.’