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Many brands that say they are producing sustainable product are in reality greenwashing their textile production in China, according to the latest report from five environmental NGOs in China.

“Sustainable Apparel’s Critical Blind Spot,” which can be found here,  was a follow on from a report I wrote about here released in April that named 49 global fashion brands using polluting factories in China and suggested consumers make a “green choice” when buying clothes.

Led by Ma Jun’s  Institute for Environmental and Public Affairs, “Cleaning up the Fashion Industry”  listed 6,000 water pollution violations by manufacturers of goods ranging from sports apparel to luxury handbags.

Subsequently, 30 brands began conversations with IPE about how to improve the environmental performance of their supply chain, according to Ma Jun.

Clothing brands and retailers such as H&M, Nike, Esquel, Levi’s Adidas, Walmart, Burberry and Gap have all established regular screening mechanisms, are actively identifying pollution violations in their supply chain and have pushed more than 200 textile and leather suppliers to clean up.

Adidas, Nike, Levi’s and H&M have begun to address environmental challenges with their dyeing and finishing suppliers, the report said.

The latest investigation looked deeper into supply chains following a letter sent September 25th by the NGOs to the 49 brands requesting information about pollution management issues at materials suppliers.

Besides IPE, authors of the report were, Friends of Nature, Green Beagle, Envirofriends and Nanjing Greenstone

In all, 22 of the brands receiving the letter, including Marks & Spencer, Disney, J.C. Penney, Polo Ralph Lauren and Tommy Hilfiger gave limited or no responses to specific questions relative to emissions violation problems in their supply chain. This despite Marks & Spencer, for example, promoting its “Plan A”, which is a sustainable business benchmark for global textile companies and retailers.

Companies promoting sustainability should “not continue to let suppliers pollute the environment and hurt communities whilst using concepts such as ‘zero waste’ and ‘carbon neutral’ to greenwash their performance,” the environmental NGOs wrote in the report.

The report draws attention to the fact that textile exports from China have dropped recently, weighed by higher labor costs in China, trade barriers, the appreciation of the RMB and higher resource costs.

Big brands have moved some of their cut and sew production to South and Southeast Asia.  Nike shut down its only shoe factory in China and recently, Adidas also closed its only factory in China, leading people to believe China is steadily losing its status as the textile factory to the world.

But materials production is still concentrated in China, with exports of these products rising steadily, according to the report. This is the most polluting portion of the apparel supply chain.

In the raw materials processing sector, which includes dyeing and finishing, exports are growing steadily. According to the 2011/2012 China Textile Industry Report, for the six main printing and dyeing product categories, the total amount of exported printed and dyed cloth was 14.412 billion meters which showed a year on year growth of 13.76%.

The value of exported printed and dyed products was US$16.979 billion, which showed a year on year growth of 31.26%. However, at the same time the total value of all exported textile products only increased by 0.49%.

The cut and sew industry provides the most jobs, uses less water and energy and pollution discharge is not a big problem. However, the reverse is true for textile production. Essentially, China has kept the dirty part of the business, while allowing the relatively clean, job-creating cut and sew industry to wane.

The problem is that enforcement of pollution remains weak in China, while the cost of inputs like water and energy are still relatively low. So dyeing and finishing companies often avoid any water or energy savings initiatives and disregard pollution control, ignoring environmental laws and regulations.

Sustainable apparel in particular,  has a ”dangerous blind spot,” according to the report, which means that dyeing and finishing mills and factories lower their environmental standards to cut costs and win orders in a race to the bottom.

Essentially the problem is that most apparel and retail brands still choose not to look into the polluting part of their business – the bottom of the supply chain. Consequently, materials manufacturers are still trying to produce in the cheapest way possible in order to keep costs low for fast fashion.

We as consumers must recognize that we have a choice not to buy the cheapest item on the shelves, to acquire less and from companies that truly care about not doing harm to our planet.

One of the more important conversations that emerged from June’s Rio+20 Summit was around valuing natural resources and, ultimately, moving our economies beyond GDP as a sole measure of growth.

The concept is not a new one but it did seem gain traction.  Included among the side events on one day alone were at least two standing-room-only sessions on the topic: “Measuring the Future We Want” and the Natural Capital Summit.

In Measuring the Future, the panel recognized that over the last 20 years we have seen poverty decline but at the cost of growing environmental challenges. The call was for governments to institute a framework for natural capital accounting.

The Natural Capital Summit, meanwhile, featured speeches from Britain’s Nick Clegg and Norwegian Prime Minister, Jens Stoltenberg, as well as remarks from the presidents of Gabon and Costa Rica, illustrating clearly the level of interest in the topic.

“How to value nature is one of the most important political decisions,” Stoltenberg said, shortly after Clegg had talked over a masked heckler, accusing world leaders and the World Bank of commoditizing nature.

Despite the mask and the point well taken about assigning value to nature, the reality is not so simple. As we have it now, few benefit from our forests, oceans, our extractive industries and water.  The costs of pollution are borne by us all rather than the polluter.

This creates a world where we are rapidly depleting our natural resources for the enrichment of a few, and economic growth, as measured by GDP, is vastly inflated.

Both Rio+20 side sessions were short on answers or plans of action, despite some participants stating the desire to help international gatherings move beyond declarations – something that is sorely needed.

As a path toward action, however, also at Rio, the United Nations Environmental Program (UNEP) and the UN Environmental Program, the International Human Dimensions Programme on Global Climate Change (IHDP) introduced the Inclusive Wealth Index.

The idea is to consider a country’s assets to get a better picture of a country’s wealth and the sustainability of its growth.  In reporting every two years, IHDP will calculate the IWI for 20 countries that together account for almost three-quarters of global GDP.

Unsurprisingly, the first report showed that despite strong GDP growth, the United States, China, Brazil and South Africa had significantly depleted their natural capital base.  This was calculated as the total of renewable and non-renewable resources such as fisheries, forests and fossil fuels.

Again, not surprisingly, China showed the most dramatic difference between GDP and IWI. GDP growth alone was measured at 422 percent between 1990 and 2007 but IWI measured over the time was just 45 percent.

The report also showed that future growth, as measured by IWI, was dependent on the sustainable use of resources since all countries surveyed had a higher share of natural than manufactured capital.

The key factor here is that countries are using their natural resources faster than they can be replenished, thus challenging future economic development.

The strong sense in Rio was that governments need to step in to create a policy framework by which natural capital can be valued in order for real change to happen. The private sector, of course, wants a level playing field.

Meanwhile, some leading companies that are among the biggest beneficiaries of natural resources and free pollution, also stepped into the discussion this week in Rio.

Twenty-four of them, including Cocoa-Cola, Xerox, Dow Chemical and Kimberly-Clark announced a four-step framework for a methodology that would value natural resources.

Two-thirds of our planet’s land and water ecosystems are now significantly degraded thanks to human activity and climate change is only accelerating the damage. The UN estimates that mismanagement of natural assets costs the global economy an estimated $6.6 trillion a year or 11 percent of GDP collectively.

According to the report, these costs are expected to reach $28 trillion by 2050 and threaten core business interests through potential supply chain disruptions or costly substitutions, regulatory or legal risks.

KPMG has estimated that if companies had to pay for their own environmental bills they would lose 41 cents for every $1 in earnings.

The text of Valuing Natural Capital acknowledges that “each year our planet’s land and water systems produce an estimated $72 trillion worth of “free” goods and services essential to a well-functioning world economy.”

Because these are not bartered and sold in the marketplace it is hard to assign them with a value or corporate or government financial statements. “As a result this value has been largely unaccounted for in business decisions and market transactions.”

But this is starting to change, according to the document, with, “business executives recognizing the business imperative of safeguarding them.”

Among the natural goods and services on which the global economy was seen to depend are: Clean water and air; affordable raw materials and commodities; fertile soils; fisheries; buffers to floods, droughts, fires and extreme weather; barriers to the spread of disease; biological information to propel scientific and medical breakthroughs.

Still, the report although strong on the challenges is short on how natural resources will actually be valued.

Puma has been a leader in this field. Last year the company introduced an environmental profit and loss screening that represented an interesting step toward assigning economic value to resources consumed, to emissions and toward determining the true cost of production for the apparel and shoe brand. I have written about this here.

Finally, also this week the leaders of 37 banks, investment funds and insurance companies agreed to take better stock of the stress put on ecosystems by the economic activity they manage, and work towards integrating natural capital into products and services.

The Natural Capital Declaration is once again short on detail, but at least represents an acknowledgement of the issue.

 

 

In Rio this week up for discussion and negotiation (mostly negotiation) is a 49-page draft document that aims to establish clear sustainable development goals and action to achieve them.

The United Nations Conference on Sustainable Development, better known as Rio Plus 20, marks 20 years since the Earth Summit, which at the time was the largest gathering of heads of state ever to talk about environmental challenges.

This time, the agenda has been softened to be about sustainable development, with an emphasis on development. Indeed, some people here don’t seem to believe that environment really plays any part in the conference. Earth isn’t anywhere isn’t mentioned – despite that this is clearly supposed to be a follow-on to the earlier event.

Yet it’s hard to imagine how the discussion of sustainable development can take place without careful consideration of our natural environment.

The reality and the urgency is that our world’s population is expected to rise from its current 7 billion to more than 9 billion in 2050. That’s scary in a world where already an estimated 3 billion people don’t have clean water to drink and 14 percent of our planet, to adequate food.

According to the final version of the Rio Plus 20 Common Vision submitted today under the title, The Future We Want, one in five people, over 1 billion people, still live in extreme poverty. By 2050 two-thirds of our world will live in cities.

So where we find food and water for another 2 million people in 38 years is the crux of the challenge and one that really can’t be denied, regardless of political leaning.

And we live in Asia, where most of that future population growth is expected to occur. This places the challenges front and centre for those of us engaged in work to combat environmental challenges and with communities without adequate means to survive.

Despite the enormity of the task at hand, however, few here in Rio are optimistic that real change will come from or be led by the conference.

The Brazil delegation worked hard in recent days to ram through a document that is in essence hollow, fearing more than anything a repeat of the Copenhagen disaster when no one could agree on anything.

I guess the sense is that if they can at least agree on nothing meaningful that’s better than agreeing on nothing at all over the three-day official proceedings, which begin Wednesday?

The conference document finalized today was, “the result of intensive and prolonged negotiations,” according to the press release, and is a “compromise text,” in which, “countries have had to both give and take to achieve progress.”

The text is to be approved by heads of state at the conference conclusion on Friday. Significantly, Barack Obama, David Cameron and Angela Merkel will not be present in Rio.

Still, the text does include a commitment at least to the concept of sustainable development and recognition that eradicating poverty is one of our greatest challenges. It emphasizes the urgency around “freeing humanity from hunger and poverty”.

The text establishes the clear linkages between sustainable development and the environment, between sustainable development and the means to bolster our struggling economies, and emphasizes the value of public-private partnerships.

Sadly, the hope that this translates into government action is absent from the jaded community spending long hours being bused among several distant event locations in fancy and frigid coaches that have nothing to do with sustainable development other than collective transport.

Part of the skepticism also derives from the fact that the earlier Rio conference ended with two treaties aimed at curbing emissions of greenhouse gases and conserving biological diversity that have since languished amid lack of political will.

There is, additionally, a certain exhaustion generally with the promotion of international frameworks to make sweeping change toward environmental progress.

Those just have been too hard to achieve in our economically challenged world that doesn’t yet seem to link better development, protection of our natural world and an improved economic environment.

like the posh buses, the main conference venue itself is a reflection of misunderstanding of the challenges we face. The huge Riocentro is two hours in traffic from Ipanema and Copacabana, where most participants are staying.

There, air conditioning blasts through huge buildings that are no model of efficiency – either in space or energy consumption.

At the same time, Rio Plus 20 is largely white and male – at least this is particularly true of the official and business delegations. Amongst the NGO community, women are better represented.

At the alternative youth summit in Flamengo, three hours from Riocentro in traffic and closer to Rio’s pulsing centre, the situation is considerably different.

Here, the youth and community-connected people are basing themselves, including many of the smaller NGOs – and diversity is evident in the variety of national dress, skin hues and music that accompanies many events.

In a long stretch of tents, people gather for animated discussion or to listen to seminars on topics related to conservation and sustainable development. Here, the environment is very much present although it’s hard to see where, concretely, the discussion will lead.

Official delegations are noticeably lacking these communities – the NGOs and youth. This is despite the final text emphasizing wide agreement among business, NGOs and government.

Perhaps one bright light here in Rio seems to be the talk on many levels of the importance of valuing our natural resources. Companies, NGOs and governments alike seem to recognize the need to bring environmental value into economic decision-making.

And engaging the private sector, governments, communities in this important dialogue, in partnerships to achieve results, is key to real change.  As always in large gatherings it’s the back-room learnings and discussion that are the real drivers for change.

 

 

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?

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?

Recently we were in Northern Sulawesi visiting Willie Smits, an evangelist for sugar palm. I had seen his Ted talk and met him in Hong Kong on a previous visit and we wanted to see his work for ourselves.

We were keen to understand more about both sugar palm as a source of livelihoods for local populations and also his program of ecological restoration built around the trees, which are native to Sulawesi.

ADM Capital Foundation has been working with the Nantu conservation effort, also in Northern Sulawesi, and are looking at ways to help Nantu generate alternative local livelihoods. Clearly we can’t talk about forest conservation without working on the development/education piece for communities, as I have discussed in previous blogs.

Smits, a biologist/forester, has lived in Indonesia for three decades and is married to an Indonesian tribal princess who is also a local politician. Having worked previously for years for the ministry of forestry in Jakarta he has a good understanding of both Indonesia and its political/corruption challenges.

Over the past decade writing about, researching and working with sugar palm, Willie has built a unique store of data on everything about the tropical plant, as well as on deforestation, its causes and consequences.

He spends much of his time working through how to restore land for people and forest-dwelling animals alike, create livelihoods for local populations so they no longer must poach, log or otherwise log to support their families.

Understandably, Indonesia’s Forestry Ministry is focused not so much on conservation in Indonesia, but on how to support development that will sustain a rapidly growing population currently at around 230 million. This was made patently clear in a recent conversation with Jakarta MOF officials.

Understanding this, Willie Smits instead of talking about saving Orangutans from palm oil plantations, talks about community livelihoods, about Samboja Lestari, which is the restoration initiative discussed in his TED talk, about his sugar palm cooperative of 6,285 shareholders in Northern Sulawesi.

Although he now is not directly involved with Samboja, which is administered by the organization he founded but no longer leads, Borneo Orangutan Survival Foundation, Willie is still a board member of BOS. The principles around which Samboja was built stand regardless of its management: diversified secondary forest that includes sugar palm and at each layer provides income for communities as well as habitat for animals.

Secondary forest that produces income of course also takes the pressure off native forests.

To achieve this, Willie has developed a franchise process and system to sign up local holders of degraded land, provide the palms and training at a cost of approximately US$1000 per hectare.

The idea is that each cluster of about 150 farmers form a “Village Hub” or a cooperative that acts to build the social fabric, as a bank and to consolidate the product. The mini sugar processing plant, the core of the village hub, which is primarily solar driven, concentrates the raw sugar juice from about 20% to above 60% where it is nonreactive and easier to transport.

Each farmer has an account with the hub and this is credited with each container of juice brought in. They can then use the credit to buy goods and services in the village. This removes the use of actual money and the potential for corruption or theft.

The concentrate is delivered to a regional hub that processes the concentrate to various products, including raw sugar, rum, bio ethanol, among many others. Village Hubs are estimated to cost around 350,000 Euros.

Now to the numbers:

Willie claims to be able to plant 70 producing sugar palms per hectare in among other vegetation, with each tree producing 13 liters of sugar syrup, equivalent to 3 kilos of sugar per day. That’s roughly 36.5 tons of sugar or  19 tons of ethanol per hectare per year – according to Willie the equivalent of 82 barrels of oil per hectare per year.

Sugar palm, he says, requires little water, no chemical fertilizers or pesticides (they have their own built-in defenses), creates local jobs for tappers (trees must be tapped twice a day and this keep local people occupied and away from natural forest). They also enhance food security since sugar palms produce sago, sugar (better for you apparently than cane sugar) and fruit.

Sugar palm, Willie emphasizes, is not a crop but a forest and there are already an estimated 10 million existing sugar palms, many of these in Indonesia. Furthermore, there are tens of millions of hectares of grassland or wasteland that could be restored to include sugar palm that would provide local livelihoods, sequester carbon, while producing fuel and food. He is looking at where else in the world sugar palm might be used to generate income.

Some interesting concepts and hard to verify since most of the work around sugar palm has been done by Willie himself.

Certainly, we would be keen to be pointed in the direction of other numbers/thinking connected to community livelihoods and sugar palm.

Greenpeace last week released the results of its third-annual green electronics survey – a look at how leading electronics manufacturers companies are doing. All but Apple and Phillips of the 21 companies contacted agreed to be ranked on three criteria; removing toxic substances, responsible take-back of their end-of-life products and energy efficiency.

The survey was motivated by the fact that throughout a product’s lifecycle – from material extraction to production, and from consumer use to disposal – electronic products have the potential to impact human health and the environment through the release of dangerous substances and energy consumption.

China is the world center for processing IT products and that country’s environment is paying the price. Printed Circuit Board and battery power production especially create heavy metal pollution.

Part of the problem is consumer demand for cheap products that don’t reflect the true cost of production – they don’t reflect the toll on the environment, on public and worker health.

Furthermore, IT companies continue to produce goods that have obsolescence built in, which means we consume endlessly looking for the newest or better product, boosting company revenues but at huge environmental and social cost, that, again, is not reflected in the price we pay.

The Greenpeace survey found a general improvement in green features compared to the previous two surveys in 2008 and 2007, including a significant decrease in use of hazardous chemicals and almost all products met or exceeded energy efficiency standards.

But lifecycle management was still the weakest point, with very little use of recycled plastic, varying take-back practices and few marketing efforts to prevent fast obsolescence of products.

Generally, also, Greenpeace found that electronics companies were becoming more transparent in the amount and type of product information provided to customers, often listing product’s chemical make-up and performance details.

Apple and Philips, however, once again refused to disclose any information to Greenpeace. Of course this reluctance to provide information is disappointing and not limited to probing by Greenpeace.

Beijing-based IPE, led by environmental activist Ma Jun, has also over the past year focused on the IT sector for its significant contribution to environmental degradation in China.

IPE has also contacted electronics companies about environmental violations and Apple is among those refusing to address questions about noxious emissions by factories producing its products.

Writing in a Guardian blog earlier last year, Ma Jun said 34 Chinese environmental organizations, including Friends of Nature, the Institute of Public and Environmental Affairs, and Green Beagle, questioned heavy metal pollution produced by companies in Apple’s supply chain in a letter sent to CEO Steve Jobs. Last week Ma Jun said that the only response from Apple has been a demand for proof that the polluting factories are producing electronics for Apple.

“The links between these companies and Apple are clearly established,” Ma Jun said last week. “We are working now to provide the company with hard evidence. Their unwillingness to release information about their production processes reminds me of Nike in the 1990s,”

By contrast, in an interview with Asia Water Project last year Ma Jun praised Hewlett Packard and Samsung for duck disclosure and movement toward greener products. Indeed, HP and Samsung were among the companies singled out in the Greenpeace survey for the producing some of the greenest products.

Why single out Apple, as IPE has done? Does a company with a solid reputation for being on top of its game, for producing innovative, quality and well-designed products, have a responsibility to manufacture without excessive environmental and social cost? Shouldn’t Apple be a leader also in its production processes and not a laggard?  Should we as consumers not demand more from the companies that sell us our products?

Fortunately, consumers ARE beginning to taking note. Companies that fail to adapt are poised to suffer huge reputational and revenue losses as a consequence.  A game-changing opportunity awaits those companies that choose to meet this challenge.

 

The world’s problems are too vast for philanthropy or governments alone to solve. The US$300 billion spent by U.S. philanthropists last year is just not enough to make a significant dent, while foreign aid represents less than 1 percent of global gross domestic product.

The reality is that only by harnessing the markets, large-scale private and institutional capital, will we even begin to meet the challenges posed by massive population growth, meet our many needs, address issues around water scarcity, our depleted resources as well as our polluted air and water.

Philanthropy can help spur innovation, it can be used as risk capital, to develop models for social benefit that can then be scaled. Governments can help take that innovation to scale but they can’t do it all. Only markets have the potential to bring about real change at the scale and speed we need that to happen.

In other words, we urgently need to take social investments out of the realm of just doing good and plant them firmly in business models in order to make our world fit for our children and grandchildren.

But how does that happen?

A new report released last week by J.P. Morgan and the Rockefeller Foundation in partnership with the Global Impact Investing Network  (GIIN) attempts to advance this discussion.

The report argues that impact investments are emerging as an alternative asset class, thus allowing the sector to be considered alongside any other as part of an investment portfolio.  Impact investments in this instance are defined as investments intended to create positive impact beyond, although not to the exclusion of, a financial return.

“With increasing numbers of investors rejecting the notion that they face a binary choice between investing for maximum risk-adjusted returns or donating for social purpose, the impact investment market is now at a significant turning point as it enters the mainstream, ” the report states.

It addresses questions such as what defines and differentiates impact investments, who is involved in the market and how they allocate capital. Also considered is what makes impact investment an emerging asset class, how much return investors are expecting and receiving,  how large is the potential opportunity for investment in this market and what does risk management and social monitoring involve?

The report analyzes five sectors that serve bottom-of-the-pyramid populations (the global population earning less than US$3,000 annually): Urban affordable housing, rural access to clean water, maternal health, primary education, and microfinance.

For just these segments of the impact investing universe, the report identifies a potential profit opportunity of between $183 and $667 billion as well as  investment opportunity between $400 billion and $1 trillion over the next decade.

Many impact investments will take the form of private equity or debt investments, the report says, while other instruments can include guarantees or deposits.  Publicly listed impact investments do exist, although as a small proportion of transactions.

B-Lab differentiates Impact Investing and Socially Responsible Investing, which has been around for some time, defining SRI (estimated at $2.7 trillion in 2007) as primarily negative screening, or investment in screened public equity funds that avoid so-called ‘sin stocks’ or seek to influence corporate behavior.

The core of the II asset class is that the model of the business (which could be a fund management firm or a company) into which the investment is made should be designed with the intent to achieve positive social or environmental impact, and this should be explicitly specified in company documents.

There are a handful of investment funds established to finance businesses that address social problems, especially in the developing world. Examples of funds working in these space include Acumen Fund, Root Capital, E+Co and IGNIA, among others.

A significant challenge identified in making impact investments is sourcing transactions. Many impact investment recipients are small companies and the majority of deal sizes analyzed from our investor survey are less than US$1m.

Particularly for investors based in different regions, the costs of due diligence on these investments can often challenge the economics of making such small investments.

Another, of course, would be setting the reporting standards needed to establish just what constitutes a social or environmental return on an investment. This is something on which GIIN and B-Lab are working hard.

It’s great to see a mainstream financial institution dipping into this discussion.

Last week,  I participated in a panel discussion at INSEAD, Singapore on impact investing and many of the points above were discussed at length. In particular, we spoke of the  challenges of II in a developing world context where this is urgently needed.

 

We recently hosted a forum with the Asia Foundation on Philanthropy and Climate change.  We hoped to encourage Asian funders to draw the lines between climate change (something that seems often hard for the individual to grasp) and the more tangible and immediate air pollution, forestry degradation, water scarcity etc.

We also hoped to then get them to think beyond the environment to a wider philanthropic portfolio and to consider the impact of climate change on livelihoods, health, education – even how funders in the arts might get involved to build awareness around the need to act.

Why? We feel that given the enormity of the problem, it’s often hard for the individual funder, the family office foundation, to see how they might act in any way that is impactful.

But what we found was remarkable energy in the room. Rather than despair, we felt that participants left informed and energized by our panelists and keynote speaker, Stephen Heintz of Rockefeller Brothers Fund, which has an excellent environment and health, southern China program, managed by Shenyu Belsky.

Dr. James Hansen, one of the world’s leading climate scientists and head of the New York’s NASA Goddard Institute for Space Studies, provided an overview of climate science – setting the scene for discussion. Dr. Hansen, an advocate for a carbon tax, spoke of our inertia in the face of an emergency, the possible extermination of species, receding glaciers, bleaching of coral reefs, acidification of the ocean, basically that we are a planet out of balance.

Heintz also spoke about urgency, describing climate change as a “planetary threat that knows no bounds.” He emphasized the particular threat in Asia – that of 16 countries facing extreme risk, five are in in this region and they are among the most impacted, low-lying Bangladesh for example.

In all, he said, global warming could cost southeast Asia 6-7 percent of GDP. Clearly, Asia is squarely at the intersection of climate and development and he emphasized the need for new ideas and new ways of thinking, something that accurately reflects current realities and anticipates new needs.

It is easy, Heintz pointed out, to be discouraged by the science, yet philanthropy, government, civil society and the private sector all have roles to play. In reality , it is imperative that we act because, inevitably, climate change will impact every other issue that we are working on.

Global grant-making, Heintz said, has increased dramatically over the past decade yet environmental issues are way behind, receiving only 5 percent of funding. Resources targeting climate change specifically, of course, are far less.

The philanthropy sector, Heintz said, can play a crucial catalytic role, take risk, experiment, support advocacy to change public policy and trigger larger systemic change. Important will be innovative public-private partnerships, helping to develop emerging models of low-carbon prosperity. His was an excellent speech.

Our three panelists, Runa Kahn of Bangladesh’s Friendship, Dorjee Sun of Carbon Conservation and John Liu, an environmental filmmaker and journalist based in Beijing, spoke of the practicalities of working effectively within this context – and they also were inspiring.

Runa spoke about making life possible for the 4 million people living  in impossible circumstances in Bangladesh’s northern chars, John Liu on a massive ecological restoration project in China and showed the results, Dorjee on carbon, community and market solutions for saving forests.

The entire session was expertly moderated by the Asia Business Council’s Mark Clifford who managed to draw together the discussion, keeping an often amorphous and difficult topic moving toward practical solutions and away from fear.

The forum was a private side event to the C40 Climate change conference early this month organized by the Civic Exchange and supported by the Hong Kong government and Jockey Club Charities Trust.

It would be great to hear about other experiences linking climate change with a wider philanthropic portfolio, about nudging funders into action in this arena.

Mountains of garbage in Mumbai

Mountains of waste

 

We hear about climate change all the time now, we know it’s bad, we understand much of the science behind the phenomenon. But what can we do? No really, what CAN we do? How does this broad concept connect with our daily lives? 

We turn off and unplug appliances, we try to take public transport where possible, we use fewer resources, turn down the air conditioning in summer and heat in winter, we buy less bottled water. 

But often we don’t stop to think about the rest of our lives. We still want to eat strawberries in winter, meat flown in from the U.S. We (or our children) still buy clothes where often quantity and price reigns over quality. 

We look for lower prices (because we’re hooked on cheaper is better) and then don’t have to think so hard about whether or not that particular cheap item that clearly is not taking into account the environmental or social cost of  production is actually needed.  

We change our cars regularly, buy the latest Apple gadget (must have the ipad, the latest computer to stay in touch) and think nothing of chucking an iphone, ipod that has lasted only a year. 

What happened to the time in the not so distant past when we romanced a dress for a long time and just one purchase was ok, when we could buy fresh local produce and meat in season, when one car lasted a decade or more, when we didn’t need gadget upon gadget to be happy?    

So back to climate change: All of that consumption, flying goods around, needs energy. Production and energy (produced largely by coal in China) at least at the moment lead to air pollution and climate change. Sometimes we forget the connections. 

 In Hong Kong this week Clean Air Network has been good to remind us  with its tongue-in-cheek Fresh Air video what we face if we don’t change our bad habits:  http://www.youtube.com/watch?v=lmH3xCpOSW8

Most of us agree that deforestation on the scale we have seen in recent decades is undesirable and unsustainable.

Our tropical forests are in dramatic decline, pumping tons of carbon into our atmosphere and causing changes in temperature and rainfall worldwide with potentially devastating consequences for our planet.

The problem remains, how to tackle this critical problem in developing regions, where corruption is endemic, how to pay the enormous costs of protecting forests and engaging the local communities that depend on them for their livelihoods.

Reversing global deforestation will require industrialized countries to invest billions annually in forest protection. It is worth remembering, however, that last year U.S. government put aside $700 billion for banks, insurers and automakers during the financial crisis as part of the Troubled Asset Relief Program.

By now, we know the story: Rainforests soak up huge amounts of planet-warming carbon dioxide. Deforestation releases retained CO2 released into the atmosphere.  Forest destruction contributes about 20 percent of mankind’s greenhouse gas emissions annually, according to the U.N. climate panel. Indeed, tropical deforestation is more damaging to our planet than the transport sector or factories, with one day of logging equivalent to the carbon footprint of eight million people flying to New York.

And why do we care? Our rainforests form a vital cooling band around the earth’s equator, generating a large part of our rainfall and acting as a thermostat.  We perhaps also aren’t aware that 50 per cent of life on earth exists in these humid forests, which cover less than 7 per cent of the planet’s surface. We are far from understanding the real consequences of losing the biodiversity we seem to take for granted.

Yet our governments, and indeed most of us, continue to act as though our tropical forests are expendable, that there is no impending climate crisis, biodiversity is a given, perhaps unimportant, and anticipate little, if any alteration in our lives of consumption and energy use.

Clearly, December’s global climate powwow in Copenhagen was the best reflection of this, with no real sense of urgency conveyed by governments gathered there.  Country delegations arrived by private jet, were ferried around town in gas-guzzling limos – not exactly the right tone for a crisis meeting on climate.

There had been hope to gain a legally binding international treaty committing nations to mandatory cuts in greenhouse gases but none was forthcoming, lost once more in the all too familiar regional bickering. And chances are slim of any agreement from the next round of U.N. climate talks in Cancun, Mexico, particularly following the resignation last week of Yvo de Boer, who has led the process for four years.

The pledges that de Boer did manage to eke out of Copenhagen will merely stabilize emissions by 2020. By most accounts, we need to achieve reductions  of at least 50 percent by midcentury – something that can’t be achieved without big cuts from the major emitters, which are the U.S., China, India and Brazil.

Part of the problem lies in ascertaining, at the international level, who should pay to conserve our forests. Developing nations want the right to develop unimpeded, while the United States wants to see significant emissions cuts from China and India that would be on par with its own and doesn’t want to be held accountable for cost.   Fundamentally, the U.S. has no effective national strategy of its own and thus is really not in a position to take the lead.

The assumption is that at some point, nations will get it together to achieve meaningful emissions reduction and carbon will become a real part of the solution. In the meantime, regional initiatives such as the U.S. Climate Change legislation currently stalled in the U.S. senate are evolving and could bring some movement in the carbon picture, generating resources for forestry conservation.

But will this be too little too late for our forests and what is the solution for them while we wait?

The bottom line is that in an attempt to protect what is left of our precious stores of tropical timber and the estimated 1.6 billion people who live amongst them, environmental groups have poured tens of millions of dollars into conservation over the last two decades without any real gains.

Global Witness co-founder Patrick Alley, said in a worth-quoting speech last year :

Virtually every intervention by the international donor community into the forests sector over the past few decades costing hundreds of millions of dollars has essentially been to patch up the holes in enforcement to stop the haemorrhaging of illegal timber and corruptly looted revenues. And these interventions have ranged from certification, chain of custody systems, governance, capacity building, law enforcement and there has been precious little success in that litany. And on top of this, we have the increasing threats of conversion to plantations and agricultural encroachment http://bit.ly/fiCvz

The U.N.’s Food and Agricultural Organization says about 13 million hectares, or an area the size of England, are still destroyed annually. In all, half the world’s tropical and temperate forests are now gone.

Author and environmental advocate, Gus Speth, ( http://bit.ly/bSBjOR) pointed out in a recent speech that species are disappearing at rates about 1,000 times faster than normal in a spasm of extinction not seen in 65 million years, since the dinosaurs disappeared.

Changes in our rainfall patterns have meant that over half the agricultural land in drier regions suffers from some degree of deterioration and desertification.

A key concern, if we are to reverse this trend, is either how to pay for conservation or, alternatively, how to make conservation pay; at a national level, how to justify the loss of revenue for developing countries that need the income.

The sad reality is that logging in the tropics generates enormous profit, but not for local communities and mostly not for governments in the form of taxes. Instead, much of the profit finds its way into corporate coffers and the offshore accounts of connected local individuals through corruption and illegal practices. The profit pressures on forests are huge from these interests. Biodiesel and palm oil have now also entered the equation, adding to the strains.

One initiative that tries to address the question of  how to generate profit for conservation and formalized at the Copenhagen talks was a U.N.-backed forest protection scheme called Reduced Emissions from Deforestation and Degradation or REDD.

This would include forests in the global carbon markets,  allowing polluters to earn tradable carbon credits by paying developing nations billions not to chop down their trees.  Local communities are supposed to earn a share of REDD credit sales to pay for better health, education and alternative livelihoods that persuade them to protect rather than cut down their forests.

But the revenue-sharing arrangements will differ for each country. Some NGOs worry that once again little support will filter down to the communities, with central and provincial governments demanding control of the money.

Another problem is that carbon measurement and accounting as part of any REDD design is complex and time-consuming, requiring laws to be enacted, officials to be trained and investors to be assured that the scheme won’t be undermined by corruption.

And finally, ensuring the forests aren’t simply cut down later, or that deforestation is displaced to another region or country, is another concern. REDD’s final technical design will have to address these issues.

Still, the well-regarded Eliasch Review (http://bit.ly/d99kM3) suggests that including REDD in a well-designed carbon trading system could provide the finance and incentives to reduce deforestation rates by up to 75 per cent in 2030

Still, in Indonesia, where the REDD discussion is quite advanced, there have been warnings that billions of dollars clearly are at risk from graft unless the country puts strong oversight mechanisms in place, according to a recent report released by CIFOR. (http://bit.ly/cfld28)

“Investors should be looking very carefully at the financial governance conditions in the countries where they will be investing their funds. Like Indonesia, many tropical forest countries have long track records of mismanaging public financial resources, particularly in the forestry sector,” said the report’s co-author, Christopher Barr.

Indonesia, which is one country in which ADMCF works on forestry issues, is the world’s third-largest area of tropical forest and the world’s third-largest emitter of carbon after the United States and China because of the massive destruction there of rainforest and peatlands.

Last year, Indonesia set up a legal framework for REDD. Several pilot projects are under way and the governments of Norway, Australia, Germany and the U.S. have promised millions of dollars in funding.

What we have seen everywhere forests are protected however, are the sad unintended consequences of the scramble for carbon: environmental groups that have been conserving forests are backing away from protecting them, fearing that as protected forest they won’t qualify under the REDD additionality clause.

It is uncertain whether already protected forests would qualify for REDD credits. This means that while we wait for REDD, for any sort of global or regional framework that will push forward the mechanisms that will allow large-scale protection, our forests are potentially more vulnerable than ever.