Archives For Hong Kong

Lisa and Charly Kleissner

Sophisticated Investors like to think their portfolio risk has been carefully mitigated and hedged. For the average portfolio, however, standard risk calculations don’t necessarily include analysis relative to environmental and social  issues an investee company potentially faces, or even resource consumption analysis, yet all can have a significant impact on returns. This is particularly true of a long-term “buy and hold” investment strategy.

By contrast, impact investors believe not only that these factors weigh on a company’s returns, but also a positive screen for companies actively managing these risks can improve a portfolio’s performance.

Speaking in Hong Kong about their own 13-year journey toward an “Impact Portfolio” were Lisa and Charly Kleissner, founders of the KL Felicitas Foundation. As part of their mission, the Kleissners have urged audiences globally to think about how we can better deploy capital to help better steward the planet’s resources. On Tuesday, they spoke at a forum organized by the RS Group, hoping to advance the discussion in Hong Kong.

Today, the Kleissner’s foundation and personal portfolios, managed by San Francisco-based Sonen Capital, are more than 93 percent allocated across four different asset classes to “Impact Investments”, which signal the intent to generate both financial return and “purposeful, measurable, positive social or environmental impact”.

According to “Evolution of an Impact Portfolio: From Implementation to Results“, a report published by Sonen in October last year, the Kleissner’s portfolios have achieved index-competitive risk-adjusted returns, illustrating that, “impact investments can compete with and, at times, outperform, traditional asset allocation strategies, while simultaneously pursuing meaningful and measurable social and environmental impact”.

Their journey toward impact has not been easy, according to the Kleissners, Silicon valley denizens who both worked under Steve Jobs at Apple, among other firms. The process began with dim looks from early investment managers who wanted to focus only on returns.

“We wanted to know about the positive upside for communities, for the environment, from our investments,” Lisa said. “We wanted to make money and have positive impact but our early investment advisors had no idea how to achieve this.”

They sought an advisor who cared about impact. “We didn’t want someone who saw this as simply a job,” Charly said. “We want to change the world not just make money and our investment advisor needed to be a partner in this.”

The results were far-reaching, meaning investment policies needed to become impact investment policies, due diligence restructured, term sheets re-written, new monitoring and exit strategies developed. Sonen Capital was founded in response to this need.

The portfolios the Kleissners ended up with are far from US-centric, with more than 50 percent of investments made globally. Among those are holdings in renewable timber, carbon offsets, water and land use that is respectful of biodiversity. In other words, the Kleissners invest in companies that reflect positive impact. They have opted not to invest in coal-fired power plants or extractive industries.

Three percent of their assets are in early stage direct investments, reflecting their silicon valley, entrepreneurial background. Indeed, the Kleissners efforts to promote the impact sector has included investments of money and their own time in social enterprise incubators. These, and others, the Kleissners like to think of as “catalytic” investments that can lead to change.

Beyond the incubator model to support social enterprise development, the Kleissners  also have invested in helping to build networks of like-minded investors to share due diligence as well as in promoting intermediaries to help develop the impact sector.

“Development of these investor resources is critical,” Charly said, “We want people anywhere to be able to tap into the knowledge”, which is available on the KL Felicitas website.

Measurement, always a difficult discussion, is rigorous across the portfolios, captures trends across the sectors and then includes qualitative analysis, which involves telling the story from the numbers and more.

Charly spoke of impact investment as often an evolution of smarter philanthropy. He also spoke of the importance of collaboration between grantmaking and investment to widen impact, pointing to microfinance as an example of this and to social enterprises that can start life as a nonprofit but move into a more commercial space over time using blended capital.

Speaking in Hong Kong, the Kleissners said, was a learning for them, that having worked with an incubator in India over a number of years, the entrepreneurial context there was more familiar.

In China, where the environmental challenges are substantial and polluting companies numerous, an audience member pointed out that impact might also come from working with conventional companies to change their environmental and social practices, rather than shunning them altogether.

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An unbelievable and disturbing sight photographed Jan. 2nd in Kennedy Town, Hong Kong by Alex Hofford and Paul Hilton. An estimated 18,000 fins were found drying in the beautiful early January sunshine.

About 50 percent of the global shark fin trade passes through Hong Kong, largely to feed Asian appetites for shark fin soup and other shark-related product. Estimates are that possibly as many as 73 million shark are harvested annually in a lucrative trade estimated in value from US$540 million to US$1.2 billion.

A third of all fins imported to Hong Kong come from Europe, with Spain as the largest supplier, providing between 2,000 and 5,000 metric tons a year. Norway supplies 39 metric tonnes. Britain, France, Portugal and Italy are also major suppliers. Bags of fin labeled from Brazil were found on the Hong Kong rooftop.

As affluence has grown in Asia, particularly China, so too has demand for shark fin soup, which is eaten largely as an expensive delicacy at wedding and other banquets.

One-third of sharks species are threatened or near-threatened with extinction, according to the IUCN Red List.

This first appeared as an Op-ed in the October 25 opinion pages of the SCMP.

We might finally have an administration that cares about cleaning our filthy air. Indications are that the new administration led by C.Y.Leung will act to finally stem the choking smog that represents Hong Kong’s No 1 public health crisis and is a major impediment to the city’s competitiveness.

Last week, in his first address to the reconvened Legislative Council, the chief executive said improving air quality was among his top objectives. In a move that already stirred optimism about the government’s determination to protect public health, Leung last month named environmentalist Christine Loh Kung-wai undersecretary for the environment.

It was also encouraging to see, a day after Leung’s address, Secretary for the Environment Wong Kam-sing calling roadside pollution the city’s greatest problem, and that a basket of initiatives to improve the city’s air quality would be introduced next year. These, he said, would aim to comply with World Health Organisation standards rather than the outdated air quality measures still in use.

Among the initiatives being considered are “carrot and stick” policies that include removing some 60,000 heavily polluting diesel vehicles from our roads.

Such measures are urgently needed. Some older vehicles have been on the road for as long as 20 years and should be refused registration if they don’t comply with vehicle emission standards.

While atmospheric pollution might have improved somewhat – due mainly to lower emissions from the city’s power stations – the concentration of roadside emissions remains unacceptably high, and it is these emissions that affect us the most.

Wong has said that 80 per cent of roadside pollutants come from outdated commercial diesel vehicles.

Retiring obsolete commercial diesel vehicles will improve our air and our health. It’s also worth remembering that research from the Hong Kong University of Science and Technology showed that, 53 per cent of the time, pollution that affects us most comes not from across the border, but from our own roads and ships on the harbour.

Indeed, the recent flurry of positive announcements from the government came amid a string of bad air days and public health warnings to moderate outdoor activity.

According to Hong Kong University’s Hedley Environmental Index, which measures the cost of pollution, yesterday was a “clear day” (one that complies with WHO air quality guidelines) in Hong Kong. The last such day was September 22, which means that our air stayed bad for more than a month.

According to the index, there have been only 59 clear days so far this year. The polluted days represent a cumulative HK$33 million in health-related and other costs.

Beyond the direct cost to our economy, surveys of business executives regularly point to our smoggy air as a real obstacle in recruiting and retaining workers – whether foreign or local. Patience is wearing thin.

By now we have heard from doctors and scientists that our dangerously high level of pollutants raises the risk of such conditions as bronchitis, asthma, pneumonia, headaches, lung cancer, stroke and heart attack.

So we should applaud the suggestion of phasing out outdated commercial diesel vehicles, despite what I imagine will be heavy lobbying from the transport sector.

As Wong pointed out, mainland China is phasing out diesel vehicles more than 15 years old, so why should we be any different? The government’s carrot will include subsidies to soften the blow of replacing vehicle fleets.

It is encouraging that the administration has also spoken about retrofitting Euro II and III franchised buses with selective catalytic reduction devices to reduce nitrogen oxide emissions and might even tighten emission standards for LPG and petrol vehicles as well.

Here’s hoping that our new government will finally act to protect our health.

 

I am constantly surprised that Hong Kong does not pay more attention to its water supply, that something so vital to our city is far from secured by our government.

How many of us know that 75 percent of our water comes from the Dongjiang River, while only 25 percent of the city’s drinking water is supplied by reservoirs from within the territory? That while Singapore has similar water concerns, the island nation is investing in technology to conserve, recycle and desalinate water to ensure adequate supply, yet our government simply is not.

This is wrong for many reasons but here are two of the most obvious:

1) China is experiencing a significant water crisis and is acting aggressively to ensure its own supply. As Civic Exchange’s Su Liu recently pointed out while speaking on a panel, “We in Hong Kong don’t see the big picture – 40 million compared to our 7 million also rely on the Dongjiang. If water tensions rise on the mainland – where is the priority? ” You can more read about the excellent discussion on China’s water stresses moderated by http://www.ChinaWaterRisk.org’s Debra Tan, here.

2) The Lower Dongjiang River Basin is becoming intensely  industrialized and urbanized meaning industrial pollution regionally is a real concern. At the same time, agriculture further inland has intensified and pollutants from farms, such as pesticides and fertilizers are just as dangerous in drinking water as industrial materials. So How safe is our water in reality? Clearly local testing shows that currently the water we drink meets health standards but can we be sure that will always be the case?

To my first point, China registers a 50-billion-cubic meter water shortage annually, with two-thirds of cities having trouble accessing water, according to a China Daily article last week quoting Chen Lei, the country’s minister of water resources. In all, China’s water consumption apparently has exceeded 600 billion cubic meters, accounting for 74 percent of the country’s exploitable water resources.

In January, the central government issued a document asking the entire country to limit the scale of water exploitation, improve the efficiency of water usage and curb water pollution. According to the article, China aims to reduce water consumption per 10,000 yuan ($1,597) industrial value-added output to less than 40 cubic meters by 2030, raise the effective water use coefficient of farmland irrigation water to above 0.6 and improve water quality.

Chen also has said the nation will set water consumption quotas for local governments and continue to perfect the water price formation mechanism in order to promote water resource conservation and protection.

So it sounds as though Su Liu has the right idea – the Chinese government priority won’t be to keep prices low and supply constant for the 7 million Hong Kongers drawing ever higher upstream on the Dongjiang.

And we are vulnerable. Our water agreement with Guangdong was renewed in late 2011 but only for another three years, until 2014 and for a maximum supply of 820 million cubed meters from the Dongjiang, a major tributary to the Pearl River, 83 kilometers north of Hong Kong. Our current accord commits to this supply regardless of drought.  But the river also supplies fresh water to seven other cities, including Guangzhou, Dongguan and Shenzhen. All of those cities, however, have seen allowances decreased during drought years so will Hong Kong continue to receive privileged treatment?

At the same time, we would be ill-equipped for any water rationing. As China Water risk has pointed out here, Hong Kong uses more water per capita than Paris, London, Singapore or Melbourne and over 50 percent of our water is for domestic use. This compares to just 15 percent of water usage in China being for municipal use.

Part of the problem is that our tariffs are among the lowest in the world. As CWR points out, the first 12 cubic meters of water used every four months is free for all domestic users. Countries with comparable GDP per capita such as Netherlands, Switzerland and the U.S. all have higher water tariffs.

But tariffs are also low in China and the expectation is that with a push on the mainland toward water conservation, pricing will likely at some point rise to a water tariff level of 2-3 percent of average household income. That should also translate to higher prices in Hong Kong.

Turning to pollution, I have written several blogs on the lack of enforcement of water quality standards in China. The intense industrial development throughout China, but particularly in the south, has helped fuel annual GDP growth in the double digits but it has also rendered many rivers, lakes and reservoirs, indeed much of the country’s groundwater, essentially useless for agriculture or consumption.

Of the country’s 26 key lakes and reservoirs monitored, only 23 percent fall within grade 1-111, while 19 percent of China’s seven major river basins monitored are  considered essentially useless. Finally, almost 74 percent of groundwater is considered grade IV-V standard, or excessively polluted. More information on China’s water pollution can be found here.

We should remember that a river collects the water in its basin and that means that all the pollutants within the Dongjiang Basin could potentially end up in Hong Kong’s water supply – not a pleasant thought. Will we have to wait for a major accident on the Dongjiang or its feeders before the Hong Kong government wakes up to our vulnerability?

For now, Hong Kong water quality data, although only through September last year, can be found here, on the Water Supplies Department website.

Hong Kong consumers have the ability to sustain a significant tariff hike.  That would help us move toward greater water conservation and at the same time provide  the resources for the city to invest in making options such as desalination and water recycling economically viable. What are we waiting for?

 

Orangutans inhabiting an Aceh protected peat forest surrounded by oil palm concessions are at risk of being completely wiped out by the end of this year if fires set to clear the land aren’t stopped, according to conservationists in Indonesia.

Ian Singleton of the Sumatran Orangutan Conservation Program (SOCP) said that only about 200 of the 3,000 Orangutans living in the Tripa forest in the early 1990s remain. In all, only an estimated 6,600 Sumatran Orangutans are left anywhere in the wild, he said.

This has come as the pace of burning in the Tripa Peat swamps has accelerated in the past few weeks, possibly as palm oil companies take advantage of Aceh’s uncertain current status under an “interim” Governor, conservationists said.

The real concern is that at the current pace of destruction there will be no remaining High Conservation Value Forest and no more protected wildlife in the area by the end of 2012.

Graham Usher of the Foundation for a Sustainable Ecosystem said that only 12,000 of the original 60,000-hectare forest remains. Much of the forest is now highly fragmented, with the largest remaining block measuring less than 8,400 hectares and only one other fragment over 1,000 hectares.

Any orangutans trapped in the remaining small fragments of forest amid the burning are now effectively refugees of forest that no longer exists and are likely to die from starvation if not killed or captured.

Just in recent months, Usher told a Jakarta press conference, at least 100 Orangutans have been killed, while an additional 100 died between 2009 and 2011 in the process of conversion of the palm oil concessions or from starvation.

According to Usher, over 100 fire hot spots were recorded between 19 and 25 March among the area’s palm oil plantations.This is apparently perhaps the worst burning since satellite monitoring of Indonesia’s fire hot spots began in late 2000.

A number of the fire hotspots were coming from an apparently illegal palm oil concession, considered by many in breach of Indonesia’s moratorium on clearing forest.

The PT Kallista Alam concession permit was, according to the conservationists, issued three months after the government’s moratorium map was issued. There is currently an ongoing legal case in Aceh concerning the same concession in which a decision is expected April 3rd.

This suit alleges that the concession was clearly issued inside the Leuser Ecosystem, which is designated a National Strategic Area for Environmental Protection in Indonesia’s National Spatial Plan, established in 2008 under Government regulation 26.

Conservationists also say that forest clearing and drainage canal construction began in the concession even before the permit was issued, that the permit was issued while the concession was clearly shown as off-limits to any new plantations under the President’s official map establishing a moratorium on new permits.

The request was made Thursday for the government immediately to order all oil palm companies with concessions within the Tripa Peat Swamps in the Leuser Ecosystem to immediately cease all land clearing and burning.

In addition, it was suggested that the government of Norway immediately suspend the 2010 bilateral letter of intent that was the basis of the moratorium until the burning has been thoroughly investigated.

By far the most fire hotspots, however, were located in the PT Surya Panen Subur 2 Concession, a 13,000 hectare palm oil concession that formerly belonged to PT Astra Agro Lestari, in which Hong Kong-based Jardines owns a majority stake.

That was purchased by Astra Agro Lestari in 2007 and then sold to Triputra Group, founded by a former CEO of Astra, according to SOCP, in late 2010, following heavy criticism of Jardines connection to the concession in international press reports.

Why would Jardines want any association with a palm oil concession located in a protected area and, indeed, why would the company then turn around and sell that under pressure to a loose associate rather than set it aside for conservation?

This is what the air should look like in HK but rarely does Photo by Ella Smith

Hong Kong finally has found its voice amid government inaction to  clean our air and protect our health. And long may it last – at least until we have real action to address the pollution.

Newspapers this morning featured banner headlines on air pollution, including the SCMP’s  “Clean-Air Targets Don’t measure Up” and then inside, “Gasp it’s Worse Than we Thought.”

Yesterday, the government said it would toughen its clean-air targets for the first time since 1987, but only marginally, and admitted they will still fall far short of World Health Organization standards.

And this four-and-a half-years after first engaging a consultant to review air quality objectives then launching a six-month public consultation that ended in late 2009. The environment secretary sat on the recommendations until yesterday and they were announced unchanged – by the consultation or time.

The new objectives impose tougher limits on the atmospheric concentration for seven pollutants including sulfur dioxide, nitrogen dioxide, carbon monoxide and lead.

For the first time the city also will measure airborne particles smaller than 2.5 micrometres in diameter, known as PM2.5. These are more harmful than the larger particles currently measured.

The government apparently also has identified 22 measures to help achieve the new standards, which are to be introduced over a three-year period after 2014. This will allow infrastructure projects to proceed without delay.

Thus the government, in reality, will allow our air to be made even dirtier while it finishes some mammoth construction such as the Hong Kong-Zhuhai-Macau bridge and a third runway at the airport.

Oh, and the steps to be taken apparently will extend the life expectancy of the average person in Hong Kong by one month.

Secretary for the Environment, Edward Yau, was quoted in the South China Morning Post as saying, “We have to understand that the ultimate WHO guidelines are a distant target” and pointing to regional pollution as the principal source of pollutants.

Yet 2007 research by Alexis Lau from the HK University of Science and Technology and Civic Exchange, “Relative Significance of Local Vs. Regional Sources: Hong Kong’s Air Pollution,” showed that 53 percent of the time the pollution that affects us most is locally generated by buses, trucks, shipping and power plants.

The basic, undisputed message for a long time has been, Hong Kong can do much to clean up its own air and improve the health of its residents.

Despite this, little has been done in recent years, despite urging from Clean Air Network, Civic Exchange, Friends of the Earth and many other environmental groups.

And herein lies the paradox: The HK government speaks and acts as though we are a developing nation, yet HK is one of the world’s richest cities. The government sits on reserves estimated at US$80 billion.

We are so rich in fact that last year the government announced that it would give a cash handout to each adult permanent resident (even those living abroad and those who patently did not need the extra money), of HK$6,000, or US$700. That massive handout cost the government HK$37.98 billion that certainly could have been used to better effect to clean our air.

Meanwhile, Roadside pollution levels reached a record high last year. The number of days that pollution was rated “high” hit 20%. That is five times more than in 2005. And, embarrassingly, the HK government is clearly playing catch up to Beijing, which in response to an online campaign earlier this month said it would provide hourly updates of PM2.5 measurements.

Clearly gone are the days when Beijing looked to Hong Kong for direction and innovation.

Meanwhile, the Civic Exchange yesterday said a revamped environmental index run by Hong Kong University researchers showed that air pollution here is more harmful than previously thought, costing HK$40 billion annually, up from previous estimates of HK$16 billion.

The number of premature deaths per year over the past five years should also be revised upward to 3,200 from 1,000, according to the Hedley Environmental Index. This, of course, is not information that the HK government is gathering.

The sad reality is that Hong Kong’s air has been deteriorating steadily over the past 20 years with almost no action by government to alter the trend.  Pollution now poses a serious threat to public health and we should be angry, very angry.