World is Green

Globalization is built not just out of the telecommunication and computer network linkages that make financial markets anywhere accessible from your iPhone. The bricks-and-mortar of global production supply chains have turned that iPhone into a product requiring the efforts of multiple nations and multiple companies. An earthquake in Taiwan affects Dell’s quarterly earnings. High corn prices in Iowa lead to an expansion of soybean farming in Brazil. Bad investment bets by New York bankers lead to an infusion of funds from Singapore and Abu Dhabi and bankruptcies in small towns in Norway. In every direction one looks the linkages are multiplying.

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Africa’s tryst with development continues and the theories of development are never ending. Now, Reuben Abraham points to a Business World article titled “Can Greed Save Africa”. Or what can be more appropriately called “profit making”, it provides an example of how plain business sense can provide development opportunities to Africa.

In many ways, Africa’s economic situation seems hopeless. While $625 billion in foreign aid has poured in since 1960, there has been no rise in the region’s per capita gross domestic product, notes William R. Easterly, economics professor at New York University. What’s more, from 1976 to 2000, Africa’s share of global trade dropped to 1%, from an already negligible 3%. The U.N.’s scale of human development, which considers health, education, and economic well-being, ranks 34 African nations among the world’s 40 lowest. Thus far, foreign aid hasn’t made a dent.

Greed, however, might. Thanks to the global commodities boom of the past few years, sub-Saharan Africa’s economies, after decades of stagnation, are expanding by an average of 6% annually—twice the U.S. pace. And like bees to honey, investors are swarming into the region in search of the enormous returns that ultra-early-stage investments can bring. Blue Financial, for example, has already netted its early private equity backers a ninefold gain thanks to the 385% rise in its stock since its October, 2006, initial public offering in Johannesburg. Emerging Capital Partners has bought all or part of 42 African companies this decade and cashed out of 18, with gains on their investments averaging 300%. “The money we can make is matchless,” says Emerging Capital Partners CEO Thomas R. Gibian, a former Goldman Sachs (GS) banker.
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Masoud Alikhani is no moral crusader; he thinks the “We Are the World” movement of the 1980s, which sought donations to end African hunger, “made beggars of whole nations.” The burly 66-year-old is among the new wave of investors at the tenuous nexus of venture capital and agribusiness in Africa. Five months ago he pitched a large hedge fund in New York on the merits of ESV Biofuels, as his company is called. The fund’s partners agreed to take a tour of the facility in January. “We are capitalists and opportunists,” says Alikhani. “We are doing this to make money. That’s the only way to help.”

For more on this Profit vs Aid question, check out the work of William Easterly.

Sustainability is a good thing. Everybody agrees on it. However, what is the process of achieving this?

Previously we reported that 9 Indian states are looking at organic farming to tap into the $37 billion
global market. That is good. The Mint reports that Kerala is planning to get into the field by converting all its cultivable land into organic farms in 5 years.

“The policy will be ambitiously aimed at freeing Kerala of all chemical fertilizers and pesticides in five years. This is with a long-term vision of ensuring that future generations here do not consume food contaminated by toxic pesticides and fertilizers. The strategy is clear: Convert 20% of the cultivable land to organic farming using biofertilizers and biopesticides every year so that total conversion can be achieved in five years,” adds Vijayan. Currently, there are around 7,000 certified organic farmers covering a minuscule area of 5,750ha, when the net sown area in the state is 2.13 million hectares.

To begin with, 100 villages across the state will soon be organized as organic farm villages. Mullakkara Ratnakaran, state agriculture minister, says the government will set up an Organic Agriculture Authority of Kerala, which will be the nodal agency to interact with grass roots level groups, and also national and international agencies.

The authority will have a governing council headed by a chairman, to be elected from representatives at the pan chayat and village levels, where organic farmer interest groups will be formed. The council will also have officials, scientists, farmers’ representatives and non-governmental organizations (NGOs) promoting organic farming, he adds.
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Vijayan admits that a major stumbling block will be funds and the lack of a market for this produce.

For the first three years, conversion to organic farming means a drop in yields, putting farmers to hardship. It is for this that the authority will have funds both from the Union and state governments to support the farmers. Financial support from international agencies can also be looked at, Vijayan says. As part of the marketing thrust, the authority will look at independent retail outlets and also tie up with others to market these products, which will include rice, vegetables and fruits.

It has been clearly demonstrated around the world that centrally managed economies do not work.

Even though organic farming may be a good thing; the process of converting all lands compulsorily without figuring out the market for the produce and creating more hardship for already poor farmers is totally unacceptable.

This is the exact kind of economic nonsense that has troubled India all these years. If this is the same thinking used for “sustainability issues” then it will not make any difference and can actually harm the people and the environment. Economic sense matters.

The Supreme Court of India is considered by many to be the most environmentally friendly court in the world. We do not know how this assertion has come about but it points to other things.

Before we go ahead lets check out what the Court has accomplished.

The Indian Supreme Court has been most effective in protecting the environment. It is considered as one of the most environmentally friendly courts in the world. The Supreme Court of India has delivered landmark judgements. It has protected the Taj Mahal, which is one of the wonders of the world, has protected the Ganges, which is one of the holiest of holy rivers, from pollution. The Court also directed that every day on television and radio networks in the country at least seven minutes programme on environment should exclusively given and one prime programme should be given at prime time each week on environment.

The Daily Pioneer editorial discusses the request of the Indian government to the Supreme court to stop interfering in environmental matters.

The Union Government has made an outrageous demand to the Supreme Court that it should wind up its ‘green’ bench and stop ‘interfering’ in environmental matters…What the Supreme Court has wisely done is to expand the fundamental right to life to include the right to live in a healthy environment through its enforcement of the various environmental laws. In contrast, the record of the executive in relation to the ecosystem is far from satisfactory. One does not have to look too far, for the facts about India’s vanishing tigers are in the open, and shrinking forest cover, widespread pollution and a host of other issues that plague India are the result of executive bungling and corruption.

The Supreme Court has done some important work in the environmental area however, this points to a bigger problem of law making, execution and managing environmental issues in the country.

However, this suggests (PDF) the following:

The judiciary, a spectator to environmental exploitation for more than two decades has recently assumed a pro-active role of public educator, policy maker, super-administrator, and more generally, amicus environment. We can say environmental law in India as the story of India’s judiciary responding to the complaints of its citizens against environmental degradation and administrative sloth.

I am no expert on law making and definitely not environmental law but this constant tinkering is not the solution.

Financial Times and IFC have concluded their Sustainable Banking Awards for 2007. The winner all the way was ABN AMRO; winning in both; overall and the emerging markets category.

In the lead-up to the awards, FT provided an opportunity for readers to query Rachel Kyte, director of IFC’s Environment and Social Development Department, and Leo Johnson, co-founder of Sustainable Finance Ltd, the technical advisers for the FT Sustainable Banking Awards, on how banks are integrating environmental, social and corporate governance considerations into their business and the challenges ahead.

I have highlighted some of the questions and the responses below.

What is the biggest unrealised opportunity in sustainable banking?
Virender Singh, Delhi

Rachel Kyte: I think there are two. Finding the financial products that will value natural resources in situ and let communities sustainably harvest them or protect them. These will be forest bonds, commercial ecosytem payment schemes and water pricing instruments. We are very close - but the world’s natural infrastructure needs the same kinds of investment innovation as the world’s built infrastructure needs.

Second, finding ways to bring services to the poor - the next billion - not just microfinance, but services that let them create wealth through health insurance, life insurance and education funding. This is already beginning - but is a huge untapped opportunity for all

Can sustainable banking be delivered by a corporate culture driven by large city bonuses encourage employees to focus on short term individual goals, whereas sustainable objectives are usually long term and collective in nature?
Rev Patrick Gerard, Solihull

Leo Johnson: The glib answer is no. But is that about to change? TXU is an interesting case - 11 coal fired power plants fast-tracked for approval by the governor of Texas, Rick Perry. What happens? The allegation emerges that they are going to produce 78m tonnes of CO2 as the alleged footprint of the projects. The campaigns begin. The media, the banks, the NGOs. What happens next? Private equity steps up to the plate.

Texas Pacific, along with KKR make a $40bn plus proposal that is called the world’s first leveraged environmental buyout. In an all night meeting they convene TXU’s management and the leading NGOs and make the case that the only way for this company to succeed financially is to close down eight of the 11 and adopt good practice technologies for the remaining three. There is now a private equity counter bid based around the same sustainability strategy. That was private equity. That is the power of the bonus. If social and environmental externalities are starting to get internalised into the balance sheets, we will start seeing the most incentivised as the most powerful agents of change.

The recent forestry deal by Bank of America underscores the innovation in finance suggested by Rachel Kyte above. The financial industry has seen some amazing innovations over the past decades. Junk bonds revolutionized the leveraged-buy out mechanism in the US. The ability to package assets into bonds like mortgage backed securities provided new avenues of generating funds and transferring risk. Derivatives changed the way risk was hedged. Carbon trading is creating new opportunities to value forests and financial transactions like Joint Implementation as part of the Kyoto Protocol are helping to provide a low-cost method of decreasing carbon-di-oxide. Now in the same way a new wave of financial innovation in the environmental sector will fund the growing needs of sustainability.

As Leo Johnson suggests above; as externalities are being internalized it creates powerful new incentives to create change. Atanu Dey makes a powerful statement about incentives.

Incentives matter and just like you can explain all sorts of natural phenomena by understanding the law of gravitation, you can explain all sorts of diverse economic puzzles by asking what are the incentives.

One important learning for me is that as the economic structures change; sustainability is creating a new perspective/lens for business. A lens which creates innovation, opportunity and growth. A perspective which can literally create change.

Dr. Nachiket Mor, Chairman, New Ventures India Steering Committee and Deputy Managing Director, ICICI Bank announces a 100 cr fund to invest in Green Businesses in India (hat tip: Karen Seeh).

Dr. Mor also announced Rs.100 crore investment towards the innovation and development of green businesses in India.

“The burden of climatic changes will be borne by the developing countries, therefore opening up a huge market for green business and the market of clean energy is going to double by 2015″, he said.

India has to maintain its GDP growth to become a developed country and green businesses have lot of growth potential for Indian economy, he added.

India offers a great opportunity for investors who can take risk, invest and take initiative and the current economical growth provides the right pace for venture funding to innovative projects, said Dr. T Ramasami, Secretary, Department of Science and Technology, Government of India.

New Ventures India’s goal is to achieve at least 15 million dollars worth of investments in 20 sustainable and green businesses by 2008. These include areas of green building materials, energy efficiency products and services, renewable energy and water products, said Deikun.

CII - Godrej GBC aims at creating India as one of the global leaders in green businesses and India has leadership potential in green technology in the cement, paper, green buildings and renewable energy sector, said S Raghupathy, Senior Director and Head CII - Sohrabji Godrej Green Business Center (Godrej GBC).

Dr. Mor is a visionary in this area. In Deeshaa, our team had interacted with him at different times and he spearheaded the entry of ICICI bank in the Micro finance and rural banking areas. This will be the new growth area for ICICI.

The Green Wave is spreading in all directions and India has great potential in this area.

The Guardian reports that Sir Nicholas Stern is to advise the Indian Government on climate change:

Despite Sir Nicholas’s longstanding interest in India - he lived in a village in the north of the country for the best part of a year for his early research - many question whether action on climate change in India is politically possible.

“(His) economic warnings are unlikely to find many takers in the harsh political reality of India today,” wrote Barun Mitra of the Delhi-based thinktank Liberty Institute recently in the Hindustan Times.

“About half of Indian homes today don’t have any electricity, and many who do have the connections, don’t enjoy the benefits. It will be politically suicidal for any Indian leader to promote the virtues of low energy consumption to the Indian masses.”

India unlike developed countries has low per-capita emissions however, that does not mean the future will be the same. With rapid economic development and increased use of cars, electronic appliances, rise of low cost airlines, and the increasing population, India will be a major greenhouse gas producer.

Low energy consumption is not connected to consumers only. Products and industrial systems can be designed in a way in which they use less resources and can be recycled efficiently at the end.

India has an opportunity to leap-frog the developed nations in this area.

The AFP reports that 20% of livestock are in danger of extinction.

Some 20 percent of the world’s livestock species — cattle, pigs and poultry — are threatened with extinction, with one breed disappearing each month, the Food and Agriculture Organization warned.

Over the past five years alone, some 60 breeds of cattle, goats, pigs, horses and poultry have become extinct, the Rome-based UN agency said in a draft document, blaming globalization as the “biggest single factor” in the erosion of livestock biodiversity.

“Maintaining animal genetic diversity will allow future generations to select stocks or develop new breeds to cope with emerging issues, such as climate change, diseases and changing socio-economic factors,” said Jose Esquinas-Alcazar, secretary of the FAO’s Commission on Genetic Resources for Food and Agriculture.

Rearing livestock contributes to the livelihoods of one billion people in the world, the FAO says.

Livestock are the mainstay of human species. Reading livestock is one of the most important aspects of survival and growth in the world for man. Biodiversity is important in generally for a variety of reasons and in this case of global diseases it is far more important.

Business need to understand that like diverse portfolio investments in various financial assets, it is important to have a wide variety of species for overall benefit.