Nixon’s leadership should be saluted, but an opportunity was missed that day. He could have asked all people, not just banks, to consider the impacts of their investments – to help make the world a better place while also improving their investment returns.

That he didn’t make this broader appeal is no surprise. Impact investing, as it’s typically (and narrowly) defined, is at best a niche concept. It incorporates a range of emerging investment products like social impact bonds, microcredit financing, green building mortgages, social venture funds, and so on. These products are mostly being adopted by private foundations, and now banks are embracing them as bolt-on strategies that extend their mission or brand.

These allocations by foundations and banks, while a start, will be inadequate to meet our greatest social and environmental challenges. Royal Bank’s $20 million commitment, for example, is like finding a penny in a couch cushion for an institution with $750 billion in assets.

A much broader approach is required. Impact investing should be defined more by philosophy and strategy than by products. It should embrace all investors, partially because it will take a collective effort to build a more sustainable future but mostly because it can be the path to superior investment returns.

The challenges confronting the world today are daunting. After quadrupling in the 20th century, our current global population of about seven billion is expected to grow to nine billion by 2050. Yet the energy discoveries that have fuelled the expansion to date are declining in productivity, and new discoveries are not keeping pace with this decline.

Meanwhile, the ability of the globe to supply sufficient quantities of clean air, water and productive land in the face of continued population and industrial expansion is by no means a certainty. These questions of resource and environmental sustainability occur against a backdrop of geopolitical tensions, unprecedented imbalances in trade, and an evident shift in economic power from the West to the East.

When confronted by an uncertain future of growing challenges, an appropriate societal response is to save more for the proverbial “rainy day” – deferring some current consumption to invest scarce resources in infrastructure that will provide future returns. Yet, while global savings rates have remained stable in recent decades, in the Western “advanced” economies, savings have dropped from 22 per cent of GDP in 1980 to only 18 per cent in 2010. In the United States, where savers have been punished with near-zero interest rates for most of the past decade, savings are at all-time lows of 12 per cent of GDP.

And where have our reduced savings been directed? In what industries are we investing for future returns? Not, in our minds, where impact is needed.

Despite an arguably low-ball estimate by Booz Allen Hamilton in 2007 that the world faced a $41-trillion deficit in power, transport and water infrastructure, and despite America’s property market collapse with unoccupied homes and homeowners in default remaining at record levels, Americans still invest more in their private homes than in public water and transportation infrastructure. Globally, over the past five years, equities in the consumer discretionary sector have been among the top performers while capital goods and utilities have lagged. Far from saving for a rainy day we are indulging our live-for-the-moment society.

A broader definition of impact investing would bring the traditional concepts of investment back to financial markets that have strayed too far from their roots. Investing with impact requires a direct connection to real capital projects that will bring real productive returns in the future. It requires the patience to realize those returns on the time scale of years – even decades. In contrast, financial markets today have an ever-shortening time horizon where returns are more often than not derived from zero-sum game tactics such as market timing or high frequency trading. In effect, the financial world has become completely preoccupied with price movement – and has little interest in value creation.

Under our broader definition, more impact capital could be directed to economic value creation. For long-term savers, the returns would be tough to beat. Consider the performance of historic investments in rail, roads, generating plants and so on.

For example, the hydroelectric generation facility at Churchill Falls in Quebec cost $942 million to build in 1970 ($6 billion in 2012 dollars). But we would value the asset at between $15 billion and $25 billion today based on cash flow produced and replacement value. And this doesn’t include the four decades of emission-free electricity it has contributed to Quebec’s power system.

California completed the San Francisco Oakland Bay Bridge in 1936 at a cost of $77 million ($1.24 billion in 2012 dollars). A recent bill to repair just the eastern span of the bridge came in at $6.3 billion. These are not unique examples: The valuations of existing infrastructure have massively exceeded inflation in the developed world. Chances are new infrastructure in the developing world will see similar returns over the coming decades. And these types of investments are accessible to all investors through publicly traded utility firms, the manufacturers of utility equipment or the engineering firms that build and maintain the infrastructure.

While a publicly traded company that makes subway cars, electrical transformers or solar panels may not have the obvious social impact of a public housing bond, we would contend that directing capital towards infrastructure and away from instant-gratification strategies helps make markets and our economy more sustainable. As the Booz Allen report demonstrates, the need for this kind of capital is far greater than the niches to which impact investing has been attached so far.

So what would this broader definition of impact investing look like? Here’s one possible wording: Impact investing forces traditional financial investors to consider value creation (vs. price appreciation), social and environmental impacts and risks, and longer-term investment horizons, all in service of maximizing investment returns.

The concepts of long-term investment horizons, thoughtful risk management, and value creation are historically attractive attributes of successful investors, yet these are the disciplines so many investors seem to have abandoned. Defined this way, even bank executives could feel comfortable asking all their customers to consider the benefits of impact investing.

The post Redefining impact investing appeared first on Corporate Knights.

Nikiforuk builds on Fuller’s ideas in his book The Energy of Slaves: Oil and the New Servitude. It is a fascinating book with, I think, a dreadful title. One’s first thought is that, yes, energy slaves have taken the place of human slaves. But is this a bad thing? To paraphrase from the 1970s science fiction movie Soylent Green, “Oil isn’t people.” You can’t compare the two. Or can you?

In fact, Nikiforuk makes a solid case that our dependence on oil is the physical, if not quite the moral equivalent of slavery. Our dependence on oil has defined the way we live and made us who we are.

He argues that fossil fuels are also the root of all evil, including the population explosion. “If coal was the Spanish fly of the nineteenth century, then oil surely served as the Viagra of the twentieth.” He doesn’t think much of the way we have turned out, either. Take the following excerpt:

“The people on fossil fuels, perhaps the most narcissistic and bankrupt cohort in the history of the species, shop incessantly and genuflect to the market or the state, the provider of goods and services. They have fewer children. They prize small families or no families and primarily live in cities. They eat lots of animal protein, tend to be obese, and live as long as J.D. Rockefeller. They use condoms and support abortion. They accept women in the workforce, eschew marriage, hail secularism, promote individualism… Highly mobile, they prize no place in general. Their elderly are numerous but neither valued nor respected. The overwhelming presence of mechanical slaves in everyday life has created the temporary illusion that children are not needed to care for the old.”

This is an extremely telling and troubling paragraph, in which Nikiforuk dismisses much of western civilization and most of his readership. It would appear that for Nikiforuk, most of the wonders of the 20th century, from longer lives to equal rights for women, are problematic as they are built on the backs of our energy slaves. He never acknowledges the benefits that replacing human labour with energy slaves has brought society, only the excesses.

Now, as the cheap and easy sources of fossil fuels run out and our energy slaves become more expensive to feed, what are the alternatives? Nikiforuk doesn’t think renewables can generate enough, and, like writer David Owen, thinks energy efficiency just leads to more consumption.

Nikiforuk concludes that we have to reduce our energy consumption by changing our lifestyles in “a radical decentralization and relocalizing of energy spending combined with a systematic reduction of the number of inanimate slaves in our households and places of work.” It all comes down to the argument we are seeing played out in the streets of our cities every day now. In this regard, Nikiforuk quotes Austrian philosopher Ivan Illich:

“Each community must choose between the bicycle and the car, between a ‘postindustrial labor-intensive, low-energy and high-equity economy’ and the ‘escalation of capital-intensive institutional growth’ that would lead to a ‘hyperindustrial Armageddon.’”

Nikiforuk concludes that there is a worldwide “haphazard and improbable emancipation movement” emerging where people are “exchanging quantity for quality, and relearning the practical arts… Above all, they are relearning what it means to live within their means, with grace.”

It is a weak ending; the world will not be saved by hipsters on bikes. But the fact that Nikiforuk cannot come up with a plausible solution doesn’t diminish his basic thesis: We are too dependent on our energy slaves, and are becoming incapable of surviving without an army of them for each of us. It’s not healthy for us or the planet, it’s not moral and it’s not going to last.

The post The energy of slaves appeared first on Corporate Knights.

The technology is a relative of the hybrid electric vehicle (HEV) pioneered by Toyota’s Prius, which achieves enviable mileage by recapturing much of the energy lost during braking. Instead of saving that braking energy in batteries, UPS’s new hydraulic hybrid vehicle (HHV) delivers a 35 per cent boost to mileage by storing hydraulic fluids in super strong tanks.

“The hydraulics are the muscle, managed by very sophisticated electronics,” says Mike Britt, director of maintenance and engineering for the company’s international ground fleet.

Hydraulic systems may be new to delivery trucks, but they’re widely used elsewhere. The strength and durability of hydraulic systems have made them a mainstay in countless heavy-duty machines, from fighter planes and garbage trucks to bulldozers and car crushers. But until now, high costs have made it difficult to use hydraulic drives in everyday vehicles.

As part of a long-term government-backed program to study and scale up this technology, UPS began at the end of 2012 to introduce 40 of the advanced Daimler-built hybrids on delivery routes in Atlanta, Georgia, the shipping giant’s hometown, and Baltimore, Maryland.

From the outside, UPS’s hybrids are the same familiar brown boxes-on-wheels that have delivered catalogue orders and holiday gifts for generations. Pop open the hood, however, and you’ll begin to see differences. Inside is a powerful diesel engine, but instead of connecting to a drive axle and transmission, as in a regular truck, the motor drives an advanced pump that pressurizes a tank of hydraulic fluid.

Upon acceleration, digital controllers send bursts of highly pressurized fluid via narrow pipes to pump motors, which set the wheels spinning. The system works in reverse during braking. The pumps act as generators, recapturing more than 70 per cent of the vehicle’s kinetic energy. At idle, the engine doesn’t run. Rather, it switches on and off intermittently to top up hydraulic pressure.

The design’s main attraction is that it consumes less energy. Using the diesel engine to generate hydraulic pressure, rather than propel the van, allows the motor to run at a fixed, optimal speed.

What’s more, the regenerative braking process is about 50 per cent more effective at recapturing energy compared with a Prius-style hybrid electric vehicle, Britt adds.

There are also secondary savings in the form of less wear and tear. Compared with conventional designs, UPS anticipates the brakes will last four or five times longer.

Likewise, running the engine at its “sweet spot” should extend its lifespan two- or three-fold compared with a diesel engine used conventionally, Britt says.

Given that a typical UPS brown delivery van has an average lifespan of up to 25 years, less day-to-day downtime means many more deliveries and lower lifetime operating costs.

Performance improves, too. Drivers like that the system delivers enormous torque – or pushing power – immediately. That’s an advantage when moving a 27,000-pound van up to speed, then back to a stop, scores of times every day. “Hydraulic power is really well suited to stop-and-go delivery routes,” says Britt.

The design is the result of a project that started in 2006, backed by the U.S. Department of Energy’s Clean Cities program.

In the six years since, the department has orchestrated the development of a series of pilot vehicles in collaboration with three vehicle manufacturers (Eaton, Parker Hannifin and FCCC) and three major shippers (FedEx, Purolator and UPS).

With a fleet of 93,000 delivery vehicles – running the gamut from big rigs down to three wheelers – UPS has proven itself an eager early adopter of green vehicle technologies. The hydraulic hybrids join a fleet of 2,500-plus “unconventional” vehicles, which includes HEVs, compressed natural gas (CNG), clean diesel and pure electric vehicles (EVs). Taken together, this fleet has motored more than 200 million miles since 2000.

The hydraulic hybrids are hitting U.S. roads at around $120,000 per vehicle, Britt estimates. That’s roughly twice as much as a standard diesel version. To help validate the long-term cost advantages, and to amass data on the real-world performance of the technology, the Environmental Protection Agency subsidized about a third of UPS’s total costs.

Britt believes there’s room for costs to fall and energy savings to rise. “If we do this right, we can set a standard for the whole industry.”

Click here to view our complete Tech Savvy series.

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Yet in its September report “Carbon Tax – Deficit Reduction and Other Considerations,” the Congressional Research Service (CRS) promoted fiscal effectiveness over climate issues, forecasting that a carbon tax of $20 per tonne of carbon dioxide – designed to rise annually by 5.6 per cent – could halve the projected federal deficit to $1.1 trillion in 10 years.

Many Republicans see no chance of this happening, at least in the short term. “We have been offered tax hikes for tax cuts before,” Republican arch-lobbyist Grover Norquist of Americans for Tax Reform told CK. “New Jersey’s income tax was introduced to reduce property taxes; in Texas, Bush raised sales taxes promising lower property taxes. The result is always the same. New tax grows. Old tax grows back.”

Memories are long on Capitol Hill, said John Gimigliano, a principal with KPMG’s energy sustainability tax practice in the U.S. He points to former U.S. President Bill Clinton’s BTU (British thermal unit) tax to conserve energy and raise $30 billion per year. While not enacted after being proposed in 1993, it was still succeeded by a motor fuel tax of 5 cents per gallon.

The CRS report has nonetheless sparked some political discussion. Two months after its release the conservative American Enterprise Institute (AEI) organized a one-day carbon tax conference, which included International Monetary Fund and Treasury officials. Citing one admittedly extreme scenario, the AEI’s Kevin Hassett suggested Republicans may be willing to accept a carbon tax under the right conditions. “If we had a one-cent carbon tax and we took 10 percentage points off corporate taxes, what do you think the reaction would be?” he offered rhetorically.

ExxonMobil would also accept a carbon tax if enforced, but would not advocate for one, company spokesman Alan Jeffers told CK, conceding that carbon taxes were administratively more efficient and provide greater price certainty than carbon markets based on cap-and-trade. Exxon would insist, however, on revenue neutrality and not tolerate a revenue grab, said Jeffers.

The devil is certainly in the details, but Republicans and Democrats risk missing a great opportunity by not taking the carbon tax option seriously. To address the fiscal deficit, Obama has two basic choices: broaden the tax base through measures such as taxing carbon emissions or increasing existing taxes; or cut welfare and health care spending. The latter is politically costly.

But policy tradeoffs do exist through so-called revenue neutrality – recycling carbon tax receipts to offset increased energy prices or, for example, reducing payroll or corporate taxes and continuing with Bush-era tax cuts.

Individual taxes raised $1.09 trillion in 2011, or 47 per cent of total federal receipts, while social insurance and retirement receipts provided 36 per cent. Corporate taxes raised $181 billion, just 8 per cent of federal receipts, according to the CRS report. It estimated that a $20 carbon tax could raise $88 billion in year one, increasing to $144 billion by 2020 with a 5 per cent annual increase.

Opposition to carbon taxes often stems from trade-exposed, energy intensive industries such as the coal industry and coal-fired power utilities. The CRS report projected a $20 per tonne price would increase the cheapest coal prices by $38 a short ton, four times its 10-year price average, while the most expensive coal, anthracite, would see its 10-year price average increase 80 per cent to $48 a ton.

Furthermore, a $20 per tonne carbon tax would represent 10 per cent of the average U.S. utility’s revenue, according to a 2007 Carbon Disclosure Report, which estimated North American utilities emitted 5,000 tonnes of CO2 per million dollars in revenue – 2,000 tonnes more than European Union utilities.

Consequently, the American Coalition for Clean Coal Electricity claims carbon pricing could cost $220 billion, forcing the closure of 69,000 megawatts of power generation capacity and costing up to 900,000 jobs, mainly in electoral battleground states Ohio, Michigan, Missouri, Wisconsin, Illinois and Indiana.

This is likely scare-mongering. In resource-dependent Australia, the government introduced a three-year fixed carbon price of A$15 (about US$15.50) per tonne last July (transforming later to a cap-and-trade market). But tax-free thresholds, above which individuals pay income tax, will triple from A$6,000 to $18,000, offsetting the impact, said Tony Mohr, climate change program manager at the Australian Conservation Foundation.

Besides, carbon taxes could prove to be a competitive advantage for U.S. industry.

Industry often flags the risk of carbon leakage as a consequence of carbon pricing – that is, industries in developed countries will become uncompetitive against those in developing countries like China and India that do not mitigate CO2 by pricing carbon. Therefore, they argue, developed countries’ industries would be encouraged to close shop at home and move operations overseas.

Many consider this a red herring. China is committed to reducing its carbon intensity to between 40 and 45 per cent below 2005 levels during the next decade, a target comparable to the U.S. target of 17 per cent below 2005 levels by 2020. Seven Chinese provinces are planning cap-and-trade markets and Beijing wants a national carbon market by 2015, according to a 2012 FORES/Stockholm Environment Institute report.

Also, a carbon tax plan could be designed to protect U.S. industries from developing-country competition by legally imposing border tax adjustments on nations such as India and Indonesia, which fail to reduce emissions, according to a World Trade Organization-UNEP report released in July 2009.

Republicans must face reality. They lost the climate battle when the U.S. Supreme Court ruled that the Environmental Protection Agency (EPA) could regulate greenhouse gas emissions under the Clean Air Act. At best, the GOP can delay implementation through legal action, but industry observers say this also risks delaying regulations beneficial to the flourishing natural gas industry.

Besides, the EPA regulations can be used by Obama as an olive branch. “There won’t be any concession on our side without EPA pre-emption,” said Dave Banks, a Bush-era Council on Environmental Quality policy advisor turned Tea Party activist.

Should Obama waive EPA regulations, “a sincere conversation” could take place between the “two crowds” in the debate – the energy-environment crowd and the Treasury-tax crowd, said Banks.

Both sides (and crowds) would be wise to seize the mettle, but breaking the impasse likely requires congressmen to perceive how negative consequences of inaction over a carbon tax outweigh the consequences of implementing a carbon tax, explained KPMG’s Gimigliano.

For those watching the discussion unfold, don’t hold your breath.

The post The fiscal cliff appeared first on Corporate Knights.

It’s all happening faster than the most extreme predictions. “It’s not just a wake-up call, it’s a wake-up scream,” Cynthia Rosenzweig, a senior research scientist at the NASA Goddard Institute for Space Studies, reportedly said of Hurricane Sandy.

As a consequence, New York City and other at-risk metropolises are preparing a more robust response to the next super storm. But just as important is how to effectively engage all citizens in the kinds of behaviours that will help them reduce and adapt to the certain impacts of climate change. What methods are most likely to work?

The answer may surprise you: rewards and incentives; social contagion, and gamification – bringing gaming concepts of motivation and engagement into daily life.

Individually or in combination, these approaches tap into our human desire to play games, compete, cooperate – and be infected by other people’s pro-social behaviour. From spurring energy conservation to waste reduction and more, these tactics may yield meaningful opportunities to respond to climate change, especially as international negotiations to reduce atmospheric greenhouse-gas levels betray many people’s hopes for a better future.

And best of all, they’re practical. At a cash-strapped time, for relatively low cost, consumers can be motivated to adapt to shifting realities through incremental changes to awareness and behaviour.

This was Andreas Souvaliotis’ goal in 2007, when he started Green Rewards, the loyalty program that later became Air Miles for Social Change (AMSC) after being acquired by LoyaltyOne, operator of the popular Air Miles program in Canada.

AMSC works with utilities, public transit providers and assorted government agencies seeking cost-effective ways to “incentivize” energy conservation, greater use of public transit, and healthier lifestyle choices.

Its secret weapon is a combination of reach and reward. Air Miles, which through an extensive network of partners provides loyalty points for certain retail purchases, has direct access to more than 70 per cent of Canadian households, making it the largest loyalty program of its kind in North America. Its points are redeemable for an array of sustainable products.

By piggybacking on that reach and using much sought after Air Miles points as the carrot, AMSC has educated and engaged a significant portion of the population. One successful energy-conservation campaign attracted 120,000 more participants than a traditional advertising-and-rebate approach, representing an increase of 600 per cent. At the same time, it saved the government agency behind it 66 per cent in taxpayer dollars.

“If we’re looking for solutions with a true and measurable impact on the human species’ overall footprint, then we must realize that all seven billion of us are consumers,” says Souvaliotis. For the beasts of consumption that we are, incentives work – whether the goal is to get people to drive less and use more transit, or recycle more and conserve electricity.

Souvaliotis is now evolving the approach in “a number of other markets beyond Canada” through newly founded Social Change Rewards, which states on its website that it can “consistently demonstrate dramatic improvements in marketing efficiency, effectiveness, and overall program cost.”

Meanwhile, Friendefi, a start-up based in Montreal, Quebec, is on track to bring the rewards-and-incentives concept to the world’s social networks. The idea is to plug existing loyalty programs into social networks such as Facebook, then use the lure of rewards to stimulate online competition and cooperation through customized games. Friendefi’s co-founder Aaron Carr concedes it’s difficult to get people to break old habits and adopt new ones. “People are so busy that taking a few steps off the day-to-day path is really challenging.”

To ease the load, Friendefi aims to break down big problems into a menu of “gamified” day-to-day actions that translate to a larger impact on the whole. “We need immediate, bite-sized programs that prevent people from getting scared and tuning out,” says Carr. “For example, we could put value on specific actions, such as not idling your car. People would measure and track their actions, gain 50 points here and 100 points there, and see a cumulative impact (over time).”

Rewarding healthy and environmentally beneficial behaviours, of course, is just one approach. Some companies, such as Arlington, Virginia-based Opower and Quinzee of Toronto, Ontario, are harnessing our innate desire to compete with and emulate neighbours and friends. Their goal: to make energy conservation contagious. Faizal Karmali, co-founder of Quinzee, wants smart energy use to spread among “people like you or near you” – that is, within social networks and among neighbours.

Opower, which recently integrated social-comparison features into its service, works with 75 utilities on three continents to educate consumers about their energy use. Partnerships with Facebook and the Natural Resources Defense Council have helped expand Opower’s reach to 15 million homes, which so far have reduced electricity consumption by 1.7 terawatt-hours – roughly what a small coal-fired power plant generates in a year.

A key challenge, according to Karmali, is that there’s been no way for individuals and communities to know what’s normal in terms of energy consumption, and whether their personal energy usage would be viewed as excessive or, conversely, super-efficient. “Socializing consumption provides people with points of reference,” he says. As consumers gain insight into their own energy-consumption patterns, “Quinzee alerts customers when they’re beating their peers, or falling behind them, which seems to motivate sustained, better behaviour.”

Using Quinzee, individuals and their peers can influence the social network contagiously – and save money. “People seem to really care how they’re doing compared to others and we use this social dynamic for environmental good,” Karmali says. “One of our friends in the suburbs was using as much energy as a couple in our peer group with two kids. He was really embarrassed when we mentioned it over dinner one night, and has since reduced his energy use by about 25 per cent.”

The social-contagion aspect of Opower and Quinzee may be especially significant. As reported in Science Daily, a joint study by Yale University and New York University found that “people are more likely to install a solar panel on their home if their neighbours have one.” The study found that with just 10 installations in a given zip code, the probability of adoption rises by 7.8 per cent. A solar panel that’s visible to neighbours, combined with a homeowner who expresses enthusiasm about saving money, may lead to additional installations. A social contagion “bump” could apply equally to other low-carbon, energy-saving goods such as electric cars.

But let’s not forget the power of fun. Asi Burak, co-president of not-for-profit Games for Change, based in New York City, is convinced that positive social and environmental impacts can come through digital games. Burak believes there are solid reasons why games and gamification hold long-term promise for helping spur the kinds of progressive behaviours that can help us, for example, adapt to or mitigate climate change.

The digital games industry has heft, and games are a proven way to engage people. “Call of Duty on a console can sell 20 million units. There are 100 million players for some Facebook games,” he says. “Americans spend 407 million hours every month playing online games, which offer continuous daily engagement.

Americans spend the most time on social networks. Number two is online games.”

In his view, it makes no sense to leave such a dominant, interactive medium just for shoot-’em-up, thrill-seeking entertainment. Burak says his daughter spends more hours playing games in her life than many other activities. “But if 100 per cent of her play is going to be entertainment, it won’t teach her how to prepare for this world in a meaningful way.”

Admittedly, online games that do just that are niche offerings. They include ElectroCity, which teaches young players in New Zealand about managing urban energy, sustainability and the environment; and computer-based strategy game Fate of the World: Tipping Point, which challenges players to “solve” the climate crisis. Such games, as designed and available today, seem a long way from holding the attention of the masses.

“There will be a tipping point when a game for social change is a blockbuster game,” says Burak. “It took movies time to develop the independent documentary voice, for example, and games will take longer because they’re more complex, are evolving so fast, and look so different.”

Jesper Juul, a New York University games researcher at the NYU Game Center, weighs in. “I haven’t seen many good climate change-related games. One problem we have in that category is there’s a green button or a red button, something that’s bad or good [which is inherently uninteresting].”

One missing ingredient in the creation of good interactive experiences – the kind that will reach large-enough audiences to effect positive change – may be a lack of widespread, open and accessible data on everything from individuals’ travel patterns and energy consumption to social behaviours.

Norman White, clinical professor of information sciences at the NYU Stern School of Business, says big data clusters are needed to bring together large data sets across silos, so that interesting patterns can emerge about, say, how taxi rides and climate data intersect. “There’s a whole new group called data scientists,” he says. “These are specialized computer scientists who apply statistics to computer data, and we need them to find better ways to put together climate data, social network data, financial data, and so on.”

All this, White muses, may yield interesting, scalable opportunities for game development or gamification on top of open, rich and compelling data. Until then, catch a positive social contagion, seek out rewards for your good behaviour, and look ahead to the 2013 launch of SimCity 5, which promises to feature greenest-city competitions among other climate change-related themes.

The post Game changer appeared first on Corporate Knights.

The British department store Marks and Spencer (M&S) announced in late October it has committed to eliminating the use of toxic chemicals throughout its products and supply chain by 2020. An investigation by Greenpeace last summer found that the majority of clothing sold by M&S and other major retailers contained a mix of chemicals harmful to animals and humans. Some chemicals were added intentionally to the textiles to provide a benefit such as wrinkle resistance, while others remained on the clothing as residue from the manufacturing process. The “Detox” campaign that followed successfully pressured M&S into sitting down with Greenpeace, and has led to the company formulating a new set of chemical commitments. Detox campaign coordinator Martin Hojsik is pleased by the company’s newfound dedication, praising M&S in a press release for “showing real leadership on the issue of toxic water pollution.”

M&S has pledged to phase out the use of perfluorocarbons (PFCs) – a group of chemicals used to make clothing water- and stain- resistant – by the end of 2016. PFCs are not processed properly and accumulate in humans and wildlife over time. They have proved toxic for some laboratory animals. With no technical alternatives currently available, M&S will be partnering with universities, dye houses, chemical manufacturers and other industry players in hopes of setting a clear benchmark for the industry. It has also resolved to increase transparency throughout its supply chain, and will launch a chemical discharge disclosure trial at five mills in China to measure groups of hazardous chemicals identified by Greenpeace as potentially harmful to humans and the environment.

Although rising wages in China have resulted in sewing factories moving offshore, the resource-intensive dyeing facilities responsible for most of the chemical use have remained. A group of Chinese NGOs released a report in October emphasizing the need for expanded on-site testing. It found that supply chain management for international clothing companies is much stronger at cut and sew factories compared to the dyeing and finishing facilities. With Chinese water prices low and government environmental enforcement lax, the report concludes that “dyeing and finishing companies commonly skip implementing water or energy savings, make no effort to reduce pollutant discharge and consistently fail to abide by environmental laws.”

Zero: Gruppo Riva

Italian Prime Minister Mario Monti’s cabinet passed an emergency decree in late November allowing Gruppo Riva’s Ilva steel mill in southern Italy to continue operating, overruling a court decision to shut down portions of the plant and seize output over environmental and health problems. Seven senior executives were arrested on November 27 for conspiring with local politicians and officials to downplay the scale of pollution at the site, which Italian magistrates have described as an “environmental disaster.” Emilio Riva, one of the richest men in Italy, was placed under house arrest back in July under suspicion of having coordinated the cover-up as chairman of Grupo Riva. His son Fabio, the chief executive, has likely fled to South America to avoid prosecution. (Update: Fabio was arrested in late January in Britain, and is fighting extradition) A local priest has also been implicated in the growing scandal.

The Italian National Health Service released data in October showing that residents of Taranto – the town that houses the steel mill – are 30 per cent more likely to develop tumors and face elevated risks for various forms of cancer. Prosecutors estimate that 386 deaths have occurred as a result of the emissions released over the past 13 years. The agreement reached between management and the Italian government will require that a $4 billion refurbishment be undertaken to comply with European Union emissions standards by 2016. Production will be allowed to continue throughout this period. Union boss Gianni Venturi blamed the company for failing to make the investments in new technology that its competitors made years ago. “Plants such as the ThyssenKrupp one in Duisburg (Germany) or the Voestalpine one in Linz (Austria) are very similar to Ilva … but [they] have a much more sustainable environmental impact,” he told Reuters in December.

The Ilva complex is the largest European steel mill, responsible for 8 per cent of continental output. It provides about 20,000 jobs in a region facing high unemployment. The national government has been desperate to preserve the facility, concerned that its downfall will lead to the loss of more industrial manufacturing jobs. Four per cent of the country’s GDP is derived from the steel supply chain, impacting industrial heavyweights from Fiat SpA down to smaller manufacturers. The future of the facility is far from assured, with national elections scheduled for February casting uncertainty over the deal that provides €336 million (roughly $440 million) in federal retrofit funds.

Click here to view our complete Heroes & Zeros series.

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The challenge is how to be socially responsible while investing in an industry that is not inherently sustainable, will cause at least some degree of contamination – even with the latest environmental technology – and has a track record of human rights violations.

Almost one thousand investment firms representing $25 trillion in assets have signed the UN’s Principles for Responsible Investment, pledging to be “active owners and incorporate environmental, social and corporate governance issues into (their) ownership policies and practices.” They use their leverage as shareholders to try to influence company policy, including calls to defend the rights of local communities affected by oil, mining and gas projects.

This growing chorus of investors and traditional SRIs say they are shareowners, actively using their influence to push companies to improve social and environmental policies. Their stance is both moral and economic: evidence shows that poor environmental and social practices can lead to financial woes, like the $40 billion price tag attached to BP’s oil spill in the Gulf of Mexico.

But do companies really listen to these do-gooder investors? Analysts, non-profits and even company insiders say that although final decisions rest with the majority shareholders (the owners), minority shareholders – even those with relatively few shares – can have an impact. A company’s annual general meeting (AGM) provides an opportunity for responsible investors to file shareholder resolutions, vote on company policy and garner media coverage for their cause.

“Companies prepare for their AGMs months in advance and they know if a shareholder resolution is in the works,” said one oil and gas insider. To avoid the spotlight, he said, “they’ll do everything they can in advance to resolve problems.”

Private talks, phone calls and letters are more appealing to company executives who are intent on minimizing scandal. Shareholder resolutions, on the other hand, are public. If passed, the company is obliged to execute them and report on progress. Since most SRI firms hold less than 1 per cent of a company’s shares, it’s rare for their resolutions to obtain a majority vote. But a tally of 20 per cent will capture media attention and might put enough pressure on a company to address some of the issues raised.

To gain more votes, SRIs need to win over more mainstream investors. An analysis by Corporate Knights, using data from the environmental-investor group CERES Resolution Tracker, shows that SRIs are making an impact. About three-quarters of environmental and social resolutions tracked by CERES received either 20 per cent of shareholder votes or the matter was resolved in advance. The list included several oil, mining and gas companies. Issues ranged from water pollution and worker safety at Marathon Oil to climate change and emission reductions at Occidental Petroleum and Exxon Mobil.

A new study published last year by U.S. and U.K. academics shows that activism by shareholders (known as ‘engagement’) also makes financial sense. The study, which won a prize from the University of Berkeley, examined 2,152 engagements by shareholders over a 10-year period and found that successful activities led to higher shareholder returns.

But even when a resolution is passed, implementation can be difficult, as illustrated by the famous Newmont gold mining case. In 2007, a group of about 15 Christian investors filed a resolution at the gold giant’s annual meeting in Colorado. The document called for an independent review of Newmont’s poor handling of conflicts with local communities at its mines around the globe. Oddly, the resolution passed with over 95 per cent support, meaning the company itself actually voted in favour. This marked the first time a U.S. mining company had endorsed a social resolution at its own AGM.

Rev. Seamus Finn of the Missionary Oblates of Mary Immaculate, one of the resolution’s supporters, says Newmont’s support remains a mystery. “It may have been they saw the writing on the wall.”

At the time, Newmont was under fire for its treatment of local communities in Peru, Ghana, Indonesia and the U.S., and had even faced legal action for environmental contamination at a few of its mines. Despite the surrounding controversy, the resolution was heralded as a victory for SRIs.

The resulting independent review, published in 2009, was surprisingly critical of the company and included a hefty list of recommendations. In a move some consider groundbreaking, Newmont created an independent advisory panel to help implement the report that included Christian Brothers Investment Services, the leading proponent of the resolution, and long-time critics of the company like Oxfam and Earthworks.

“We felt the report could have an impact on the industry,” says Julie Tanner, assistant director of SRI at Christian Brothers. “It was one of the first in the mining industry that was so extensive and with the clear goal of trying to develop recommendations for change.”

But three years later, Tanner admits it’s been “difficult” to get information on the company’s implementation of the report. Activists put it more bluntly, saying that recent violence at Newmont’s mine proves the company has failed to follow through on the recommendations.

In 2012, Newmont was forced to suspend a $4.8 billion expansion project at its Yanacocha mine in Peru after massive protests supported by the regional government resulted in five civilian deaths. The Minas Conga gold project would have been Newmont’s largest mine to date, but locals say it would destroy four sacred lakes, the source of water for an entire farming region.

Every day of delay from protests was costing Newmont shareholders an estimated $2 million, illustrating the danger of pushing ahead with a project without first obtaining local consent. But Newmont insists that Conga isn’t completely dead. It has announced plans to build water reservoirs on the site, sparking accusations that the company is creeping ahead with plans to build the mine despite local opposition.

Newmont’s responsible investors now face some tough decisions. If they divest, they lose their opportunity to hold Newmont accountable. But if they stay, they risk being used to prop up the company’s already tarnished image. Having SRI firms on board is like being awarded a certificate of “good conduct” and Newmont’s handling of the Conga crisis hardly deserves a medal.

The case highlights another challenge for responsible investors: the issue of local consent. It’s not hard to ask a company to put more women on the board of directors or to use cleaner technologies. But what if the local community’s wishes go against shareholders’ interests? What if the community quite simply wants the company to go away?

These tough questions were put to the test when a group of responsible investors, including Ethical Funds, part of NEI, filed a shareholder resolution in 2008 asking Vancouver-based Goldcorp to conduct a human rights impact review at its Guatemalan mine. Before the resolution came up for voting, the company agreed to conduct the review and the resolution was withdrawn. A year later, the Public Service Alliance of Canada, one of the resolution’s signatories, withdrew its involvement in the review process because community leaders said they were not consulted about the resolution. They also accused Goldcorp of manipulating the review process.

That the SRIs neglected to obtain support from locals before taking action on their behalf highlights what activists consider a conflict of interest. “SRI firms might be supporting best practices, but at the end of the day they earn money from the company,” said Camilo Leon, who has worked on corporate social responsibility for mining firms, non-profits and the government in Peru. “If there’s no mining project, there’s no money.”

Can investors overcome this conflict of interest? There’s the encouraging case of Vedanta Resources, a British-based natural resources company that tried to develop a bauxite mine in India’s Orissa state despite opposition from the local indigenous group. The 9,000-member Dongria Kondh survive on hunting and gathering and said the project would destroy their water resources and livelihood.

In 2007 Norway’s sovereign wealth fund divested its holdings of Vedanta, accusing the company of environmental damage and complicity in human rights violations. Three years later several other high-profile investors divested, including the Church of England, Marlborough Ethical Fund and the Dutch pension giant PGGM. India’s government responded by rejecting Vedanta’s plans, causing the company’s shares to plummet.

The SRIs that divested not only made a strong moral statement, they also spared themselves the resulting losses from Vedanta’s falling share prices.

Examples like Vedanta, where shareholders divest from billion-dollar projects that lack a social license, are few, however. The majority of SRIs have a more subtle impact on oil, gas and mining industries, leveraging their clout to advance social and environmental policy and more efficient use of natural resources. In the process, they must navigate tricky waters to ensure they don’t harm local struggles or become good publicity for companies with damaged reputations.

The challenges are great, but the alternative is to leave investment in this sector to the sharks: those who believe “social” means a good cocktail party and “responsible investing” is about getting the highest return for clients, without caring how that money is earned.

The post Shark-infested waters appeared first on Corporate Knights.

The bond markets have grown into a $100 trillion oxygen chamber for finance ministries and businesses. Standing at the gates are Standard & Poor’s Ratings Services, Moody’s Investors Service and Fitch Ratings – the most powerful oligopoly in the world. The Big 3 have a 95 per cent market share of the global credit ratings market, which gives them the power to deem who breathes in the capital markets and who suffocates.

The rating agencies serve a critical function labelling which debt is safe, but they are only as good as their proprietary models. Sometimes the models miss important factors, like when they slapped AAA ratings on financial products based on mortgages extended to NINJAs (folks with No Income, No Job and no Assets).

When the NINJAs’ throwing stars popped the housing bubble, AAA turned into junk overnight, sending the global economy reeling into the Great Recession. The U.S. government’s Financial Crisis Inquiry Commission reported that “the mortgage-related securities at the heart of the crisis could not have been marketed and sold without [the rating agencies’] seal of approval.”

From the time of tulip mania in the 17th century, bubbles have been a reality of capitalism. The question is, what will the next asset bubble be and how can we begin to deflate it? The conventional wisdom chalks the European sovereign debt crisis up to there being more Porsches in Greece than taxpayers declaring 50,000 euro incomes. But the reality is more ominous.

There are strong indications that we may be brushing up against the mother of all asset bubbles: an economic model of growth premised on short-changing Mother Nature. Popping this asset bubble intentionally amounts to “a global suicide pact” in the words of UN Secretary-General Ban Ki-moon.

The four countries at the heart of the eurozone crisis – Greece, Italy, Portugal and Spain – have something in common. They not only had their sovereign debt harshly downgraded, but are also among the largest ecological debtors in the world, running the green into red at twice the eurozone average, according to the Global Footprint Network.

Shedding further light on how nature is creeping onto balance sheets, the UNEP-backed Environmental Risk Integration in Sovereign Credit Analysis (E-RISC) has found that resource price swings of 10 per cent can push trade deficits up by between 0.2 and 0.5 per cent of GDP.

Treating the environment as an off-balance sheet item has always been a ticking time bomb–in the long term. After the Copenhagen climate talks collapsed, the time horizon was pushed even further into irrelevance by the rating agencies. While we were waiting for government to bring nature onto balance sheets, the markets beat them to the punch, thrusting us into an era of rising and volatile resource prices.

This is difficult to digest for anyone who lived through a 20th century that delivered rising living standards and a population soaring from 1.6 billion to 6 billion, while prices for the 33 most important commodities declined by 70 per cent. However, in the past decade these declines were completely erased or reversed due to demand from Asia and other emerging markets. Real commodity prices have risen by 147 per cent since the turn of the century. With 3 billion more middle class consumers expected to join us by 2030, we are in the midst of a revolution that places resources ahead of capital and labour at the heart of public policy and business strategy, according to a recent McKinsey report.

Amidst this resource revolution, rating agencies risk being caught flat-footed once again. The UN Secretary-General’s High-Level Panel on Global Sustainability noted that rating agencies largely ignore environmental issues and “do not take account of likely changes in resource prices.” The panel suggested that if ratings were sensitized to such matters, there would be a more urgent financial interest in mitigating negative impacts and leveraging positive ones.

At a time of intense scrutiny by regulators and their large ‘universal owner’ shareholders, rating agencies have a chance to take a proactive approach. Just as the Big 3 have shown leadership in the past by taking into account unfunded pension liabilities and longer-term demographic risks to fiscal health, there is now an opportunity to show leadership by integrating natural resource factors into rating models.

The E-RISC methodology integrates 20 indicators to assess natural resource-related risks to sovereign creditworthiness, including most saliently: change in trade balance from a 10 per cent change in resource prices expressed as a percentage of GDP; ratio of the country’s ecological footprint over its biocapacity; and change in trade balance from diminishing productivity due to overuse of productive land and marine areas.

Integrating these metrics into ratings models as a starting point would be good for the global economy, good for the rating agencies, and good for the planet.

The alternative is to keep ignoring Mother Nature’s signs, which are increasingly less discrete if the massive flooding of Standard & Poor’s executive offices during Superstorm Sandy is any indication.

The post Risky resources appeared first on Corporate Knights.

This financial instrument is known as a Social Impact Bond (SIB), a new form of impact investing that has sparked widespread interest since its inception several years ago. The idea originally emerged from the British Prime Minister’s Council on Social Action, which spurred the creation of the non-profit group Social Finance. The group went on to pioneer the first pilot program in 2010 at the Peterborough prison north of London, in partnership with the British Ministry of Justice. Alisa Helbitz, director of research and communications at Social Finance, says that prison recidivism programs have been an early target of SIBs because they have clearly defined outcomes, but “we are already seeing the model applied across a range of other social services.”

Most SIBs are structured as follows: The government identifies a social problem that it wishes to tackle, and finds an organization like Social Finance to act as a facilitator. The philanthropic or private sectors provide capital, and non-profits implement carefully crafted programs that have been successful elsewhere. All of the stakeholders agree to the same performance indicators, which are assessed by a third-party organization well-versed in evaluating success in the particular area (e.g., an anti-poverty centre). The government only pays for the programs that achieve measurable progress.

Harvard University economist and former Obama administration official Jeffrey Liebman prefers the term pay-for-performance contracts, as SIBs are not in fact bonds (there is no guaranteed return on one’s investment). “The way our governments currently fund social service programs produces insufficient innovation and weak performance,” he says. “The goal is to make it so the government only pays for what works.” Shifting the risk away from taxpayers onto private investors allows for greater innovation and accountability, not only for government programs but within the non-profit sector as well, he argues.

SIBs are structured to create preventative programs that save the government increased social and financial costs down the road. “Governments are aware that an ounce of prevention is worth a pound of cure, but they remain reluctant to move from these legacy programs to a more preventative model,” says Laura Callahan, a senior expert at McKinsey & Company’s social sector office. As the capital for pay-for-performance contracts is originally derived from other sources, the hope is that this becomes more politically palatable for governments to sell to the public once true savings are demonstrated.

In less than three years, SIBs have drawn interest from the national governments of Israel, Canada, Ireland and the United States, along with numerous state and local governments. Social Finance’s American sister operation says that it has been in contact with over 30 jurisdictions. Both left- and right-leaning politicians have been publicly supportive of the idea, with President Obama’s administration to launch pilot programs inside the Labor and Justice departments this year. Governor of Massachusetts Deval Patrick, a Democrat, announced plans last fall to establish SIBs tackling juvenile justice and chronic homelessness. The Conservative government in Canada announced in November it would begin experimenting with SIBs.

Established donors of foreign aid and developing countries are also open to the pay-for-performance model. The Center for Global Development has been conducting research into “cash on delivery” programs and working with Social Finance to explore different models. One idea involves Development Impact Bonds, a form of SIB where development agencies replicate the role of governments in paying for successful outcomes. The American non-profit Instiglio has partnered with the state of Antioquia in Colombia to design Latin America’s first SIB. “Developing economies do offer formidable challenges, but if structured the right way we’re confident they will become an important tool for improving human welfare,” says Michael Belinsky, co-founder of Instiglio.

Despite evident enthusiasm from numerous governments, proponents such as Liebman and Callahan urge caution in embracing this model too quickly. No concrete evidence currently exists for the effectiveness of SIBs, with pay-for-performance programs lasting five to 10 years. The Peterborough prison pilot won’t end until 2016, and despite anecdotal evidence of success there is little else to go on.

One of the biggest concerns is around feasibility. Thus far, SIBs have focused on social issues where demonstrating progress is reasonably straightforward. Measuring prison recidivism is simple, says Katherina Rosqueta at the University of Pennsylvania’s Center for High Impact Philanthropy, but what about mental illness or teacher quality? “People aren’t yet clear in some cases what they ought to be tracking,” she told the university publication Knowledge@Wharton in September. “What does success look like? And even when there is a common understanding of success, measuring whether or not it happened can be logistically tough.”

Judging a program’s effectiveness can be done, in part, by running a control group alongside the program. While this can produce superior results, it also adds to the growing project costs. Operating such a group requires a large sample to ensure accuracy, limiting SIBs to bigger projects that are larger and thus more risky. Vulnerable members of the population are often impacted by multiple social programs at once, so any adjustments made to these other programs during the assessment period make the data less reliable.

David Macdonald, a senior policy analyst at the Canadian Centre for Policy Alternatives, believes that SIBs represent a negative shift in the government’s mandate to provide social services. “These bonds change who is at the front of the line, and who we’re serving,” he says. “We need to pay a middleman mark-up to shareholders, who are now at the front of the line.”

Growing interest in SIBs from the Canadian federal and some provincial governments has led to fears of a backhanded attempt to begin privatizing some public services. NUGPE, the second largest union in Canada, announced last year that “higher costs, reduced accountability and privatization are all risks in the social impact bond funding scheme for public services.”

In a world where financial innovation is no longer viewed as the silver bullet, champions of pay-for-performance projects will have to wait for the results of the early pilots to come in before attempting any significant scaling. In the meantime, says Liebman, any policy tool that can accelerate solutions to even a subset of our most pressing social problems is an important breakthrough – one that deserves thoughtful consideration.

The post Bonds with a social mission appeared first on Corporate Knights.

And that’s based on a survey of Americans of all political stripes. Zeroing in on Republicans who supported Mitt Romney during the election, only 42 per cent agreed global warming was happening and a whopping 82 per cent denied that humans have anything significant to do with it.

This makes it tremendously difficult in the U.S. context to talk about pricing carbon, let alone take the necessary steps to follow through, particularly in such dire economic times. But Republican insider and columnist David Frum, a former speech writer for George W. Bush, believes it will happen, probably should happen, and that a tax on carbon is the way to go.

In his view, energy security should be the top priority, followed by the cleanliness of an energy source. A carbon tax addresses both: First and foremost, it encourages reductions in energy use, but it also gives domestically produced natural gas, nuclear power and renewables more equal footing with imported oil and domestic coal. The market would ultimately decide the mix.

As Frum wrote in his 2008 book, Comeback: Conservatism That Can Win Again, “You don’t have to believe that global warming is a problem to recognize that a carbon tax is the solution.”

And cost? Frum has argued there are many proposals out there that would numb the impact of a carbon tax. It would have to be carefully designed, but he maintains it can be done.

His stance hasn’t made him popular with fellow Republicans, particularly those of Tea Party persuasion. But his position is based on a political calculation. For Republicans to win – for the GOP to gain credibility with mainstream America – Frum sees the need to become less extreme, more flexible and better tuned to the middle class. When it comes to climate change, winning independents and moderates means offering a viable alternative that can neutralize the green edge currently held by the Democrats.

Spearheading a carbon tax on Republican terms would accomplish this. And, Frum once wrote, “nothing could possibly flummox the left more.” The following is an excerpt of a recent conversation with Frum on this issue:

CK: Why support a carbon tax over a market-based approach such as cap-and-trade?

FRUM: If you’re looking at the American context, you have to ask yourself how the idea you have looks like going into Congress, and then how it will look coming out. With cap-and-trade, the question is who gets the caps? How much? On what basis? Would the allotments be auctioned off? Would they be grandfathered? One of the things to always remember about the United States is that its system of administration is way more politicized than administrations in any other country. A carbon tax is just much cleaner to administer. Anywhere, but especially in the United States, you want to focus on programs that are very simple. The carbon tax is and cap-and-trade is not.

CK: How do you sell it to Americans?

FRUM: First, you have to make people aware that there’s a problem. And second, you have to package this in such a way that people get relief. One important thing is that before the current fiscal situation, it was possible to talk about a revenue-neutral carbon tax for consumers. In today’s world, that gets more difficult. The problem is around who gets the benefits? Certain regions are going to lose, and certain regions are going to benefit, and that’s why there is so much resistance to it. People who live in New York City should not receive the same (rebate) cheque as people who live in North Carolina. And this should not simply be an opportunity for the government to gouge them.

CK: Can it happen?

FRUM: I am confident that it will happen. Yet I think that the United States has an immediate crisis on its hands that makes Americans less confident in their political decisions. It’s not a good moment to launch big projects. But the fact is, we’re already seeing a transition by the mere fact that gasoline is so expensive, and (cheap and plentiful) natural gas is on the rise.

CK: Yet resistance is still huge…

FRUM: Right now we’re in a very serious economic depression, and there are very important donors in the Republican Party who make their money in legacy industries and are used to doing things in a certain way. They don’t see why things need to change and they don’t believe that change can be good for them. Plus, the voting base is drawn from very hard-pressed and economically disappointed retirees whose stock market portfolios and houses are worth less. These are very real fears that can paralyze politics. What I’d like people to remember is that the Republican Party has been as active in the environmental movement as the Democratic Party.

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