Brave New World: Financing for a Low Carbon Economy - Globe 2010

coverage of the Globe Conference provided by Allyson Clark

“Energy is a low hanging fruit… but a watermelon of a fruit”, a memorable quote from Bruce Schlein, Vice President of Corporate Sustainability at Citigroup in New York, and a great way to start off the round table discussion on solutions for a low carbon economy. His speech addressed not only the big picture, but also the simple things that one person can do in order to create a better world, such as reducing their energy use through the use of retrofits and other mechanisms.

The conversation quickly shifted to finance and investment as a driving mechanism for making large scale changes. As Michael Jantzi, CEO of Jantzi-Sustainalytics, said “We essentially decide what we support through where we spend our money.”

Personal decisions such as investing in SRI funds are one way to begin to create a low carbon economy, but discussion centred on the need for large capital investment in green tech or clean tech projects. This can come from the pools of money that are being run by the world’s rich as well as investments from countries through sovereign wealth funds. Paul Clements-Hunt, the head of the United Nations Environment Programme Finance Initiative (UNEP-FI), stated: “a combination of market and policy will help us reach a low carbon economy”. This sentiment resonated throughout the panel.

New products and services are being offered through banks and insurance companies to make a move to a low carbon industry. Insurance providers are beginning to understand the need to mitigate risks associated with climate change, which will impact how risk is assessed for everything from infrastructure projects to homes. Understanding how a company operates around the world and their impact on the environment will ultimately affect their business and consequently their profit. “Green will become a part of risk rating” says Sandra Odendahl, Director of Corporate Environmental Affairs at RBC Canada.

Unfortunately, according to Mr. Jantzi, a complication arises when looking at the risk return profile of green investments as the returns occur in the medium to long term and often don’t match the short term time frames of today’s financial world.

Sandra Odendahl, in response to a question from the audience, stated that she was interested in looking into double entry book-keeping for carbon, thus creating a system where carbon would be more accurately reflected on the books than it is today. Only time will tell how things will play out but the future will include more green investments and many more initiatives for development of the carbon markets.

Globe 2010 – Opening Plenary

coverage of the Globe Conference provided by Allyson Clark

“We have to invest in Green”, says Frank Wouters, Chief Executive of Masdar Power in Abu Dhabi. The opening remarks from Mr. Wouters were supported by Vancouver’s mayor Gregor Robertson who welcomed all green businesses and investors to Vancouver for Globe 2010, the 11th biennial trade fair and conference on business and the environment. Mr. Robertson focused on Vancouver’s plan to become the greenest city and outlined what types of initiatives are being offered to companies to come to Vancouver and make the city a “green investment hub”. For example, a new partnership between ClimateSmart and the City of Vancouver to help businesses account for their GHG emissions, and reduce those emissions through a set of workshops.

Mr. Wouters continued his speech by outlining how important renewable energy and the green tech sector will be in the coming years. Governments will need to invest more into research and development, and companies and large VC firms will have to start growing these innovative industries. Sectors that will begin, and continue, to see growth are in sustainable construction and green building, clean technologies, and solar technologies, particularly solar PV.

Mr. Wouters and Masdar Power are dedicated to growing clean power in Abu Dhabi. The focus is on moving towards “what the earth already provides”, such as wind and solar, rather than using fossil fuels.

The focus will now be on “relationships” says James Suciu, President of Global Sales and Marketing for GE Energy. GE is making a significant commitment to clean technology and innovation, and it would seem that many other companies are following in their footsteps. The world can no longer focus on single companies within an industry; those companies need to come together to move innovation forward. This new green economy, one in which we will all see tremendous growth will be fueled by “worldwide partnerships” and innovative thinking.

The conference, which runs until Friday, will cover many topics, including SRI, sustainable supply chains and a large focus on clean technology and carbon. Carbon markets, carbon capture and storage as well as measuring sustainability through carbon will be at the forefront of this event.

Stay tuned for more updates.

Say on pay campaign to be ramped up

Meritas Mutual Funds says it plans to expand its successful “say on pay” executive compensation campaign. Working with the Shareholder Association for Research and Education (SHARE), Meritas submitted say on pay proposals at 12 Canadian companies this year.

Ten of those, Enbridge Inc., EnCana Corporation, Suncor Energy, TransAlta Corporation, Biovail Corporation, Canadian Pacific Railway Limited, Agrium Inc, Russel Metals Inc., Barrick Gold Corporation and Major Drilling Group International Inc. have agreed to hold pay votes beginning in 2010 or 2011.

“I applaud these companies for recognizing that a “say on pay” vote is quickly becoming recognized as a sign of good corporate governance,” said Meritas CEO Gary Hawton in a statement.

Two companies did not voluntarily adopt the proposal. Shareholder votes will be held at Gennum Corporation on April 7 and at Methanex Corporation on April 29.

“While we have had some success the past two years in making “say on pay” a reality in Canada, there are still hundreds of companies that have not adopted this practice,” said Hawton. “If need be, we will go through the list of companies we own, one by one, to make this vote a reality but I would hope that there are many board of directors who will step up to the plate and act on providing this vote without a need for shareholder pressure.”

The campaign began in 2007, when Meritas approached the country’s big banks, asking if they would voluntarily provide their shareholders with an annual advisory vote on executive compensation. The banks declined, and Meritas instead filed shareholder resolutions. In 2008, those resolutions failed, but garnered an average of 40% of the vote. The same resolution passed in 2009 and this year, the big banks are receiving overwhelming support for their compensation plans.

A total of 25 Canadian companies have now adopted say on pay.

Social Capital Financing

Connecting the dots….that’s what needs to happen to get social finance rolling in Canada. Today’s Lunchbox Speakers Series, sponsored by the Social Economy Centre at U of T, featured Karim Harji of Social Capital Partners and socialfinance.ca, and Anne Jamieson of the Toronto Enterprise Fund, a project of the United Way.

Although in Mr. Harji’s favoured economic lingo, he approached the problem from the supply side and Ms. Jamieson from the demand side, both had a similar take on where we are now and how to move social finance forward.

Social finance was defined by Mr. Harji as the deliberate and intentional application of tools, instruments and strategies to enable capital to achieve a blended value return. Blended Value is a concept articulated by Jed Emerson, similar to the triple bottom line. The Blended Value Proposition states that all organizations create value that consists of economic, social and environmental value components, and that investors simultaneously generate all three forms of value through providing capital to organizations.

SRI is part of the social finance spectrum and we are seeing increased activity in a variety of related areas, including our third pillar, community investment as well as social enterprise, impact investing etc.

According to Mr. Harji and Ms. Jamieson, three main areas need to be developed in order for social finance to move forward. These are:
· The legal/legislative framework. Canada does not mirror the range of organizations that exist in the UK, or even the US. Many other jurisdictions allow hybrid entities, which facilitates the flow of capital to social ventures. Work is being done in this area, check out the white paper Social Entrepreneurship: Legislative Innovations sponsored by MaRS.
· Measurement tools and Social Finance metrics. It’s relatively easy to measure the business outcomes of social enterprises, but how do we measure the social outcomes? And how do we balance the social outcomes and the business outcomes?
· Educating investors on how to look at the not for profit sector. Probably the toughest task. The SRI community has spent years, nay decades, demonstrating how environmental, social and governance factors impact financial returns, and we know it’s a tough slog. But we never give up.

There’s a lot of activity in the social finance area in Canada, but Mr. Harji is concerned by the amount of ‘uncoordinated innovation’. The SRI community is involved in helping to join the dots, most recently through the SIO’s project, ‘Impact Investing: a feasibility study for social enterprise financing’ with partner Causeway and funding from the Trillium Foundation. More partnerships like this will allow us to learn from each other and leverage our resources to encourage the advancement of social finance.

Budget gets mixed reviews from green coalition

The federal government’s decision to invest in water is garnering praise from the Green Budget Coalition, an alliance of 21 environmental and conservation groups. However, coalition members say they are disappointed that last week’s budget contained no measures that would help transform the country to a green economy.

“We are encouraged to see new investments in Canada’s freshwater,” said Barry Turner, chair of the Green Budget Coalition, “including for cleaning up Areas of Concern and upgrading First Nations’ infrastructure, as well as for protection from invasive species in the face of the current Asian Carp threat. Federal leadership is crucial to protecting Canada’s limited freshwater resources and wetlands. We are also pleased to see funding to continue Canada’s valuable natural capital indicators for two more years.”

Finance Minister Jim Flaherty also announced that Ottawa would spend $100 million over four years to support clean energy technology in the forestry sector.

Still, there’s concern that the budget’s stated objectives of green jobs and growth were not accompanied by action.

“Amidst International Year of Biodiversity, in the lead-up to hosting the G8 and G20, we are disappointed that the budget contained no new funding to protect our biodiversity and to meet our commitments under the Convention on Biological Diversity,” said Mara Kerry, Nature Canada’s Conservation Director.

“Furthermore, this budget was a critical missed opportunity to invest in clean energy jobs and to live up to the climate change commitment to developing countries reiterated in the Throne Speech,” said Tim Weis of the Pembina Institute. “Canada will be falling behind countries worldwide in supporting clean energy and thus missing out on the numerous economic advantages available to those leading the way to a greener economy.”

The coalition also expressed concern over reduced funding to Environment Canada, Natural Resources Canada and the Canadian Nuclear Safety Commission, as well as the extension of the Mineral Exploration Tax Credit.

Ottawa’s proposed new Red Tape Reduction Commission is risky, the coalition says, as is the move to delegate responsibility for environmental assessments of energy projects to the National Energy Board and the Canadian Nuclear Safety Commission, from the Canadian Environmental Assessment Agency.

In last year’s budget, the government said it would commit $1 billion to a Clean Energy Fund and $1 billion to a Green Infrastructure Fund, both over five years. To date, the feds have announced funding for three carbon capture and storage projects under the Clean Energy Fund, worth $466 million.

Happy (sad) International Women's Day

It’s International Women’s Day. But there’s not much to celebrate in the boardrooms of corporate Canada. Catalyst is a nonprofit membership organization working globally with businesses and the professions to build inclusive workplaces and expand opportunities for women and business. Their recent report, 2009 Catalyst Census: Financial Post 500 Women Board Directors, tells the same sad story we have heard for many years about women’s lack of representation on major business boards.

In 2009, 44.9% of public companies have no women on their Board and 28.5% have one women director. Those are shameful numbers. In both 2007 and 2009 less than one–fifth of companies had three or more women on their boards.

A 2006 paper by Vicki Kramer, Alison Konrad and Sumru Erkut Critical Mass on Corporate Boards: Why Three or More Women Enhance Governance finds “The number of women on a board makes a difference. While a lone woman can and often does make substantial contributions, and two women are generally more powerful than one, increasing the number of women to three or more enhances the likelihood that women’s voices and ideas are heard and that boardroom dynamics change substantially.
The magic seems to occur when three or more women serve on a board together. Suddenly having women in the room becomes a normal state of affairs. No longer does any one woman represent the “woman’s point of view,” because the women express different views and often disagree with each other. Women start being treated as individuals with different personalities, styles, and interests. Women’s tendencies to be more collaborative but also to be more active in asking questions and raising different issues start to become the boardroom norm. We find that having three or more women on a board can create a critical mass where women are no longer seen as outsiders and are able to influence the content and process of board discussions more substantially.”

It’s no better in boardrooms around the world according to the World Economic Forum’s Corporate Gender Gap Report 2010. The first study to cover the world’s largest employers in 20 countries, it also benchmarks them against the gender equality policies that most companies should have in place but are, in fact, widely missing.

“The findings of The Corporate Gender Gap Report are an alarm bell on International Women’s Day that the corporate world is not doing enough to achieve gender equality. While a certain set of companies in Scandinavia, the US and the UK are indeed leaders in integrating women, the idea that most corporations have become gender-balanced or women-friendly is still a myth. With this study, we are giving businesses a one-stop guide on what they need to do to close the corporate gender gap,” said Saadia Zahidi, Co-author of the report and head of the Forum’s Women Leaders and Gender Parity Programme.

Social Capital Partners - the story continues

For many of you who read this blog, the Social Capital Partners story will be familiar to you. On Wednesday, I had the opportunity to hear Bill Young speak, and once again I was inspired, and I thought -this is a story worth repeating.

Bill Young came into a lot of money at the time of the technology stock frenzy, and he used it to found Social Capital Partners in 2001. He wanted to figure out the answer to the question “is there a way to harness market forces to do social good?” He held a contest for business plans for real projects that would be profitable both financially and on social metrics, with the prize being funding by SCP of the project. The winner was Inner City Renovation, a fascinating project based in Winnipeg that helped recipients of social housing gain valuable and transferable skills in the construction trades by renovating houses that would become social housing units. Inner City Renovation was followed by a variety of other projects across the country, all with quantifiable social and financial aims. This was what Mr. Young calls Phase 1 of SCP, where “we proved that you can make these double bottom line companies work.”

Five years later, Mr. Young realized that although they were doing good work, SCP "had not changed the landscape. We wanted this to become the prevalent model and it wasn’t.” In order to move ahead, he identified two things. First, they had to figure out how to engage the private sector in what they were doing, and second they had to find a way to make the projects more replicable so that they could do more projects. The solution was to work with franchises. The benefit being that the business end of things was already being taken care of by the franchisor and SCP needed to focus only on the social returns. So, SCP loaned the franchisee the money to buy the franchise on the condition that the franchise then employ people from the job ready pool of applicants that SCP was working with. This too was successful, and constituted Phase 2.

But it wasn’t enough either. Now Mr. Young wants to change the way HR works with respect to entry level employees. His new 10 year vision is for every company to have a social hiring program integrated into their HR function and reported on using standard CSR mechanisms. He believes that “employment outcomes of people hired through these channels will be as good or better than those of people hired through regular channels.” And he’s in the process of creating a pilot project that will demonstrate this. “In order for this (initiative) to scale up, we have to prove the economics of it.”

This summary gives you the bare bones. I can’t do justice to the humour, the eloquence and the inspiration provided by Bill Young. Sometimes it seems like the S in ESG gets short shrift, and it takes someone like Bill Young to bring it all back into focus.

ESG: focus on reducing risk, not adding return

Today’s purchase of RiskMetrics by MSCI marks the ascendance of SRI as a tool to identify risk, rather than one that adds alpha to portfolios. MSCI Inc. is a leading provider of investment decision support tools to investment institutions worldwide. The company’s flagship products are the MSCI International Equity Indices, which include over 120,000 indices calculated daily across more than 70 countries, and the Barra risk models and portfolio analytics, which cover 58 equity and 49 fixed income markets. RiskMetrics is a leading provider of risk management and corporate governance products and services to the global financial community. Following their purchase of ISS in 2007, they have become well known to the SRI community after snapping up Innovest and most recently KLD.

In a conference call this morning, Ethan Berman of RiskMetrics said “the need to understand risk as part of the investment process is critical” and that the two companies will combine their risk management capabilities to provide a ‘unified language of risk’.

SRI got it’s moment in the sun when Henry Fernandez, Chairman and CEO (isn’t that a governance faux pas?) of MSCI discussed one of the reasons the two companies complement each other. “One clear example of that kind of revenue synergy comes in the environmental, social and governance space that RiskMetrics has been expanding on. We’re excited about the potential to leverage the research, the analytics and the data of RiskMetric’s ESG business to create global indices that will enable us to offer benchmark products for global socially conscious investors. That’s just one example of the synergies that we can generate with this combination.”

However, the idea of improving corporate performance through shareholder action doesn’t suit this model. Asked how ISS and the governance business fits into the new company, Mr. Fernandez answered “The core businesses that we want to build in this combined company are equity performance indices, equity portfolio management tools, fixed income portfolio management tools and the risk management tools. When you look at the ISS business in the context of that, it obviously becomes less core, less mainstream to us.”

Significant consolidation has occurred in the SRI industry over the past few years, and clearly new opportunities are now presenting themselves for our entrepreneurs.