Big plans are in store to spread the Internet across all of Africa. However, despite the hype surrounding Silicon Savannah in Kenya, the digital economy on the continent is but a strand in the World Wide Web. What obstacles must be overcome so that a true Internet revolution takes hold there?
flickr / Charlesfred under Creative Commons
Innocent Munzaneya’s version of the global e-commerce site eBay, called Cyamunara (which means “Auctions”), seems like a great idea on the surface.
Munzaneya decided to create the platform, which is in Kinyarwanda (Rwanda’s most-spoken language), after seeing people visit the capital city of Kigali from far away just to attend auctions. He thought these people could do this online, from the comfort of their office or home. It has certainly worked in other places. The German startup incubator Rocket Internet, famous for replicating successful Internet business models worldwide, is the most notable example, with clones of Amazon, Booking.com and eBay functional across several African countries.
Yet when Amine Chouaieb, a Tunisian consultant and entrepreneur, dug into the idea a little further during a lunch at the recent International Business Forum 2013 in Istanbul, skepticism arose. Cyamunara’s maximum potential return—provided that all of Rwanda’s 100,000 Internet users sign up as active customers (an unlikely scenario) —would be around $500,000 (U.S.) per year. A low figure that Chouaieb doesn’t find very attractive, given that Munzaneya’s website, founded three years ago, is still very far from a 100,000-customer threshold. However, despite Chouaieb’s current estimates and calculations, there is one important thing to consider: Internet penetration across Africa has become a central growth policy for many governments.
“In Rwanda, the president likes IT and wants it everywhere,” says Munzaneya, who was given a Best SME in the ICT Sector award two years ago by the Rwanda Development Board for his holding company, Hoziyana Group Ltd., which includes Cyamunara and an IT hardware import company. But, despite the president’s motivations, the Internet in Rwanda is actually not so widespread. Only 8 percent of the population can access it, which is low compared with many other African countries. Morocco, for example, has an Internet penetration rate of 55 percent. Then there’s Seychelles, Tunisia, Mauritius, South Africa, Nigeria and Kenya, all with more than 30 percent.
Most African countries, however, have an Internet penetration rate lower than 15 percent, with Eritrea at the very bottom, at 0.8 percent. With developed countries’ rates varying between 70 and 95 percent, it appears the digital divide is wide in Africa.
Student Reporter; Data: ITU and ILO
But numerous infrastructure projects are on the agenda to solve this problem, potentially making a company like Cyamunara considerably more acceptable and worthy of investment. Regional and international organizations, as well as African and multinational corporations (TNCs), are investing in new undersea cable projects, while 3G and 4G networks—the latter technology being implemented in Africa more or less at the same time as in some developed countries—are attracting a great deal of foreign direct investment (FDI).
Indeed, foreign and local investors, like Percival Ampomah, head of investments at the Ghana Venture Capital Trust Fund, believe the “mobile phone has revolutionized the way of doing business [in Africa],” as he says.
According to the Groupe Speciale Mobile Association’s 2012 Sub-Saharan Africa Mobile Observatory report, mobile-phone penetration rose from nonexistence in 2000 to a rate of 55 percent in 2012, bringing with it both growth and development opportunities. Investors want to get the lion’s share in this potential boom. Especially if, as the GSMA’s report details, the number of mobile broadband connections soar, with a 360 percent increase from 2012 to 2016, while fixed broadband connections remain rather stable and far behind.
Nevertheless, broadband access will not be equally distributed across the continent. Not all countries are getting access to 4G, and in some, their remote and rural areas don’t even have 3G connections now. Moreover, if coverage is available, it is sometimes not accessible to all because of price concerns. As stated in the International Telecommunication Union’s 2013 Study on International Internet Connectivity in Sub-Saharan Africa, a wired connection can be cheap, at around $25 a month in South Africa, or very expensive. The 10 highest fees range from $170 in Uganda to more than $1,000 a month in Burkina Faso, which is said to be too expensive even for businesses.
Source: Based on data from ITU and ILO
Apart from the plan prices, hardware is also an additional high cost for Africans. Although programs exist that supply low-cost computers in several African countries, such as One Laptop per Child and Computer Aid International, international smartphone manufacturers and local followers are designing cheap, fashionable devices that are more likely to become the main agent driving the Internet revolution in Africa. What’s more, smartphones make it easier for bottom of the pyramid consumers to use a computer interface they might have never seen, or had access to, before. Lucas Simons, founder of the consultancy firm NewForesight and the agricultural rating agency SCOPEinsight, says spreading the Internet “will help collect information about groups” that were earlier deprived of access to information, so that “new business models will be developed to serve them better in the future.”
This is in line with what Munzaneya said about Rwandan President Paul Kagame and his goal of equipping the country with modern information and communication technologies (ICT) through Vision 2020. The plan’s central goal? To turn the economy into a knowledge-based one.
“Today in Ethiopia,” says Pascale Bonzom of the United Nations Development Programme, “young people are not present in agriculture,” which continues to be the major economic sector there. “Alternatives such as services to agriculture or food processing are to be considered.”
For Stephanie Ludwig and Thorsten Scherf, ICT advisers at German enterprise GIZ, “market research, pricing, distribution and marketing/customer relationship management are the areas that ICT can leverage the most.” Therefore, by upgrading communication speed, enabling video transfer and generalizing the use of smartphones, the shift to a connected continent could bring a double economic boom and, in turn, provide more jobs.
The first boom would occur through a local economy’s diversification of its industry. A digital economy, being less capital-intensive than other sectors—once a connectivity infrastructure has been created—allows for plenty of opportunities in the creation of small and medium-sized enterprises (SMEs) in areas like smartphone application design or online commerce. Or, if some TNCs are starting to build or already have digital markets, they will need to hire local people as software developers, technicians or content producers. Improvements in the existing economy through the emergence of productivity gains would drive the second expected boom.
For SMEs, cloud computing will enable better data management, and advertising will be cheaper, targeted and reach a larger scale. What’s more, various services may compensate for poor local infrastructure. In the case of video conferencing, “people could avoid traveling a four-hour round trip because of Cairo’s road traffic for a one-hour meeting,” says Bernhard Rohkemper, head of the GIZ RIBH MENA tech hub.
Student Reporter; Data: Dalberg
In agriculture, Ghanaian company Esoko has already increased market price transparency with its SMS-based system, but it could be more accurate and detailed with more frequent broadband Internet updates.
As far as finance is concerned, the “mobile money is good but has a too-low penetration rate,” Ampomah says. A user-friendly interface application for smartphones might encourage more people to join this system.
The Internet could also be particularly profitable and beneficial for the health sector. Remote photo/video-based consultations in rural areas deprived of doctors have great potential. According to the World Health Organization, in 2012 Africa had 2.2 physicians per 10,000 inhabitants. Imagine their bolstered reach if equipped with Skype. Moreover, improving access to information has a vast social impact. When information can be accessed from independent channels, government officials should be “better able to understand what happens at the macro-level and then influence policies,” Ampomah notes.
As an instrument of transparency, the Internet might even help break the cycle of corruption that Ampomah describes as “systemic” in Africa. Charles Ocici, Enterprise Uganda’s executive director, says that “corruption affects the cost of opportunity to start a business, FDI and the cost of financing through interest rates.” Honesty, by way of the Internet, pays off.
In the end, if the Internet can indeed be leveraged across Africa, it won’t be so much an Internet revolution as a revolution in everything else. Therefore, for his online auction venture, Munzaneya can count on more just than his president’s support. He’ll have the support of many positive agents within Rwanda and across the rest of the continent. An expansive digital market is being built in Africa, and despite the obstacles, it will see the light of day.
In the meantime, Munzaneya has another challenge waiting for him: Rocket Internet has just launched Kaymu, its eBay clone, in Rwanda. The market is hardly built, and there’s already little room for the competition.
The 16th International Business Forum took place this past October in Istanbul. It hosted many guests from emerging economies, a number of whom, naturally, were from Turkey. In terms of business, the best thing the republic can do for itself is ensure that its sizable youth population gets greater access to entrepreneurship.
flickr / Eric Kim under Creative Commons
ISTANBUL, Turkey – As with other areas in the surrounding region, entrepreneurship has become a coal-hot issue for the Turkish government. In its eyes, it stands as the opportune nation for conducting business, as it boasts a modest corporate tax rate, low entry barriers, sky-high levels of tourism, a premium location, a close to double-digit growth rate and, most important, a very large, tech-inclined youth populace. Seventy percent of its 80 million inhabitants are under 35. But Turkey is still pegged by the global community as a nation with only great heaps of potential.
As it tries to become an entrepreneurial society, much of that potential will rest in the able hands of its residents aged 15-24, who make up almost 17 percent of the nation. (They’re also a big reason why global investment firms like Tiger Global are bankrolling Turkish e-commerce, and more.)
The entrepreneurship ecosystem in Turkey is nothing new, as it started developing in the late 1990s. Many initial investments at the time did not succeed. However, there were some success stories, largely in the e-commerce, mobile and gaming sectors. Today, there are many opportunities, especially in low-risk business areas such as Web and mobile companies, which are cheaper and relatively easier to pursue.
But “most…investment is still going to real estate, importing and exporting goods, and service businesses,” says Kutlu Kazanci, a Stanford engineering graduate who has worked in finance in New York and for the World Bank in Indonesia. In Turkey, he was active in the entrepreneurship center Endeavor Turkey for two years and has helped start a Turkish angel investment network as well as the Founder Institute, an organization that “empowers founders to launch 1,000 companies per year worldwide.”
Recently, Kazanci has been coordinating SU-COOL, an entrepreneurship pre-incubation center at Sabanci University in Istanbul. The center plans to provide training for young entrepreneurs, so forecasting the future of youth entrepreneurship in Turkey is an important part of his job. He estimates that in the next 10 to 20 years more money will be available for nontraditional entrepreneurial startups.
“From the cultural point of view, family and the education system in Turkey is largely hierarchical and does not support creativity and much deviation,” Kazanci explains. “However, with the new generation there is already less conformity and compliance, and in that sense more space for entrepreneurship.”
It’s largely in the education sphere where Turkey has failed its people. Though entrepreneurs are generally well-respected in Turkish society, the educational framework needed to construct an entrepreneurial nation is severely wanting. In innovation-driven economies, which is what Turkey is aiming to become, 11.9 percent of the population aged 18 to 64 has received some business development education during formal schooling. As of 2010, in Turkey only 2.5 percent has received such training across the same demographic. Even more glaring is that 23.3 percent of innovation-driven populations received that formal training at some point in that age time span. By contrast, only 6.3 percent of Turks did so between those working years.
The government has sought to make up for lost ground by doubling bank lending to entrepreneurial businesses; providing tax incentives to any Turkish companies working in high-tech sectors; and setting up programs, like the Emerging Enterprises Market SME Support Program, that help entrepreneurs access funds and capital.
Although EY’s G20 Entrepreneurship Barometer 2013 for Turkey points out that 47 percent of native entrepreneurs feel that the government’s role in providing startup programs has improved in the past three years, only 30 percent thought university incubators saw improvements and a measly 14 percent thought teaming/mentor programs did. This comes during a time when the burgeoning youth populace feels inextricably tied to the direction its birthplace is moving in. “People were impressed by the creativity and the energy of the [Arab Spring] protests,” Kazanci says. “There is a general sentiment that the new generation is lazy and indifferent, but the protest showed the opposite behavior, so people were surprised.”
Tara Chantal Hopkins is intimately familiar with the region’s energy and the Turkish entrepreneurship ecosystem, being an American entrepreneur who has lived in Turkey for many years. Contrary to common expectations, entrepreneurship in Turkey is not necessarily more difficult than in the United States—the countries simply offer different challenges, she says.
“In the United States, business entrepreneurship, which creates a new need, is much easier, while in Turkey social entrepreneurship, which satisfies an already existing need, is easier. Also, in Turkey social rules somewhat limit excess innovation,” Hopkins explains. She is the founder and director of Çöp(m)adam, a company that takes garbage and turns it into fashion and lifestyle products such as bags and other accessories. With her mostly Turkish team, she has managed to avoid many struggles that entrepreneurs with a foreign team face, such as obtaining work permits and difficulty in tapping into native connections and networks. According to Hopkins, the business culture in Turkey can be suspicious of foreigners.
So while her experience doesn’t directly speak to entrepreneurial Turkish young people trying to establish their foothold in the marketplace, it offers a perspective on what is achievable in the country, even when its business climate is compared with America’s. If Hopkins has turned to Turkey (with the help of her Turkish associates) to build her enterprise, so can the country’s growing youth population, if it is provided with the right support systems.
flickr / Joe Sullivan under Creative Commons
As Turkey looks to court international attention from a business standpoint, an important challenge will be to make sure the largest chunk of its people are involved in its rise as an entrepreneurial power. In that sense, investing in youth entrepreneurship will become a matter of sustainability for the fast-emerging economy.
“The culture is…short-term-focused and impatient,” Kazanci says. “There should be more long-term planning and setting stretched goals, going after them and cooperating—in other words, more awareness and holistic thinking.”
That impatience might benefit the young entrepreneurs of “right now” but may also help stunt the work of youth entrepreneurship over the long term—something Turkey can ill afford to do if it’s serious about establishing itself as a business hub. Hopefully, by strengthening institutional support for young entrepreneurs, some of whom will receive better formal education and training in the coming years, Turkey can enhance its standing in the world. As Alex Kubo aptly states in his article “Youth Entrepreneurship in Turkey: Freeing Unprecedented Potential for Economic Growth”:
“From conceptualization to realization, entrepreneurship is young and vibrant by nature and is often conceived in youthful, creative minds. Therefore, in developing the opportunities for, and the viability of, entrepreneurship in Turkey as a means to invigorate the nation’s economic growth, an emphasis must be placed on its promotion and support at a youth level.”
In other words, youth is wasted on the young in countries that do not value its stake as an economic driver.
Scaling up a green and inclusive business is a challenge many entrepreneurs are now facing. What lessons did participants take away from the discussions at the International Business Forum 2013?
flickr / Crossroads_Foundation under Creative Commons
ISTANBUL, Turkey — Of the many green and inclusive entrepreneurs and private company representatives that attended the 16th International Business Forum in Istanbul, most were heads of a microenterprise or SME—small or medium-sized enterprises. As efficient as their business model might be, they all shared a key challenge: scaling up while balancing commercial viability with a limited income that must take into account the needs of a large customer base.
India’s Greenlight Planet, for instance, seems to be following a clearly defined strategy. Director of Communications Anjuli Pandit said, “We don’t want to be profitable right now. We need to invest more.”
She added, “When you are [in] a scaling period, you don’t want to be profitable during that period. It’s a sign that you’re not scaling properly. It means you are not using your resources properly.”
Accordingly, Greenlight Planet has been in equilibrium this year with its operating results, and the company plans to remain so and continue at this pace until 2015, Pandit said.Know the Community You Are Talking To
Regarding the way Greenlight Planet is scaling up, Pandit had two words: “community building.” When dealing with those at the bottom of the economic pyramid, product affordability is an indispensable requirement, but marketing—in particular, corporate image—is also essential. After a tragic poisoning incident killed more than 23 children in a school district in Bihar, India that Greenlight Planet sold its products to, the company decided to contribute to the community it had become part of. To express its condolences, the company donated one of its solar lamps to every family that lost a child.
Amine Chouaieb, founder of Chifco, a Tunisian energy-saving consulting firm, highlighted how finding innovative ways to communicate was affecting green and inclusive businesses, or GIBs. He told the story of Opower, an American software company that promotes energy efficiency. Inspired by behavioral economics, it achieved significant results in lowering households’ energy consumption by asking families to compare their consumption with that of their neighbors.
With inclusive businesses, communication must be not only innovative but also appropriate to the particular community you are focusing on. When Ahmed Cisse, founder of the food group-buying website Tongtong in Senegal, wanted to increase his 100 total orders by reaching more customers, he had to partly redesign his website’s selling process. Inflation and numerous intermediaries between producers and consumers make food in Dakar expensive, but the main problem, in this case, was computer illiteracy. Cisse started hiring intermediaries at a district level to manage the computer interface for Tongtong’s potential customers. Local districts benefited as well, because the intermediaries earn 50 percent of Tongtong’s profit for each transaction they work on.
Matthieu Bourlet / Student Reporter
Partnering to Scale Up Quickly and Surely
Adam Abate, founder of Ethiopian software engineering company Apposit, believes the key for scaling up is partnering. “Nairobi doesn’t need five food-delivering companies. If they merge, they could address a bigger scale,” he said.
More specifically, Abate recommends partnering early. That’s what he did with his company when conceiving the Paga mobile-payment software for Nigerian company Pagatech, instead of simply creating a subsidiary. “[They] got 1 million users in about three years,” who account for “65 percent of the Nigerian [mobile-payments] market,” Abate said.
That it is only the beginning, he added, given that “[Nigeria] is still a young market.” Putting this into perspective, the pioneering mobile-payment system M-PESA in Kenya boasted 17 million customers as of March 2013.
As a solution frequently used to scale up, partnering can be done in many ways. Cavit Yantaç, DPE Lead at Microsoft Turkey, said that “small IT companies should partner with big companies, such as Microsoft.” Big transnational corporations, or TNCs, are always looking for new access to markets through national companies to localize their products and services, he noted. In exchange, the absorbed or partnering company may benefit from business development support—thanks to access to worldwide offices—as well as a possible technology transfer.
“TNCs own main technical skills,” said Charles Ocici, executive director at Enterprise Uganda, a public-private foundation that fosters SMEs’ creation through the various advisory and counseling services they provide.
Alternatively, selling a share of one’s company to an angel investor or an impact investment fund is another option for scaling up. Sometimes this route has demanding implications, but these stakeholders provide funds and give access to their extensive business networks.
Eventually, public-private partnerships may allow a company to grow on the basis of a freemium—“try for free”—business model, like the Guatemala National Cleaner Production Centre. Meeting the stakeholders an entrepreneur may want to partner with, especially during his or her company’s early stages, can be difficult when living in a country where few of them are present. However, more and more hubs are being set up in developing countries to help solve this problem.
Some of these scaling-up strategies may also be applied to more traditional companies. But when applied to GIBs, scaling up should not impinge on their primary goal, which is to keep generating positive externalities while remaining cost-effective. Felix Oldenburg, Europe director at Ashoka, a nonprofit supporting social entrepreneurship worldwide, claims that “GIBs are companies you have to be patient with.” Meaning that you may not be able to scale up a GIB as rapidly as a traditional company.
DETROIT, United States – On a sunny Thursday afternoon, I meet Nefertiti Harris at her salon in the Cass Corridor, one of Detroit’s comeback neighborhoods. Harris is a tall, slender, smiling woman with long locs wound neatly around the crown of her head. She suggests walking over to Shinola’s storefront around the corner. The upscale watch and bicycle manufacturer recently converted a 5,000-square-foot former Jeep warehouse into a storefront, event space and juice bar. Bikes cost between $1,000 and $3,000; watches range from $400 to $800. A bottle of Drought’s cold-pressed organic juice costs $10.
Photo Courtesy of Marvin Shaouni Photography
After checking out the colorful, cavernous space, we sit at a rustic wooden table out front. As we sip from bottles of extravagant raw juice, it is difficult to discern signs of bankruptcy from our perch on Canfield Street, a popular destination for new businesses.
Just a few minutes after taking our seats, a young woman approaches from across the street. “Do we need to move?” Harris asks. “I know you’re trying to film something.” The woman explains that her company is moving to Detroit and that she is making a promotional video to air at South by Southwest. “We’re making this video about our move to Detroit,” she says. “We’re showcasing the cooler, hipper places, showing people that Detroit’s not all bad, that we have fun, cool things for you to do down here. We’re convincing other people to move to the city.”
Harris, flashing a warm smile and striking a model-like posture, replies, “Well, it might not be a bad idea to have some living people in it, then.”
So much conversation about this city alternates between, on the one hand, depopulation and fiscal distress and, on the other, local billionaire Dan Gilbert’s skyscraper collection and the influx of young, white tech entrepreneurs. By hewing to the themes of vacancy and rebirth, the conversation often overlooks the city’s approximately 700,000 residents and 50,588 businesses, of which 64 percent are owned by African-Americans and 50 percent by women, as of 2007.
Harris, for her part, has been living in Detroit since the 1980s, after she moved from her native Chicago, where she worked as a model. Once in Detroit, Harris started a natural hair care business. She came to the idea through her disillusionment with the modeling industry’s preoccupation with Western standards of beauty. “Because I am an African-American woman, I noticed that many African-American women had a standard of beauty that they could never attain. I wanted to change that,” she says. When she first started cultivating her own locs, Harris explains, many African-American women viewed unpermed, loced hair as unkempt and unprofessional.
“A lot of times I would have to hold their hand, walking them through this process of coming out of their perms. They had a lot of concerns about what their family, boyfriends or fellow church members would think,” she says.
During the 1990s, Harris worked out of the kitchen in her home, which was then in Detroit’s Boston-Edison neighborhood. Her client base, consisting of mostly professional women, grew quickly. In 2003, she and three other women started Cass Corridor’s Spiral Collective—a large space on the corner of Cass Avenue and West Willis Street shared by the four business owners. Dell Pryor, a stalwart of the Detroit art scene, operates an art gallery in the space. Her daughter, Sharon Pryor, runs a boutique called Tulani Rose. The other two members of the collective are Janet Webster Jones, owner of Source Booksellers, and Harris. Jones joined the Collective after working for nearly 25 years as a mobile book vendor, specializing in history and memoirs. Harris launched her salon, Textures by Nefertiti.
As Harris’ business continued to grow, she imagined expanding into a full-service salon with a nail technician, aesthetician and massage therapist. In 2009, she relocated Textures 100 feet down Cass Avenue. Similarly, Source Booksellers moved into a storefront across the street, where it hosts Saturday morning exercises and tai chi sessions in addition to readings and discussions. The four women continue to promote and support each other’s businesses.
Harris goes to great lengths to support her nine women employees. She takes an active role in their lives, discussing goals and finances. “Women are nurturers and teachers, and this is the way we do business,” she explains. “You care about the people around you. If the people around you are doing well, you’re doing well.” Textures’ endurance and growth in an environment fraught with turbulence and uncertainty suggests that this approach has served Harris well.
Photo courtesy of Textures by Nefertiti
The salon is airy and intimate. When I arrive, the stylist chairs lining the perimeter of the room are all occupied. The salon’s fullness contrasts sharply with the sense of vacancy that pervades many of the city’s streets. Some clients face mirrors on the wall, speaking softly with stylists. Others face the center of the room, chatting, laughing or looking at their cellphones. A man with locs hanging over his shoulders sits in the center of the room consulting a stylist. Two children huddle on a couch, engrossed in handheld video games. Harris floats through the salon, engaging clients and employees in casual conversation.
Harris’ clientele represent a cross section of city residents: artists, musicians, city workers, professionals and students from Wayne State University. Some folks drive in from other cities in southeast Michigan. Harris is conscientious about maintaining a comfortable and relaxed atmosphere in the salon. She describes the place as “a respite,” a safe space where people can talk about anything or nothing at all, a space that offers its visitors a sense of belonging.
When I ask if clients discuss Detroit’s bankruptcy filing, Harris shrugs and says, “It’s a passing conversation…. I don’t know what bankruptcy means for the city, or for me. I’m just going to keep doing what I’m doing. What else can I do? I have no control.”
Harris has neither a pension nor health insurance. Nevertheless, she remains optimistic. “I know what’s going on in Detroit. It’s depressing,” she says, “but you can’t pay attention to the fear …. It’s down to a dollar, and that’s when you buy.”
Back at Shinola, it’s clear that individuals and investors are doing just that. In September, a Canadian investor group scooped up all but one of the 22 properties up for auction in North Corktown, the historic neighborhood where Harris currently lives. A handful of organizations—Revolve Detroit, Hatch, D:hive and Detroit Soup, among others—now offer support to entrepreneurs. New businesses are sprouting around town. Among them is Harris’ newest venture: Tarot & Tea, a spiritual tearoom, in West Village, a few miles from Textures.
“I’m seeing a lot more young people, and a lot more creative energy here,” Harris says. “I see folks taking chances. I think Detroit is a wonderful place where you can take a chance and start a business, do what you want to do, and get the support that you need to do it.”
flickr / Michigan Municipal League under Creative Commons
A forward-looking company is radically changing the rules of the game in the financial industry.
This is the view advanced by Lenddo, a social enterprise started in 2011 with the goal of economically empowering the middle class in developing countries. Founded by Jeff Stewart and Richard Eldridge, two businessmen who formerly worked in the financial and technology industries, Lenddo is based in Hong Kong and has a data science team in New York City. Despite a small staff of only 66, the company has grown to more than 380,000 members in the Philippines, Colombia and Mexico in the past two years.
This extraordinary success is due to the company’s innovative online model. Instead of lending to the very poor using traditional screening methods, Lenddo lends to the middle class and uses social networking sites to screen and select loan applicants. Much is anticipated from Lenddo’s model, which could force the financial industry to adopt a new, social-based approach to lending.
In September, Eldridge, Lenddo’s global chief operating officer, was invited to represent the company at the World Economic Forum’s Annual Meeting of the New Champions in Dalian, China. There, the forum named Lenddo one of its 36 Technology Pioneers for 2014.
At the forum, Eldridge explained that the idea for Lenddo came after living for 15 years in developing countries, where he identified a trend in the financial industry’s dealings with emerging markets. “There were microfinance companies servicing the bottom of the pyramid,” he says, while the pyramid’s top was already being served by traditional financial services. But, he adds, “the middle class was often under-banked and sometimes unbanked” in developing countries, since it did not have access to a full range of financial services.
In trying to get this access, members of the middle class in developing countries face two main challenges, Eldridge says. First is financial education. They have “no [financial] education, and if they have access to education, most of them feel it is not relevant to them in their country and it is not delivered in a way that [the middle class] likes.” (Instead, it is delivered in long, complicated texts.)
Second, Eldridge found out that “most middle class [people] have either no credit rating or are ‘thin file’ clients,” so traditional financial institutions find it hard to work with them. “If [young people in the middle class] live at home with their parents, still have a prepaid cellphone and pay everything by cash, they do not have a comprehensive financial history,” Eldridge says. Thus, traditional financial institutions decide they cannot serve them.
This led to the idea for Lenddo, in 2010. “My co-founder [Stewart] and I decided to use technology and the power of social media and big data” to build an online platform for the middle class, Eldridge says. The original concept was very simple, based on the idea that middle-class people are online, mobile and heavy users of social media. Thus, their social reputation becomes increasingly important.
On this platform, “people could connect and join for free easily and get free financial education,” Eldridge says. Originally launched in the Philippines, the company has now grown in Colombia as well as Mexico, and it is expanding to other developing countries.Growth through accessibility, ease of use
“People do not want to go to a bank branch anymore and fill out paperwork to get a loan,” says Stewart, Lenddo’s CEO. If traditional banks do not change this model, he insists, “they are going to go out of business.” Based on this idea, Lenddo uses social websites such as Facebook, LinkedIn and Twitter instead of conventional screening to rate its clients’ creditworthiness. This allows the company to lend to its applicants within one business day, if their information is valid and they are considered trustworthy borrowers. That is, if they are very likely to repay.
Lenddo’s screening and revision of loan applications is done entirely online. Eldridge explains that all Lenddo members are given a “LenddoScore” (from 0 to 1,000), which measures creditworthiness, when they join. Applicants need to connect accounts such as those for Facebook or Gmail to their profiles, and then Lenddo uses a standard social media authentication process to collect the new member’s profile information (without collecting any user names or passwords).
“The data collected is then consumed by algorithms produced by data scientists,” Eldridge adds. Approximately 70 composite variables are used to determine an applicant’s LenddoScore, such as to whom the applicant is connected, what words the applicant is using online and what websites the applicant visits. For example, the score increases with the number of reputable connections the applicant has, or if the applicant behaves well on social websites such as Facebook or Twitter.
An applicant’s LenddoScore moves “on a regular basis; it depends on you, your behavior and your network,” Eldridge says. He adds, “At the moment, we are not able to serve anyone with a score that is less than 300.” But Lenddo also has “people up in the 900s. They have very good networks, they probably had credit before us, and they repaid on time.”
Lenddo’s average clients are usually between 23 and 35, and they typically are employed as waiters in restaurants or work in call centers or insurance companies. “Now we’re also looking at the informally employed sector,” Eldridge says. “They have social media accounts, and they are very active with that,” and thus are a good match for Lenddo.
Photo courtesy of Lenddo
Lenddo’s loan statistics are about average for the industry. “Our average loan right now is just over $400 [U.S.],” and “the average duration is about nine months,” Stewart says. Eldridge adds that the company’s average interest rate differs by country, but “in the Philippines it goes from 35 to 80 percent,” depending on a person’s LenddoScore. The other option for Lenddo’s clients is informal borrowing, with interest rates that can reach between 150 and 200 percent. Eldridge assures that the company has “very high repayment rates,” although Lenddo does not disclose the exact rates.
After clients repay loans from Lenddo, more than 60 percent receive a second loan. Although it is still difficult for middle-class people to move on into more formal credit, Lenddo is “looking at options in the future for our clients to use their score for other purposes,” Eldridge says. For example, a LenddoScore could be used when applying for another type of credit or for employment purposes. But for now, Eldridge says, many people in emerging markets still “do not understand that their credit scores today might influence their interest rates for a loan 10 years from now.”Expansion to other financial sectors
“We already have a product to be released for micro-insurance,” Eldridge says. “We also want to launch a product on savings and investments,” but this is taking some time, he says, because “it has some regulatory issues in some countries.” As with its current loan services, Lenddo plans to launch these new services entirely online. “We ultimately want all our members to have access to a full range of financial services,” Eldridge says.
He notes that Lenddo is hoping to expand to other countries, in Asia and South America, and it is evaluating Africa as well. Social-based lending is growing quickly, and the traditional banks will have to adapt if they do not want to go out of business, the two founders believe.
Having raised $8 million (U.S.), Lenddo seems poised to quickly become one of the main players in this new financial industry. The company’s very fast growth, from zero to more than 380,000 members in two years, is one of many measures of its positive impact. The World Economic Forum’s award to Lenddo as a Technology Pioneer for the year to come is just another indication of the company’s success and the promise of social-based lending.
As a member of the press attending a World Economic Forum (WEF) conference, I was surprised by how welcomed I felt. For three days the so-called “Meeting of the New Champions” in Dalian, China was an epicenter of power where world leaders in business, non-profits, academia, science and government networked and discussed ideas. As a student reporter, I was able to attend multiple panels, converse with numerous panelists, and interview over a dozen participants. I left with a sense that I had really seen it all.
But had I? Was the WEF really all that welcoming?
To understand the dynamic at the conference we must start with the dichotomy of its attendees. The meeting attracted three distinct groups: the media, general attendees, and WEF “Strategic Partners”—mostly representatives of big global businesses. Each group was treated in subtly different, but important, ways. The group with the most restricted access to the conference was the media. We could attend only a select number of panels that were handpicked by the “powers that be.” We had “access” to most participants, but only if we happened to meet them in the hallway or if they chose to respond to an interview request through the Forum’s networking system. Lunch was graciously provided to us, but it was served in a windowless basement three floors below the other 1,600 participants.
Adam Byrnes / Student Reporter
In contrast, general attendees paying CHF 8,000 in registration had access to every panel and could network freely with each other, being invited to special after-hours parties. This group’s base of operation was the “Village,” a safe zone in which to network freely away from prying eyes (watch this video to learn more about the conference layout). The food was reportedly superior to ours, according to a general attendee who ate with me in the media lunch area. When I asked how our lunch compared to his, he just rolled his eyes and gave me that sympathetic look your friends give you when they don’t want to give you difficult news.
The last group, the Strategic Partners, seemed to have it all. WEF Partners, who in part help to underwrite the Forum by each paying over half a million dollars in membership fees, had access to everything at the conference including the “Village,” their own lounge, and the “bi-lateral” meeting area on the top floor of the conference center. More than a few of the people I observed taking the exclusive escalator to the bi-lateral meeting area had monogrammed dress shirts. I can only imagine how sumptuous their lunches must have been.
Sunmin Kim / Student Reporter
Upon reflection it is clear to me that the WEF is taking its cues from Downtown Abbey, the period drama that details the lives of Victorian England’s haves and the have-nots. WEF Partners serve as the “upper class aristocracy,” living lives of privilege apart from the rest of the world, replete with their own lounges and meeting areas; WEF attendees make up the charming “middle class” that are tolerated to the extent that they also want to be upper class; and lastly, the media make up the “lower class,” living and working below deck and, in this case, serving as a mouthpiece to the upper classes.
This dichotomy was reflected in my access to participants. Out of the dozen or so interviews I was able to arrange, by far the majority were general attendees. My requests to interview WEF Partners were either rebuffed or ignored. Yes, there were opportunities to interact with newsmakers, but primarily through two controlled means: panels that were under Chatham House Rules that limited the extent to which a story could be told, and press conferences that were about as dry as toast and as newsworthy as paint drying.
To be fair, in addition to the paid partners there are also a number of individuals who attended the Forum free of charge, including the “Young Global Leaders” and “Global Shapers who the WEF”—individuals the WEF has recognized as young leaders with very high potential.
Sunmin Kim / Student Reporter
With over 1,600 people in attendance, I suppose it makes sense that there would be some sort of stratification among participants. After all, some members are paying through the nose. I respect the fact that different people attend the Forum with various agendas and that those agendas may be best served away from prying eyes of the press. But I wonder if the Forum itself and the world at large would be better served if the WEF granted greater media access in order to highlight the marketplace of ideas that the Forum facilitates. There are few places in the world like this, where the best minds in the world all come together. The people I met were amazing examples of what the world has to offer. Surely the “upper class” participants have just as, if not more, amazing stories that can be shared with the world. Surely they have ideas that can be better communicated though open dialogue with the media than through staid panels or stodgy press conferences.
As it stands, Violet Crawley, Downtown Abbey’s deliciously vicious defender of the aristocracy, would be so pleased.
Resource efficiency in industrial processes is a key part of corporate social responsibility policies in developed countries. For almost 20 years, institutions have been promoting the same behavior in developing countries, arguing that investing in sustainable industrial processes is cost-effective, whatever the scale. How well does the Guatemala National Cleaner Production Centre’s work illustrate this point?
ISTANBUL, Turkey – “If you think the cost of knowledge is too high, then just think of the cost of ignorance.” That is how Karen Rosales, echoing calls from the likes of Benjamin Franklin, Baron Moser and Barack Obama, closed her remarks at a workshop on capacity building and corporate communications at this year’s International Business Forum on sustainable and inclusive business, in Istanbul, Turkey.
For Rosales, deputy director of the Guatemala National Cleaner Production Centre, or CGP+L, reducing the “cost of ignorance” is one of the main missions when it comes to improving industrial processes’ sustainability and lessening their environmental damage.
flickr / aaronw79 under Creative Commons
CGP+L is a consulting firm that works with Guatemalan industrial companies. It does an on-field diagnosis of their current production process and develops strategies based on benchmarked best practices to optimize water and energy consumption as well as waste management.
Consulting firms working on resource efficiency generally deal with big national or multinational companies, and the impact of their corporate social responsibility efforts and up-to-date, resource-efficient industrial processes can be huge. But the World Bank’s International Finance Corp.’s 2012 Small and Medium Enterprises fact sheet points out that “SMEs account for about 90 percent of business and more than 50 percent of employment worldwide.”
“In Guatemala, 80 percent of the companies are either microenterprises or SMEs,” said Rosales, which is why CGP+L targets them—not just the big local or multinational firms—and has worked so far with companies staffing anywhere from five to more than 500 employees. Most Guatemalan businesses in the beverage, coffee, sugarcane or other food processing industries operate small factories with few workers. Altogether, their impact may be equivalent to that of many large companies: Many drops can make up an ocean.
And yet the lack of experienced or dedicated people to design and maintain a clean, lean and up-to-date industrial process that may induce the small scale leaves room for improvement. What’s more, Rosales said, the wasting of resources is due not only to process design issues but also to how the process is executed. As a result, negligence caused by ignorance among a factory’s staff is a common and significant point to address with specialized training.
Since CGP+L is an independent institution, the services package it provides—which includes audits, technical assistance and training—and the investments it requires have to be financed. These services are typically not cheap, especially for small enterprises. But thanks to public-private partnerships with the United Nations Industrial Development Organization, the United Nations Environment Programme and foreign cooperation agencies, the companies CGP+L works with have to pay for only 20 to 30 percent of the services package. Implementation costs—technology changes, facilities modernization, etc.—are borne by the benefiting companie . Once they get the recommendations, they are likely to follow at least part of them, given that they now know precisely what they can save in the future.
Speaking about corporate social responsibility, Amine Chouaieb, founder of Chifco, a Tunisian energy-saving consulting firm, put into perspective a consulting experience he had in the banking sector. “They don’t care about being green or not,” he said. “In the end, it’s [about] reducing the companies’ costs.”
Indeed, for any company, no matter its size, improved resource efficiency and waste management can lead to very substantial savings.
Expected savings based on CGP+L’s recommendations*Resource Dedicated investments (US$) Annual saving (US$) Water 695 1,014 Energy efficiency 1,934 2,801 Waste management 6,470 51,122 Total 9,099 54,937
CECARSA (meat processing), 25 employees. Source: the CGP+L’s datasheet (not available to public)Resource Dedicated investments (US$) Annual saving (US$) Chemicals 330 6,528 Fuel and thermal energy 30,533 779,168 Total 30,863 785,696
REMERSA (stoves & tinware items manufacturing), 92 employees. Source: CGP+L’s datasheet (not available to public)
*Follow-up studies led by CGP+L 4 to 6 months after the implementation phase has shown that in average savings objectives were reached at 70-80%. The gap is explained by the fact customers are not bound legally to apply the recommendations, and can invest to put into practice only the ones they consider most significant.
This year, CGP+L’s first nonsubsidized packages were introduced in the form of annual memberships. Companies that are not eligible for public-private partnership funding, or previous recipients that now know the advantage of, and want to keep, their regular resource efficiency diagnosis, will pay CGP+L for its services, which is expected to put the latter on a more commercially independent and viable path.
Whether this cost-saving approach is the main driver for companies to optimize resource consumption, instead of the old environment-friendly PR strategy, remains debatable. But for Rosales, the return on investment is obvious. In fact, CGP+L is busying itself with the opening of a new office in rural Guatemala.
“We have estimated that annually the companies which we work with [280 between 2004 and 2012, according to Rosales] are saving altogether about $20 million” when they invested only “around $16 million,” she said.
With more than 44 National Cleaner Production Centres worldwide, it’s clear that sustainability does pay off.
As various initiatives try to bring electricity to the globe’s most remote places (by way of solar energy), profitability looks to be blocking the light they bring.
ISTANBUL, Turkey — Salinee Tavaranan has a quite determined face when she talks about solar energy and inclusive business. Nothing surprising, though—the entrepreneurial Thai woman is committed to both. She runs a local business installing solar panels in the off-grid villages of a mountainous area near the Myanmar-Thailand border. It’s one of the many remote rural places, still untouched by electricity, that compose “the last mile.”
SunSawang, her company, used to be a nongovernmental organization that aimed to implement and repair solar systems the Thai government bought in 2004 for the remote countryside.
But when the government stopped providing solar panels, Tavaranan and her team decided to buy them themselves and handle their installation and maintenance. “We realized that if we’d keep doing this for free, we would not be able to do that forever,” Tavaranan says. And so they transformed SunSawang into a business.
SunSawang now offers individual solutions to off-grid households. It trains villagers to become technicians so they can install and repair the systems locally. “This service [maintenance] is the missing part in … similar projects,” Tavaranan says.
Indeed, neither the Thai government nor NGOs, which since 2004 had helped SunSawang install the solar panels, planned to do any upkeep on the precious equipment. The technician’s role is pivotal. Because the rainy season lasts for five months and cuts off access to those villages lost in the mountains, the locals themselves must complete all maintenance and repairs. When customers purchase the solar systems, the cost of installation and maintenance is built in.
This challenge —linking remote areas to electricity—is global. And the innovative solutions and approaches for reaching the most remote customers in these areas are quite diverse.
In the Horn of Africa, for example, Andreas Spiess runs a growing social enterprise called Solarkiosk.
“It’s very simple,” he explains. “There are fantastic technological solutions that are being developed for the needs and specific requirements of the rural off-grid population. And on the other hand, there is this huge market. The problem is, the product never reaches the customer.”
The German entrepreneur spends 180 days a year in Africa. His Solarkiosk is essentially a clean white shed with a roof covered by solar panels. Now settled in the center of several Ethiopian and Kenyan villages, it provides local customers phone and battery chargers, Wi-Fi and refrigerators in which to store medicines. It is its own sustainable marketplace.
Solarkiosk’s business model relies on a franchise system, tapping into local would-be entrepreneurs who can own and operate the kiosks.
The most prosperous kiosk in Ethiopia is held by 23-year-old franchisee Marrashka. Wisely advised by his mother, who used to be a shopkeeper, he has converted his kiosk into a small commercial complex. He has even connected it to a hairdressing salon and a movie theater.
Photo courtesy of Andreas Spiess and Merron Pillart
“This young man with no business experience became a thriving entrepreneur,” proudly observes Merron Pillart, director of Solarkiosk’s Ethiopian subsidiary.
While business is going well, Pillart and Spiess both say they are having difficulty finding investments. Since they work mostly with prototypes and cannot forecast their profits over more than a few years, banks scarcely grant them loans.
“We are profitable, but we are not bankable,” Spiess laments. “Solarkiosk’s concept is bankable,” Pillart adds, “but banks don’t look for concepts.”
Although doubts can be cast on their concept of profitability, another green energy company has been “investment profitable,” even if it was for the first time last quarter.
Greenlight Planet is a global company based in Illinois, United States and Mumbai, India. It delivers the Sun King, a yellow, unbreakable, semaphore-like lantern powered by solar energy, to the BoP (base of the economic pyramid) population of three continents. Greenlight Planet’s positive return on investment was almost accidental, as it does not plan to be completely profitable until 2015.
Compared with SunSawang and Solarkiosk, Greenlight Planet is a large company. It employs more than 800 people worldwide, many of whom sell lanterns in villages across 31 different countries. Anjuli Pandit, Greenlight Planet’s director of global communications, offers a colorful portrayal of her local sales forces, saying. “You can buy Sun King from the gossip mother of the village, the respected elder, the teacher, young influencers.”
However, when it comes to reaching the last mile customers—those in remote and rugged areas—Solarkiosk and Greenlight Planet share a similar strategy. They contract with notable local figures, such as elders or business owners, in the targeted area, who then serve as intermediaries between the companies and the end users of their products.
Such an approach to the market is very similar to a nonprofit’s way of proceeding, which arouses the skepticism of Erik Simanis, a researcher at the Center for Sustainable Global Enterprise at Cornell University. By having the same goals, resources and management style as nonprofits, green and inclusive businesses are not likely to be profitable. In such cases, he suggests, “social business is another word for NGO.”
But Pandit insists her company is an actual business. The expectations for Greenlight Planet’s BoP employees are the same as in any global for-profit corporation. “We are an American company, giving to our employee a salary, a career path and performance objectives,” she says.
Greenlight Planet aims to scale up its model, and reach more customers, through its distributors’ network. The company has sealed a partnership with oil giant Total, and as part of its “Total access to solar” strategy, the French company now distributes solar lanterns in many of its African gas stations. Ironic, indeed, but also profitable.
Still, some have their doubts about whether these strategies will work in the long term. “You can’t point to a single profitable solar power license right now,” says Simanis, noting that economies of scale are hard to build in this particular sector because of the cost of solar panel materials. He concedes, however, that some business models are successful, such as that of the company d.light.
One of Greenlight Planet’s main competitors, d.light is an international for-profit enterprise, based in San Francisco, that also produces solar lanterns, which are distributed to Total gas stations. It targets BoP consumers across 40 countries. The two companies are alike in many aspects: They sell similar products, distribute them through local agents in remote areas and yearn to expand as much as possible. Still, as Simanis explains, they remain nonprofit companies and are able to sell mainly because they are subsidized.
This strategic game being played in the BoP market shows that the opportunities in the solar energy field are tremendous. Enough, at least for now, to allow the co-existence of several global firms across various model schemes, as Solarkiosk and SunSawang also have common interests in BoP market. Tavaranan, for example, distributes Greenlight Planet’s Sun King to Thai households.
Even if solar products have not yet proved profitable for entrepreneurs, the creativity they demonstrate, and the way they integrate the BoP population into the process, makes possible a win-win solution for all. After all is said and done, this is not only about the money. In addition to their interest in solar energy, Tavaranan, Pillart and Pandit have one thing in common: They all are former expatriates who came back to their country of origin. The profit they seek is not only pecuniary. They also want to be involved in helping to light the last mile. Or, as Tavaranan says succinctly, they want to “keep doing this.”
Social projects that once depended on aid from donor agencies are shifting to what are known as “sustainable businesses.” But to stay sustainable, they need funding. Fortunately, as social issues arise, investors have changed how they invest capital. Instead of the biggest profit revenue, they are looking for the biggest impact—not to mention the healthiest snacks.
ISTANBUL, Turkey — Somewhere in the middle of the lush, green mountainous region of Ecuador, groups of farmers are harvesting tons of potatoes, beetroots, parsnips and plantains. But instead of selling them as raw crops, they convert them into certified healthy snacks. Within a matter of days, these high-quality crops are processed, packed and sent thousands of miles away, branded as Kiwa chips.
flickr / Global Crop Diversity Trust under Creative Commons
“We started this business because we see that the farmers here harvest mostly commoditized raw materials, like corn and potatoes, and are … easy prey for intermediaries who buy very cheap from them,” says Martin Acosta, general manager of Inalproces, the maker of Kiwa chips. “With this problem in mind, we decided to connect these small farmers to world markets.
“The job was never easy, but it has proven to be effective,” Acosta continues. “By providing them with technical assistance, we have managed to increase their productivity by 30 percent, thus increasing their income by 50 percent on average.”
Thanks to globalization, healthy Ecuadorian potato chips can now be enjoyed anywhere. “After selling our products in more than 10 countries, including Canada, Germany, France, Saudi Arabia and South Korea, our sales have grown at an average of 115 percent in just three years,” Acosta says.
But this ingenious and impactful business is not without its challenges; funding remains a central issue. “Since February 2012, when I committed … 100 percent of my time to Inalproces, funding has become tougher, and I am now looking for more investments, both as equity and debt,” Acosta says.
Indeed, access to finance is one of the main discussion topics among entrepreneurs, especially those who try to make a social impact with their businesses. But as the businesses shifted to being socially engaged, investors started to change the way they invested.
“[The] global financial crisis in 2008 and the pressure on government budgets, as well as the search for purpose and value creation, partly accelerated this shift in investments,” says Anja König, a Mercator-IPC Fellow from the Istanbul Policy Center at Sabanci University in Turkey. “In the past years, asset managers are observing an increased demand from asset owners for investments that not only minimize risk but also actively [create] social and environmental impact.”
Thus, the term “social investment” was born. “Social investment is [focused] on the deployment of capital in organizations with the explicit intent to create a social and environmental impact, in addition [to] financial return,” explains König.
Since the essence of social enterprises is generating profit while making a social impact, Acosta thinks the core purpose of his project is maximizing profits. “To be sustainable, we are increasing our sales and focus on profitability,” he says. “Our aim is to make our products reach markets worldwide.”
But when it comes to the source of funding, Acosta takes a firm stance. “I do not want it to depend on funding from development organizations or charity; we focus on profitability, all the time,” he says. “When it comes to financing, we have to be more profitable and expand our sales to attract more investors.”
A good example of a social investor is U.K. social investment bank Big Society Capital, which had more than 900 million USD in assets in 2012. Through its social investments, Big Society Capital ensures that social organizations are provided with a funding source and are able to fill financing gaps that would impede their growth and innovation. As of 2013, more than 15 social organizations have benefited from a Big Society Capital investment. According to the bank’s website, these organizations varied in type, from renewable energy companies to affordable housing institutions.
Harry Hummels, managing director at SNS Impact Investing, an investors group that focuses on social development, says that “impact investments are made into companies, organizations and funds with the intention to generate measurable social and environmental impact alongside a financial return.” He adds, “They can be made in both emerging and developed markets and target a range of returns, from below-market to market rate.”
flickr / Global Crop Diversity Trust under Creative Commons
These kinds of initiatives that focus on social projects are seen as an opportunity to further develop and sustain Inalproces. They have certainly not escaped Acosta’s attention. “We currently have a lot of impact investors and Ecuadorian investors interested in financing our activities,” he says.
And to ensure his business’s future, he has already made ambitious plans. “We want to continue growing. In the near future, we want to create two more businesses that will stem out from our core business. One of them will [be] related to green tourism.”
Thus, through socially impactful businesses like Kiwa, revenues can co-exist with the sustainable livelihood of the farmers they depend on. Fortunately, the potato chip enterprise is not alone. Hundreds of flourishing businesses with social impact are emerging today across the globe. It is now the task of investors and policy makers to help them grow as lushly as the raw crops on the Ecuadorian mountainsides.
Green taxes play an important role in the encouragement of green solutions in developed countries, but how ready is the developing world to apply them?
ISTANBUL, Turkey — “What do you mean with ‘green’?” Emin asks while driving me to Atatürk Airport in Istanbul. This young Turkish taxi driver tells me (with his limited English, and even more limited body language, given he’s driving) he does not know what environmental taxes are, while pointing out the dozens of cars stacked in traffic on the right side, traffic he managed to avoid by maneuvering.
flickr / davidbenito under Creative Commons
More than 1.6 million automobiles are circulating on Istanbul’s roads, a number that is increasing every day. Consequently, so are gas emissions. The Turkish Finance Ministry, using Germany’s green policies as a model, is planning to implement a green car tax—a levy that Emin evidently does not know about.
In Germany, this tax is based on how much a vehicle pollutes (carbon dioxide emissions per kilometer) and not on just the capacity and age of the engine. Germany has even created Environmental Green Zones where only low-emission vehicles can travel. The proposed tax in Turkey would be for just new vehicles, however.
Most developed economies are applying green tax policies. Some are using incentives, like the United States, or increasing penalties, like Japan. Yet as the developed economies introduce green taxes, it’s not common to hear of them in the developing world. Do green taxes depend on how developed an economy is?
Green taxation has been equally criticized and lauded in recent years. It is meant to incentivize ecologically sustainable activities by applying taxes on CO2 emissions and other pollutants, and by offering exemptions that promote sustainable corporate behavior. The more you pollute, the more you pay, so the theory goes. Well-targeted green tax policies are seen as critical for genuine sustainable development. As Anna Peters, a senior consultant at Endeva, an institute that promotes solutions for global problems, says, green taxes can “push actors into a direction.” But can they work in all developing countries or regions?
According to Charles Ocici of Enterprise Uganda, a consulting company that advises and encourages sustainable businesses, green taxation does not play an important role in Africa yet, but it is coming.
“Until people are sure that food and clothing are there … in the villages nobody would care about gases for the environment,” he says.
In low-income countries, it seems wrong to ask for green taxes if you have not addressed even basic needs. However, Ocici still emphasizes the necessity for green legislation and education.
Alejandro Velasco, CEO of Quality Energy Solutions in Colombia, takes a different position.
“Green taxes could be just another tether of governments,” he says, meaning that green taxes can be another way for governments to get income. In developing countries, “green taxes should not be applied the way they are being managed in Germany or in Sweden,” he adds. “The change would be systematical.”
For Velasco, countries like Colombia are not ready to ask their citizens or industries to pay higher taxes on energy because they have not yet created or invested in greener alternatives.
Carbon dioxide emissions are known to be the main cause of environmental pollution and climate change. While the United States emitted around 5.49 billion metric tons of CO2 in 2011, Colombia was responsible for 71.15 million metric tons in the same year. Despite the fact that Latin American countries do not pollute as much as developed economies do, these countries should follow a clean path to development, Velasco says.
“We cannot make the mistakes Europe did,” he says, implying that developed economies’ practices have not always been sustainable and clean.
But two of the biggest concerns from developing economies are already among the top 10 most-polluting countries worldwide, with China holding first place and India third. Together, these two economies are responsible for one-third of global CO2 emissions, which have increased about 44 percent in the past five years.
Biplab K. Paul, CEO of Bhungroo, an Indian company that offers irrigation solutions, notes that green taxes have not been extensively applied in India because the political situation will not permit it.
“People know what a tax is, but they do not know what green is,” he emphasizes. “Taxes do not stop consumption.” The pollution rate per capita in India is not high, which means that industry bears the heaviest responsibility for the problem.
Paul believes India will have to adapt to global practices, but the government’s unwillingness represents a barrier.
Another energy sector executive from Asia, Alpine Wu of Sinopec Corporation, points out that China is taking the initiative and setting goals for reducing CO2 emissions. Green taxes and incentives in the world’s most polluting country are being applied, especially in terms of resource efficiency (energy, water) and green buildings. “For the next seven years, China is planning to reduce its CO2 emissions by 17 percent,” Wu says.
However, the Earth Policy Institute’s latest report reveals that China increased its CO2 emissions by 40 percent in the past five years. This presents a huge challenge for the Asian giant, which is already experiencing the consequences of a carbon-based energy supply, as seen in the dense cloud of muddy smog in the northeastern city of Harbin this past month.
flickr / jaaronfarr under Creative Commons
In an increasingly globalized world, international cooperation and industry participation could play a crucial role in green taxation, offering a new and cleaner energy path for developing economies.
Andreas Spiess, CEO of Solarkisok, a German company that brings solar power to remote towns in Africa, offers a widely held perspective on how green taxes can be an opportunity for investment and can therefore open new markets in developing economies.
“[Green taxes] are neither a luxury nor an advantage. They are a strategy,” he says. Some African countries are already applying tax exemptions, which is one way to help finance foreign business in Africa and also encourage investors to go green. This way, the massive demand for electricity in Africa could be met without the risk of having a monopolized, centralized energy supply. And, as Spiess notes, “you can avoid the mistakes that we made in Europe.”
Governments face the challenge of finding a new and sustainable strategy for improved living worldwide. The current environmental crisis demonstrates that the way developed economies improved living standards is not the best model to follow. Natural catastrophes and new climate conditions, which normally have a greater impact in developing nations, are going to become even more extreme as Typhoon Haiyan in Philippines just showed . Better living conditions won’t be attainable if industry does not change. Even though some countries pollute more than others, every nation has to understand that environmental issues are global.
flickr / daniwally under Creative Commons
Because people react to economic realities and market forces, incentives and penalties might be a smart way to promote environmentally friendly practices, especially given the urgency of the issue. Factors like diverse electricity offerings, organized public systems and higher incomes create a more stable platform for green policies. Nevertheless, this does not mean they are a requirement for a green strategy. Well-targeted green taxes and other policies require a country-by-country, and even state-by-state, analysis.
On the other hand, focusing on recovering our natural connection to where we all come from—through, for example, early education that charts a course toward respecting nature—could achieve a more lasting impact on people’s behavior. Meanwhile, green taxation could be an opportunity for developed economies to demonstrate factual international cooperation on the issue, taking into consideration the conception of a self-sufficient local growth.
A recent United Nations Development Programme report sees business as usual as “not sustainable and therefore without a future.” So what next?
ISTANBUL, Turkey – “The model by which businesses focus on the higher end of the income-pyramid consumers, with the poor and the disadvantaged being mainly supported by the State, is not sustainable and therefore no longer has a future.”
That rather epic quote comes from a newly released United Nations Development Programme report on the private sector’s contribution to human development, and it summarizes neatly the reason why companies and organizations gathered at the 16th International Business Forum in Istanbul.
This year’s conference theme was “inclusive business,” which means business that includes and benefits low-income communities by reaching out to them on the demand side as consumers and on the supply side as producers. If there were any buzzwords to replace the previous development-world mantra, “sustainability,” then “inclusiveness” would surely be one of them.
There seems to be few words of criticism about businesses that directly support people at the bottom of the income pyramid. But can these companies really bring about a global change? That is, if we believe that the end of non-inclusive models of business must come as soon as possible, are a relatively few, small and inclusive companies sufficient to change the impact the private market has on development?
Roger Oakeley, from British consulting firm the Springfield Centre, would say no. “Transforming individual firms is not enough,” he said during the Istanbul conference. “Entire markets must change in order for green and inclusive business practices to become the global norm.”
Indeed, the notion that markets must change does not spark too much disagreement at an inclusive-business forum, but how they should change invites various opinions from the usual left-to-right palette of economic policy.
Abdi Dorre, head of the Somali Chamber of Commerce, confidently stated that inclusive businesses can grow, and will grow, in his country without any help from the government. However, Archana Bhatnagar, President of Madhya Pradesh Association of Women Entrepreneurs and Managing Director of Haylide Chemicals Pvt. Ltd, raised the issue of green and inclusive businesses not managing to compete with, if we may call them so, brown and excluding firms. It is simply too expensive to do the right thing, she said.
“Governments should take their responsibility and better support companies that contribute to social development and that do not pollute,” Bhatnagar said.
Positions on whether free market incentives are sufficient to make inclusive business the new global norm tend to drift apart.
flickr / kholkute under Creative Commons
One thing did stand clear: Not all stakeholders in global business were represented at this conference in Istanbul. Small and medium-sized enterprises and nonprofits from all around the world gathered to pat each other on the shoulders and say “good job”—and rightly so. But large multinational corporations, some arguably more powerful than entire nations, were missing.
One conference attendee from a development organization, who wished to remain anonymous, said, “The private sector will continue to bring social injustice and environmental degradation as long as it is not forced to change.”
The attendee added, “There should not be anything like CSR [corporate social responsibility] departments at big firms. The pure existence of a business should benefit all people in the certain community where it functions, and likewise not be bad for the environment.”
It has even been shown how a small group of corporations control global markets, and their ambitions are what the future of inclusive markets relies on. Alice Hutchinson, head of advocacy at the nongovernmental organization Care International UK, points out in an article on inclusive markets that “a plethora of standards currently exist to try and hold companies to account, but these have nearly all been voluntary.” She further notes that “Harvard Business School estimates that out of the 82,000 multinational companies out there, only 3,000 or so are exploring inclusive models.”
It seemed that most representatives at the International Business Forum would agree that markets should change, but the question of how produces diverse answers. Unfortunately, green and inclusive companies are not even close to being the most influential stakeholders in international business, no matter how many conferences are hosted in their honor. And beyond the politically complex question of how markets can change to benefit those at the bottom of the income pyramid, there are the ambitions of the large and powerful corporations that profit from the way markets function today.
As a way to reverse harrowing global youth-employment numbers, youth entrepreneurship is seen as a bright light at the end of a very long tunnel. But how viable of a solution is it?
ISTANBUL, Turkey — The numbers are terrifying. According to recent research conducted by The Economist, around 24.4 percent, or about 290 million, of the world’s young people are currently unemployed. No wonder they’ve been dubbed the Jobless Generation.
In global conferences—where policies and ideas about young people, business and development are laid forth and discussed—the young themselves are often forgotten. It is as if the next generation is simply affected by policies created by the older ones, instead of taking part as policy makers. Fortunately, this was not the case at the 16th International Business Forum in Istanbul.
Photo courtesy of IBF
“It is without a doubt that youth play an important role in inclusive business, as most of the startups come from them,” said Hansin Doğan, deputy director of Istanbul’s International Center for Private Sector in Development, part of the United Nations Development Programme. Yet, although youth entrepreneurship is often seen as a solution to mass unemployment among the young, it is far from a panacea.
In the world’s fastest-growing economies—like China, India and even Turkey—young people aged 15 to 30 make up almost half of the population. Yet they face considerable barriers if they wish to set up their own businesses. “There are many great ideas from young entrepreneurs, but lack of skill makes it difficult for them to be implemented,” Doğan said.
Young entrepreneurs who came to the forum in Istanbul shared a similar view.
“Our main challenge in doing business is that we don’t have the business skills needed,” said Salinee Tavaranan, founder of SunSawang, a business that provides affordable solar energy systems for rural areas in Thailand.
Indeed, entrepreneurial skills are one of the main challenges for young people planning to start an inclusive business. “Starting a business needs skills; you cannot learn it by doing. It’s very challenging for youth because they need not only skills but also mentorship, compliance and access to finance,” Doğan said.
Many organizations are now emerging to help young people become entrepreneurs. One of them, Job Skills, a Canadian nonprofit, offers a Youth Entrepreneurship Program that provides resources and skills for any business, which can range from copy centers and general contracting to dog treats and rock bands.
“The program assists unemployed youth between the age of 15 and 30 who are out of school and out of work,” said Sandra Ponting, business services and programs coordinator at Job Skills.
“For 24 weeks, we taught them how to set up their business plan, [conduct] market research [and deal] with finances, management skills and operating their business,” Ponting explained.
The importance of fostering entrepreneurs under 30 is emphasized not just by grass-roots NGOs but also by large economic and development organizations, such as the Organisation for Economic Co-operation and Development.
“In OECD, we view young entrepreneurs as a driver in local economic development, as well as in innovative solutions,” said Cristina Martinez-Fernandez, the OECD’s senior policy analyst on employment and skills.
To reduce the high number of unemployed young people, many countries are aiming to give them better access to self-employment. “In some [OECD] regions, youth entrepreneurship is part of their strategic policy for economic development,” Martinez-Fernandez said.
This eagerness to help young people start their own businesses has been translated into specific policy frameworks for youth entrepreneurs. For example, the OECD’s Local Economic and Employment Development program, or LEED, focuses on analysis and evaluation at the local level of entrepreneurial activities, particularly in entrepreneurship education.
Some European countries already have policies aimed at promoting youth entrepreneurship. One good example is the United Kingdom’s Think Big program, which has been replicated in Germany, Ireland and Slovakia. The program was established in 2009 to engage and inspire young people to launch local projects that make a positive impact on their communities.
Hands Up Who’s Bored is an example of a project supported by the Think Big program in the United Kingdom.
Through training and grants, Think Big works to give young people a chance to turn their entrepreneurial idea into something they can be proud of. According to its website, more than 2,500 projects from almost 30,000 young people across the United Kingdom have been supported by Think Big.
Nevertheless, to support entrepreneurial activities as early as possible, formal institutions must still play an important role.
The United Nations Conference on Trade and Development Entrepreneurship Policy Guidelines stress “the importance of raising awareness to school students about self-employment as a viable career option,” said Tatiana Krylova, head of the Enterprise Branch Division on Investments and Enterprises at UNCTAD.
To raise awareness of entrepreneurship at an early age, basic skills in economics, marketing and local commercial law can be introduced in classrooms. “Implementation of extracurricular activities, including visits to businesses, also proved to have good results for students,” Krylova said.
“I believe the role of youth entrepreneurs in sustainable businesses is going to be bigger,” Martinez-Fernandez said, “since entrepreneurship for young people [is] already part of strategic policy for development in some countries. Now it is also about how well young entrepreneurs [organize] themselves and [about] establishing a global network.”
Undoubtedly, the future of sustainable business relies greatly on how much young people are involved in it. Unfortunately, present government policies are not enough to start the chain reaction needed to increase entrepreneurship among them. According to recent data from the World Economic Forum, the quality and relevance of education is still a major reason for youth unemployment. Without increasing the relevance of education systems, the effectiveness of entrepreneurial policies for the young may be disrupted.
The WEF’s Global Agenda Council on Youth Unemployment says high population growth, recurring economic crises and a discouraged youth population are some of the main challenges in combating the high rates of unemployment. Despite many initiatives taken by numerous organizations and policy makers, the issue is far from resolved.
Student Reporter, a global media outlet and journalism incubator, is hiring for a part-time Community and Marketing Manager to: 1) help us manage our international community of writers, 2) grow our outlet’s readership through social media marketing and 3) assist in market research to ready the next stage in our venture as a global media company start-up.
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Duties and Responsibilities
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In the first week of October, experts from around the world met at the third World Resources Forum in Davos, Switzerland, where they discussed issues regarding sustainability and resource efficiency. The WRF, according to the organizer, is a science-based platform to “promote innovations and build bridges among researchers, policymakers, business, SMEs, NGOs and the public.”
What was most striking about the conference’s participants, however, was the absence of politicians, entrepreneurs, women and students. Overall, there was much talk but no concrete decision making. Instead, there were cuddly stuffed animals resembling the marmot, a type of ground squirrel native to the Davos region.
At one point, Bas de Leeuw, the WRF’s managing director, threw a stuffed animal to a gray-haired man. “Now you have Marmi, the marmot,” de Leeuw said, adding, “Please introduce yourself.” As he held Marmi high up in the air for all to see, the man introduced himself as a Finnish engineer. On this first day of the conference, Marmi flew through the air at least 10 more times, “so that we can get to know each other better,” explained de Leeuw, before he announced the “parade of workshop leaders.” Lit up by colorful disco lights, the 20 leaders made their way through the crowd toward the stage, while the audience members clapped to the sounds of Midnight Oil. “How can we dance when our earth is turning,” boomed the loudspeakers.
Student ReporterScientists, scientists and more scientists
With the parade and Marmi, conference organizer de Leeuw wanted to emphasize “the humanity” of the participants to open up the dialogue. The strategy paid off: After just a few minutes, the ice was broken and laughter could be heard. But was there any ice to break in the first place? This year’s WRF attracted a rather homogenous crowd. Scientists were meeting among themselves. Politicians, entrepreneurs, women and students were all missing.
Werner Bosmans, a member of the European Commission, was one of the few politicians present. He observed that there was “broad support for mandatory, international requirements for the use of land, water and coal” among the conference participants. Yet there was no agreement on how this goal should be achieved, and with so few politicians and entrepreneurs present, a group needed to implement such change was missing.Preaching to the converted
English sustainability expert Roland Clift would have liked to have seen more politicians at the WRF. “Industry has the technologies to enable sustainable living globally,” he said. “Now politics and entrepreneurs need to implement them.” Markus Reuter, product manager at Outotec, a firm specializing in technology and services for the metal and mineral industries, said, “At the WRF we are preaching to the converted.” It isn’t enough to talk with scientists and engineers, he added. “We also have to discuss with young people.” In other words, Marmi wants to reach everyone.
Flickr/ unicoletti under Creative CommonsWhere were the students?
Besides the lack of politicians, entrepreneurs and concrete measures, there was also a conspicuous absence of students, despite the fact that de Leeuw repeatedly mentioned “the importance of the next generation, our future.” Efforts were made to attract more students to the WRF, he said. But collaborations with Oikos Consulting, a student consultancy for sustainability startups, and Student Reporter, which provided media coverage and offered student discounts, did not succeed in bringing more students to the event. De Leeuw said the WRF wants to work with interested students, noting he was glad to see that the few students who attended the conference “actively participated in the debates.”
25-year-old ETH student Hari Chithambaram offered an explanation for why students stayed away: Despite the playful marmot activity, the conference was “too repetitive.” Many of the speakers “presented nearly the same thing as last year.” In addition, the presentations were too theoretical, and there was a lack of concrete measures, Chithambaram said . “The young generation calls for action,” he added.“Gender balance fail”
Marmi could also not conceal the fact that so few of the presenters were women. Dianne Dillon-Ridgley, a human rights activist and adviser to President Barack Obama, was the only woman to share the stage with seven men on the first day. This inspired participants to blast out tweets, such as “Gender balance fail.”
“That was unfortunate,” said de Leeuw about the gender imbalance. “We had invited more women, but for different reasons they had to cancel shortly before the conference.” The main focus of the WRF was “to find qualified speakers,” he said. “Gender is irrelevant.”The message goes unheard
The WRF organizers chose for its location the Davos Congress Center, casually referred to as the World Economic Forum conference center, where the WEF hosts its annual meeting every January. A provocation? “The message is, sustainability is just as important as economy,” said Harry Lehmann, who is with Germany’s Federal Environment Agency. “The time has come to say fair’s fair,” sang Midnight Oil in the tune played at the beginning of the conference. Sadly, the message wasn’t heard outside of the prestigious conference center’s halls.
The Turkana people in Kenya have a new claim to fame. Rather than being the face of famine in the dustbowls of Africa, they have struck both oil and water in a span of two years, and with implementation of the new Kenyan constitution, devolution places these newfound fortunes on the governor of Turkana’s plate. Heavy is the head that wears the crown.
For a county where the poverty rate is estimated to be over 90 percent, the successful drilling for oil in 2012 and the discovery of a huge aquifer in September 2013 will change the people’s lives, a drop at a time. Curiously, though, the locals are more intrigued about the aquifer than the highly sought after black gold. With its surface area more than 4,000 square kilometers, hydrologists estimate the aquifer holds about 200 billion cubic meters of freshwater, enough to take care of all of Kenya’s water needs for the next 70 years. There is no greater news for the inhabitants of this bone-dry area, who have lived through perpetual droughts. This might just be the one place in the world where water is more precious than oil.
© UNESCO/Nairobi Office
Regarding this priceless water find, David Zetland, an economist who owns the blog Aguanomics, says the most pertinent questions are who has the rights to the water and who makes decisions on its extraction and use. He says the locals should get most of the rights and control, as well as the resulting profits from the water, because it’s their resource.
“A centralized ‘grab’ to put it into canals to use elsewhere is likely to help the rich and not the poor. It will probably not be sustainable, either,” Zetland adds. The extent of the impact of the discovery on the marginalized people will heavily depend on how the government, particularly the devolved administration headed by the Turkana governor, manages the aquifer.
Following the adage that you never miss the water till the well runs dry, Zetland says one easy way to mitigate damage is to limit extractions to less than 1 percent of the total water. This will provide adequate time for planning, managing and getting accustomed to the availability of water, without over-exploitation.
© UNESCO/Nairobi Office
If the limit is agreed to, it might take about a century to deplete the water source. For a people who have buried their relatives because of the seemingly endless kilometers they had to walk in search of the scarce resource, there is little doubt that the vast water supply should be theirs. It seems only equitable for a place that in 2011 was hit by the worst drought in the Horn of Africa in 60 years. This can be seen as the climax of the burden they have had to bear, generation after generation.
Interestingly, though, the name of the area where the aquifer was found, Lotikipi, alludes to an underground water source, or so it’s said. But the birthplace of the Stone Age had a cruel surprise for its future inhabitants, as millions would die of hunger and become one with the endless sea of dust in the semi-arid area. Now, with the Turkana aquifer, every single drop counts.
Ask someone at TBLI 2013 for a definition of impact investing and you’re unlikely to get the same answer. Berry Kennedy listens to another part of the long conversation defining the impact investment field.
There must be “clarity between philanthropy, CSR and investing efforts. They are not all impact investments,” stressed Ximena Escobar de Nogales, head of social performance management at Bamboo Finance, an inclusive-finance private equity firm.
It was a bold opinion in a presentation to a room full philanthropists and corporate representatives who consider their work to be exactly that: impact investing. A bold statement, but not a surprising one: The stance is another variation on the debate mentioned in Friday’s blog about what exactly constitutes impact investing. In a way, TBLI is a conference full of people who are glad to see each other but are not quite sure what everyone is doing there.
“There is a little too much sniping at each other,” admitted Paul Sanford, chief investment officer at the private investment startup TriLinc. But this disagreement—and the process of figuring it out—is possibly the most valuable part of the conference.
Finding the boundaries of this rapidly evolving field raises questions that would rarely be heard at a traditional finance conference. For example, Patrice Schneider, chief strategy officer for the nonprofit Media Development Investment Fund, claimed the first fund’s high returns raised suspicions about the quality of the group’s impact. “When they saw our returns, they said, ‘You’re not an impact investor. You want a Ferrari,’” he said. As a result, he is targeting lower returns for his next fund.
Others take the opposite approach. “I don’t talk about impact until the very last two minutes. You talk about all sorts of things, then you talk about all the smiling faces,” said Oliver Hanke, CEO of the agroforestry investment firm Forest Finance Ltd. But while Forest Finance may talk finance first, it has its own alternative approach. “We’re not planning for an exit,” Hanke said. “A forestry project delivers over time.” The structure does allow for opportunities to sell early, but the target is for an investment of up to 25 years. It is a pretty radical idea, given the usual 10-year life of private equity funds.
Still others questioned whether the field they were there to discuss even exists. “The definition of impact investing is normal investment trying to claim a brand advantage,” said Guilio Franzinetti, who is on TBLI’s board of advisers. “Nobody takes a lower return to redeem yourself.” For Franzinetti, the term “impact investing” is just a new label for socially minded practices that have been around “since the Middle Ages.”
This lack of consensus on the nature of impact investing, and the terminology to define it, can disrupt communication between different players. “My advisers didn’t know what I was really wanting, or they didn’t want to hear,” private investor Karien Ter Muelen said. In her case, the problem again seems to come down to a definition of impact. “They think it’s impact investing,” she explained, talking about an African agroforestry investment she’s unhappy with. “I want more impact.”
For entrepreneurs, it can be hard to learn the field’s new vocabulary, especially those in emerging markets. “These standards are quite Western-dominated,” said Escobar de Nogales during a panel. She told the story of a female entrepreneur in Latin America who said she didn’t do “negative screens” on suppliers, when in fact the entrepreneur didn’t understand that negative screening was the work she did to ensure that her suppliers had fair labor practices.
Though there is debate, there is largely agreement that a consensus should be reached. “We need to make a case to the outside world,” said one audience participant. If people unfamiliar with the field “hear discourse…they’ve got other places they can put their money,” TriLinc’s Sanford agreed.
But the arguments themselves show a common desire for a new way of doing business that makes a substantial positive difference. The discussions at TBLI are just one small part of the shaping of a new industry. In the meantime, investors and the social sector alike have little choice but to become comfortable with ambiguity, waiting to see what emerges from the conversation.
Featured image source: flickr / itupictures under Creative Commons.
Large financial institutions’ responses to social issues are shifting from a cosmetic approach to a core investment strategy. At TBLI 2013, Nancy Gephart hears how times have changed.
Photo courtesy of TD Bank
Throughout the 2000s, large financial institutions loved visibility. Consumers were becoming increasingly concerned about the social and environmental consequences of big businesses’ activities, so major banks felt the need to prove their virtue in a highly observable way. Morgan Stanley built playgrounds for underprivileged youth. TD Bank planted trees in urban areas. Bank of America built low-income housing. All of these projects had clear positive social effects and were highly visible, leading to widely publicized photos of bankers “doing good.”
Today, though, this sensibility has shifted, and financial corporations are now viewing environmental and social issues in a more strategic way. “Today, asset managers are thinking about integrating ESG [environmental, social and governance investment] into all asset classes,” said Henry Schilling, a senior vice president at Moody’s, a credit rating agency.
Although much of this is still done to impress consumers, in financial services, where risk is king, investors are now recognizing that these “feel-good” ESG practices actually have financial benefits in mitigating political, climate and other risks.
“Increasingly, academic studies are validating the notion that high adopters of ESG considerations as a risk mitigant, or to enhance performance, translates into improved results,” Schilling said during an interview at the TBLI 2013 Conference in Zurich, Switzerland. “To the extent that they can integrate those factors and produce better performance results, they think that there’s value to that.”
This doesn’t mean large financial institutions have abandoned the photo opportunities altogether. In fact, for some of them, PR-based social initiatives have become even more important. But they’ve now been integrated into the company’s core strategy in a more meaningful way.
“CEOs, directors and management want to attract the best and brightest people, and the best and brightest people of [the younger] generation care about these things,” said Michael Eckhart, global head of environmental finance at Citigroup.
“You can say it’s for PR if you want to cheapen it, or you can say it’s for the overall leadership of the company, strategy, image and motivating people to buy your products,” he said.
By bringing these considerations into their core business, some large financial institutions have even dropped the publicity angle completely. Johanna Köb of Zurich Insurance Co. noted, “I’ve been talking to fund managers who say that, in the U.S., there are funds now doing ESG, but they don’t tell anybody about it” because of the hostility toward green-washing and any association with climate change.
Rather than using socially and environmentally responsible projects purely as a PR tool, financial institutions are now thinking seriously about how these efforts play into their core business. Highly visible social projects will undoubtedly continue to appear, but these institutions see ESG as more than building playgrounds and low-income housing. Instead, they view it as critical to their overall investment strategy in the long term.
TBLI 2013 is full of experts advising banks and individual investors on how to make sustainable or impact investments. But where, Berry Kennedy asks, do the experts put their own money?
Surprisingly, it turns out that not all professionals who work in the sustainable finance field make impact investments.
“It’s not a question of not believing in it. It’s just a question of not getting around to it,” says Andrea Weidemann, head of public relations at the indices provider STOXX.
“There are too many moving parts in my life right now,” admits image and personal brand consultant Rick Keating.
This is not to say that people in sustainable finance don’t try to invest their own funds. Some, like Beth Richardson at BCorp, are lucky enough to work for companies that make it easier by offering responsible benefits, like Beth’s socially responsible retirement fund. Others, like Rosanna Grimaldi, global relationship manager also at STOXX, or Eric Holterhues at Triodos Bank, which has both impact funds and and SRI funds, work in positions that make it easy to find out where and how to make personal impact investments. Grimaldi owns a small amount of an ESG indices offered by Stoxx. Conflict of interest policies at Triodos keep Holterhues from investing in his own products, but he does have his savings in environmentally and socially responsible banks.
But it also depends on how you define the term impact investing. Beth Richardson does go beyond her company retirement fund, investing a small amount in the community development bank Self Help. The challenge, she says, is that “I’m not an accredited investor, so there are not a huge amount of options.” There are some SRI options, but to Richardson, that’s more screening, which is “different than impact.” In other words, Grimaldi and Holterhues’s investments may be good, but they are not “impact investing.”
There are also investors who would go even further. Aymeric Jung, who left a 10-year career in inevestment banking to try to start the Slow Money movement in Europe, says that for him, the first step was to “take back money from capital markets, because nobody anymore can explain what’s going on…” Instead, he’s moving his money into primarily loans to local organic food businesses. His first investment is in an organic seed company. When I asked him how he got around the accreditation problem he laughed: “By using a lawyer.”
The underlying theme is a strong personal belief in the field itself- the field is their social return. Grimaldi brushes aside the fact that the sustainability indices she owns have earned returns as good as the benchmark. She invests in them, “not to earn money, to be frank… I do it because I believe in it.” Even Holterhues stresses that the profit is important “to attract money from investors” not for itself. The profit seems to be less a personal motive than a desire to bring more people to the field.
Initially, it seemed odd, inconsistent, that so few impact professionals I spoke to have their own impact investments. But given the challenges to individuals to make impact investments—which could be the subject of a whole other article—I’m more interested in those that do take creative steps to do so. Either way, the men and women who invest their careers in the field add a fourth prong to the triple-bottom-line approach: Beyond people, money, environment, they want make their mark on the world.
Ed. note: A description of Triodos Bank was added 18 November.
Nancy Gephart gives a round up on some of the winners of the ESG Leaders Awards and considers the dangers of praise.
Photo courtesy of TBLI CONFERENCE
Diversity ruled for the ESG Leaders Europe Awards at the Triple Bottom Line Investing (TBLI) Conference in Zurich. With four categories the award looks to highlight successes across the impact field, commending investors as well as the projects which tend to be the focus of awards.
In the end, it seems everyone could have been a winner – and that was the point. Rather than using concrete investment metrics to choose a winner, organizers chose to celebrate a wide range of activities across the field.
“What we tried to have between these four awards was a balance between big and small ones, new and old ones, and a reflection of specific elements related to this year,” explained Andrea De Wolff, founder of Sustainable Finance Geneva and one of the three judges of the competition.
VBV Vorsorgekasse, which took Best Investor in ESG, was a peculiar “newcomer”. With 1.8 million euro under management, VBV is the largest pension fund in Austria, and was the first to go into socially and environmentally responsible investing 10 years ago. A decade on almost all of Austria’s pensions funds have followed suit.
“When we started, no one was doing it. Nowadays, there are 10 pension funds and eight of them are doing it. What used to be a niche topic is now becoming an industry standard.”
Although 10 years seems like a long time, it’s relatively short in the life of a pension fund; by the standards of a famously cautious industry, VBV’s move into impact and its market-altering effect in Austria has happened at high speed. With many pension funds around the world still unwilling to touch ESG, it’s still a novel idea for the industry.
The award for Best Impact Investor went to LGT Venture Philanthropy, a well-established investor, aiming to “increase the sustainable quality of life of less-advantaged people.”
The judges here favored experience over innovation: Although all nominees were doing innovative work, according to De Wolff, it was the length of LGT Venture Philanthropy’s involvement in impact investing that made them stand out.
The winner of the “Most Innovative Impact Investing Project” award went to the Moringa Tree Project. By planting trees at women’s cooperatives, schools, clinics, and orphan homes, this project has environmental benefits, but also provides financial opportunities for those who sell the tree fruit and pods.
The judges went with Moringa partly because its focus differed from the other awardees: “We considered that LGT looks mostly at social dimensions and wanted to also recognize those doing environmental work.”
A big part of conferences like TBLI is to get people going, to show them how much is going on; but while the awards made all conference attendees feel good and showed the breadth of innovation in impact, it perhaps gave credence to the stereotype that impact investing lacks rigor and is a “soft” field. By embracing breadth over performance and depth, the ESG Leaders Europe Awards celebrated the diversity of players in this space, but maybe set an unclear standard for high performing funds and projects in the future.
Nauru is a small island-state in the South Pacific, but instead of white sandy beaches and swaying palm trees, a barren wasteland meets the eye. The population is forced to live on a thin coastal strip and may have to be evacuated soon. On the other side of the world, a green algae slime is encroaching on the Baltic Sea, covering the rocks in port cities such as Finland’s Helsinki and Tallinn in Estonia. In Morocco, children living near mines have black teeth.
What all these events have in common is one mineral: phosphor. Essential to all life, it glows in the dark and is found in bones and teeth. We need it in our food to survive; we need it in our fields to grow food. And we are running out of it.
We broke the phosphate cycle. Our ancestors lived in huts next to their fields, consumed local food, and used their excrement, and their animals’, as fertilizer. The phosphor cycle was closed and working. But as a result of urbanization, more than 50 percent of the world’s population today lives in cities, and its excrement is collected in waste treatment plants and is usually not inserted back into the environment the phosphate came from. Often it is incinerated and used in construction, power plants or chemical factories.
This prevents phosphor from re-entering the cycle. “This is a huge missed opportunity,” says Ludwig Hermann, a senior consultant for energy at Finnish company Outotec. Valuable phosphor is wasted, and to Hermann, this is a “major misuse” of waste.
“We also have a mental problem, because unlike our forefathers, we don’t like to put our shit, in the literal sense, onto the fields,” says Jörg Matschullat, a professor at Germany’s Freiberg University of Mining and Technology. However, the story has become more complicated than a problem of attitude, as Hermann explains. Today much of human and animal excrement contains too many hormones and too much medicine to be safely applied in its primary form.
Hence, the two scientists advocate recycling phosphor and have developed technologies to do so. “You can de-water the manure, combust it and convert it into ash and use it as a highly concentrated fertilizer,” Hermann says. “That product you can move across Europe or even overseas. You are starting with a concentration of 0.3 percent, and you end up with a concentration of 20 percent, which can be transported, as it’s valuable enough. This secondary product is highly concentrated, free of harmful pollutants and clean.”
Today, we not only put the nutrient into buildings; we also send a massive overdose of phosphor into our seas and other water bodies. The Baltic Sea is one of the most polluted seas in the world, and despite 40 years of environmental management, the depressing fact is that “in reality the ecological state of the Baltic Sea is not improving,” according to the Finnish Institute for International Affairs. The Baltic Sea today contains 800 percent more phosphorous than it did 100 years ago, which causes eutrophication, a fancy term for a process that leaves large water bodies dead.
Such a dosage of this nutrient leads to excessive algae growth, sucking up all the oxygen and killing all other life. This is a major problem not only in Europe but in many other regions as well, China being a prominent case. “Redistribution would also solve this problem, because the incentives are wrong at the moment,” Hermann says. “The people who have wastewater plants want to get rid of the material and actually pay the farmers to be able to unload the waste. Simply moving the farmers away from phosphor hot spots sounds easy in theory but is not happening, so the nutrient needs to be moved.”
“Mining is dirty,” Matschullat says bluntly. It pollutes the environment with highly harmful substances, leading to, among other things, black teeth in children living close to the mines in Morocco. Using recycled phosphor would also lessen dependence on regions with phosphor mines and prevent unsustainable mining, such as that on Nauru.
Morocco alone sits on 75 percent of the world’s phosphate resources. This is highly critical, Hermann emphasizes, noting, “If there is an uprising in Morocco, we might not have phosphate in Europe.” Matschullat says, “We need a paradigm shift from a centralized to a decentralized system of phosphate management. But the large companies who control the minerals don’t like this paradigm shift. We will need the young generation to work on this. You could say, ‘Folks, there is an alternative! This is no longer needed.’”
Featured image: Phosphate mining operation in Togo; Source: Wikimedia Commons.