SIX
Changing the System
IF THE ENTREPRENEURS profiled in previous chapters could agree on anything, it would be that the current system is dysfunctional. Some parts do work (to the advantage of privileged communities and classes), but overall, the twentieth-century governance, market, and social systems we have inherited are ill suited for the twenty-first century. So it should come as no surprise to find that one key characteristic of many leading social and, to a degree, environmental entrepreneurs is that they seek to change the system, tackling social, environmental, and governance challenges at the source.
To take a sports analogy, some people may choose to change the disposition of players on the pitch or to redesign the playing field, but a few rare individuals work to change the rules of the game— or even the game itself.
There’s a bit of the game changer in most entrepreneurs; many seek to influence government policy, market rules, the educational system, or whatever else they think it will take to reach their objectives. But while some seek to change the rules of the game, others think to do so only when and where those rules bump up against the wider reality in uncomfortable ways.
Historically, many game changers have come from the worlds of science and technology. Samuel Plimsoll was one, with his extraordinary decades-long effort to force the shipping industry to adopt what eventually became known as the “Plimsoll line.” Thomas Edison was one, too, when he helped switch on the world to electricity, as were Henry Ford with his mass production line, James Watson and Francis Crick with their cracking of the basic human genetic code, and Tim Berners-Lee with his original operating code for the World Wide Web and his ongoing work on the Semantic Web.
In addition to science and technology, today’s social entrepreneurs are exploring new approaches to governance, property rights, and market transformations. For example, people like Peruvian economist Hernando de Soto work hard to promote the kind of governance and market systems that will ensure better living conditions for populations in developing countries.1 In China, de Soto notes, “only 250 million out of 1.3 billion Chinese have property rights and the right to hold assets in the private sector.”2 Once again, someone needs to change the system before the forces of entrepreneurship can be fully unleashed.
Other entrepreneurs, too, know that there are great advantages in shaping larger systems to support their purpose. A striking example is Gary Cohen of Health Care Without Harm, an international coalition of hospitals and health care systems, medical and nursing professionals, and related stakeholder groups. Its ambitious aim? “To transform the health care industry worldwide, without compromising patient safety or care, so that it is ecologically sustainable, and no longer a source of harm to public health or the environment.”3 Health Care Without Harm exists, in part, to phase out a wide range of toxic chemicals and materials that can impact the health of patients, medical staff, the public, and the environment.
To get a better sense of how—and where—social and environmental entrepreneurs are trying to change the system, we examine six areas where real progress is being made:
Again, for each area we spotlight real people and organizations that are expending considerable energy and other resources to make a difference. Mainstream companies that get involved in such initiatives early not only have an opportunity to shape future market rules but also get the jump on their competitors. The stragglers may find themselves struggling to catch up with some of the most important endeavors and opportunity spaces of the twenty-first century.
Transparency
Reasonable people make do with the information they can track down. They accept that information is always imperfect, and they make the best of things. Unreasonable people, on the other hand, believe that transparency is a necessary condition for political change, which, in turn, is a necessary condition for sustained, equitable progress. One man has stood head and shoulders above the rest in turning the world into a goldfish bowl, affording much higher levels of transparency and accountability. He is Peter Eigen, who cofounded Transparency International (TI), an organization dedicated to the battle against bribery and corruption.4
Transparency does not guarantee system change, but it is often a critical first step. Eigen, originally a World Bank official with vast experience in Africa and Latin America, had argued unsuccessfully that the World Bank should address these problems in its programs. Many of his colleagues at the Bank thought him unreasonable in pushing for a state of affairs that offended so many vested interests. But Eigen and his unreasonably determined colleagues made it clear that they were serious. After considerable discussion, the founding group decided that their initial objective—launching a publication to draw attention to corrupt actions by specific businesses—was unlikely to have the desired impact. Instead of going head-on at governments and business, they concluded that coalition building was the real key to success. Instead of criticizing from a distance, TI would join in the search for solutions. Today, this tiny group has turned into a global force, with national chapters around the world.
The founders shared the experience of seeing firsthand the devastating effects of corruption—particularly corruption across borders. They argued that in many parts of the world, the system was deeply diseased. And they knew that if you want to change the system, you must have—or must develop—convening power. Officially launched in 1993, TI soon leveraged its large list of contacts to organize its first conference, bringing together such figures as Oscar Arias Sánchez, the Nobel Peace Prize laureate and former president of Costa Rica; Ahmedou Ould-Abdallah, the former foreign minister of Mauritania; Ronald MacLean-Abaroa, the former foreign minister of Bolivia; and Olusegun Obasanjo, then of the African Leadership Forum and later president of Nigeria. One early target was the regulatory frameworks in most countries that allowed people to offer and give bribes abroad.5 In some countries bribes were formally tax deductible.
But TI isn’t just another gathering of the world’s political elite. One key to the organization’s success has been its nurturing of an unusual coalition of actors from civil society, business, and government. Although it does not expose individual cases, viewing that as the work of journalists, TI does see access to information as a key weapon in the battle against corruption. Its approach of publishing an annual country-by-country listing of whose hands are dirty—and whose are clean—has been hugely successful. The Corruption Perceptions Index (CPI) provides a snapshot of the views of decision makers and businesspeople, both locals and expatriates, about the level of corruption in a given country. That, the TI Web site argues, “is an incredibly important indicator of the image a country conveys to investors and potential business partners. A poor score in the CPI is a clear signal that a government has to make drastic changes—and to be seen to be doing so.”6
This is only the start, however. At best, TI acts as a gadfly, goading government and business leaders to act. Its campaigns encourage media awareness and coverage of such issues, but effective government policy making, regulation, and enforcement are needed to develop sustainable traction in the war against corruption. As globalization continues, these efforts will need to expand around the world, which will entail the fundamental rewiring of existing institutions or the creation of new ones.
Accountability
Reasonable people know that they can expect a limited degree of accountability from leaders in the public and private sectors. They understand that power implies privilege and, with it, a human tendency to skirt the rules or reach for more than one’s share, ignoring the consequences for others. Unreasonable people, on the other hand, set out to change the order of things. They insist on developing new mechanisms of accountability for effective, equitable, and sustainable social change. Recent years have seen a proliferation of such initiatives, several of which use approaches similar to that of Transparency International. Why? Because transparency and accountability generally go hand in hand.
Countries are competitive—and companies even more so. Therefore, if you were to devise a credible methodology and produce a set of national or corporate rankings on just about any subject, you would likely attract attention from those being ranked. SustainAbility and the United Nations Environment Programme did just that in 1994, when they began benchmarking and ranking companies in a series of studies, variously labeled over time as environmental, social, sustainability, nonfinancial, and extrafinancial reports. The two organizations more recently partnered with the risk-rating agency Standard & Poor’s, and the program—and its influence—have continued to grow.7
On a larger scale is the Global Reporting Initiative (GRI), which encourages companies to report on their triple-bottom-line performance—that is, the extent to which they are reducing their negative economic, social, and environmental footprints and building new kinds of blended value. The GRI was the brainchild of Bob Massie, who at the time headed the Coalition for Environmentally Responsible Economies (Ceres), a U.S.-based coalition of investors and environmentalists.8
Ceres’s goal for the GRI is to leverage the power of institutional investors in holding corporations accountable for environmental sustainability in all those corporations’ activities.9 Massie, trained as a historian and a theologian with a doctorate from Harvard Business School, brings a unique perspective to the issues of transparency and accountability. “As a historian, one learns to look at the world not through the perspective of a few years or decades, but through trends that last over centuries,” he told participants in the 2006 launch of the GRI’s G3 reporting guidelines.10 Together with the associated protocols and sector supplements, the guidelines are designed to help any business or other organization to produce consistent, useful sustainability reports. But Massie sees all of this in a much wider context: “And as a theologian, in my case a Christian theologian, one is encouraged to think about questions at an even greater scale. And one becomes comfortable thinking about the question of meaning. The creation of meaning, the understanding of why we do things always takes place in community.”
Massie noted that when the GRI was launched, “many people assumed that its mission was too bold, its resources [were] too few, and the historical differences and resentments between the parties whose cooperation would be required [were] too great. By any objective measurement, their analysis seemed to be correct. But fortunately there were enough people who decided that despite the probability of failure, they wanted to participate in the experiment.”
Massie went on to say:
We all knew that a corporation, just like a government, or a school, was an organism that pulled in resources, transformed them, and emitted products, knowledge, and waste, and that only some of the inputs and outputs were captured by the form of measurement we refer to as accounting. As a result, our idea of what it is to create wealth—real, lasting wealth [and] genuine, enduring capital—is hopelessly primitive and unsophisticated. And we believed that the purpose of all of these measurements was not to please any one group—investors, or consumers, or managers, or stakeholders—but to help to make progress toward the more elusive question of purpose, of trajectory, what the Greeks called the telos.
In conclusion, he remarked:
The question “What is the purpose of the firm?” is a subset of a larger question: “[W]hat is the goal of our human community?” The more we understand what a firm does and does not do, can and cannot do, the more we as managers, board members, investors, consumers, government leaders can ask ourselves whether this is indeed what we want it to do, whether we are expecting too little or too much. The GRI was built on the notion that transparency would allow everyone to see—and thus to begin to accept intellectually and morally—their own responsibility for the choices that we face today and [in] the future. In that too we have begun to succeed.
These are deep questions for most corporate boards, but a growing number of key actors are placing them on the business agenda. They include Alice Tepper Marlin of Social Accountability International, with its SA8000 social auditing standard, and Simon Zadek of AccountAbility, with its AA1000 standard for organizational accountability. The trend is spreading to the sensitive area of NGO accountability, too. Over a decade ago in India, for example, Bunker Roy of Barefoot College called for an NGO code of conduct. At the time, it was a groundbreaking and controversial, but visionary and much-needed, initiative.
Roy sought to standardize social auditing to render the Indian voluntary social sector more transparent, effective, reliable, and accountable. In the firestorm of controversy that followed, the social sector divided into opposing camps of pro- and antitransparency advocates. As a result, Roy’s campaign failed to achieve its main goals, and to date, Barefoot College has been the only community-based organization in India that has opened its auditing books to the public. Still, the campaign did influence the more recent creation of the Credibility Alliance in India, spearheaded by followers of Roy’s example.
Here again, however, voluntary efforts only take us so far. They are certainly better than nothing, but while initiatives like the GRI may attract a few thousand supporting companies, a single giant company like Wal-Mart has something like sixty-one thousand suppliers in its vast supply chain. If companies on that scale begin to embrace the benefits of new forms of transparency and accountability, the movement will advance dramatically. Nevertheless, as we will see in the conclusion of this book, national and international governments are crucial actors here, too. Why? In the end, these are political questions, and government will need to develop and enforce the rules for twenty-first century society and its markets.
Certification
Certification and other assurance processes are crucial steps toward ensuring acceptable conditions for producers and high standards for consumers and investors. Many of the accountability initiatives mentioned in the previous section, including the GRI, offer some form of certification. Other organizations certify social performance (e.g., Social Accountability International) or environmental performance (e.g., the Forest Stewardship Council, the Marine Stewardship Council, and other initiatives in such areas as organic agriculture, labor conditions, and workforce diversity). To learn how their efforts can transform a sector like coffee production or retailing, consider the work of Paul Rice, president and CEO of TransFair USA, the leading fair trade organization in the United States.11
When asked for TransFair’s elevator pitch, Rice replies, “It all depends on what sort of audience I had in the elevator. But for the average layman, fair trade is about helping farmers become independent and self-reliant through direct, equitable market linkage, about helping farmers and their communities escape from poverty without relying on international aid.”12 What about TransFair? “That’s simple: We’re the only certifier of fair trade products in the USA. In the coffee area, we have signed agreements with over six hundred coffee companies, including Starbucks, Procter & Gamble, and Green Mountain Coffee Roasters, and fair-trade certified products are now in more than forty thousand U.S. retail outlets.”
Fair trade has a direct effect on farmers in the developing world. “It’s about the farmer getting a dramatically higher price for his or her product,” Rice explains. “We’re talking about fair trade companies paying $1.26 per pound of coffee, and more for a fairly traded organic product, compared with a world price of around $0.65. And when you get down to the farm level—for example, in Nicaragua, where farmers are selling to people they call ‘coyotes,’ the price is even lower—around $0.20. If you subtract between $0.15 and $0.25 for their costs, farmers are something like $0.80 per pound better off.”
This is especially important today. Why? “In recent years, the price of coffee fell to its lowest level in fifty years,” Rice replies. “The 30 million coffee farmers in Latin America, Asia, and Africa could not even put out food on the table, much less cover their production costs.” Many were forced to sell their land and migrate to cities. In Colombia, farmers were replacing coffee with coca plants, fueling the global drug trade. TransFair is working to establish fair trade practices as the gold standard of sustainability for a range of agricultural products raised in developing countries and sold in the United States, including coffee, tea, cocoa, rice, sugar, fresh fruit, and cut flowers.
Rice came to fair trade by way of the mountainous Segovias region of Nicaragua, where he worked for eleven years as a rural development specialist. In the process, he became distressed by the failure of most aid projects to help people solve their own problems. So he founded the successful Prodecoop, a consortium of some fifty cooperatives representing twenty-five hundred small organic coffee farmers in northern Nicaragua, and began selling on favorable terms to fair trade buyers in Europe.
The experience convinced Rice of the transformational power of fair trade. In fact, the business even helped pull together former enemies born from the Sandinista era of the 1980s in Nicaragua, when the country was torn apart by internal conflict and when revenge killings were the order of the day. “And then the Sandinistas were voted out,” he recalls, “and a huge number of programs supporting small coffee farmers were shut down. I lost my job at the department of agriculture—and, in retrospect, that was a blessing in disguise. It forced me to rethink what I was doing and take a more market-focused, entrepreneurial approach.”
Subsequently, Rice served as strategy consultant and development adviser to over twenty cooperative enterprises throughout Latin America and Asia, helping them become more competitive, democratic, and self-reliant. Then, in 1994, Rice returned to the United States to enroll at the Haas School of Business at UC Berkeley, where he wrote his thesis as a business plan for what would become TransFair.
So, did the money come easily when he launched the company? “We never did raise enough money,” he laughs. “In the end, the Ford Foundation’s Mexican branch gave us $100,000. We had to decide whether to launch anyway—and did. We figured we had to prove the basic concept. And it was tough. Twice in the first two years, I didn’t take a salary. But then, in the second year, Green Mountain and Starbucks came in, and the thing snowballed.” He describes TransFair’s impact on the specialty coffee industry as akin to a “paradigm shift.” The basic idea is to create a new business model that makes it profitable for U.S. companies to pay higher prices and develop long-term relationships with family farmers in the global south. Whereas much of the antiglobalization movement sees free trade and markets as the enemy, TransFair helps farming communities pursue opportunities afforded by the global market.
Although he is far from 100 percent invested in the Starbucks business model, Rice stresses that, as a company, Starbucks is radically more responsible than others—such as Kraft, Procter & Gamble, and Nestlé—who, he believes, have led the industry in a “race to the bottom,” often seeming to be in pursuit of the “cheapest, nastiest coffee.” But Rice thinks that approach is on the way out. “People are defecting from coffee that stinks,” he notes. “The specialty coffee sector has gone from 2 percent to 55 percent of the market in thirty years.” Fair trade has captured 15 percent of the specialty market, and a high proportion of fairly traded products are organic (85 percent of TransFair’s coffee, for example, and 100 percent of its tea and bananas are organic).
All this is part of TransFair’s push to link fair trade with quality, often using tactics Rice calls “guerrilla marketing.” For example, he managed to recruit actor Martin Sheen, fresh from winning a clutch of Emmys for his role in The West Wing, for a series of public service announcements on TV in 2002. Sheen appeared, looking presidential, cradling a cup of fair trade coffee and saying, “I choose fair trade. So should you.” In the end, certification is only part of the battle: even the hottest product has to be seen as cool and be both accessible and affordable. Where these conditions are met, however, certification can reinforce the connection between those who lobby for higher standards and those who buy (or might buy) the products and services produced as a result.
Land Reform
However powerful transparency, accountability, and certification may be, there are many broader areas in which countries need to be politically and legally rewired.
In many countries, for example, land and property reform is a necessary condition for progress, as Hernando de Soto has long argued. Roy Prosterman, known as the “lawyer for the landless,” has fought long and hard for that cause. That is not how he started off in life, however. A Harvard Law School graduate, he enjoyed a successful career with one of the oldest and most prestigious law firms in New York City. Over time, he became distressed by the vast sums of money corporations were spending on legal fees to defend their interests against consumers. Eventually, he left the practice and, at the invitation of the dean of the University of Washington School of Law, started teaching there. Then he came upon an article about land reform in Latin America that changed his life.
Inspired by a new life mission, Prosterman jumped in with both feet in 1966, founding the Rural Development Institute (RDI) on a shoestring. Its objective was to help reform the rural land policies of the world’s poorest countries so that their farmers could gain land ownership.13 After decades of work in land reform, Prosterman and his institute have built legal capacity in all thirty-five countries that have sought their help to date. The RDI lawyers, generally from the countries where they work, are young and committed men and women, willing to work hard at significantly less than their counterparts in mainstream law firms. Because of RDI’s efforts, 70 million farmers have gained ownership rights to about 62 million acres, close to 2 percent of the world’s arable land. In addition, Prosterman and his colleagues conduct intensive field research, discovering how farmers perceive their situation and needs.
Consider RDI’s work in China. That giant country has to feed well over a billion people on only 9 percent of the world’s arable land. To meet this challenge, it must increase crop yields, slow the loss of agricultural land to urban expansion, and bring uncultivated or environmentally degraded land into sustainable agricultural production. In service of these goals, RDI has worked hand in hand with the China Institute for Reform and Development to develop and promote the Land Management Law. This trailblazing piece of legislation provides thirty-year land-use rights for farmers, thus ensuring the long-term availability of agricultural acreage for 900 million rural citizens, 75 percent of the country’s population.
In a country like China, however, enforcement can be a major issue because of widespread corruption. To help tackle this challenge, RDI has also set up regional legal-aid centers to inform farmers about their rights and help them in the exercise thereof, which advances the rule of law in the countryside. Although some may argue that the law profession has done as much to hamper as to build trust among citizens, sustainable economies of the future have to be built on sound legal foundations—and China has a long, long way to go before it is likely to suffer from the sort of legal power abuses seen in the United States.
Emission Trading
Many people dislike the idea that the rich can pay to pollute, an argument often hurled at programs that put a price on pollution to create economic incentives for investment in clean technologies. While some see emission trading as a way of letting business and other polluters off the hook, others see a system that rewards responsible behavior (because the greenest companies actually earn money by selling emission credits) and that exacts a steep price from the worst offenders. Moreover, by turning the spotlight on the relevant corporate environmental performance and wider trading patterns, these markets encourage consumers to identify and seek out more ecofriendly strategies. The potential for positive change can be enormous when the pricing is well judged, the trading mechanisms professionally handled, and the entire system policed by open, transparent, and strategically minded governments.
Thus, a handful of innovators worldwide are working to reprogram financial markets so that they take into account new forms of value creation—or destruction. These advocates for system change believe that the only way to push markets in the right direction is to revisit the pricing of key resources and assets. These people want markets, business, and products, as Ernst Ulrich von Weizsäcker once put it, to “tell the truth”—including the truth about their social and environmental footprints. Many extraordinary individuals are at work on this front, but two in particular stand out: Richard Sandor of the Chicago Climate Exchange and Tessa Tennant of the Carbon Disclosure Project.
Richard Sandor and the Chicago Climate Exchange
Walk into Richard Sandor’s office in Chicago, and you pass wall after wall of stunning black-and-white photographs, a huge collection of historic images reflecting his fascination with diverse— often revolutionary—thinkers. Among them are Albert Einstein, Fidel Castro, and Man Ray. Unlike Castro, however, Sandor set out to transform the world by transforming the financial markets. He is the man behind the Chicago Climate Exchange (CCX), North America’s only—and the world’s first—greenhouse gas emission registry, reduction, and trading system for all six identified greenhouse gases (GHGs).14 When President George W. Bush refused to join much of the rest of the world in signing the Kyoto Protocol to control climate change, Sandor jumped in to establish a nongovernmental alternative. “Governments don’t make markets, traders do,” he declared. “I’m a trader, let’s make a market.”15 So on December 12, 2003, CCX started to trade carbon emission offsets. Such offsets allow individuals, organizations, and businesses to cut the impact of the carbon dioxide they emit by paying for carbon-reduction efforts elsewhere, generally where it is more economical to do so.
CCX member companies and organizations make a voluntary —but legally binding—commitment to reduce GHG emissions. By the end of phase 1 (December, 2006), all members were due to have cut their direct emissions 4 percent below their baseline emissions from 1998 to 2001. Phase 2, extending through 2010, requires all members to reduce GHG emissions 6 percent below their baseline. At the time of this writing, the exchange members included American Electric Power, Ford, STMicroelectronics, DuPont, Motorola, and the City of Chicago. They may have joined CCX for different reasons, but all appreciated the opportunity to use the market to begin to tackle climate change.
Hunter Lovins is another environmental entrepreneur and an avid admirer of Sandor’s work. Her organization, Natural Capitalism, is also a member of CCX. She says:
It works like this: I fly around a lot. So my company bought carbon reduction credits from a company that reduced its emissions by an equal or greater amount. They make money, I pay money. My office recently signed on to get all of our electricity from wind power. Were I a big enough player to be a trader on the exchange, I could sell my reduction of coal fired power to someone else, who hasn’t yet figured out how to reduce their emissions. Ultimately, this will be a very big business, not only because we have to do it, but because reducing our use of energy can be done very profitably. DuPont, a member of the exchange, has set itself a goal of reducing its emissions of GHGs by 65 percent by 2010, and by then getting 10 percent of its energy and 25 percent of its feedstocks from renewables.16
Lovins concludes:
Clearly, it would be better if all emitters of GHGs were required to begin to reduce their assault on the stability of [the planet’s atmosphere]. But even were the U.S. to continue its stance that solving this problem will hurt the economy, Richard Sandor has moved the game. He and his colleagues at CCX have not only set up the underlying mechanisms, and established a third party verification process, [but have also] showed their members that the process of reducing their use of energy and thus their emissions confers such very real competitive business advantages as enhancement of brand, reduction of costs, and encouragement of innovation.
Tessa Tennant and the Carbon Disclosure Project
Tessa Tennant has been another innovator in terms of systemic change. She has worked in social investment since 1987, cofounding the United Kingdom’s first equity investment fund for sustainable development in 1988. She stresses the key importance of pioneers like Alice Tepper-Marlin, then of the Council on Economic Priorities (CEP), and Steven Lydenberg, of Kinder, Lydenberg, Domini & Co. (KLD), in driving the 1987 landmark book, Rating America’s Corporate Conscience.17 But often the key test for such pioneers is what others build on their foundations.
Tennant also underscores the importance not just of individuals, what she dubs—in deference to our title—“unreasonable teams.”18 This, she says, was key to the even more influential Carbon Disclosure Project (CDP), which she also cofounded.19 This nonprofit group encourages large numbers of institutional investors to sign a collective global request for disclosing GHG emission information. Launched in 2000 at 10 Downing Street, official home of the U.K. prime minister, CDP has sent its petition annually to the Financial Times 500 companies and, in 2007, expanded its reach to over twenty four hundred companies.20
The CDP Web site is the world’s largest registry of corporate GHG emissions. The fourth CDP survey, based on a questionnaire and completed on February 1, 2006, garnered endorsements from 211 institutional investors with assets of more than $31 trillion. Seventy-two percent (or a total of 360) of the Financial Times 500 companies responded, with 87 percent of those indicating that they saw climate change as presenting business risks or opportunities— or both.
Over time, ventures like CCX and CDP will encourage—and, in some cases, force—business leaders to take greater account of carbon dynamics in their business models and strategies. Meanwhile, Tennant has been tackling an even greater challenge: opening up Asia to the potential of socially responsible investment. To this end, she cofounded the Association for Sustainable & Responsible Investment in Asia (ASrIA) in 2000. ASrIA is a nonprofit association promoting corporate responsibility and sustainable investment practices in the Asia Pacific region.21 Its members include investment institutions managing over $4 trillion in assets, although membership is open to any organization with an interest in sustainable investment.
Central to ASrIA’s eventual success, Tennant notes, was “a relentless effort to share the reasoning for sustainable investment with financial service audiences across the region: pension funds, stock market and financial service regulators, investment institutions, accountants, actuaries and so on. We explained why sustainable investment was relevant to Asia, on Asian terms. I’ve made concerted efforts to reach out. I think the ability to reach out is a significant feature of effective social entrepreneurs.”22
As a result of such efforts, not only is sustainable investment in general—and areas like emission trading in particular—taking off, but there has been a parallel boom in renewable energy and so-called cleantech. Industry observers estimate that more than $70 billion of new money was invested in clean or renewable energy in 2006 alone.23 This was more than a 40 percent improvement on the previous year, reported analyst Michael Liebreich at New Energy Finance.24 He also noted that more than twelve hundred private equity funds were targeting environmental projects: “All the biggest private equity houses are looking at this space.” As the challenges spotlighted in our ten great divides grow, these markets look set to explode, making a number of once-unreasonable people very influential and, in some cases, for better or worse, very rich.
Value and Valuation
You might think that after five hundred years of development, current methods of accounting for value creation—and destruction— are about as good as they can get. But recall Bob Massie’s point that today’s concepts of wealth creation are “hopelessly primitive and unsophisticated.” Clearly, five hundred years of movement in one direction is no guarantee for even fifty years more. If people genuinely want to transform the capitalist system, or any other economic system, they need to consider what gets measured— which brings us to valuation.
One of the most effective champions of new ways of thinking of value has been Jed Emerson, who came up with the concept of blended value. From 1996 to 2000, he was executive director of the Roberts Enterprise Development Fund, started by George R. Roberts, founding partner of corporate raiders Kohlberg Kravis Roberts & Co. Based in the San Francisco Bay Area, Emerson worked with social entrepreneurs like Rick Aubry of Rubicon, who were trying to produce early forms of blended value.
“Traditionally,” Emerson explains, “value has been understood as either economic value or social value. This has given rise to the notion that for-profit firms create economic value and nonprofit firms create social value.”25 Linked to that notion is the idea that “investments of capital are either market-rate or charitable gifts—and that firms operating to create both social and economic value are ‘double bottom-line’ companies, while those that are mainstream are ‘single bottom-line’ companies. This historical understanding of value is fundamentally wrong,” he insists, “and has led to a host of social and environmental problems since, in truth, value is non-divisible.”
All enterprises and corporations create blended value, he says. “The only issue up for debate is the degree to which they maximize the component elements of value, best tracked through the use of a triple bottom-line framework.” But what motivated him to dig into all this in the first place? “The initial idea for attempting to map the universe of players engaged in the pursuit of economic, social and environmental value came after six weeks of seemingly endless travel in the United States and Europe,” he recalls. “The [Roberts Fund] team talked to people at the heart of corporate social responsibility, social enterprise, investing, research and advocacy. And it became clear that the boom in [corporate social responsibility], human rights, sustainable development and the like has created a proliferation of silos, in the worlds of activism, government, business and investment.”
Many people the team spoke to appeared to be “grappling with very similar issues and challenges, but from within their own ‘silo’ of orientation (whether social investing, philanthropy, social enterprise or so forth), and were largely unaware of other initiatives just ‘over the wall.’ ” Such silos are a major issue. As Emerson puts it: “Collectively ‘we’ actually know much more than any ‘one’ of us has the bandwidth to appreciate, which led to the idea that by gathering a core representation of existing organizational and intellectual capital across all four silos of activity one might better inform specific efforts within each silo.” Like the Israelites before Jericho, and like many of the people profiled in these pages, the team wondered how the silo walls might be brought down. This remains a work in progress.
Meanwhile, there is Canada’s Chris Corps. He may not consider himself a social or environmental entrepreneur, but he is. He has been working to reboot international laws of asset valuation to better capture the long-term value created by buildings or infrastructure with sustainability features. He describes green valuation as “the most powerful tool you haven’t yet used.”26 He also makes the point that green buildings’ value is not just in their energy efficiency but in how they increase people’s productivity—a notion that can switch on even the hardest-headed CFO.
So what does this mean in practice? We asked Corps for a practical example.
Last December [2006] I was asked to work with some people looking at the sewage treatment plant proposed for Greater Victoria Capital Regional District (or CRD). In June of 2007 they published their study concluding a C$1.2 billion cost for the proposed plant. In May, I was one of ten British Columbia experts and four international experts asked to a meeting with British Columbia’s premier, Gordon Campbell. In July, the Cabinet approved an initial study to confirm my numbers, which I am now working on. My initial projection was that a sustainable approach could be as much as C$1.6 billion better than a traditional sewage approach. In other words a technical profit!27
So how can the original estimates have been so wrong? “I realized that the traditional financial methods of analysis are fundamentally flawed,” Corps replied.
Basically by using a discounted cash flow they are literally discounting future value and the longer life cycle of a sustainable approach. So much so that they concluded it was unviable when the exact opposite was true. The main problem is that the traditional approach and method of both accounting and valuation analysis is what might be termed “single perspective,” i.e., they only count one party’s perspective. This omitted one line item alone of C$150 million in savings from being sustainable. Reanalyzing the exact same numbers on a total cash basis over the life cycle, the difference is an amazing C$4 billion39 in favor of a sustainable approach. In other words, sustainability is being fundamentally failed by traditional methods.
Most strikingly, he noted that “the discounted cash flow devalued the future cost savings and value benefits, which will grow substantially over the cash flow horizon, to 2065. One hundred dollars in 2065 is only worth $6.60 today.”
Corps recognizes the importance of strategic partnerships: he is working with organizations like the International Valuation Standards Committee, Canada’s Appraisal Institute, the United Kingdom’s Royal Institution of Chartered Surveyors, and Mexico’s Federation of Colleges, Institutes and Societies of Valuation. If he succeeds in his self-appointed task of helping demonstrate that sustainability really does add value—for example, in the projects being developed for the Beijing, Vancouver, and London Olympics—the impact could be profound. Such a mentality could influence financial institutions in ways that have proved impossible to date. And the change would help create market pull for people like ecoarchitect Bill McDonough, who has been helping companies like Ford and Nike green their factories and is also supporting China in its efforts to adopt sustainability principles as a wave of urbanization sweeps across the country.
Profound systemic change tends to be driven by new forms of transparency and accountability, by the deployment of radically new technologies, by economic discontinuities like depressions, and by major conflicts. As we have seen, however, there is another option, and that is the intervention of unreasonable people. Their ultimate success and impact will depend on the degree to which they manage to scale and replicate their solutions, a challenge we explore in chapter 7.