Hungry bubbles

May 12, 2009 by  
Filed under Third Quarter

Dr Jem Bendell
Adjunct Associate Professor, Griffith Business School, Australia
Niaz Alam
Board Member, London Pensions Fund Authority/Senior Associate, Lifeworth
Barbara Wettstein
Research Officer, UNI Finance Global Union
Olivier de Schutter: speculation in commodity markets has contributed to hunger

Olivier de Schutter: speculation in commodity markets has contributed to hunger

Money, money, money. by mid-2008 money was certainly making the world go round, first in a spin, then a downward spiral. The financial system really unravelled in the third quarter of the year. Yet, before the credit crunch became a credit calamity, at the top of the world’s agenda was the huge inflation in the price of food, with some pointing an accusing finger at that soon-to-be-endangered species—the investment banker.

As the world saw a doubling in wheat prices and tripling in rice prices in a year, leading to food riots in over a dozen countries, Olivier De Schutter, the United Nations special rapporteur on the right to food, said that, although climate change played a part, ‘speculation in commodity markets, driven in part by investors seeking havens from slumping stocks has . . . contributed heavily to hunger by pushing food prices out of reach for tens of millions’.1 In the last few years, regulations and advice have been changed to enable large institutional investors to buy into commodities-tracking funds, thus allowing huge sums to pour into this sector and its derivatives, such as options and futures. ‘This has been a serious factor aggravating the crisis,’ Mr De Schutter said, with some retailers and global agribusiness firms benefiting disproportionately from the price hikes.

One implication of this situation for investor responsibility is that investors need to assess more carefully the societal and longer-term economic implications of any regulatory changes they seek. Investors have been incorporating the political affairs of the corporations they invest in as part of their environmental, social and governance (ESG) assessment, but what of the political involvement of the private financial institutions themselves? Might we expect their own political influence to be consistent with the longer-term interests of the people whose money they manage? It is an issue we return to below when considering the influence of financial institutions and their former staff on the regulators.

Although clearly a topic of increasing concern and research, the food crisis had not produced a concerted response by socially responsible investment (SRI) organisations. This disparity is reflected in the varied views collated in June 2008 in an Investment Week survey of UK ethical investment analysts by Sarah Griffiths.2 Gonzalo Baranda of JPMorgan Asset Management said the food crisis was in part driven by long-term trends of ‘an increasing world population and a change in consumption patterns in rapidly growing emerging markets with, for instance, an increase in the consumption of meat’, but that ‘growth in demand for heavily subsidised biofuels’ were an exacerbating factor.

Speaking to Jeffrey MacDonald of the Christian Science Monitor in August 2008,3 Lloyd Kurtz, principal at Nelson Capital Management, a private money-management firm in Palo Alto, California, said, ‘It’s hard to figure out who to blame for the food crisis. Social investment has been most influential when there was an actor that could be identified—e.g., the tobacco companies, the South African apartheid regime, etc. But the causes of the global food crisis are multifaceted . . . That’s probably why you haven’t seen a coherent response from the social-investment community.’

Joachim von Braun: capital for agricultural growth cannot come only from the public sector

Joachim von Braun: capital for agricultural growth cannot come only from the public sector

One response came in June 2008 when the Interfaith Center on Corporate Responsibility launched an initiative to tackle food-related issues and propose investing guidelines for its 275 institutional investor members with projects aiming to encourage sustainable agriculture worldwide. Joachim von Braun, director-general of the International Food Policy Research Institute, a food-security think-tank in Washington, DC, also looked at what investors might do to positively help the situation. He advised that ‘The mobilization of capital for agricultural growth, especially in the small-farm economy, definitely cannot come only from the public sector. So the private sector has a very important role to play in order to mitigate and overcome the current food crisis.’ He urged social investors to shun commodity futures trading and instead provide ‘what small-farm agriculture really needs, [which] is long-term investment’. Von Braun added that ‘Ethically motivated investors should stay away from grain and oilseed-based biofuels because these biofuels by now are the cause of about one-third of the overall increase in food prices.’ In select cases, he told the Christian Science Monitor, development of certain biofuels can be justified, but ‘the large-scale investment in Europe and North America has been extremely damaging to world food security’.

The price of many foodstuffs fell back somewhat in the third quarter, but the price inflation forewarned of likely future scenarios, as climate impacts increase, groundwater and soils are depleted, industrial agriculture becomes more expensive due to peaking oil production, and global finance herds from one asset class to another. Socially responsible investors need to consider these root causes. A key factor has been that investment seeks the greatest returns without pricing in externalities such as carbon, or the risk to future generations from a food supply dependent on oil. This gives rise to situations such as in the Philippines, which went from a net exporter to the largest importer of rice in a matter of decades, as investment poured into its business process outsourcing industry, and government and industry turned their backs on domestic agriculture. Supporting the resilience of communities and economies should be a key dimension to responsible investment, with encouragement given to the government facilitation of investment to build such resilience.

Another issue highlighted by food inflation is the bubbling nature of our financial system. Most countries use a debt-money system, where money is created by private banks in the form of loans. Consequently, as Chris Martenson explained on Corporate Watchdog Radio, there is not enough money in the world to pay back all the debt. It leads to a situation where the economy must continually grow at a continuing rate, because of compound interest. This, he argues, leads to inevitable economic bubbles.4 Any form of bubble can cause a problem for asset owners, who lose out far more when the bubble bursts, compared to the financial services professionals, who can make a personal fortune on commissions as the bubble inflates. A bubble affecting the price of goods that are needed by disadvantaged people (think rice rather than shares in ‘’) presents a double whammy, as many people are hurt as the bubble inflates. If a bubble becomes too large, due to an inability to create units of value out of thin air (think derivatives of mortgage-backed securities) bought by people with access to sufficient credit (think ‘sufficient’ to keep the process going until they get their bonus), then you have the mother of all bubbles, which leads to a financial crisis. As institutional investors such as pension funds invest in the whole economy, they are particularly vulnerable to boom-and-bust cycles, and yet we might expect them particularly able and willing to influence the economy, as part of their duty to their policy holders. Yet, as we will see, this has not happened, and people who have saved for their whole lives are as a consequence hurt by a lack of systemic fiduciary duty shown by those meant to safeguard their future.

» From bail-outs to better capitalism

(The references are available in the pdf download and hard copy versions of this annual review, available from Lifeworth’s bookstore.)

This section can be referenced as:

Bendell, J., and N. Alam, S. Lin, C. Ng, L. Rimando, C. Veuthey, B. Wettstein (2009) The Eastern Turn in Responsible Enterprise: A Yearly Review of Corporate Responsibility from Lifeworth, Lifeworth: Manila, Philippines. (Page numbers for this section are available in the pdf download and hardcopy.)

Drinking problem

May 8, 2009 by  
Filed under First Quarter

Ken Livingstone, former London Mayor: behind the ‘London on Tap’ initiative

Ken Livingstone, former London Mayor: behind the ‘London on Tap’ initiative

In February 2008, London Mayor Ken Livingstone launched London On Tap, a campaign encouraging consumers to ask for tap water in restaurants and pubs for environmental reasons. Jenny Jones, Green Party member for the London Assembly, called the bottled water market ‘one of the biggest con jobs of the last two decades’, adding that ‘Selling water in bottles and burning massive quantities of fossil fuels for its transportation does not make economic or environmental sense.’31

San Francisco Mayor Gavin Newsom passed an outright ban on the purchase of bottled water by city departments in July 2007; New York City officials heavily promoted tap water over bottled that same summer; and officials in Minneapolis, Salt Lake City, Chicago, Rome, Florence and Paris have taken similar actions. On top of being 500 times more expensive,32 bottled water comes with a heavy carbon footprint: from the oil used to make the plastic bottles most water comes in, to the carbon emitted during transportation and refrigeration, to the millions of bottles that end up in landfills. And the market is booming: the world spends $100 billion on bottled water every year; in the United States its sales are second only to carbonated soft drinks.33 The Worldwatch Institute has previously calculated that this is a similar amount to that required to ensure the whole world has potable tap water.

More than 25% of bottled water is treated tap water, including Pepsi’s Aquafina and Coca-Cola’s Dasani. In many parts of the developed world there is no particular health value in drinking bottled water rather than water from the tap. In fact, laws governing the testing of bottled water are much less stringent than those covering tap water: New York City tap water was analysed some 346,000 times in 2006.34 Given this fact, much of the advertising that claims bottled water is beneficial to health could be challenged.

Principally, though, the corporate responsibility problem lies with the bottles. According to the Earth Policy Institute, more than 17 million barrels of oil are needed every year to produce the 29 billion plastic water bottles used in the United States alone. Less than a quarter of these are recycled; the bottles that end up in landfills take four centuries to biodegrade.35 Add to this the emissions generated through pumping, processing, refrigeration and transportation, since 25% of bottled water is imported relative to where it is consumed, and its environmental impact per litre is estimated to be up to 300 times that of tap water.36

Kim Jeffery, president and CEO of Nestlé Waters North America, does not like the comparison with tap water. He argues that consumers don’t choose between bottled and tap water but between bottled water and other bottled drinks, which are sugar-loaded or otherwise unhealthy. In addition, he highlights that water is one of hundreds of beverages to come in plastic bottles. According to Jeffery, water bottles constitute less than 1% of municipal solid waste in landfills.

All of this raises the question: is it legitimate to target bottled water producers? Is similar attention being paid to really big water users, such as agriculture, or old and inefficient infrastructure? Part of the bottled water focus is due to the fact that large corporations are easy, cohesive advocacy targets. But of all drinks sold in plastic bottles, water is the easiest to replace instantly—in most industrial countries—it is quasi-ubiquitous, safe and cheap, and in this regard makes for an excellent advocacy target, since the public can act instantaneously.

Those pushing for extended producer responsibility would demand that companies take responsibility for their containers’ life-cycle. But producers have shunned deposit programmes and emphasised community recycling, for which they are not responsible and incur no costs. There are, however, signs of change: in September 2007, Coca-Cola announced its intent to build the world’s largest recycling plant in order to recycle and re-use the entirety of its plastic packaging in the United States.37 Unfortunately, there was no specified time-frame. Nestlé and Coca-Cola are reducing the plastic in certain bottle sizes by 20–30% to diminish plastic waste and the energy spent in making the bottles. Nestlé produces its own bottles on-site, so they don’t have to be shipped to the plants, which would add to emissions. An option that seems greatly ignored could be a shift towards materials that are more easily biodegradable, such as hemp- and natural fibre-based pseudo-plastics, which are made without resins and break down much more quickly than petrochemical-based plastics. Finally, producers could offer a re-usable bottle, or join in on the trend of directly encouraging re-use by selling water at a discount to those who bring their own container. Regarding emissions, the problem applies more widely than this industry; legislation and political pressure could encourage the use of modes of transport with lighter footprints.

Congressman Ed Markey: calling for deposit law

Congressman Ed Markey: calling for deposit law

Legislators could offer consumers a real incentive for bottle return, e.g. a deposit law charging a small sum for each bottle on purchase, which is refunded on return. In the US, states that have deposit laws and community recycling have much better rates of return than the national rate, but they are in a stark minority. Again, there are signs of change: Massachusetts Congressman Ed Markey has called for what amounts to a nationwide deposit law on single-use beverage containers, though his programme is still to be fleshed out, as it currently lacks crucial specifics such as management and sources of funding. A final way to target bottled water consumption is to look at it practically: people also buy bottled water because having a portable form of hydration is practical, since it’s not given that there will be a clean source of water wherever one is. In Bath, where council bottled water costs were running into the thousands of pounds annually and a ban on bottled water in all council offices was recently passed, activists have additionally called for the rehabilitation of public water fountains.

As with most environmental dilemmas, the problem is structural: it has to do with how we live and consume in daily and seemingly inconsequential ways. Campaigns such as London On Tap, which seek to raise awareness about our societal disconnect with the environmental and commercial systems we function in, are only a first step to jolt consumers towards simpler, cheaper and more environmentally friendly modes of consumption.

This is not to say that this is not a matter of corporate responsibility. Nestlé articulates its new approach to corporate strategy is one of creating ‘shared value’ for its shareholders and society. Its 2007 annual corporate responsibility report highlights a range of commercial initiatives that are generating revenues while addressing social problems.38 Such initiatives are laudable, but any reader of its report could justifiably ask whether this ‘shared value’ approach is really central to the Nestlé core business. It is difficult to see which social or environmental problem is being addressed, which social value being created, by the sale of bottled water in industrialised countries, rather than adding to existing problems of pollution and waste. The arguments offered by their CEO do not resonate with a ‘shared value’ approach. Given that many of the examples offered by companies of how they can address social challenges through business are in practice making less of a rate of return than that expected from the business as a whole, are not scalable, and are dependent on government or NGO subsidy through partnership, we may question whether they really embody a new strategy. Perhaps they could be more appropriately understood as an advanced form of an established strategy: effective public relations through corporate philanthropy.

» Glassed: women and CSR

(The references are available in the pdf download and hard copy versions of this annual review, available from Lifeworth’s bookstore.)

This section can be referenced as:

Bendell, J., and N. Alam, S. Lin, C. Ng, L. Rimando, C. Veuthey, B. Wettstein (2009) The Eastern Turn in Responsible Enterprise: A Yearly Review of Corporate Responsibility from Lifeworth, Lifeworth: Manila, Philippines.
(Page numbers for this section are available in the pdf download and hardcopy.)