Linkage?

A recent poll suggests that many Americans still aren't sure about whether there is a link between human activity and climate change. As Joel Makower states in his blog today:

"a poll conducted by market research company Vizu Corp. and Green Home found that people are convinced the global warming phenomenon exists (70%) and is important (74%). However, the public remains unsure of the cause of global warming and is debating whether the culprit is human behavior (26%), natural climate cycles (26%), or some combination of the two (25%)."

A colleague wrote me over the weekend asking about what I thought established this link. Evidently, as the poll reveals, this person is not alone in asking this question! Here is part of my response:

"I think there is good evidence of a link between human activity and global warming, but I am less sure that that means there are compelling reasons to make it the TOP priority for global economic policy (or even environmental policy). Those are different questions and that seems to get glossed over these days.

Here are two summaries of the science from what I believe are objective groups.
First, the Pew Center: http://www.pewclimate.org/global-warming-basics/ and then the National Academies of Science, which issued a joint statement, stating in part: "It is likely that most of the warming in recent decades can be attributed to human activities."

Bjorn Lomborg, who has been a critic of much of the environmental movement's doom and gloom has stated that climate change is caused in part by human activity. He questions, however, if it is the most important challenge facing the earth and how accurate the predictions are for future disaster. This project, enlisting many Nobel prize winners, is called the Copenhagen Consensus. He recently testified to Congress in March, and you can download his testimony at the site: www.copenhagenconsensus.com Of course, he has been criticized. But I would say that reading Pew, NAS and Copenhagen would give you a pretty good view of the thinking on this linkage."

So, is climate change the world's biggest problem? I'd say I am closer to Lomborg than Gore on this question.

My first concern is that carbon emissions are not the only environmental problem facing us, and that there are many other sources of environmental pollution for which we have the technology to fix them. Fortunately, many of these solutions also reduce carbon. But I question whether our environmental policy should be carbon monogamous. For example, with Envirofit, our retrofit cleans up a number of nasty emissions: particulates, hydrocarbons, NOx and CO/CO2. CO/CO2 are probably the least harmful of 2-stroke emissions for the people living in these cities... but under Kyoto, we only get "paid" for carbon reductions. That is OK, and will help us clean up these other pollutants as well. But it isn't the carbon that is causing respiratory disease in Asia. So pursuing a more polygamous emissions strategy makes sense to me, and when we get to the strategies like carbon sequestration, I am less sure that they make sense (compared to other investments to reduce pollution or improve global health).

Another concern is that the climate change models don't seem to me to properly model the liklihood of technological solutions, and I am not sure they can. While I don't want to be a "naively optimistic" about this, if you look at the pace of technology change for the past 100 years, I see no reason it is going to decelerate. How could we have predicted what we have in 2007 back in 1907? This doesn't mean we shouldn't start acting on reducing carbon, but that the justification should not be all the "disaster" scenarios that are being postulated for a hundred years from now.

I'd like to see the US take some policy approaches to carbon emissions mitigation, because I think that we need to slow the pace of emissions growth. So, for example, carbon cap and trade, or perhaps a carbon tax. It just seems sensible to not keep dumping more into the atmosphere, since we aren't really sure what it is going to do. We do know that it persists for decades, so as a recent article said, the carbon from Model T's is still up in our atmosphere.

Much of the growth in emissions will be from China and India, and it seems that in order to put some pressure on them, the US needs to get on board. In addition, I think coming up with a carbon reduction policy will get the US to innovate in this area... which will drive more technologies that can reduce carbon emissions and be cleaner, more cost effective sources of energy.

So, yes, climate change is an important issue. Is it the TOP issue? I don't think so. Part of an economy is having scarce resources, and as a society, we need to figure out where to invest/allocate these limited resources. I see Climate Change as a top 10 challenge, but feel that not all of the "answers" being proposed are as cost effective as say, malaria nets, clean water, vaccines, etc. So, if I were King of the World, I would be spending resources in multiple areas, where I saw best chances for payback (in lives saved, nature preserved, etc.). Climate change is not in my top 3... but I am happy it is some people's top 1. That is the basis of policy debate... people with different ideas on what society needs to do.

Lastly, I think many in the environmental movement have an aversion to discussing "mitigation strategies" and that this is a mistake. They would rather send out missives about relocating millions of people from flooding, than talk about sea walls, etc. Beyond the simple stuff, like changing light bulbs and more efficient cars, they seem to think that the only answer is wind and solar and doing with less. I don't buy it. That's why I like Lovins, McDonough, etc. and the view that done right, and designed right, there are many solutions that will in the end be better solutions. They will reduce waste, reduce pollution, and likely reduce carbon emissions. But they are going to come from the innovators, not the environmentalists (though I think there are lots of people who are both!).

Investments

An investment involves purchasing an asset or obligation with the expectation of future return. The aggregate effect of these investments drives capital flows around our globe. If, as is usually the case, people are investing for financial returns, financial capital will be searching the globe for the best returns. There is a lot of investment capital in this world, and our investment patterns, just like our consumption patterns, can drive significant change.

What happens when people are interested in other types of returns? This has given rise to the field of "socially responsible investment" and there are several types. There are the "negative screens", where you avoid investing in companies that sell certain types of products (cigarettes) or have certain types of supply (extractive mining). Then there are "positive screens" where one attempts to find particularly exemplary companies, with the idea that they will achieve higher returns (perhaps because this is their competitive advantage... in that attracts more customers, sparks greater innovation, or avoids risks). Think Ben & Jerry's or Interface. This is a burgeoning field, one of the faster growing areas of investor interest. Calvert, Pax World, and Domini funds are growing.

For most economists, investing is what one does with savings. If one donates money to a charity, the economists don't treat that as an investment. And if the government takes money from you (any one else just pay taxes?), and uses it for public "good" that isn't treated as investment either. Nor should it be. But back up... what if the reason one provided money to the charity was to seek a non-financial return on an investment? While we may never convince the economists that this is an "investment," there is certainly growing evidence that this is how the people with the money view what is happening. This growing trend falls under various labels like "venture philanthropy" or "social venture capital" or "new philanthropy".

Intriguingly, the investor may look at this "social investment" quite a bit differently than a "charitable donation." Returns in general, while speculative on the front end, are measurable at the back end. So, the investor might want to know what the investment accomplished. They might even want to know that it accomplished a superior return over a similar investment. Hmmmm. Ever compared yields on a mutual fund? Now, what about your "social investments"? Did you get the return you wanted from that United Way gift last year?

The law treats charitiable donations as gifts. Back in law school, we had to learn the difference between a gift and a contract,and it basically hinged on intent and a lack of mutual consideration ("consideration" as with many legal terms, doesn't mean what most people mean when they use the word; here it means money/property/services). If you are an investor, you usually get some form of obligation from the recipient (a share, a note, a deed). With a charity, you used to just get a thank you note and a tax receipt. But this has been changing. These "investors" are bringing some of the discipline of financial capital to this area. They are holding organizations accountable: funding based on milestones, requiring better measurement of results, etc. I think smaller donors (like me) are also beginning to think this way about at least some of our charitable giving.

Am I consistent in how I treat my investments across the spectrum of retirement savings to charity? No. But I do tend to start with a small position, and continue to grow it over time in the more successful ventures. And, I sell if I sense that the venture has moved away from the strategy it had when I invested, or if there has been a significant negative development in their market. I use this approach regardless of the investment. I also look for signs of growing value, whether in cash flow or other impact. I like measurable impacts, not the squishy stuff.

Mutual Funds. One of my tasks this year is to begin to move these funds (largely retirement) from standard mutual funds into more responsible funds. Along these lines, I have recently started a position in the Wilderhill Clean Energy Portfolio (AMEX: PBW). I will dollar cost into this fund over time, as I sense the portfolio companies are "richly valued".

Publicly traded companies: Whole Foods, Novartis, Johnson & Johnson and Toyota. All companies that pass my "positive" screen of being innovative, and having products that improve the world, particularly when compared to their competitors. I also think they will increase in value over time at a faster rate than other companies (a key idea behind an investment).

Private companies: Brighter Pla.net (carbon offset credit cards), Inviragen (developing world vaccines), Gelazzi (gelato) and CaringFamily (use of communication networks to treat disease). I also own stock in a few companies that I have worked/consulted for in the past. These are my gambles. Investing in early stage companies is foolish, but it is also a way to back teams you think have potentially "game changing" ideas.

Philanthropy: Rotary International, Nature Conservancy, Doctors without Borders, Kiva, Opportunity International, One Acre Fund, Ashoka, One World Health, Envirofit International. All of these have a common theme: all of these use private enterprise approaches to achieve societal value. All also understand that they need to partner with other organziations and governments to get sustainable results.

Looking at it, I feel good about my investments. I know my goals for each, and what my expected return is. I would like to single out One Acre Fund for doing an incredible job this past year, both in terms of results, and reporting. Guess I need to increase my investment in this great start up venture.

Some Thoughts on "Capital" and "Investing" in the BOP

Last month, I was fortunate enough to attend the Skoll World Forum. Interestingly, many of the other attendees were bemoaning the lack of "capital" for early stage social ventures. It seems that just a little more money (or a lot, depending on the participant) would cure a host of the world's ills. And, frankly, many of the participants (including me) were there in part because we are looking for money. But the specific issue of getting money for your organization is different than the issue of "is there enough money" for this emerging sector.

I have spent part of my career in the biotech sector. It was a common complaint that there was not enough start up capital in this industry either. The complaints were numerous: venture capitalists were moving to later stage deals, pharmaceutical companies were waiting too long to enter partnerships, the governments needed to get involved, universities needed start up funds, etc. So I designed an experiment. When someone started in on this, I would ask them for a specific example of a good team with a good idea that didn't get funding, somehow. In close to 10 years, I never got an example. It is NOT a trick question.

Does this mean there aren't examples of companies that didn't get as much funding as they wanted, had to delay some programs, pay "below market" salaries, travel in coach, or stay in Motel 6? Of course not. The point is that good teams, energized by good ideas about which they are passionate, will figure out a way to keep going. They work for stock, stay in Motel 6 and bust their butts. So, please, tell me what good social venture with a good team hasn't gotten funded, somehow?

When I talk about funding BOP ventures, I emphasize that "capital is relentless". What does this mean? It means that capital seeks a return... and if it doesn't get it, it leaves. And this isn't true of just financial capital... it is also true of human capital, and natural capital (1). So, if your organization (or sector) isn't getting capital you are doing something wrong. If you are having a hard time raising money, or getting good people to work for you, your red warning flag is flapping. I hope you see it. This does not make you a bad person, or a failure (unless you don't figure it out and try to fix it). Remember, too, that no one is entitled to capital. Remember those old Smith Barney advertisements? You have to "earn it." As long as capital is limited, you are competing for it, and that is hard work.

What about the bigger picture? What is the funding challenge for social ventures (and I am focusing on the "new" models here, not the more traditional charities)? Why is capital going to come into this sector? Remember, the context of trying to alleviate poverty is one of trillions of dollars of aid, with a very poor return on the investment. Now we are mixing in "start up venture," another high risk/low return (overall) proposition. At least when I took math, a low probability times a low probability resulted in an even lower probability. That is going to make capital (of all forms) a bit leery. Hmmm. More hard work.

And what about the other side of the equation? Are Jeff Skoll/Bill Gates/Pierre Omidyar/Google.ogres (just kidding, Sergey, in case you are reading this) sitting around saying: "Jeez, I wish I had more money, because there are so many good teams with good ideas that I would like to fund because I know they can be successful?" I doubt it. My sense is that they are seeing lots of interesting ideas swirling around, but not the teams that offer superior execution. Jeff Skoll was posting on this in the early days of his SocialEdge site. Why are Google.org and Omidyar Network looking in the for-profit sector? Probably many reasons, but at least in part because they aren't happy with the deal flow/quality in the social sector. Why are Prahalad and Hart emphasizing the need for multinational companies to lead the charge on BOP markets? In large part because they believe that only MNCs can execute(2).

Please don't tell me the answer is that if the sector only paid more (3), more good teams would form and attract more financial capital. The history of entrepreneurship is that ventures start with people with dreams, that then attract capital. It is only during the bubbles that this sometimes flips, and it doesn't last. It certainly isn't a "sustainable" way of attracting capital to the sector.

My next post will be about "walking the talk". Where am I investing in this sector... both my financial and human capital?

Until then, do good, and be great at it.
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(1) I don't think this is necessarily the case with intellectual capital, because for practical purposes, there are no limits on imagination/creativity. That is not to say that governments, cultures and organizations don't try to limit them.
(2) They convenienly ignore, unfortunately, that there are few (no?) examples of large corporations leading large scale societal change. That role typically falls to entrepreneurs and activists.
(3) Check out Rod Schwartz's interesting observations on this from his March 30 posting.