WRI Publications Feed: Markets & Enterprise

On the Frontiers of Finance: Scaling up Investment in Sustainable Small and Medium Enterprises in Developing Countries

Tim Herzog — Fri, 28 Aug 2009 14:24:09 -0400

Report Contents

Why invest in sustainable SMEs?
Financing sustainable SMEs in developing countries: An overview
Investor challenges
Bridging the finance gap: Recommendations

What Are Sustainable SMEs?

This report defines sustainable SMEs as those whose core business produces a triple bottom-line return—that is, social, environmental, and financial gains—and therefore contribute to dynamic, healthy economies and societies. Such enterprises tend to be of two types: those that use natural resources responsibly, such as organic agriculture, sustainable forestry, and ecotourism; and those that offer substitutions or solutions for otherwise resource-intensive products or services, such as clean technology, renewable energy, and new materials. In this report, SMEs refer to enterprises that are legally formed and operate within the formal economy. As defined by the International Finance Corporation (IFC), a small enterprise employs between five and 49 people, and a medium enterprise employs between 50 and 250 people.

Sustainable SMEs: The Future for Emerging Economies

Small and medium enterprises (SMEs) play a critical and well documented role in both developing and industrialized economies. They drive innovation, spur economic growth, create jobs, and facilitate the provision of goods and services.

Sustainable SMEs are those that manufacture and market environmentally friendly products and/or serve low-income communities and generate additional benefits for society and the environment. Financing such value-added businesses in emerging economies makes sense for both business growth and sustainable development. In developing countries, however, sustainable SMEs face major barriers to growth and success, most notably access to finance and business development support.

Over the past decade, specialized financial intermediaries—generally, those that are international, often with a non-profit organizational structure—have emerged to provide finance and business development support to sustainable SMEs in the developing world. This investment community has grown significantly in recent years, along with the rising interest in green investment, clean technology industries, and market-based approaches to poverty reduction and sustainable development.

On the Frontiers of Finance provides an overview of the current landscape, lending practices, and principal challenges of financial intermediaries providing capital to sustainable SMEs in developing countries. The objective is to help stimulate greater and more effective sustainable SME investment by better understanding how the sector can best be supported and expanded.

Investment Leaders Survey

In 2007, WRI and Boston College, with support from the International Finance Corporation (IFC), gathered together and interviewed 20 leading sustainable SME investment fund managers from Africa, Asia, Eastern Europe, and Latin America. Our discussions focused on challenges, opportunities, best practices, and pathways to sectoral growth, which forms the basis of this report. Section 3 and the appendix are overviews of these funds and their investment models.

In reporting our findings, we have divided the interviewees into two broad categories:

Blended Capital Intermediaries—investors with a primary focus on creating positive economic, social, and environmental impact by supporting sustainable SMEs and generating financial returns for investors. These are mostly non-profit entities with an international focus, and tend to be based in the U.S. or Europe;
Venture Capital Funds (VC Funds)—investment vehicles that are for-profit, commercial entities that provide market returns. This report examines VC funds in developing countries, those that are tapping into opportunities in green or socially oriented markets, such as cleantech funds.

Our survey revealed the intermediaries face three major challenges: raising funds for what remains an outlying frontier of the finance and development mainstream; justifying to the intermediaries’ investors the high costs of technical assistance for businesses; and finding ways to capture the “added value” of positive social and environmental impacts both cost effectively and consistently across the sector.

Recommendations

Improve Capital Allocation: Educating commercial investors and grant funders about the business models and performance of SME financial intermediaries, combined with high standards of accounting transparency among the intermediaries would greatly improve the efficiency of the fundraising process. Compiling information about the financial viability and success of different intermediaries and highlighting the growing track record of commercially viable investments is crucial in order to attract further capital to the sector.
Promote Financial Innovation: Long-term approaches and innovative thinking focused on system-wide barriers are needed to move the sector toward the status of both a recognized investment class and a strategic priority area within the development community. Sector-wide initiatives, angel investor networks and experimentation with social stock exchanges are efforts in the right direction that need to be supported and where successful, replicated and scaled.
Capture the Triple Bottom Line: As more investors and donors enter the impact investing space, they will focus even more on demonstrable results and measurable effects. Smart, comparable metrics would facilitate the investment decision-making process by providing a clear picture of which intermediaries’ activities are best aligned with the priorities of impact-driven donors and investors. For this reason, comparability is paramount when measuring and communicating impact. Dedicated resources and a collaborative effort among leading intermediaries, investors, donors, and other stakeholders is required to move toward a shared standard methodology for impact measurement and reporting. Over time, aggregate results will help validate and evaluate the efficacy of the enterprise development community’s market-based approach to socioeconomic and environmental issues.

Both development and investment trends are leading major advances in sustainable SME financing. The scale and speed of these advances are not, however, meeting either the demand of local entrepreneurs or the urgency of the social and environmental challenges facing the world. Opportunities to achieve development and environmental goals while delivering financial returns are being missed.

We hope this report will inspire investors, financial intermediaries, the philanthropy and donor community, and enterprise development organizations to increase capital flows and improve capital deployment to sustainable SMEs in developing countries.

Accounting for Risk: Conceptualizing a Robust Greenhouse Gas Inventory for Financial Institutions

Camilo Ramirez — Fri, 28 Aug 2009 14:16:38 -0400

Report Contents

Executive Summary
The Business Case for Robust GHG Emissions Accounting
Primer on Corporate GHG Accounting
Applications for Financial Institutions
Scope of Products and Services
Calculating and Reporting Emissions, and Using the Inventory
Final Thoughts and Next Steps

Executive Summary

Compiling greenhouse gas (GHG) emissions inventories is no longer the province of only first-mover corporations: Approximately two-thirds of Fortune 500 companies now use the standards developed by the Greenhouse Gas Protocol — an initiative of the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) — to compile their GHG emissions inventories. While the standards set forth by the Greenhouse Gas Protocol Initiative are broadly applicable, the diverse, complex, and service-focused nature of financial services has triggered discussion about the appropriate application methods for financial institution users. Accordingly, financial institutions and their stakeholders are seeking additional clarification on developing and evaluating GHG inventories for financial institutions.

In response, this issue brief draws from the widely used WRI/WBCSD Greenhouse Gas Protocol’s Corporate Accounting and Reporting Standard, Revised Edition, to discuss objectives, options, and challenges for financial institutions and stakeholders to consider when creating and evaluating a GHG emissions inventory.

Approach

Because emissions related to investments and services may contribute to a significant portion of financial institutions’ GHG inventories and potential business risk, this brief discusses such options as

Using an equity share approach to capture emissions from relevant proprietary investments.
Reporting relevant indirect emissions (i.e., emissions that are a consequence of business activities but occur at sources owned or controlled by another entity) related to debt and equity investments and other products, services, and financial contracts.

Given the practical and conceptual complexity in creating an inventory that includes emissions from investments and services, we encourage financial institutions to keep the following business objectives in mind during the development process:

Demonstrating environmental stewardship to stakeholders (i.e. managing reputational risks).
Informing risk management practices for proprietary and managed investments (i.e., helping manage GHG risks in an institution’s own portfolio and fulfilling its fiduciary duty to its clients).

The inventory ultimately should facilitate positive environmental outcomes, namely, the reduction of GHG emissions, and serve a business imperative. To achieve these business and environmental objectives, setting GHG reduction targets as well as tracking and reporting on progress are critical.

Undisclosed Risk: Corporate Environmental and Social Reporting in Emerging Asia

Payson Schwin — Thu, 25 Jun 2009 09:13:16 -0400

In a world where the physical impacts of environmental degradation are already being felt, and most governments have embraced some form of regulation to mitigate further damage to the environment, environmental concerns are increasingly relevant to companies’ bottom lines. Companies will both impact and are dependent on the environment and current environmental trends will present companies with both risks and opportunities. In its report Emerging Risk, World Resources Institute (WRI) identified the critical trends that countries in emerging Asia face; trends that have a material financial impact on key sectors in the region (see Box).

At a Glance: Environmental Trends

Deforestation
Water Scarcity
Climate Change
Food Security
Energy Security
Air Pollution
Urbanization
Population Growth

Today, if and how companies manage trends such as climate change or water scarcity is of direct interest to investors. In fact, many investors and financial analysts regard a company’s performance on environmental and social aspects affecting their business as a proxy for good management.

In developed markets, company disclosure on environmental, social, and governance (ESG) performance on their website, in their annual report, or a separate corporate sustainability* report, is routine practice. In emerging markets, however, such reporting still lags behind.

Undisclosed Risk: Corporate Environmental and Social Reporting in Emerging Asia examines the current state of public corporate sustainability reporting in English by the ten largest companies in each of six Asian countries—India, Indonesia, Malaysia, Philippines, Thailand and Vietnam. This report does not cover corporate governance reporting and its drivers, although a national corporate governance code may have a positive influence on company transparency on environmental and social factors.

The companies examined include both multinational and national businesses, and cover sectors ranging from resource-based energy, mining, and oil and gas corporations to service sector banking, telecommunications, and transportation. The companies are ranked according to a four point criteria developed by WRI, which draw on guidelines from the Global Reporting Initiative1 and from the international consultancy SustainAbility’s Global Reporters work.2 To put the results in context, we also examine the regulatory and non-regulatory drivers in place in each country to encourage corporate disclosure on sustainability risks.

This study provides an investor perspective on corporate sustainability reporting in the six focus countries. It is intended for both foreign and local investors in key emerging Asian economies, as well as sector and equity analysts and researchers that cover the region.

Undisclosed Risk is part of a multi-report research project† between WRI and the International Finance Corporation (IFC) that studies the financial materiality of key environmental issues in India, Indonesia, Malaysia, Philippines, Thailand and Vietnam. The project seeks to help equity investors in emerging Asia to mitigate risks and take advantage of opportunities by directing capital toward environmentally sustainable listed companies.

Key Findings

Sustainability reporting in the six focus countries has improved in the past 5 years through the efforts of national governments, training and consulting organizations, national securities regulators, accounting professional associations and others.
Company disclosure in emerging Asia is typically focused on community giving and philanthropic activities. In general, such reporting is of more interest to stakeholder groups such as local communities and employees than to investors. We found most of the sustainability information disclosed to be of limited relevance to mainstream investors.
Indian companies examined in this study were ahead of the field, with the majority producing sustainability reports that we evaluated as average or above-average and somewhat relevant to investors. In contrast, the Vietnamese companies surveyed had the least progressive disclosure.
Companies with above average reporting are responding to external pressures, including pressure from stakeholders and parent companies, as well as reputation and supply chain concerns.
Each country, with the exception of Vietnam, has some form of regulations, codes, awards, support organizations, or market initiatives that encourage sustainability reporting. Malaysia is the most advanced in this respect.
Investors and equity analysts in emerging Asia often obtain pertinent information on sustainability risks through non-public informal channels. This practice likely gives some investors a competitive advantage. However, it does little to help tip the scale toward mainstreaming corporate sustainability reporting in the region.

Emerging Risks: Impacts of Key Environmental Trends in Emerging Asia

Payson Schwin — Thu, 25 Jun 2009 08:57:13 -0400

The health of the planet is becoming a significant issue for the financial and corporate world. Powerful global trends around the environment, sustainability, business, and investment have converged to a point that certain environmental issues have become material financial matters for publicly traded companies and their investors. Financial markets that are attuned to these trends are likely to create strong incentives for companies to improve their environmental performance.

The relevance of environmental sustainability to investment is not limited to London, New York, and Tokyo. Emerging markets have grown at an unprecedented rate in the last two decades as large institutional investors have increasingly looked to these markets as investment destinations.

Emerging Risk is an introduction to a series of sector reports on the financial materiality of key environmental trends in India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam. It forms part of a research collaboration between the World Resources Institute (WRI) and the International Finance Corporation (IFC) to give investors in emerging Asian countries the information and tools they need to link the materiality of issues such as climate change, air pollution, water scarcity, and deforestation to traditional financial analysis.

Emerging Risk sets the scene with an overview of the principal players, main stock exchanges, selective environmental trends affecting emerging Asian nations, and the impacts of the trends on critical sectors in the six focus countries. This report is intended for international and local investors as well as analysts, policymakers, and researchers who cover this region. It should be useful to any investor-related audience seeking to understand the business impact of environmental trends on publicly listed companies in emerging South and Southeast Asian countries.

Because this report addresses an investment-oriented audience with varying degrees of knowledge about environmental issues, we have framed the issues in terms of broad environmental themes or trends, reflecting those typically identified in reports by the World Bank, Asian Development Bank, and the like.

The six Asian economies on which we focus—India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam—all have rapidly growing industrial, commercial, and financial sectors, and all are susceptible to environmental risk. For example, all six are particularly vulnerable to the physical risks associated with climate change. The region’s rapid economic growth has fueled the world’s highest increases in the commercial and domestic demand for energy. In 2008, the six countries together contain approximately 1.6 billion people, or about 25 percent of the world population.

At a Glance: Environmental Trends and Risk Categories for Investors

Trends:

Deforestation
Water Scarcity
Climate Change
Food Security
Energy Security
Air Pollution
Urbanization
Population Growth

Risks:

Operational or physical
Regulatory and legal
Reputational
Market and product
Financing

The box to the right summarizes the main environmental trends we explore and the main types of risk they engender. Physical impacts are likely to be the most pronounced and can directly affect a company’s daily operations, for example disruption in production due to a lack of water or severe weather-related damage to company assets.

Our research shows that resource-dependent sectors—like forestry products, food and beverage, and oil and gas—which are important to these emerging Asian economies, are precisely those that will be affected by the physical impacts of environmental trends. The construction and real estate sectors also have become significant economic players and are highly dependent on the availability and cost of raw materials. The manufacturing sectors range from low value–added goods, such as textiles, to high value–added goods, such as software, and they often are highly resource (labor, energy, and water) intensive. India, Malaysia, and the Philippines have a thriving service sector, such as business process outsourcing, which is highly dependent on a skilled workforce.

To illustrate the environmental challenges facing companies operating in this region, we use three case studies: supply chain pressures on Staples, the office supplies giant; the effects of water scarcity in India on Coca-Cola’s manufacturing process; and the physical effects of flooding in Indonesia on sectors ranging from automobiles to telecommunications.

In the years ahead, investors and asset owners, particularly large institutional investors, will have a role to play in redirecting capital toward more environmentally sustainable economic activities, which can reduce investment risk and support the region’s long-term prosperity. This report is intended to help them take the first steps in that direction.

Powering Up: The Investment Potential of Energy Service Companies in India

Tim Herzog — Wed, 22 Apr 2009 13:34:03 -0400

Publication Sections

Overview of India’s ESCO Industry
Summary of Findings
Summary of Recommendations
Data and Information Sources

An ESCO is “a company that provides energy-efficiency-related and other value-added services and for which performance contracting is a core part of its energy-efficiency services business” (definition from Lawrence Berkeley National Laboratory and the National Association of Energy Service Companies).

We describe lessons from the ESCO industries in Brazil, China, and the United States and analyze factors that could either contribute to or hinder the growth of the Indian ESCO industry. We also assess the industry’s growth potential and look at three case study examples. Last, we summarize the key issues and opportunities and make recommendations to increase the industry’s attractiveness to investors.

Our ultimate aim in driving greater investment in the ESCO industry is to reduce greenhouse gas emissions and contribute to a more sustainable development in India and across the world.

Against a backdrop of national concern about climate change and rising oil imports, interest in implementing energy efficiency initiatives has been increasing in India’s government, business, and investment sectors. Both government policies and efforts by multilateral and bilateral organizations to conserve energy across a wide range of sectors have contributed to new domestic and international energy efficiency companies to serve this market. This expansion over the last half decade has in turn led to investors’ interest in funding the energy efficiency sector. The potential for energy savings is enormous: an estimated 183.5 billion kWh per year, based on reports prepared by the Asian Development Bank and the Indian Bureau of Energy Efficiency (BEE).

One subsector within the energy efficiency industry that can help deliver both energy savings and financial returns in India is the specialized energy service company (ESCO) industry.

In other emerging countries, ESCOs have made significant contributions to energy efficiency programs and local economies. In Brazil, such companies produce annual industry revenues of USD 344 million (2008), and in China, USD 121 million (2006). In both countries, the industry is growing at double-digit rates.

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Summary of Findings

India’s ESCO industry has grown steadily and significantly over the past five years; we estimate a compounded annual growth rate of 95.6 percent from 2003 to 2007. Our data and analysis indicate that this still young industry has a high investment potential for debt investors (see below for Data and Information Sources). The majority of ESCOs’ energy efficiency projects have payback periods of less than two years, and ESCOs save clients an average of 20 to 25 percent on baseline energy costs. Currently, opportunities for equity investment in India’s ESCO industry are generally limited to direct investment in the larger energy service companies, most of which are vendor ESCOs – those ESCOs affiliated with or owned by an equipment or control manufacturer. Larger energy service companies (revenues of USD 0.2 million and above) report no problems with funding projects, although some of their clients may still have some difficulty when clients are providing the financing.

Smaller ESCOs, however, have had difficulty because they lack the collateral to meet bank requirements. Moreover, some prospective clients are unwilling to finance, or cannot obtain financing for, ESCO projects owing to a lack of confidence in energy service companies’ capabilities and/or reluctance to take risks. A particular concern raised by prospective clients was the industry’s domination by “vendor” ESCOs that are technology biased (i.e., offer only one technology and suite of products), rather than providing comprehensive energy management services. Another barrier that we found was Indian banks’ lack of engagement. In order for ESCO clients to be able to obtain market-rate financing for energy efficiency projects, banks must recognize the savings potential that an ESCO’s involvement can offer.

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Summary of Recommendations

WRI’s analysis indicates that the following actions can help the ESCO industry become more attractive to investors and realize its market potential:

For equity investors, banks, and other financial institutions:

Pilot financial products targeted at ESCOs and energy efficiency projects.
Include an energy efficiency and an ESCO component in existing credit guarantee funds for small- and medium-sized businesses.
Invest in ESCOs with good credit ratings (banks) or high revenues/growth rates (equity investors), and explore other financial support mechanisms (banks/other financial institutions).

For government:

Consider the clean energy sector to be a priority for the banking sector.
Follow through on the 2001 Energy Conservation Act’s mandate to create state energy conservation funds.
Create energy efficiency mandates related to the 2008 National Action Plan on Climate Change.
Develop and approve monitoring and verification protocols for energy efficiency, especially for projects undertaken by government agencies, such as water pumping and street lighting.

For energy service companies:

Establish a strong, inclusive national association to increase the industry’s credibility, to lobby for its needs, and to coordinate other organizations’ efforts to support its growth.
Focus on developing technical skills in a few industries or technology streams in order to build expertise and increase value to customers.
Develop cogeneration and captive power generation capabilities to expand opportunities for projects in these untapped sectors.
Utilize enterprise development and investment facilitation programs that can provide business advisory services and access to investors.

For enterprise development programs:

Provide business advisory and investment facilitation services to ESCOs and work with banks to develop pilot products to finance them.

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Data and Information Sources

The information and data used for this publication were derived from three sources: (1) a survey that WRI conducted among ESCOs in India; (2) interviews of selected ESCOs, financial institutions, ESCO clients, prospective ESCO clients, and government entities; and (3) secondary sources. WRI’s survey included only those ESCOs that have had at least one client contract in hand and met the aforementioned ESCO definition. Based on these criteria, we identified twenty-six ESCOs, twenty-four of which responded to the survey.

The ESCOs which responded to our survey are as follows:

Asian Electronics Ltd.
Blue Star Ltd.
Dalkia
DSCL Energy Services Company Ltd.
EL PRO Energy Dimensions
Encon Energy Management Services P Ltd.
Energetic Consulting Pvt. Ltd.
Energy Economy and Environment Consultants
Epic Energy Ltd.
Dynaspede
Five-M Energy Pvt. Ltd.
Honeywell Automation India Ltd.
Intesco Asia Ltd.
M.K. Raju Consultants P Ltd.
Optimumair Solutions Pvt. Ltd.
MITCON Consultancy Services Ltd.
Pranat Engineers Pvt. Ltd.
Rayon Applied Engineers
Win-Win
Salzer Electronics Ltd.
SEE-Tech Solutions Pvt. Ltd.
Sudnya
U V Krishna Mohan Rao Associates (UVKA)
Transparent Energy Systems

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Environmental Stories to Watch in 2009

admin — Wed, 17 Dec 2008 00:00:00 -0500

Stores To Watch in 2009

Watering Scarcity: Private Investment Opportunities in Agricultural Water Use Efficiency

Kelly McCarthy — Tue, 11 Nov 2008 17:37:41 -0500

In many regions around the world, demand for fresh water now outstrips renewable supplies. Water scarcity is projected to worsen considerably due to a combination of factors such as population increase, higher incomes and changing lifestyles, pollution, and climate change.

Agriculture is by far the biggest water user, accounting for more than 70% of global withdrawals. With booming industrial and domestic demands for water, especially in fast-growing emerging economies, the competition for finite water resources is intensifying.

Water scarcity and increasing competition present the agricultural sector with a huge challenge. Farmers are expected to meet the rapidly increasing demand for food, feed, fuel and fibre crops even though most land and water resources have already been committed. Consequently, crop water productivity must increase (‘more crop per drop’), partly through raising irrigation water-use efficiencies, either at the system or at the farm level. This is also an investment opportunity which, we believe, will attract the necessary private capital for at least three reasons.

Technologies to improve water use efficiencies are mature and are ready for large-scale adoption. These technologies include automated ‘on-demand’ irrigation, remote-sensing technology to manage soil moisture, low-pressure drip irrigation, as well as drought-resistant crop varieties.
Policies are starting to provide farmers and investors with the right incentives to invest in water-use efficiency. Water prices are rising to better reflect the value and delivery cost of irrigation water. Rights to water are formalised and can in some countries be traded from low to high-value uses. The private sector is engaging in providing expertise and capital as investment risks are shared. Farmers’ access to product markets and financial services is expanding. Consequently, water-use efficiency in irrigated agriculture is emerging as an opportunity for private investments.
Market signals seem to be favourable. Food and commodity prices reversed their long decline and farmers’ incomes have increased accordingly. Higher water, energy and fertiliser costs may encourage efficient irrigation technologies and practices. Some irrigation technology markets and specialised companies are reporting strong growth. Investors are increasingly aware of the opportunities in the water sector.

However, the current turbulence in the global financial markets (October 2008) may impact private investors’ decision making and their investment options which we cannot oversee at the time of writing. In practise this means that some of the conclusions drawn in this report may be affected although the general picture still holds.

Rattling Supply Chains: The Effect of Environmental Trends on Input Costs for the Fast-Moving Consumer Goods Industry

Kelly McCarthy — Mon, 10 Nov 2008 10:33:45 -0500

In recent years, the world has experienced a remarkable rise in the prices of vital commodities, including energy and agricultural products. For example, between 2006 and 2008, the average world price for oil rose by 110 percent, rice by 217 percent, wheat by 136 percent, maize by 125 percent, and soybeans by 107 percent. The resulting economic impact on firms, households, and entire economies has renewed attention to the scarcity of natural resources and the best way of managing them in the twenty-first century.

The world’s natural resources are under pressure, as approximately 60 percent of the benefits provided by natural ecosystems are being degraded or used unsustainably. As much as 20 percent of freshwater use exceeds the long-term sustainable supply, and between 15 and 35 percent of the withdrawal of water for irrigation is unsustainable, raising concerns about agricultural yields and costs. The current patterns of resource consumption are exemplified by the case of oil. North America and Europe consume more than 50 percent of this resource yet account for only 20 percent of the global population. At the same time, the growing populations of developing countries are realizing their desire for a better quality of life, which has led to increased consumption and thus greater demands on finite resources.

As global forces like changing demographics, growing environmental pressures, environmental regulation, and climate change interact to alter the future landscape of markets and industries, business leaders have recognized the need to understand their nature and magnitude. For large companies with global dimensions, this need for understanding is not limited to their direct operations but instead may rest primarily in their supply chains.

To illustrate the financial relevance of environmental issues, WRI and A.T. Kearney, Inc., collaborated to develop a future scenario of major environmental trends, including the physical impacts on the environment and the public policy response. We then determined the potential implications for a basket of commodity prices for energy and agricultural commodities, as well as the effects of those prices on the earnings of a representative set of companies in the fast-moving consumer goods (FMCG) sector.

Our scenario, which we named Ecoflation, shows a future in which policies and constraints on natural resources force firms to add to the cost of doing business the environmental costs previously borne by society. While this concept will inevitably increase costs in the near term, technological advances, efficiency gains, and reallocation of resources should ultimately lower costs to firms while reducing natural resource–related risks over the longer term.

Based on our scenario of more stringent climate change regulations, enhanced and enforceable forest policies, growing water scarcity in key agricultural regions, informed biofuel policies, and a greater consumer demand for green products, we estimated a reduction of 13 to 31 percent in earnings before interest and taxes (EBIT) by 2013 and 19 to 47 percent in 2018 for FMCG companies that do not develop strategies to mitigate the risks posed by environmental pressures. While we do not claim to be able to predict the future, and indeed our methodology has inherent limitations, our scenario is based on scientific knowledge and a sound understanding of policymaking. We believe that the magnitude of our estimated impact on earnings is not unrealistic for companies that do not act. Please see the accompanying technical document for further information about data sources and underlying assumptions of our methodology.

Even though the earnings at risk for our selected sample are significant, we believe that companies have the ability to independently and collaboratively find solutions and transform their operations to mitigate this risk and also to take advantage of growth opportunities. We suggest the following actions for companies in the FMCG and other industries to address the emerging environmental risks to their supply chains:

First, understand environmental impacts and dependencies by examining how cost drivers are exposed to emerging environmental trends and, when possible, seek substitutes with lower environmental impacts.
Take inventory of current environmental initiatives through the value chain to see what the company, its suppliers, and its partners already are doing.
Rank environmental issues and opportunities according to their current and future potential impact on costs, revenues, and reputation.
Chart a new course by embedding sustainability principles into an action plan, by including externalities in the decision-making process and establishing the principal performance indicators.

Winners will generally be those companies that anticipate the implications of a changing landscape, collaborate with suppliers and other stakeholders, and make environmental sustainability one of their business principles. Hedging strategies or shifting suppliers will not be enough. We believe that in order to adapt to these challenges, companies will need to implement real structural changes, such as product innovation and restructured value chains, which will affect both the companies and millions of existing and new consumers.

World Resources 2008: Roots of Resilience - Growing the Wealth of the Poor

Stephanie Hanson — Fri, 25 Jul 2008 18:08:14 -0400

World Resources Report 2008 continues the focus of the World Resources report series on poverty and the environment.

The reality of global poverty is that it is rural and it is persistent: three-quarters of the 2.6 billion people living on less than $2 per day—almost 2 billion—live in rural areas; that number is virtually unchanged in 20 years.

World Resources 2008 argues that successfully scaling up environmental income for the poor requires three elements:

Ownership–a foundation of good governance that both transfers to the poor real authority over local resources and elicits local demand for better management of these resources.
Capacity–making good on this demand requires building local capacity for development-in this case, the capacity of local communities to manage ecosystems competently, carry out ecosystem-based enterprises, and distribute the income from these enterprises fairly.
Networks–the third element is establishing adaptive networks that connect and nurture nature-based enterprises, giving them the ability to adapt, learn, connect to markets, and mature into businesses that can sustain themselves and enter the economic mainstream.

The result is communities with increased resilience: economic, social and environmental.

Such outcomes take on added import as it becomes increasingly clear that the impacts of climate change are likely to have their biggest effect on those areas where most of the world’s poor live: drylands, low-latitude geographies and high-stress watersheds.

Trees in the Greenhouse: Why Climate Change is Transforming the Forest Products Business

Payson Schwin — Wed, 25 Jun 2008 12:19:28 -0400

The world is entering an era when natural resource constraints, environmental policies, and shifting consumer values will create unprecedented demands on the private sector. Recent spikes in the prices of energy and food commodities illustrate the dynamic forces that are changing the world. In this new business context, the concept of “creative destruction”—a process by which innovation builds long-term value even as it destroys the value of the status quo—may extend beyond individual companies and apply to whole industries.

One example is the forest products business. What was once a simple business of turning trees into lumber and paper is now uniquely positioned—or exposed—to political and economic forces that are reshaping regulatory and market landscapes. Can this industry take a new position as a sustainable producer of fiber, energy, and materials to meet the world’s growing needs? And can the industry be a supplier of ecosystem services—the valuable benefits provided by nature—such as carbon storage?

The forest products industry has a unique opportunity to provide sustainable solutions to climate change, but clear, long-term climate policies are necessary to realize this opportunity. Nonetheless, the industry is fragmented and, in many cases, divided over what represents appropriate climate policies.

This report provides insights into the complex array of issues related to climate change. It will help companies, investors, and the sector as a whole to develop a more proactive and informed position on climate change policies and what constitutes an effective business response.

With the right regulatory frameworks in place, both internationally and nationally, the forest products industry could be a major solutions provider to climate change while seizing some of the greatest market opportunities of the 21st century.