Wednesday, November 12, 2014

Impact Investing and the internalization of externalities - an ailment for market failures

Trillions of dollars are invested in the fossil fuel sectors while still we bicker over the 100 billion USD per year Green Climate Fund, designed for adaptation and mitigation of climate change effects. Fossil fuel subsidies are at least 5 times the size of renewable energy subsidies. Smart? Moral? Financially sensible? In fact they are symptoms of a flawed investment paradigm that due to its inability to internalize externalities, negative and positive, produce market failures such as environmental degradation and dysfunctional welfare.The time has come for a transition to a more inclusive investment framework that highlight the true cost and impact of an investment. 

Negative and positive externalities 

Negative externalities occur when marginal private cost is less than the marginal social (public) cost. Clean air and clean water are to a large extent free assets, produced by nature. Use and abuse is widespread and social costs that arise because of it, for example increased health care costs, have for the most part not financially burdened the offending party. Mounting consumer pressure, increasing legislation and the introduction of "polluter pays" systems like specialized taxes and trading schemes imply a sea of change. 

The growing emphasis on externalities was confirmed by last year's inaugural World Forum on Natural Capital held in Edinburgh that spoke of the need to price natural assets such as water, air and soil and the ecosystem services we receive from nature. While it can be argued that nature is priceless, it is nevertheless valuable. The TEEB for Business Coalition published a report in 2013 which estimated that the world's primary production and processing sectors are responsible for 7.3 trillions of dollars annually in negative environmental externality costs.

In a world facing increasing resource scarcity, a population estimated at 9 billion in 2050 and the effects of climate change, businesses in particular will need to adapt to a new reality. A reality where the effects of their operations, previously kept off the balance sheet, will become increasingly internalized and potentially change the competitive landscape. The latest Living Planet Report from the WWF make it clear that globally we are already consuming 50 % more natural capital resources than the Earth can replenish, per year. As businesses rely on natural resources in their supply chains the risks are evident and easily translated into financial consequences. These externalities could for example manifest themselves in a market price for water or a tax on carbon emissions. Beverage and energy companies would see their bottom line altered and need to start preparing for such scenarios. Every business has to analyze their exposure to context specific externalities and their rate of internalization. Will for example logging companies bear the full social cost of deforestation as associated soil erosion causes loss of agricultural output and reduced resilience in flooding situations?

Internalizing negative externalities is only half the battle, to fully grasp the impact and value of an investment requires a deeper understanding of its positive impact. When the marginal social benefit exceeds the marginal private benefit it is indicative of positive externalities. These external benefits often go under valued by the market as they are difficult to monetize for the providers and suffer from the free rider problem. Therefore less of these externalities are produced than would be optimal for society as a whole. Governmental welfare systems targeting healthcare and education for all are case in point where the positive effects on society are obvious but costs act prohibitively. The advent of social entrepreneurship illustrates the situation well, the social sector needs new ideas, new delivery methods and new business models to offer citizens the best possible service today and for future generations. Collaboration between the public and private sector is crucial but governments need to lead the way, for example by transparently disclosing costs associated with social provision, as the UK government has done. For example; £64,819 is the cost of a child taken into care for a year; £39,472 is the cost of a prisoner per year; £11,972 is the cost of somebody being excluded from school (UK Cabinet Office, 2014). The positive effects of specific investments and companies are consequently easier to quantify and assess.  Internalizing positive externalities is the push that these investments need to better compete and multiply in occurrence. 

Impact Investing - a smarter choice

The absurdity of the situation we live in today is that it's cheaper to make investments that are bad for both planet and people. It's expensive to do the right thing. This has to change. Ultimately, even financial returns will collapse as nature says enough.

Can't we agree on a common valuation method and get going? A universal and easily comparable methodology is without a doubt a necessity for the process of internalizing externalities. Continued consumer interest, new policy and incentives for greener behavior are also vital pieces of the puzzle. But perhaps of most consequence, a new investment framework. Retooling our existing and out dated investment models will be an exercise in futility. The short term nature and single focus on financial returns make a successful change as unlikely as a 100 m sprint runner winning the marathon. While not a panacea, the growing phenomenon of impact investing can be a game changer in the endeavor to properly address externalities. Impact investing contrasts the ethical and responsible investment scene by going beyond the standard exclusionary approach and placing a premium on creating positive impact. Two of its main characteristics explains why it is up to the task;

Intention - investments are made to deliver positive social and environmental returns alongside financial returns, not as an afterthought but as a core objective for the investment. Heavy emphasis on metrics to measure the stated impact indicates an acute awareness of the effects associated with the investment. Transparently minimizing or eliminating negative externalities while producing more positive externalities are top priorities from the onset. Businesses that intentionally target positive social and environmental returns are poised to make smarter decisions and reduce risk. The question is; will actors that refrain from this process survive? Will they generate investor interest, get approval for bank loans or have their operations insured? 

Cross Sector Collaboration - to effectively tackle global challenges like climate change requires collaboration across borders, not only geographical but also sectoral. Each sector uses its particular strengths, for example in blending different forms of capital from public and private sources, an impact investing trademark. It makes it easier to cater to unmet needs in neglected market segments and close the gap between supply and demand in regards to positive externalities. Investing in access to to clean water in water stressed regions is an example where different forms of capital would be needed to effectively solve a problem that would deliver tremendous health benefits to the target group and productivity yields to society as a whole.

Impact investing is well equipped to supplant the prevailing yet insufficient "financial return only" paradigm over time. It's not only the just thing to do but pragmatically it is the right thing to do as we progress further into the age of the Anthropocene.

Tuesday, July 15, 2014

Almedalen - a unique week of networking in Sweden

During a sun soaked week in July, Swedish politicians, corporate leaders, media, civil society and lobbyists all come together in the medieval town of Visby, a place of boundless charm on the island of Gotland. 

This is Almedalen, Sweden's premier networking event where a spontaneous face to face chat with a minister or a CEO wouldn't be out of place. An example in democracy or a spectacle? Opinions are divided and with over 3000 seminars and events in a week, covering a wide range of issues, it is hard to get through the noise. That doesn't stop any one from trying.. 

CongressEA, represented by Director and Founder Richard Lindberg, was there to gauge the state of the Swedish Impact Investing market in regards to environmental challenges. The climate issue was high on the agenda and there is a real sense of urgency around it in lieu of Paris in 2015. Several hundred seminars focused on the climate and the wider environmental context. From our perspective we identified two very interesting phenomenons that embolden us in our work:

1. The corporate sector is on the move, often voicing its displeasure with politicians acting too slow and thus creating uncertainty in the market. Businesses want clear, ambitious and long term rules for how to adapt to a low carbon economy. They realise that it is a matter of establishing a competitive edge and ultimately survival if they transition successfully. Concepts like natural capital and the circular economy were afforded several seminars of their own with high profile speakers across sectors and large audiences. 

2. Institutional investors took center stage to explain the rationale for continuing to hold carbon heavy assets and how to gradually phase out fossil fuel companies from their portfolios. Unsurprisingly the debate with divestment proponents and environmental groups was lively and at times antagonistic due to different realities and timeframes. What is becoming abundantly clear is that the issue has gone from a purely moral issue to a discussion on risks and long term business cases. Alternative investment strategies that go beyond financial returns were brought to the fore. Investment managers from the large pension funds are more actively looking to minimise the negative impact of the fund but the overall assessment is that much more needs to be done and fast. The viability of Impact Investing in this regard was highlighted by CongressEA in the ensuing discussion and we hope to galvanise action together with major Swedish institutional investors looking to make inroads into the impact investing space. 

Friday, June 27, 2014

Social entrepreneur, please meet social intrapreneur

The demand for social innovation in the corporate sector opens up opportunities for social entrepreneurs with plenty of groundbreaking ideas and perspectives. Now they have a soulmate on the inside to talk to -  the social intrapreneur. Read our latest guest blog, this time for the Impact Hub Westminster in London. It will be an exciting space to watch and we anticipate plenty of exciting partnerships forming ahead.

Tuesday, June 10, 2014

Impact Investing in the business and governmental sectors

At CongressEA our mission is clear, help scale the impact investing sector by introducing it into new areas and industries, specifically the business and governmental sectors. We advocate that they gradually adopt the characteristics of impact investing when investing in their own core operations, be it to bolster the supply chain or a large-scale public infrastructure project. Over time this will create massive positive impact that will transform the economy and give us a fighting chance of coping with climate change, a rising population and a need for more resources like water, energy and food.

Too many, impact investing is still new or even unknown but the case to get started now is strong. Understanding how impact investing can and will effect your operations will reveal benefits like enhanced stakeholder relationships and building strong cross sector alliances. Impact Investing goes well beyond CSR schemes and puts the organization on the path to a more harmonious relationship with society and the environment. It means understanding and managing long term risks in a more interdependent and holistic manner.  Ultimately it will show the way on how to balance the need for financial returns and positive impact, not as uneasy enemies but as inseparable forces.

Contact us on info(at) to book one of our Enlightenment Lectures and learn more about this new investment philosophy and how it relates to the business and governmental sectors. Find out more on:

Monday, May 5, 2014

Suggested Reading

Check out the latest guest blogs and an interview in the Guardian with CongressEA Founder and Director Richard Lindberg.

Why impact investing can provide the right type of capital and investors for private alternatives in the welfare sector. Written for Mötesplatsen Social Innovation - a leading platform for social innovation, social entrepreneurship and impact investing in Sweden.

Interview in the Guardian, Social Enterprise section on the state of the social investment sector in the UK, scaling impact investing and why CongressEA relocated to London.

Stranded Assets and Impact Investing - how we can prevent our pension funds from going up in flames by adopting a balanced and long-term investment philosophy in the face of a possible fossil fuel bubble.  Written for award winning Swedish environmental blog Supermiljöbloggen.

Tuesday, March 11, 2014

Food: More with less

The food sector’s impact on the environment is undeniable. It contributes about 1/3 of total greenhouse gas emissions through energy/land use and methane/nitrous oxide emissions. Ironically the changing climate it helps bring about will have an immense impact on the food sector itself. With a projected population of 9.6 billion in 2050 a major global concern will be to keep up with demand. The agricultural sector must produce 70 % more output (calories) without increasing water and land use, relying on renewable energy (WRI, UNDP, UNEP, World Bank, 2013). In short more output without increasing inputs, under the guise of sustainable agriculture. A difficult equation aggravated by water scarcity, shortage of fertilizer, crop disease, waste, urbanization, overfishing, droughts, floods and competing land use. Annual productivity gains have been declining as these factors begin to take a toll, a trend that needs to be reversed in order to eradicate hunger and poverty.

A shocking fact about waste - 1 trillion dollars worth of food is wasted annually, that is ¼ of all calories produced for human consumption. The waste occurs on all levels, consumer, retail, farming and transport. According to the World Resources Institute, halving the level of waste would reduce the demand-supply gap in 2050 by 20 %. To put the waste issue in its environmental context, wasted food uses 24 % of all water used for agriculture and occupies a landmass about the size of Mexico. It is also responsible for 3300-5600 megatons of greenhouse gases (UNEP, 2013). If wasted food was a country it would only rank behind the US and China in terms of emissions.

The waste issue is not new, part of the problem is understanding its true scale. Many estimates are based on studies several decades old and fieldwork is difficult to conduct. More exact monitoring and estimation is needed in order to respond the right way. Fortunately new initiatives are popping up, the WRI recently announced the Food Loss and Waste Protocol on how to measure food loss and waste on a local level. UNEP, FAO and other partners already work with campaigns such as Think Eat Save. Reduce Your Food Print and Save Food Initiative.

Smart agriculture and food production
Another important dimension to the food and emissions conundrum is the food it self. What do we eat and how do we grow it? Along with reducing waste, yields need to be increased to ensure global food security.

GMO’s are a controversial topic. Strict labeling, following the precautionary principle as well as further science is needed to arrive at a conclusive position. Investigating both possible long-term drawbacks (declining biodiversity, gene flow) and positive aspects (less insecticides and more yields) is a must. Given that between 26 and 40 % of the potential global crop production is lost due to weeds, pests and disease, the stakes are high (FAO, 2012).

Meat – we are eating more and more but the climate effects are well known and pose a severe threat to the environment. Live stock production accounts for 18 % of human caused emissions (World Watch Institute). It uses a third of available land and a tenth of all water as well being a leading source of water pollution and deforestation (FAO, 2012). A more varied diet with less meat and/or more investments into synthetic foods are avenues we must pursue.

We need to move quickly towards climate-smart agriculture. Research indicates that using organic and ecological farming methods, renewable energy, crop rotations, protecting forests and improving the productivity of the smallholder farms will go a long way to meet our food needs. Increased resilience and reduced emissions are welcome bonuses.
Water-energy-food linkages and Impact Investing
In the pursuit of food security and climate smart agriculture the linkages to water and energy need to be fully realized and considered when making the necessary investments. For example, the food production and supply chain is responsible for around 30% of total global energy demand and agriculture alone uses 70 % of available freshwater.

Furthermore, competition between sectors for land use, water rights and energy is becoming increasingly common, the biofuel boom being case in point. Rainforests, grasslands and agricultural land have been converted to produce first generation biofuels, leading to a food price spike in certain regions and for specific products. This very conversion process leads to GHG emissions on a scale that dwarfs the benefits of using the biofuel instead of fossil fuels.

Aforementioned food price increases, due to rising demand and competing land use, have steered considerable investment to the agricultural sector. A word of caution is warranted as many of these large scale farming initiatives run the risk of becoming stranded assets as climate change makes previously fertile land unusable. As evidenced, any investment analysis needs to go both deeper and broader.

The opportunities for investment are nonetheless plentiful, The World Business Council for Sustainable Development estimates 1.2 trillion USD annually through 2050. Realizing the necessary shift to sustainable agriculture where more output is produced while reversing the negative impact on the environment will need both efficiency measures, for example drastically cutting waste, and investments in new technology and smarter solutions, for example synthetic foods and yield increasing innovations. In short, a combination of short and long term or defensive and offensive investment strategies.

Envisioning the investments as impact investments will go a long way in ensuring that they consider more than economic profit from the very onset of the process, balancing profit and environmental perspectives as equals and guaranteeing a long term perspective. It will also facilitate collaboration and coordination between sectors, including business and government. Alignment of interest between investors, investees and public sectors partners is not a “nice to have”, it’s a “must have”. Using specific, interdependent metrics to measure performance is another key tenant of impact investing that will hinder the usual “silo” thinking that oversimplifies investments and ultimately leads to underperformance. The world is hungry, investments need to happen now, let the shift begin. 

Thursday, January 2, 2014

Would you like some water with that energy?

To truly earn the mantle smart city a key insight needs to be reached. Water, energy and other resources are interconnected and inseparable. This rather obvious realization will herald a revolution in the way cities plan, design, invest and implement sustainable, low carbon solutions that allow them to do more with less.

Cities’ contribution to sustainable development is epitomized through their will to lead; pioneering positive change instead of waiting for a global, UN brokered climate deal. Great strides are being made here and now with renewable energy initiatives, innovative recycling/waste management, public transport projects, smart grids and metering, green building codes/retrofits and water saving technologies.

However, despite the myriad of creative and technological solutions, these and other vital infrastructure investments risk becoming unprofitable and unsustainable unless they consider the interdependency of the underlying resources and their climate effects. For example:

Ø  The energy sector demands ever more water to produce the energy that keep our cities running (around 15 % of worldwide water withdrawal). In an increasingly water stressed world this equates to more blackouts when nuclear or solar plants shut down because of lack of cooling water or too hot water caused by climate change. On the flipside, water requires pumping to our taps and treatment to make it drinkable, involving huge amounts of energy.

Ø  Efforts to provide cities with clean and renewable energy, for example to its transport systems, have hailed biofuels as a solution. Unfortunately first generation biofuels like ethanol occupies massive landmasses and water resources and have caused certain food prices to rise 200 % and riots to break out.

Ø  With a growing population and changing dietary habits tied to rising affluence, additional food must be produced and transported, consuming more energy and water (agriculture uses 70 % of all freshwater resources). Much of the waste issue in cities relates to food (25 % of calories produced for human consumption are wasted). Reducing food waste through awareness and better storage would save vast amounts of land, energy and water.

Future scenarios? No, these and many other examples of interconnectedness around the world are occurring now. Cities need to update their resource planning and associated investment models to balance economic profit and sustainable development, thus avoiding crippling continued growth of cities.


Ø  Capacity adding investments of resources like water and energy must consider the systemic effect on interdependent resources to maximize efficiency and reduce waste. Here lies the key to positive environmental and social impact as well as a tremendous economic opportunity. Above examples alone result in hundreds of billions (USD) in savings.
Ø  Break free from silo thinking and mandate cross-departmental collaboration, policies and co-investments, for example through joint veto power for energy and water departments.
Ø  Stimulate cross sector alliances between businesses, government, social entrepreneurs and NGOs to guarantee investments have broader support and a cross resource perspective.
Ø  Use specific evaluation metrics that measure cross resource effects for optimal planning, more credibility and less negative surprises (produce more for less and hinder resource supply bottlenecks).

With the majority of the human race residing in cities, the success or failure of cities concern the entire population, not only city dwellers. The environmental footprint of cities (representing 70 % of carbon emissions worldwide) touches us all, be it through diverted water resources, massive energy installations or land for food conversion. Using an interdependent (=smart) approach must be standard operating procedure with cities advancing sustainable development. Coupled with continued leadership it represents the best path to securing the survival and prosperity of our cities. 

This post was written for Masdar's 2014 Engage blogging contest: Smart cities and sustainable development. You can also read the post directly on Masdar's site at: