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Journal of Sustainable Finance & BankingSM
June 2015
Volume II Issue 6
Global Market Strategy Regional and Sector Strategy: Monthly Update Michael Geraghty … p. 15
Corporate Governance South Africa: A Leader in Corporate Governance Mervyn E. King, IIRC … p. 16
Gauging Governance Globally – Spotlight on South Africa Michael Geraghty … p. 18
Open Source Excellence The Johannesburg Stock Exchange: Integrating Sustainability Siobhan Cleary and Corli Le Roux, JSE … p. 21
Profiting from Trust – Opportunities to (Re-) Define a Positive Social Role for Financial Institutions Chris Coulter, GlobeScan … p. 23
Global Sector Research The Distributed Marketplace John K.S. Wilson, Margarita Pirovska, PhD, and Michael Shavel … p. 27
Regional Imperatives African Commodity Exchanges: Tough Questions about Financial Sustainability Julie Lerner, PanXchange … p. 29
Accelerating Impact Creating a Win-Win Investment in Kenya Taryn Goodman and Charlotte Kaiser, The Nature Conservancy … p. 31
The Bioenergy-Environment-Gender Nexus: How Simple Innovations Can Drive Change Dr. Mary Njenga, World Agroforestry Centre … p. 34
Sustainable Standout PanAfrican Investment Co.: Collaboration in Action in sub-Saharan Africa Dana Reed, PanAfrican Investment Co., LLC … p. 37
Sustainable Editorial Integrated Thinking in South Africa Leigh Roberts, Integrated Reporting Committee of South Africa … p. 40
Ivory Pirates: Funding Terrorism by Plundering Africa’s Natural Resources Buffy Redsecker, SunLight Time Foundation … p. 42 © Pal Teravagimov/Shutterstock
“AFRICA”
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 2
CEO’s Letter on Sustainable Finance & Banking
Erika Karp
Founder & Chief Executive
Officer of Cornerstone Capital
Inc.
This month in the Journal of Sustainable Finance & Banking (JSFB),
global markets continue to monitor progress on many fronts, including the Greek
and British tests of the rigidity of the European Union, the Transpacific
Partnership in a US strategic “pivot” to Asia, and the threats to global
cybersecurity which dominated the annual G7 Summit. While the G7 accord to
decarbonize the global economy is encouraging, it would seem that the papal
encyclical may truly help mobilize forces to achieve the vision for renewable
energy solutions… as it will take technological transformation to get there. All of
these developments unfold as investors get used to more bond market volatility
following an era of ultra-low rates.
And so, in a week where we celebrate the leadership of the private sector with the
Global Compact +15 convening at the UN, we also look for leaders in the
investment community to demand — and invest in — the innovation and
entrepreneurship needed to navigate the volatility and complexity of the global
markets. This month in the JSFB, as we “pivot” to Africa for our theme, we take
inspiration from Nelson Mandela, who said “Courage is not the absence of fear,
but the triumph over it.” We can have the courage to demand the spread of best
practices in corporate governance to address the massive environmental and
social imperatives of our day. We can also take inspiration from South Africa’s
Mervyn E. King, who has led the way to achieving the level of transparency in
corporate financial reporting which can “weave a golden thread” through the
information available to investors. Truly “Integrated Reporting” will help
facilitate the flow of capital to a private sector that can act as a
powerful force for good.
Indeed, as Cornerstone Capital’s Global Markets Strategist Michael Geraghty
highlights, South Africa continues to rank highly in this area along with the
developed markets of Europe and the UK. Another reflection of King’s leadership
can be found in the efforts of the Johannesburg Stock Exchange, featured in our
“Open Source Excellence” section. Authors Siobhan Cleary and Corli Le Roux
recount the implementation of reporting-oriented listing standards and the
introduction of the JSE’s SRI Index, which acts as a “valuable point of
engagement” with issuers.
And this engagement has borne fruit. As Leigh Roberts asserts in her
“Sustainable Editorial,” six years into the practice of integrated reporting in
South Africa it’s become clear that this discipline has helped foster “integrated
thinking” within corporations.
Of course, strong corporate governance, exemplified by enhanced transparency
via integrated reporting, is critical to gaining and maintaining investor trust. Chris
Coulter, co-CEO of GlobeScan, notes that trust is “strategically important” to
organizations—and once lost, extremely difficult to recapture. Trust in financial
institutions, while deeply negative in many regions, is still quite high in Africa—
suggesting a compelling opportunity for the banking sector to play a meaningful
role in continued development on that continent.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 3
Another example of the importance of trust is found in our recent Global Sector
Research report, “Dissecting the Sharing Economy,” which looks at the
distributed marketplace and its transformative potential to create value – but also
its significant challenges, particularly in the areas of governance and social
impact. These new business models are expanding globally and so the lessons
from the likes of Uber and Etsy are worth considering in the African context.
Even as South Africa is a global leader in corporate governance and reporting
standards, we must acknowledge major obstacles faced elsewhere in the region.
As Julie Lerner, CEO of PanXchange, writes in her “Regional Imperatives”
piece, most of the continent is not ready for national commodity exchanges; rather
than “swinging for the fences,” she advocates a bottom-up approach of
empowering smallholders and organizing the cooperative buying of inputs, as well
as establishing market (and physical) infrastructure.
The notion that small steps forward are often more effective than grand schemes
is exemplified in the good work being done by The Nature Conservancy and its
NatureVest subsidiary in “Accelerating Impact.” NatureVest structures
investment opportunities for impact investors to support conservation. Its
“Livestock to Markets” program is a case study in the importance of creative yet
commonsense approaches to balancing the needs of all those who rely on the
Kenyan grasslands for survival.
“Creative yet commonsense” also applies to the work of the World Agroforestry
Centre (ICRAF). Dr. Mary Njenga of ICRAF details how the seemingly simple task
of cooking a meal can be hazardous to the health of those living in poverty. She
demonstrates how simple innovations can yield improved health as well as
economic empowerment of women and educational opportunities for children.
Driving positive change is the ethos of PanAfrican Investment Co., formed
three years ago to focus strictly on investments in Africa. PIC seeks “passionate
social entrepreneurs”, according to CEO Dana Reed, and becomes deeply involved
in their enterprises, helping to facilitate growth while instilling solid operational
and governance practices. PIC is truly a “Sustainable Standout.”
Last but not least, we offer the impassioned voice of Buffy Redsecker, President of
the SunLight Time Foundation, in a “Sustainable Editorial.” Buffy reminds us
of the ongoing plunder of Africa’s natural resources, organized in many cases by
extremist groups such as Boko Haram and al-Shahaab to fund their violent
activities. With illegal natural resource and wildlife exploitation draining billions
of dollars from legitimate economies across the continent and potentially
destabilizing governments, rooting out these crimes may prove as important to
Africa’s future prosperity as any business development initiative.
My sincere regards,
Erika
Erika Karp
Chief Executive Officer
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 4
Table of Contents
CEO’s Letter on Sustainable Finance and Banking p.2
Market Summary
Overview p.6
Market & Global Sector Performance, Monetary Policy & ESG Data p.7
Regional and Sector Strategy: Monthly Update Michael Geraghty Global Markets Strategist, Cornerstone Capital Group
p. 15
Corporate Governance
South Africa: A Leader in Corporate Governance Mervyn E. King Chairman, International Integrated
Reporting Council (IIRC)
p.16
Gauging Governance Globally — Spotlight on South Africa
Michael Geraghty Global Markets Strategist, Cornerstone Capital Group
p.18
Open Source Excellence
The Johannesburg Stock Exchange: Integrating Sustainability
Siobhan Cleary Independent Consultant, Former Director of Strategy &
Public Policy, Johannesburg Stock Exchange
p.21
Corli Le Roux Head of SRI Index Operations & Sustainability,
Johannesburg Stock Exchange
Profiting from Trust – Opportunities to (Re-) Define a Positive Social Role for Financial Institutions
Chris Coulter Co-CEO, GlobeScan p.23
Global Sector Research
Dissecting the “Sharing Economy”: Business Opportunities and Risks
John K.S. Wilson Head of Corporate Governance, Engagement & Research
p.27
Margarita Pirovska, PhD Policy & Sustainability Analyst
Michael Shavel, CFA Global Thematic Analyst Cornerstone Capital Group
Regional Imperatives
African Commodity Exchanges: Tough Questions About Financial Sustainability
Julie Lerner Founder & CEO, PanXchange, Inc.
p. 29
Accelerating Impact
Creating a Win-Win Investment in Kenya Taryn Goodman
Charlotte Kaiser
Director of Investment Partnerships
Deputy Managing Director, NatureVest,
The Nature Conservancy
p.31
The Bioenergy-Environment-Gender Nexus: How Simple Innovations Can Drive Change
Dr. Mary Njenga Post-Doctoral Fellow on Bioenergy,
World Agroforestry Centre (ICRAF)
p.34
Sustainable Standout
PanAfrican Investment Co.: Collaboration in Action in sub-Saharan Africa
Dana Reed CEO, PanAfrican Investment Co., LLC
p.37
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 5
Sustainable Editorial
Integrated Thinking in South Africa Leigh Roberts, CA (SA) Chairman, Working Group of the Integrated Reporting Committee
of South Africa
p.40
Ivory Pirates: Funding Terrorism by Plundering Africa’s Natural Resources
Buffy Redsecker President & Co-Founder, SunLight Time Foundation p. 42
Upcoming Events
Global ESG Calendar p.45
Journal of Sustainable Finance & Banking Subscription Form
p.46
Articles p.48
Cornerstone Capital Team p.49
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 6
Market Summary
Overview
The first half of 2014 is almost in the books and risk
assets continue to outperform on an increasingly
constructive economic outlook. That said, skeptical
investors question the sustainability of the bull
market within the context of impending interest rate
hikes and less compelling valuations.
US equities are slightly off their all-time highs but are
showing resistance in the face of pending US rate
hikes and rising bond yields. From an economic
standpoint, first quarter GDP was revised down to an
annualized rate of -0.2% from the initial estimate of
+0.2% due to the strong dollar impact. Downward
revisions to an already weak consumer spending
number weighed on investor sentiment, though the
second quarter is trending upwards as May retail sales
expanded by 1.2% and the April figure was revised
higher. In addition to improving retail sales, there are
other signs that US economic activity is rebounding in
the second quarter. The NAHB Housing Market Index
increased from 54 in May to 59 in June and the ISM
Manufacturing Index registered 52.8 in May, up from
51.5 in April. Importantly, the May jobs report
revealed the economy added 280,000 new positions,
beating the consensus expectation of 246,000.
European equity markets have retreated from their
April highs as investors lock in profits, though the
improvement in European economic data is helping to
push bond yields and inflation expectations higher.
Notably, the German 10-year bund yield doubled in
the first ten days of June and was briefly above 1%,
though it’s since retraced to 0.86%. Consumer prices
in the euro area rose for the first time this year in May,
up 0.3% YoY. Despite these economic improvements,
Greece and its international creditors remain in
deadlock over its debt crisis. While markets are taking
this issue in stride, a Greek default and/or exit from
the Eurozone could have significant implications for
risk assets.
Elsewhere in developed markets, Japan’s benchmark
Nikkei reached an 18-year high as the country’s
economic condition strengthened. Business
sentiment is strong, as Prime Minister Shinzo Abe has
not only introduced quantitative easing programs, but
also pledged corporate reforms. In addition, the
weaker yen continues to boost Japanese exports and a
revised estimate found that first quarter GDP grew by
an annualized rate of 3.9%, up from 2.4% in the initial
report.
In emerging markets, China’s Shanghai Composite
pulled back 13% and suffered its worst week since the
global financial crisis. That said, the index had gained
more than 150% in the last year. Though some
analysts expect the government to provide additional
monetary stimulus, others question the effectiveness
of more easing and believe that high levels of volatility
are likely to persist.
Elsewhere, Russia’s central bank cut its key interest
rate by 100 basis points to 11.5% in June, marking the
fourth cut of the year. Though year-over-year Russian
consumer prices cooled to 15.6% in early June from
the 13-year high of 16.9% in March, the central bank
noted that future inflationary pressure could limit the
scope of further monetary easing.
On a one-month trailing basis, the MSCI World Index
(a developed market proxy) outperformed the MSCI
Emerging Markets Index by approximately 2.8%,
resulting in a YTD relative outperformance of 0.93%.
Small cap equities outperformed their large cap
counterparts by 3.3%, widening their YTD relative
outperformance to 3.8%. From a sector perspective,
performance was mixed between cyclicals and
defensives. In the MSCI ACWI (broad index for both
developed and emerging equities), healthcare and
consumer discretionary outperformed, while utilities
and energy staples lagged.
Andy Zheng contributed to this article.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 7
Market Summary
Market and Global Sector Performance
MARKET / INDEX PERFORMANCE
As of 06/23/2015 (local currency) T1M (%) T3M (%) YTD (%) 2015 P/E 2015 P/B Div. Yield
US Equity Indices
DJIA -0.43 0.57 2.88 16.2 3.1 2.4
S&P 500 -0.02 1.19 4.08 17.9 2.8 2.0
Nasdaq 1.30 2.82 9.48 22.5 3.7 1.1
Russell 2000 3.20 2.28 7.76 28.2 1.9 1.3
Developed International Indices
Euro STOXX 50 -1.87 -1.21 17.27 15.5 1.6 3.4
in USD 3.82 4.65 9.57
FTSE 100 -2.67 -1.77 6.22 16.6 1.9 3.9
in USD 4.12 3.64 8.43
CAC 40 -2.19 0.61 19.82 16.2 1.5 3.3
in USD 3.78 5.32 12.15
DAX -3.00 -4.81 16.88 14.4 1.8 2.9
in USD 2.87 4.44 10.31
Nikkei 225 0.81 4.15 17.97 19.3 1.8 1.6
in USD 1.28 8.75 14.91
ASX 200 -0.92 -4.90 6.53 16.4 1.9 4.5
in USD -0.94 -1.87 2.52
Emerging Market Indices
IBOVESPA -0.67 3.94 8.01 14.5 1.3 3.9
in USD 2.53 0.60 -4.09
Shanghai Comp -3.50 22.00 39.10 18.0 2.1 1.7
in USD 5.37 39.05 40.51
KOSPI -4.24 0.92 7.29 11.1 1.0 1.4
in USD -1.73 8.00 11.57
SENSEX -0.28 -1.24 1.64 16.0 2.8 1.6
in USD -1.09 -6.59 -0.14
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 8
As of 06/23/2015 (local currency) T1M (%) T3M (%) YTD (%) 2015 P/E 2015 P/B Div. Yield
Global Market Indices
MSCI World -1.41 0.89 5.26 17.4 2.2 2.5
MSCI All-Country World -2.21 1.07 2.93 14.7 1.6 3.3
MSCI EAFE -2.50 1.18 8.22 16.0 1.7 3.1
MSCI Emerging Markets -5.79 1.25 2.87 12.6 1.5 2.8
Sustainable Indices
DJ Sustainability World Comp -0.52 1.70 5.54 15.8 2.0 3.0
FTSE4Good Global -0.24 2.29 7.39 12.0 1.5 3.7
MSCI KLD 400 Social -0.57 -0.24 2.87 18.1 3.5 1.9
Bovespa Corp. Sustainability -0.19 1.12 3.80 20.1 1.4 3.5
Fixed Income
Barclays US Aggregate -0.20 -1.29 0.18
Commodities Levels
6/22/2015 12/22/2014 6/23/2014
WTI Crude 59.68 57.29 96.73
ICE Brent Crude 63.45 64.58 108.29
NYMEX Natural Gas 2.734 3.181 4.167
Spot Gold 1184.25 1176.44 1317.52
LME 3mth Copper 5659 6400 6725
CBOT Corn 364.25 429.25 470.25
Currencies Levels
6/22/2015 12/22/2014 6/23/2014
EUR/USD 1.13 1.22 1.36
USD/JPY 123.41 120.05 101.93
GBP/USD 1.58 1.56 1.70
AUD/JPY 95.37 97.62 96.04
DXY Index 94.30 89.77 80.37
Source: Bloomberg, Barclays. Equity Returns: All returns represent total return for stated period. Dividends and coupons are not included
in the DAX and BOVESPA indices. Bond Returns: All returns represent total return for the stated period. Index characteristics: P/E, P/B,
and Dividend Yield are based on Bloomberg consensus estimates for the stated period.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 9
MSCI ACWI SECTOR PERFORMANCE
As of 6/23/2015
1 Month Price Return (%)
Source: Bloomberg. Sector returns are based on GICS
methodology. MSCI ACWI is a free-float weighted equity index
that includes both emerging and developed world markets.
YTD Price Return (%)
Source: Bloomberg. Sector returns are based on GICS
methodology. MSCI ACWI is a free-float weighted equity index
that includes both emerging and developed world markets.
US EQUITY STYLE PERFORMANCE
Style box returns are based on Russell Indices with the exception of the Large-Cap Blend box, which reflects
the S&P 500 Index. All values are cumulative total return for the stated period including the reinvestment of
dividends. The index used from left to right, top to bottom are: Russell 1000 Value Index, S&P 500 Index,
Russell 1000 Growth Index, Russell Midcap Value Index, Russell Midcap Index, Russell Midcap Growth Index,
Russell 2000 Value Index, Russell 2000 Index and Russell 2000 Growth Index.
1 Month
Source: Bloomberg
Year to Date
Source: Bloomberg
Healthcare
Cons Disc
Telecom
Info Tech
MSCI ACWI
Financials
Industrials
MaterialsCons
StaplesEnergy
Utilities
-10 -5 0 5 10 15-5 -4 -3 -2 -1 0
Healthcare
Cons Disc
Telecom
Cons Staples
Info Tech
MSCI ACWI
Industrials
Financials
Materials
Utility
Energy
Value Growth Blend
0.1
2.4
-0.2
0.0
3.3
0.2
0.1
4.2
0.6 Mid
L
arg
e
Sm
all
2.2
3.6
3.4
4.1
7.9
5.5
7.0
12.1
7.5
Value Growth Blend
Sm
all
Larg
e
Mid
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 10
SECTOR SNAPSHOT – TOP 5 COMPANIES BY MARKET CAP
As of 6/23/2015
Company name Ticker Industry Mkt Cap (US$ Bn)
Price (Local)
Total Return YTD % (local)
P/E 2015E
EV/EBITDA 2015E
Div Yield % 2015E
Consumer Disc. Toyota Motor Corp 7203.JP Automobiles 234.0 8475.00 13.8 10.8 10.4 2.4
Amazon.com AMZN Internet & Catalog Retail
206.6 443.56 42.9 105.8 22.7 N/A
The Walt Disney Co DIS Media 194.0 114.33 21.4 22.6 13.1 1.0
Comcast Corp CMCSA Media 152.1 60.56 5.3 18.3 8.0 1.7
Home Depot Inc HD Specialty Retail 147.2 113.30 9.1 21.5 12.1 2.1
Consumer Staples Nestle NESN.VX Food Products 243.1 70.50 -0.5 20.9 13.8 3.1
Wal-Mart Stores WMT Food & Staples Retailing
233.5 72.49 -14.5 15.2 7.9 2.7
The Procter & Gamble Co
PG Household Products
216.3 79.73 -11.1 20.1 13.2 3.3
Anheuser-Busch Inbev ABI.BB Beverages 202.3 112.55 22.2 22.9 13.5 2.7
The Coca-Cola Co KO Beverages 175.8 40.34 -2.9 20.1 16.0 3.3
Energy Exxon Mobil XOM Oil, Gas &
Consumable Fuels
353.9 84.65 -7.0 19.8 8.3 3.4
Petrochina Co 857.HK Oil, Gas & Consumable Fuels
323.9 8.86 3.0 21.6 9.3 3.7
Royal Dutch Shell RDSA.LN Oil, Gas & Consumable Fuels
187.6 99.74 -9.3 24.0 6.8 4.3
Chevron CVX Oil, Gas & Consumable Fuels
186.9 1855.50 -11.2 14.8 5.2 6.6
Bp PLC bp/ Oil, Gas & Consumable Fuels
126.1 438.95 10.0 16.9 5.8 6.6
Financials Berkshire Hathaway- CL B
BRK/B Diversified Financial Services
348.1 141.12 -6.0 17.9 N/A N/A
Wells Fargo & Co WFC Banks 298.2 57.91 7.1 13.9 N/A 2.6
Ind & Comm Bank of China
1398.HK Banks 299.3 6.63 17.1 6.7 N/A 4.8
JPMorgan Chase JPM Banks 257.6 69.42 12.4 11.8 N/A 2.5
China Construction Bank
939.HK Banks 239.7 7.40 22.1 6.3 N/A 5.1
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 11
SECTOR SNAPSHOT – TOP 5 COMPANIES BY MARKET CAP (CONTINUED)
As of 6/23/2015
Company Name Ticker Industry Mkt Cap (US$ Bn)
Price (Local)
Total Return YTD % (local)
P/E 2015E
EV/EBITDA 2015E
Div Yield % 2015E
Health Care Johnson & Johnson JNJ Pharmaceuticals 276.3 99.65 -3.3 16.3 11.0 3.0
Novartis AG NOVN.VX Pharmaceuticals 275.1 96.10 6.9 19.6 18.5 2.7
Roche Holdings ROG.VX Pharmaceuticals 250.0 272.40 4.1 19.2 12.7 2.9
Pfizer PFE Pharmaceuticals 212.4 34.49 12.6 17.0 11.3 3.2
Gilead Sciences GILD Biotechnology 178.9 121.73 29.6 11.4 8.5 1.4
Industrials General Electric Co GE Industrial
Conglomerates 277.4 27.53 10.9 19.7 12.9 3.3
United Tech Corp UTX Aerospace & Defense
102.4 114.98 1.1 16.6 9.9 2.2
3M MMM Industrial Conglomerates
101.2 159.59 -1.7 20.1 12.1 2.6
Boeing BA Aerospace & Defense
99.6 144.01 12.2 16.9 9.3 2.5
Siemens SIE.GR Industrial Conglomerates
95.1 96.56 6.6 15.4 10.8 3.4
Info Tech Apple AAPL Technology
Hardware, Storage &
732.7 127.18 16.2 14.1 7.3 1.6
Microsoft Corp MSFT Software 369.8 45.71 -0.2 17.8 9.5 2.7
Google GOOGL Internet Software & Services
373.9 560.33 5.6 19.8 10.6 N/A
Facebook FB Internet Software & Services
244.9 87.19 11.8 43.9 22.3 N/A
Alibaba BABA Internet Software & Services
210.2 85.29 -17.9 31.6 23.5 N/A
Materials BHP Billiton Ltd BHP.AU Metals & Mining 116.1 28.61 7.1 15.3 6.2 7.4
BASF BAS.GY Chemicals 87.5 85.25 25.8 15.6 8.5 3.3
Rio Tinto RIO.AU Metals & Mining 79.4 56.34 -0.5 17.0 8.0 6.5
Saudi Basic Ind. SABIC.AB Chemicals 80.6 100.71 24.9 15.3 7.6 6.0
DuPont DD Chemicals 62.4 68.95 -5.5 17.5 10.3 2.8
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 12
SECTOR SNAPSHOT – TOP 5 COMPANIES BY MARKET CAP (CONTINUED)
As of 6/23/2015
Company Name Ticker Industry Mkt Cap (US$ Bn)
Price (Local)
Total Return YTD % (local)
P/E 2015E
EV/EBITDA 2015E
Div Yield % 2015E
Telecom China Mobile 941.HK Wireless
Telecommunication Ser
276.5 104.70 17.2 15.6 5.2 2.8
Verizon VZ Diversified Telecommunication
195.4 47.91 4.8 12.5 6.7 4.6
AT&T T Diversified Telecommunication
187.8 36.17 10.8 14.4 6.7 5.2
Vodafone VOD.LN Wireless Telecommunication Ser
100.5 240.95 11.7 42.3 7.6 5.2
Deutsche Telekom dte.gr Diversified Telecommunication
82.9 16.36 27.2 23.1 6.9 3.1
Utilities National Grid NG/ LN Multi-Utilities 50.4 856.50 -3.7 14.6 10.0 5.6
Duke Energy DUK Electric Utilities 49.7 71.93 -12.1 15.4 9.7 4.4
GDF Suez GSZ.FP Multi-Utilities 48.4 17.79 -6.0 14.9 6.7 5.6
Enel ENEL.IM Electric Utilities 44.4 4.22 18.1 13.1 7.0 3.3
Iberdrola SA ibe.sm Electric Utilities 44.1 6.33 13.0 16.9 9.0 2.5
Source: Bloomberg. The securities in each sector represent the largest companies by market cap in the MSCI ACWI in their respective
sectors. Sector classification is based on GICS methodology. Equity characteristics: P/E, EV/EBITDA and Dividend Yield are based on
Bloomberg consensus estimates for stated period.
GDP / CONSUMER PRICE INFLATION / RATES
Real GDP (% YoY) CPI (% YoY) Official Rates Long Rates
Region/Countries 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E
United States 2.4 2.2 2.8 1.6 0.3 2.2 0.25 0.70 - 2.2 2.6 -
Euro Area 0.9 1.5 1.7 0.4 0.2 1.3 0.05 0.05 - - - -
Japan 0.2 1.0 1.4 2.7 0.8 1.2 0.10 0.10 - 0.4 0.5 -
UK 2.6 2.5 2.4 1.5 0.4 1.6 0.50 0.60 - 2.2 2.1 -
Australia 2.7 2.5 2.8 2.5 1.8 2.7 2.50 1.95 - 3.0 3.0 -
China 7.4 7.0 6.7 2.0 1.5 2.1 5.60 4.80 - 3.7 3.4 -
Brazil 0.1 -1.2 1.0 6.3 8.2 6.0 11.60 13.90 - - - -
**India 5.4 7.4 7.7 7.2 6.2 5.5 8.00 7.10 - 8.1 7.5 -
Source: Bloomberg. Estimates are composite of Bloomberg contributor estimates. *Italicized text represents actual data. ** India fiscal year runs to March 31.
MONETARY POLICY
Jun-15 Dec-14 Jun-14
Monetary Base growth (YoY) -1.4% 8.8% 24.2%
M-2 growth (YoY) 5.6% 6.0% 6.4%
Money multiplier (M-2/mon base) 3.0 2.9 2.9
1Q15 1Q14 1Q13
Velocity of money (GDP/M-2) 1.50 1.54 1.58
Source: Federal Reserve Bank of St. Louis
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 13
ESG DISCLOSURE SCORES OF LARGEST ECONOMIES BY 2014 GDP
Composite Environ Social Governance
1. United States 14.5 16.3 16.5 49.1
2. China 18.6 10.3 21.6 42.5
3. Japan 21.0 26.5 21.0 45.1
4. Germany 27.6 31.7 40.1 38.7
5. U.K. 31.3 22.6 36.3 53.6
6. France 39.8 37.1 50.2 56.0
7. Brazil 32.5 30.4 53.7 40.6
8. Italy 33.7 38.8 43.6 43.9
9. India 14.8 14.9 19.3 43.4
10. Russia 17.7 21.9 31.4 39.8
HIGHEST ESG DISCLOSURE SCORES
Composite Environ Social Governance
Spain 41.1 43.5 56.5 49.7
Portugal 40.8 40.6 46.1 51.9
Finland 40.5 37.4 40.5 56.4
France 40.1 37.4 50.4 56.0
Sweden 35.4 28.3 41.9 52.5
Greece 33.3 41.6 47.8 44.8
Brazil 32.5 30.4 53.7 40.6
South Africa 32.4 25.7 44.6 55.0
Denmark 31.6 27.1 40.5 45.3
Britain 31.3 22.4 36.2 53.6
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 14
KEY ECONOMIC CHARTS
C&I Loan Growth (%)
Source: Federal Reserve Bank of St. Louis
University of Michigan Survey of Consumer Sentiment
Source: Bloomberg
NFIM Small Business Optimism Index
Source: Bloomberg
ISM Manufacturing Purchasing Managers Index
Source: Bloomberg
US Treasury Yield Curve
Source: Bloomberg
US Initial Jobless Claims
Source: Bloomberg
-30
-20
-10
0
10
20
301960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
% Y
oY
70
75
80
85
90
95
100
105
110
1974
1977
1979
1981
1984
1986
1988
1991
1993
1995
1998
2000
2002
2005
2007
2009
2012
2014
20
30
40
50
60
70
80
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1997
2000
2003
2006
2009
2012
50
60
70
80
90
100
110
120
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 30Y
%
6/23/2015 12/23/2014 6/23/2014
100
200
300
400
500
600
700
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
(000s)
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 15
Global Market Strategy Research
Regional and Sector Strategy: Monthly Update
By Michael Geraghty, Global Markets Strategist, Cornerstone Capital Group
Crosscurrents — Although there are no material changes to our regional or
sector recommendations this month, there have been some noteworthy
crosscurrents.
Regional Crosscurrents — Improved optimism about earnings in Europe
ex. the U.K. is offset by valuations that are still relatively unattractive, so that
the region remains Underweight.
Sector Crosscurrents — Similarly, the Underweight Energy sector has also
seen some improvement in earnings optimism, but that has not been enough
to offset the sector’s relatively unattractive valuation.
Food for Thought — The shifting of GICS weights in the MSCI ACWI
benchmark has implications for the materiality of specific ESG issues in sector
strategy at any given point in time.
Figure 1: Regional Rankings Figure 2: Sector Rankings
Source: Cornerstone Capital Group
Summary of a report originally published on June 2, 2015.
Michael Geraghty is the Global Markets Strategist for Cornerstone Capital
Group. He has over three decades of experience in the financial services
industry including working as an investment strategist at UBS and Citi.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 16
Corporate Governance
South Africa: A Leader in Corporate Governance
By Mervyn E. King, Chairman, International Integrated Reporting Council (IIRC)
After Mr. Nelson Mandela was released from jail in
1990 he would often call me. We had known each
other from before he went to jail. Whenever the
conversation opened with, “How’s my favourite
Judge?” I knew he had plans, and I knew a lot of work
was coming my way. Mr. Mandela and I shared a
vision for enhanced corporate governance, and the
direct result of this vision is that South Africa is now
consistently cited as a global leader in corporate
governance.
So how did we do it? The Institute of Directors in
Southern Africa asked me to form a committee, which
assumed my name. In 1994, the first “King Report on
Corporate Governance” (King I) was issued. It
proposed a new, inclusive approach to governance
that recognized the role and relevance of a company’s
stakeholders. In 2002, King II was released with a
focus on sustainability reporting and risk
management. It had become clear that financial
reporting was critical, but on its own was not
sufficient. By definition, the information was
historical and, to use an automotive analogy, we were
reporting on information letting our users look into
rear view mirrors but driving cars with no
windscreens. At the same time there was pressure on
companies from civil society and other sources to
report on sustainability, ISO standards, carbon
disclosure, governance structures, remuneration and
more. These are also crucial elements for a business to
report on – but cannot be treated in silos.
This pressure led to the thinking in King III, released
in 2009, that as a management runs a company on an
interconnected and interrelated basis through the
resources used and the relationships with its
stakeholders, the company should report on this
basis. At this time others were beginning to think
along the same lines, leading to a meeting at St.
James’s Palace hosted by His Royal Highness The
Prince of Wales in December 2009, at which the
“who’s who” of corporate reporting paved the way for
the evolution of corporate reporting: Integrated
Reporting.
Integrated Reporting weaves a golden thread through
the information of business reports. It links the
information that is relevant to providers of financial
capital into one clear, concise, integrated story that
explains how the range of their key resources and
relationships are creating value over time. Decision-
making and policy formulation are strengthened as a
result of enhanced corporate transparency and
reporting. Through considering the interconnection
between the resources and relationships a business
uses, the dialogue between investors and businesses
naturally shifts to focus on strategy for value creation
over the short, medium and long term.
I am Chairman of the International Integrated
Reporting Council (IIRC), a global coalition of
regulators, investors, companies, standard setters, the
accounting profession and NGOs. The IIRC’s vision is
to align capital allocation and corporate behaviour
with the wider goals of financial stability and
sustainable development through the cycle of
integrated reporting and thinking. It is the global
©Rawpixel/BigStock
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 17
authority on Integrated Reporting, striving to be
market-led and evidenced-based, acting as a global
centre of excellence for corporate reporting reform. In
2013, the IIRC issued the International <IR>
Framework.
The Framework was the culmination of three years’
development and consultation. It drew on the
learnings of integrated reports in South Africa, among
other sources. Since 2010 companies listed on the
Johannesburg Stock Exchange (JSE) have been
required to prepare integrated reports because the
principles of King III (which include the preparation
of integrated reports) fall into the Listings
Requirements on an apply or explain basis. Today,
five years on, in South Africa it’s not only the listed
companies that prepare integrated reports – unlisted,
state-owned entities and NGOs prepare integrated
reports as a discipline to ensure good governance and
improved reporting.
The acknowledged benefits of Integrated Reporting to
businesses in South Africa are widespread. There is no
doubt that Integrated Reporting has significantly
spurred integrated thinking in business. A recent
survey by the South African Institute of Chartered
Accountants found that 79% of non-executive
directors included in the survey believe that
integrated thinking has increased the quality of
dialogue with providers of financial capital and other
stakeholders.
And one of acknowledged benefits supported by the
survey is that Integrated Reporting has resulted in
better decision-making and improved internal
management. As others learn of the benefits this
enhanced approach to corporate governance and
reporting has brought to South African businesses,
more and more in other African countries and across
the globe are moving towards Integrated Reporting.
The world is not what it used to be. Business cannot
carry on as we used to carry on. The concept of value
has expanded. Instead of seeing companies as
operating in a financial bubble and viewing value
through a financial lens of future cash flows and net
asset value, stakeholders want to understand how a
company makes its money through all of the resources
and relationships (also known as capitals) it uses or
affects. From an investor perspective, it is no longer
enough to understanding the finances of a business;
one must understand and assess a company’s
strategy, business model, resources and relationships,
and risks and opportunities. A reassessment of our
understanding of value – its parameters and its effects
– is taking place, making sure that business models
sing to the tune of a value creation model fit for the
21st century.
Mervyn E. King is a Senior Counsel and former
Judge of the Supreme Court of South Africa. He is
Chairman of the International Integrated
Reporting Council, Chairman Emeritus of the
Global Reporting Initiative, and a member of the
Private Sector Advisory Group to the World Bank
of Corporate Governance.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 18
Corporate Governance
Gauging Governance Globally — Spotlight on South Africa
By Michael Geraghty, Global Markets Strategist, Cornerstone Capital Group
South Africa is ahead of many countries in terms of corporate governance. Not only
was the country at the forefront of factoring ESG issues into its exchange listing
requirements, it now requires integrated corporate reporting.
Measuring Governance
In a previous global market sector report, Cornerstone Capital Group examined
the significance of governance for country equity valuations using both “top-down”
(governance at the national level) and “bottom up” (governance at the corporate
level) metrics — see Gauging Governance Globally: Macro and Micro Metrics,
September 15, 2014. We highlighted that a multiple regression generated an R-
squared of 0.16 between equity valuation at the country level and four measures of
governance:
The World Economic Forum’s Corporate Governance score.
The World Bank’s Ease of Doing Business Index.
Transparency International’s Corruption Perceptions Index.
The World Bank’s Worldwide Governance Indicators.
©xstock/Shutterstock
Figure 1: The Cornerstone Capital Governance Composite
Source: Cornerstone Capital Group
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 19
We then took a weighted average of the four macro governance measures to rank
the eight regions / countries in our regional strategy model in terms of a composite
governance score. The rankings (from best to worst): (i) Australia; (ii) U.K.; (iii)
North America; (iv) Japan; (v) Europe ex the U.K.; (vi) Latin America;
(vii) Emerging Asia; (viii) the Central and Eastern Europe, Middle East and Africa
(CEEMEA) region.
In terms of the CEEMEA region, the country with the largest weight in the MSCI
Emerging Markets EMEA Index is South Africa — a 45% weight as of April 2015.
Other countries with large weightings include Russia (23%), Poland (9%) and
Turkey (8%). Figure 1 illustrates that, if South Africa is treated as a standalone
country, it ranks much higher than either (i) the CEEMEA region as a whole or (ii)
three European countries: Portugal, Spain and Italy.
A few points to note:
The scores for the regions in Figure 1 are based on the weights of the
component countries in the relevant MSCI index. So, even though South
Africa has a much bigger weight (45%) than Russia (23%), the extremely poor
scores for governance in Russia (and the mediocre scores for Poland and
Turkey) mean that the CEEMEA region as a whole ranks last in our governance
composite.
Our governance composite is calculated by weighting the four measures of
governance outlined above. The WEF Corporate Governance rank gets the
heaviest weight given its relatively strong correlation with country P/Es.
Despite its low R-squared, we included The World Bank’s Worldwide
Governance Indicators because a statistical analysis reveals that a four-
variable model is more statistically significant than a three-variable model
(i.e., one that excludes the World Bank Worldwide Governance indicators).
Figure 1 illustrates that South Africa ranks very well for governance at the
corporate level — i.e., the World Economic Forum’s Corporate Governance
score and the World Bank’s Ease of Doing Business Index — but not as well at
the national level i.e., the Corruption Perceptions Index and the World Bank’s
Worldwide Governance Indicators. That South Africa ranks well for
governance at the corporate level is not that surprising.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 20
The Evolution of World Class Corporate Governance in South Africa
Landmark events in the evolution of corporate governance in South Africa were
the King I Report on Corporate Governance in 1994 and the King II Report on
Corporate Governance in 2002 (both named after retired Supreme Court judge
Mervyn E. King (See Professor King’s article in this issue.) While neither of these
reports specified mandatory requirements for companies, their guidelines were
selectively adopted by the Johannesburg Stock Exchange (JSE) as listing
requirements (See “The Johannesburg Stock Exchange: Integrating
Sustainability” article in this issue).
Following the publication of the King III Report on Corporate Governance in 2009,
the JSE mandated the disclosure of sustainability information starting in the 2010
financial year and subsequently mandated the disclosure of integrated reporting
starting in 2011.
Companies are mandated to disclose their policies in relation to a series of
ESG issues as well as to report on the actions that they take to achieve the
objectives of their policies. (However, it should be noted that no specific
guidelines have been provided, or standards set, to require disclosure
along a specific set of metrics.)
Integrated reports must describe the value creation process inside an
organization and discuss a company’s impact on stakeholders as well as
the strategies for mitigating any potentially negative impacts on society.
ESG reporting was widespread among many of the large firms in the economy even
before the recently mandated disclosure of sustainability information. Following
the initiatives outlined above, corporate governance is now widely considered to
be world-class in South Africa.
Michael Geraghty is
the Global Markets
Strategist for
Cornerstone Capital
Group. He has over
three decades of
experience in the
financial services
industry including
working as an
investment
strategist at UBS
and Citi.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 21
Open Source Excellence
The Johannesburg Stock Exchange: Integrating Sustainability
By Siobhan Cleary, Consultant and Former Director of Strategy & Public Policy and Corli Le Roux, Head of
SRI Index Operations & Sustainability, Johannesburg Stock Exchange
The Johannesburg Stock Exchange (JSE) has, over
the long term, demonstrated its commitment to
promoting sustainability amongst its listed
companies. This is unsurprising given the exchange’s
operating environment. First, companies operating
in emerging economies cannot focus simply on the
single (financial) bottom line. Issues of stakeholder
engagement, community development and due
regard for environmental considerations are a core
part of their license to operate. This is not to suggest
that companies always conduct themselves
admirably, but the issues are not new. Second,
successive iterations of the King Code of Corporate
Governance (King Code) have served as the
framework for company directors in thinking about
their – increasingly broadly defined – governance
responsibilities. The first King Code was published
in 1994, and the latest version (King III) in 2009.
King III expanded the focus on sustainability that
was introduced in King II, together with a
recommendation that companies produce integrated
reports. King IV is currently under development.
The JSE has taken a multi-pronged approach to
sustainability. In its Listing Requirements, certain
aspects of the King Codes are mandated while
compliance with the remainder of King III is
required on an “apply or explain” basis. This includes
the requirement relating to integrated reporting. In
2004 the JSE also established a Socially Responsible
Investment (SRI) Index. Unlike many other indices
available at the time, the JSE’s index was not an
exclusionary/ethical index but rather one focused on
broader sustainability. The primary reasoning for
this was that because the index was at its core
intended to be about company engagement and
behaviour change, if one excluded companies at the
outset there would be no opportunity to engage them
on sustainability matters. Another differentiating
element of the index is that it is progressive in nature.
The indicators have changed over time and meeting
the index requirements has become ever more
challenging; the assessment of companies against the
index criteria moved from being voluntary to being
automatic; the evaluation of companies against the
index criteria moved from including private
information to relying solely on information in the
public domain. As the exchange does in many other
areas of its business, it established an advisory
committee comprised of representatives from
business, state-owned enterprises, the investment
community, non-governmental organisations,
academia and even trade unions to provide guidance
and input. Finally, the JSE hosts annual “ESG
Investor Briefings,” bringing together top-
performing companies and interested investors.
There are some who have criticized aspects of the SRI
Index and its operation, particularly in relation to
decisions regarding controversial issues or
borderline cases. It is undoubtedly true that a clear
set of unambiguous criteria which leave companies in
no doubt as to whether they are “in or out” would be
more comfortable for companies. But the discretion
retained by the JSE (always with input from the
Advisory Committee) has enabled the exchange to
reflect broader social perspectives through index
© viewapart/CrystalGraphics
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 22
inclusion or exclusion decisions, for example
reflecting on labor relations post the Marikana
shootings. The index has also had its fair share of
(often public) criticism from members of the NGO
community who were unhappy about the inclusion of
certain companies in the index. The decisions
occasionally resulted in difficult conversations –
either with listed companies or other stakeholder
groups – and unpleasant media. Despite this, the
exchange’s view was always that such discord meant
companies took the index seriously and that it
stimulated debate on very important issues.
While the index never gained serious traction as an
investment product, the JSE considers it an
enormously successful part of its sustainability
arsenal. Coupled with the Listings Requirements, it
has been a valuable point of engagement with issuers.
Interaction with institutional investors is also
increasing steadily. The index has also added to the
JSE’s credibility as it participates in the broader
sustainability conversation in South Africa and
internationally.
At the time that the JSE launched the index (having
already begun to include elements of the King Code
into the Listings Requirements), it was one of a
handful of exchanges engaging directly with
sustainability issues. For the leadership of the
exchange, the reason for doing this was
straightforward: at their core, exchanges are
intermediaries facilitating the channeling of capital
to its most productive use. Part of the way in which
exchanges do this is by requiring companies to
disclose information that will improve the ability of
investors to make appropriate allocation decisions.
As the definition of what constitutes relevant
information changes over time, exchanges have a role
to play. And ultimately, the more that listed
companies are grappling with these issues, the
greater the likelihood that companies will be listed
for the long-term.
Siobhan Cleary is currently an independent
consultant working on capital market issues,
including contributing research to the UNEP FI
Inquiry into the Design of a Sustainable Financial
System. She is the JSE’s former Director of
Strategy and Public Policy, where her team was
responsible for developing the JSE’s corporate
strategy and policy positions on issues such as
financial market regulation.
Corli Le Roux joined the JSE as Legal Counsel in
August 2001 from the South African Futures
Exchange (SAFEX). She has been responsible for
the development and operation of the JSE’s Socially
Responsible Investment (SRI) Index since inception
of the project and oversees the JSE’s advocacy and
engagement on sustainability issues. She
represents the JSE on various committees covering
sustainability, integrated reporting and
responsible investment, and is currently Vice Chair
of the World Federation of Exchanges’
Sustainability Working Group.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 23
Open Source Excellence
Profiting from Trust – Opportunities to (Re-) Define a Positive Social Role For Financial Institutions
By Chris Coulter, co-CEO, GlobeScan
Trust is one of the most complex, strategically important assets sought by an
organization. High levels of trust generate favorable responses to the
organization, and create environments where discussion, collaboration and
innovation can thrive.
But not all trust is created equal. Organizations can systematically build,
maintain and evolve what we see as three distinct benefits of trust: brand
equity, reputation equity and employee equity. GlobeScan believes that these
three forms of equity can be found and nurtured across an organization’s
stakeholder network, creating tangible value for the business and for society.
Once lost, however, trust is extremely difficult to recapture.
The need to rebuild trust is particularly acute in the financial services industry.
More than seven years on from the financial crisis, concerns about trust and
confidence in banks and other financial institutions show no sign of
diminishing.
With the latest series of scandals, allegations and billion-dollar fines,
questions are being asked about whether the industry has learned any lessons.
As regulators call on banks to “raise their game” to regain the public’s trust,
we ask what can be learned about the roots of distrust, the opportunities for
rebuilding reputation, and the pathways to get there, as part of our ongoing
global public and stakeholder opinion research.
Crisis of Trust
Evidence of a crisis in trust in business is stark. Research from GlobeScan,
Edelman and others continues to feed the debate about the state of business’s
social license. Our latest 2015 tracking across 22 countries shows very low
levels of trust in global companies, especially compared to other societal
actors, including academic/scientific organizations and NGOs. Net trust in
global companies remains at low levels in many countries around the world
(see Figure 1 on the next page).
Trust varies across a range of different industry sectors, however. GlobeScan’s
research across 24 countries shows the public’s net trust in banks and financial
institutions deep in negative territory, alongside that of oil companies.
Attitudes range from highly positive in Africa and some parts of Asia, to
profoundly negative in Europe and the United States (see Figure 2).
© 3DDock/Shutterstock
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 24
Figure 1. Trust in Institutions
Net Trust,* Average of 22 Countries, 2015
Source: GlobeScan
Figure 2. Net Trust* in Industry Sectors
Average of 24 Countries, 2014
Source: GlobeScan
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 25
A Bright Spot: Africa!
Africa indeed remains a bright spot for banks and an opportunity to cement
long-term trust in a highly dynamic region of the world.
In a recent interview with Gail Klintworth, Group Customer Director and
Responsible Business Lead at financial services firm Old Mutual plc (which
has a strong presence in South Africa), she mentions that the finance sector
has a positive role to play in socio-economic and environmental development
across Africa. According to Klintworth, the opportunity in Africa is to establish
and define a meaningful societal role, focused on accelerating economic
inclusion, while ensuring that economic development isn’t at the expense of
the environment or people. The potential is huge, but doing it the right way
will be critical to achieving success.
In many parts of Africa, 70-80% of the population is ‘unbanked’, which is
improving via mobile money but not necessarily enabling proper financial
planning. The penetration of personal insurance is only 2% in most countries.
This provides a huge opportunity not only to grow the business, but to make a
positive difference.
Old Mutual plc is one of the largest private investors in infrastructure and
renewables in the region. The company is continuously developing business
through partnerships with NGOs, governments, and economic empowerment
groups. Old Mutual plc aims to be the financial services champion in Africa,
and wants to be recognised as responsible business leaders in
financial services.
Rebuilding trust for banks and financial institutions, especially in Europe and
North America, will require a focus on purpose, governance and transparency.
Indeed, ethics lies at the core of the trust deficit. When we asked people across
the world what issue the banking industry most needs to address, “operating
ethically” rises to the top. While other sectors can be challenged by ethics, the
prominence of ethics as a driver of trust in financial services is unique
compared to the nine other sectors we track, and underscores the importance
for the financial services industry to engage society in a meaningful way.
Pathways to Trust
In our work we use stakeholder research to help define expectations, drivers
of trust and an organization’s optimal societal purpose.
A review of academic literature shows that there are three primary
components of trust – competency, integrity and benevolence. Our research
across a range of industries confirms that these three elements are critical to
build enduring and deep trust with stakeholders.
The structural equation modeling example below (Figure 3) outlines how
pathways to trust are built.
Chris Coulter is the
co-CEO of GlobeScan. A
thought-leader on
reputation, brand
and sustainability, Chris
is a valued advisor to
global leadership
companies and
organizations. Chris
works with leaders in
business, multilateral
organizations and NGOs
to help them better
understand and respond
to shifting stakeholder
expectations, build trust
with key constituencies
and exert greater
influence in shaping the
future.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 26
Figure 3. The Components to Trust
Source: GlobeScan
We can see that strong functional performance (competency) on its own
directly drives trust only minimally. When performance is described through
the lens of being empathetic and supportive (integrity), then trust increases.
If performance is conveyed in this warm, human way and it is also embedded
in a narrative of dedication and purpose (benevolence), we see the maximum
trust payoff.
Getting its house in order by proactively addressing ethical breaches is key to
turning round the financial services industry’s trust crisis. But if banks are
going to move beyond “doing no harm,” they need to take steps to redefine
their role in society and to articulate this effectively.
The journey to purpose starts and ends with engagement – with customers,
employees and governments to be sure, but also with civil society and
communities. Banks are not the first institutions to face a trust deficit and they
won’t be the last. There is a clear opportunity to learn from other sectors about
how they have proactively addressed their trust challenges, and to apply the
three factors of competency, integrity and benevolence in equal measure.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 27
Global Sector Research
Dissecting the “Sharing Economy”: Business Model Opportunities and Risks
By John K.S. Wilson, Margarita Pirovska, PhD, & Michael Shavel, CFA, Cornerstone Capital Group
Redefining “sharing economy.” A “distributed marketplace company”
(DMC) develops and manages an automated platform that enables self-
organized, usually ad hoc transactions between two independent parties, a
user/consumer and a provider, in order to use otherwise slack resources.
Between Uber’s $50 billion valuation, Etsy’s IPO and the large venture capital
infusions into Airbnb, DMCs have clearly attracted investor interest, as well as
scrutiny.
A matter of trust. A core component of a DMC’s value lies in its ability to
gain the support of stakeholders—not only customers and providers, but also
incumbents, suppliers, communities, regulators and investors—and facilitate
relationships among them. As DMCs grow, one of their primary challenges is
maintaining the trust of these disparate stakeholders.
Where is trust at risk? We have identified the salient characteristics of
DMCs; all of these companies sit somewhere on the continuum for each
characteristic. Assessing where a company lands on the continuum can
highlight the opportunities and risks presented by its business model.
A closer look at Uber. Uber continues to grow quickly and many in the
media speculate that the firm will go public. Meanwhile, the company faces
regulatory risk because it has riled its traditional taxi-service competitors as
well as local governments. We look at the economic implications for Uber
should regulatory or social pressure require it to change its pay model. As it
stands currently, we calculate that there is no significant pay advantage for
Uber drivers relative to taxi/limousine drivers, which would pose a risk to
Uber if it had to adhere to stricter regulations.
Executive summary
Between Uber’s $50 billion valuation, Etsy’s IPO and the large venture capital
infusions into Airbnb, the “sharing economy” is transitioning from a social
movement to a large-scale commercial business model. As more technology-
driven sharing enterprises inevitably go public (or expand via large private
equity infusions), investors will need consistent ways to evaluate not just the
financial prospects of a company, but also whether its business model will be
sustainable as it matures. In this report we lay out a methodology that can be
used to do so.
We call companies that have shifted beyond the original socially focused ethos
of the sharing economy to become more profit-oriented “distributed
©lightkeeper/BigStock
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 28
marketplace companies” (DMCs). We define DMCs as companies that develop
and manage an automated platform which enables self-organized, usually ad
hoc transactions between two independent parties, a user/consumer and a
provider, in order to use an otherwise slack resource. A DMC is a more
formalized version of a “peer to peer” network.
While they may be classified as technology companies for the purposes of
fundamental analysis, DMCs enable commercial transactions in such diverse
sectors as transportation, apparel, hospitality, the arts and household goods
and services. Moreover, a key component of their value lies in DMCs’ ability to
gain the support of stakeholders and facilitate relationships among them.
These companies will prosper based not only on financial performance, but
also on the creation and maintenance of trust with stakeholders--customers
and providers, but also competitors, suppliers, communities and regulators.
As DMCs grow, the interests of these indirect stakeholders take on greater
importance. The way in which a DMC addresses the concerns of these other
stakeholders may ultimately determine whether its business model proves
sustainable over the long term.
DMCs may create greater employment and less expensive consumption
opportunities, as well as more efficient and environmentally friendly use of
physical capital. On the other hand, the decentralized nature of DMCs may
also entail the circumvention of consumer and worker protections as well as
safety standards, or may exacerbate income inequality. Creating and
maintaining trust, a key component of the sharing economy, depends in part
on avoiding the perception that some stakeholders are benefiting at the
expense of others.
What questions should investors be asking?
Given the diversity of business models within the sharing economy, the right
questions will depend upon the specific company under consideration. We
have created a taxonomy to identify the salient characteristics and key
relationships in the distributed marketplace, and to help evaluate the risks and
opportunities associated with each business. Companies can have a mix of
characteristics, any of which can present a particular opportunity or risk. In
all cases, the analysis comes down to who benefits and how, who might be
harmed and how, and what stakeholders other than the provider and
consumer may be affected.
This is an excerpt from our full-length report dated June 9, 2015.
John K.S. Wilson is the
Head of Corporate
Governance, Engagement &
Research at Cornerstone
Capital Group. John has
over 16 years of experience
in socially responsible
investing and corporate
governance. An Adjunct
Assistant Professor at
Columbia Business School,
John is also a member of the
Advisory Council to the
Sustainability Accounting
Standards Board.
Margarita Pirovska, PhD,
is the Policy & Sustainability
Analyst at Cornerstone
Capital Group. She has over
12 years of experience in
international energy
markets and sustainable
business, working for GDF
SUEZ, the International
Energy Agency, and Gaz de
France.
Michael Shavel, CFA,
is a Global Thematic
Analyst at Cornerstone
Capital Group. Prior to
joining the firm, Michael
was a Research Analyst
on the Global Growth
and Thematic team at
Alliance Bernstein. He
holds a B.S. in Finance
from Rutgers University
and is a CFA
Charterholder.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 29
Regional Imperatives
African Commodity Exchanges: Tough Questions About Financial
Sustainability
By Julie Lerner, Founder & CEO, PanXchange
Author’s note:
On the heels of a successful pilot, August will mark my third trip to Kenya and the live launch of PanXchange ’s
web-based software. Our platform facilitates the negotiation of East African grains between farmers and
commercial buyers. I am not an expert on East African politics, nor on the specific challenges of the smallholder
farmer. The following, however, is based on my commodity market knowledge, experiences both as a founder
of a start-up and angel investor, as well as extensive research on building liquidity.
Three things we know about Africa: 1) Improving
agrarian economies dramatically reduces poverty and
improves a nation’s overall economic strength; 2) East
Africa is the hottest place on the globe for agriculture-
based profit opportunities; and 3) As we watch the
South African Exchange (JSE/SAFEX) continue to
flourish, the political interest in replicating a
successful futures and derivatives exchange is at an
all-time high.
Yet according to a recent Bloomberg article, the
Ethiopian Commodity Exchange (ECX) “is one of at
least eight commodity exchanges started in sub-
Saharan Africa over the past two decades with the aim
of improving food security for local populations.
Many have failed, and only South Africa’s is thriving
without government support.”1
The article continues, “Trading floors have flopped in
Zambia, Uganda, Nigeria, Zimbabwe, and Kenya.
Each one, analysts say, suffered from the same flaw: a
top-down approach that’s better at attracting foreign
aid than at improving farming practices and
developing transportation and communications
networks.”
I concur with the conclusion, yet I think it’s missing
one other critical component. Specifically, does a
national exchange make good business sense? If an
exchange needs government support (and likely
international aid funding) to keep it alive, does it
1 Bjerga, Alan, and William Davidson. "Trading Floors Can't Feed
Africa." Bloomberg.com. Bloomberg, 2 Apr. 2015. Web. 21 June
2015.
provide any benefit to the nation’s economy and the
well being of its populace?
South Africa’s Success
There is no doubt that the JSE/SAFEX exchange is the
continent’s biggest commodity success story. It was
launched in 1996, midway through the post-apartheid
decade, just when the government deregulated the
market. According to a 2009 UNCTAD study2, South
Africa also had these attributes:
High level of trust and cooperation amongst
industry;
Government commitment to respect the pricing
mechanism;
2 Report of the UNCTAD Study Group on Emerging Commodity Exchanges Development Impacts of Commodity Exchanges in Emerging Markets 2009, p.146
© oldandsolo/flickr
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 30
A broad-based approach to market development,
incorporating futures, spot and financing
instruments;
Strong existing warehouse and logistics
infrastructure;
Development of a robust delivery mechanism
integrated with financing solutions;
Emphasis on education.
Yet East and West Africa don’t have most of these
drivers. Without them, unfortunately, attempts to
synthetically replicate the JSE don’t make good
business sense. It is too much to build given the lack
of infrastructure in nations to the north. What’s
missing is the focus on 1) what it takes to connect
smallholder farmers to the market, and 2) growth
strategies that are realistically attainable and
financially sound. Look again at the six drivers above.
Each one is essential to building a strong foundation
— and each is a massive undertaking on its own.
Keys to Success in a Developing Nation
The first task is to flip the equation from a top-down
political approach to one that’s bottom-up. Similarly,
we need to break down the far-reaching goals of
international aid, then look at a commodity exchanges
from a business perspective:
Who is your customer and what problem are
you trying to solve? Addressing the needs of the
smallholder and how to get their crops to market has
a completely different set of issues than a national
exchange that needs a critical mass for liquidity.
Are your goals reasonable? These entities are
attempting to build an entire supply chain, yet they
could and should be broken down in at least two or
three different stages. You can’t have a robust
derivatives market if the underlying physical market
is broken.Are your numbers sound? Reasonable
fees for your target market? How many users are
needed to reach the break-even point? What is the
addressable market for the derivatives? Is it enough
for liquidity and to break even? I assume this question
is the toughest to address from a top-down approach,
as these nations simply do not have enough players for
a financially sustainable exchange.
Conclusion
No one wins if we swing for the fences. International
aid should focus on empowering smallholders
through education and helping organize the
cooperative buying of inputs and marketing post-
production. Governments should focus on
agricultural infrastructure — both the physical
infrastructure (roads, ports, etc.) but also market
structure – so that an efficient procedure will make
contracts more enforceable for freer movement of
goods, including support of standardized contract
terms and quality specifications.
If we focus on building a strong foundation, we can
empower the smallholders and improve the agrarian
economy. Once we get to that point, perhaps a
national exchange will become economically viable.
Julie Lerner is the Founder and CEO of
PanXchange, Inc., a web-based negotiation and
trading platform for physical commodities. She has
deep experience in regional and international
agricultural and energy markets. Geographically,
her area of expertise covers US, Europe, Latin
America and East Africa. Ms. Lerner currently
specializes in bringing liquidity and efficiencies to
thin and/or nascent markets.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 31
Accelerating Impact
Creating a Win-Win Investment in Kenya
By Taryn Goodman , Director of Investment Partnerships and Charlotte Kaiser, Deputy Managing
Director, NatureVest, the Nature Conservancy
The Nature Conservancy has spent the last 64 years conserving the lands and
waters on which all life depends. Working in all 50 states and more than 35
countries, the Conservancy seeks solutions that balance human well-being
and natural resource preservation. This need for balance is acutely felt in the
northern rangelands of Kenya, where the pastoralist Samburu and Masai
tribes herd their cattle alongside dwindling herds of elephants, rhinos and
lions.
The grasslands of Kenya are important to the survival of both humans and
wildlife. Unfortunately, the increasing populations of pastoralist tribes and
their cattle threaten the area’s natural equilibrium. Overgrazing by cattle,
sheep and goats in addition to climate change has resulted in desertification,
the reduction of land available as wildlife habitat, and poaching due to
decreased incomes.
To enable pastoralists and wildlife to flourish together, The Nature
Conservancy has been working with the Northern Rangelands Trust (NRT)
for over a decade to engage with local community conservancies to counteract
the degradation of these important grasslands. By demonstrating how
sustainable grazing practices can improve grassland health and carrying
capacity for both cattle and wildlife, and by encouraging herders to adopt
rotational grazing, grass banking and other practices, NRT has made
conservation relevant to tribesmen who count their wealth by heads of cattle
owned.
Historically, this work was supported through grants to NRT from individuals
and institutions. These gifts supported educational campaigns that showed
the benefits of sustainable grazing and enabled its adoption. Through this
work, NRT noticed a market failure: the pastoralists had no access to markets
to sell their cattle. This led to reduced incomes, as herders would trek their
cattle for up to four days in order to sell them to a middleman, who would
offer low prices for the animals – which had lost substantial weight during
the trek. It also meant that herders overstocked their herds, never knowing
when they would have access to a market.
Opportunity for Heightened Impact
NRT realized an opportunity to create a local market for cattle purchases and,
in 2009, launched its Livestock to Markets (LTM) program. In conservancies
where herders use sustainable grazing practices and achieve specific
conservation targets, LTM brings access to markets. Herders who once were
© Diana_Robinson/Flickr
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 32
forced to trek their animals for many days in order to sell just one or two cows
to a middleman can now sell their animals for a fair market price on
scheduled market days within their own communities, when LTM buys
several hundred animals from many dozens of households. The cattle are
then fattened for an additional 15 months, which improves the grade of beef
and allows the program to obtain higher prices in the Nairobi meat market.
As a result of the LTM program, hundreds of thousands of acres of grasslands
are better able to support not only cattle but also the elephants, rhinos, zebras
and other species that call them home. At the same time, the LTM program
has created tremendous social benefits for the local communities.
Pastoralists’ incomes have improved substantially thanks to higher prices on
cattle. And each animal sold through the LTM program carries a levy that
goes back to the community conservancy to fund investments in wildlife
guards to prevent poaching, in eco-tourism lodges, and in community
facilities like clinics and schools.
NRT initially launched the LTM program with a $1 million grant. Over seven
years, this capital enabled the purchase of 7,000 cattle, provided almost $1.5
million of income to pastoralist families and funneled more than $80,000 in
revenue to the community conservancies. However, similar to many social
enterprises, the LTM program’s growth was limited by a lack of available
philanthropic capital. This also limited its conservation and social outcomes.
Creative Financing to the Rescue
In 2014 The Nature Conservancy launched NatureVest, a program focused on
developing the market for impact investing in conservation. NatureVest’s
deal team works with TNC colleagues and other partners to source and
structure investment opportunities for impact investors to support
conservation outcomes while earning a financial return. NatureVest and
TNC-Africa saw in LTM the potential for a high-impact conservation
investment. Working with an individual impact investor, NatureVest
structured a tiered $7 million investment to grow Livestock to Markets into a
sustainable social enterprise. To facilitate this, NRT created a new for-profit
subsidiary, NRT-Trading (NRT-T).
The $7 million investment is structured as a combination of debt and equity,
and is sourced from a single investor, the Peter Hawkins Dobberpuhl
Foundation. The Foundation made a $3.5 million program-related
investment (PRI) loan to TNC, which has been on-lent to NRT-T. Due to the
nascent stage of the company, the loan earns 0% over 7 years. The proceeds
of the loan are being used for working capital to scale up the livestock
purchases, growing from 1,000 cows per year to 10,000 cows per year.
Instead of reaching just five conservancies managing 760,000 acres, the debt-
funded program will reach 19 conservancies managing 1.2 million acres of
grasslands.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 33
A follow-on $3.5 million equity investment from TNC-Africa will support
capital expenses such as a new abattoir, trucks and fencing to further support
the LTM expansion. The equity is financed by a gift to TNC-Africa from the
Dobberpuhl Foundation, which sought to create capacity for TNC to provide
market discipline to NRT-T. This structure has allowed us to work with NRT-
T to set an enterprise valuation, facilitating NRT-T’s efforts to raise additional
equity for new enterprises. And if we choose to exit at the end of our 10-year
term, we can recycle the capital to support future work in Africa. In addition
to capital, the Conservancy has also provided technical assistance and
relationships to NRT-T, introducing the organization to potential investors in
Kenya and the US.
Through this investment, The Nature Conservancy and its NatureVest
program learned three important things:
Optimize for risk, return, and impact. The Dobberpuhl Foundation
explicitly structured a $7 million commitment to the LTM program as half
loan, half gift to TNC to invest as equity, with the intent that TNC receive
a return on the equity portion of its investment to reinvest in other
projects. While the program has a proven track record of over half a
decade, a brand-new social enterprise is a risky business. A 0% loan for
working capital will allow the program to grow and manage execution risk
without also needing to manage debt service. The equity investment will
minimize the debt burden and provide the capital needed for expansion –
all while allowing TNC to use its returns to increase its impact.
Capital alone isn’t the answer. Ensuring that high-impact
investments in developing countries are successful over the long term
requires tremendous resources, the cost of which is rarely supported
through that first deal. TNC-Africa provided business guidance as well as
a volunteer interim CEO for NRT-T in its critical first year. Further, by
using its network, TNC Africa has been able to engage new potential
investors for NRT-T.
The solution must be holistic. Focusing on a conservation outcome
alone would not have generated the intended outcomes. By creating a
solution that spoke to the needs of the herders, the communities, and the
wildlife, TNC was able to balance all interests, enabling greater adoption
and ultimately, success.
In March 2014, the Livestock to Markets program bought 234 head of cattle
from a single conservancy. Six months later, the program purchased more
than 950 animals from 4 different conservancies, benefitting over 2,500
people. At the same time, over the past two years, elephant poaching in the
NRT region is down 38%. By focusing on holistic investments that create
social and conservation outcomes, the Conservancy has been able to ensure
both humans and wildlife can thrive.
Taryn Goodman is a
Director at NatureVest,
the Nature Conservancy’s
impact investing group
focused on conservation
finance, where she is
responsible for
structuring and
managing external
investment
partnerships. She earned
a Bachelor of Science
degree from Cornell
University and an MBA
from Cornell University’s
Johnson School of
Management.
Charlotte Kaiser is the
Deputy Managing
Director for NatureVest’s
deal team, where she
leads devevlopment of
pipeline of projects to
support investment in
conservation. A former
community development
banker, Charlotte holds a
BA from Harvard
University in
Environmental Science &
Public Policy, a Masters
in Environmental Science
from the Yale School of
Forestry &
Environmental Studies,
and an MBA from the
Yale School of
Management.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 34
Accelerating Impact
The Bioenergy-Environment-Gender Nexus:
How Simple Innovations Can Drive Change
By Dr. Mary Njenga, post-doctoral fellow on bioenergy, World Agroforestry Centre (ICRAF)
The seemingly simple task of cooking a meal poses
significant health risks for those living in poverty. In
sub-Saharan Africa this is certainly the case. However,
the techniques to mitigate these health risks exist—
they just need to be scaled up.
The World Agroforestry Centre (ICRAF), through its
regional offices in Cameroon, India, Indonesia, Kenya
and Peru, aims to do just that. ICRAF carries out
research and development of tree-based bioenergy
innovations that are socially responsible, ecologically
sustainable and economically viable—some of which
are presented in this article. The Centre is building out
capacity of farmers and scientists, communicating
their experiences and contributing to policy
development.
The Problem with Cooking
Cooking-related health risks take a number of forms:
Poor households that can’t afford to purchase
woodfuel (charcoal or firewood) sometimes use
unsafe sources of fuel such as plastic bottles and
old shoes.
The use of woodfuel itself generates smoke, often
exacerbated by inefficient cooking stoves and
poor ventilation. It is common to find women and
children coughing, sneezing and suffering from
headaches in smoky kitchens, where they spend a
lot of time. More serious complications such as
bronchitis, lung cancer, asthma and tuberculosis
have also been linked to prolonged exposure to
smoke while indoors.1 Household air pollution
1 “Fuel for life–household energy and health,” World Health Organization, 2006 2 Lim S.S., et al, “A comparative risk assessment of burden of disease and attributable to 67 risk factors and risk factor clusters in 21 regions, 1990–2010: a systematic analysis for the Global Burden of Disease Study 2010.” Lancet, 2012: 380, 2224–60. 3 Malmberg C. C., “Case Study on the Role of Women in Rural Transport: Access of Women to Domestic Facilities.” Sub-Saharan
causes 4.3 million deaths annually and is a
leading cause of mortality in women and
children.2
Further, the collection of firewood is tiring and
time-consuming, limiting women’s productivity
and detracting from educational opportunities for
girls. A study in Zambia showed that women spent
800 hours per year collecting firewood.3 A
different study in Uganda revealed a distance of
8-12 km is covered in the process, involving 4-6
hours per trip. With 4-6 loads per person, per
week, approximately 830-1870 hours per year are
spent collecting firewood.4 These figures may
actually have increased since these studies were
done, as firewood is becoming increasingly
scarce.
Collecting firewood can also be dangerous,
exposing those performing the chore to the risk of
rape or animal attack.
Africa Transport Policy Program, World Bank and Economic Commission for Africa Working Paper 11. World Bank, 1994. 4 Agea G., Kirangwa D. Waiswa D. and Okia C., “Household Firewood Consumption and its Dynamics in Kalisizo Sub-County, Central Uganda.” Ethnobotanical Leaflets 14: 841-855, 2010
Photos courtesy of ICRAF
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 35
Innovative Solutions
Agroforestry, organic fuel briquettes and improved
cook stoves are some of the innovations that could
significantly improve access to affordable and cleaner
cooking energy for the poor while empowering
women and allowing children more time for studies
and leisure.
Agroforestry
Intercropping trees with crops or pasture or setting
aside some space for a woodlot makes firewood and
charcoal more accessible. Most of the firewood
collected from farms comes from tree prunings.
At Kibugu village in Embu County, Kenya, for
instance, over 70% of households source firewood
from the pruning of trees planted on tea and coffee
farms, and this significantly reduces the time and
money spent on cooking energy (Mahmoud et al.,
forthcoming study). Further, short-rotation forestry,
where farmers grow trees that form coppices easily
and harvest wood on a rotating basis of about five
years (depending on tree or shrub species), would not
only supply firewood and charcoal for domestic use
but could generate income from sales of the surplus
for domestic and industrial use.
Fuel briquettes from organic by-products
Fuel briquettes are a local innovation that provides a
cheap and clean source of cooking energy. They are
used in homes, hotels, chicken hatcheries, for drying
tea, and in many other ways. Fuel briquettes are
cheap, as they are made from by-products from other
production processes. They produce low emissions
with no soot, burn more evenly than many other fuels,
and last much longer.
Fuel briquettes are made by compacting dry organic
by-products such as charcoal dust, sawdust, animal
dung, grass, maize cob, coconut shells, sugarcane
bagasse, or banana peelings, and are used like
charcoal or firewood. Carbonizing organic by-
products before producing the briquettes enhances
5 Njenga M., et al. “Implications of charcoal briquette produced by local communities on livelihoods and environment in Nairobi, Kenya.” International Journal of Renewable Energy Development (IJRED). 2 (1) 19-29, 2013. Available online.
the quality of briquettes intended for cooking in
houses.
By using these organic fuel briquettes, households
reduce their expenditures on cooking energy, women
and youth gain employment opportunities and
generate income from the sale of briquettes, and trees
are saved. In Nairobi’s Kibera area—the largest slum
in Africa—70% of households within a radius of 250
meters from a briquette production site use fuel
briquettes for cooking and those who produce them
save 70% of income spent on cooking energy while
those who bought them save 30%.5 In war-torn
Mogadishu, Somalia, disabled women are also able to
generate income from the sale of briquettes. When
briquettes are used for drying tea, for example, there
is a reduction in energy costs, boosting profits to
farmers.
Efficient cook stoves
http://www.ijred.com/index.php/ijred/article/view/88/pdf. ISSN 2252-4940
Photo courtesy of ICRAF
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 36
One of the more novel innovations that could reduce
the burden of sourcing firewood, reduce spending on
cooking fuel, save trees, and improve kitchen air
quality is a domestic gasifier. Fuel in gasifiers burns in
four stages: drying, pyrolyzation (carbonization);
gasification; combustion. The gasifier produces
charcoal during cooking that, if harvested, can be used
for further cooking or as biochar for soil amendment.
The gaseous fuel burns more cleanly than solid fuels
like firewood. Some of the improved cook stoves made
from clay have an open space with a door under the
cooking pots that keeps chicken warm. The next step
in developing the gasifier cook stove is to meet social
needs such as heating space and allowing people to sit
around the fire, which promotes social cohesion.6
Conclusions
Efforts to alleviate poverty and to empower women
could be accelerated by scaling up best practices in
agroforestry and organic waste recycling for energy
and by continuing to develop efficient cook stoves.
Further research is required to understand the social,
economic and environmental factors influencing the
adoption of innovations in these communities, and
how to adapt solutions according to local need.
Agroforestry can make a difference in alleviating
energy poverty while sustaining social and ecological
systems, while also contributing to the empowerment
of women.
Dr. Mary Njenga is a post-doctoral fellow on
bioenergy at the World Agroforestry Centre
(ICRAF) based in Nairobi, Kenya. She is a member
of the Board of Directors of Women Organizing for
Change in Agriculture and Natural Resource
Management (WOCAN). Mary is also a visiting
lecturer at Wangari Maathai Institute for Peace and
Environmental Studies, University of Nairobi,
researching and training on the bioenergy-
environment-gender nexus. Mary has over 15 years’
experience in research and development on urban
agriculture, community-based natural resource
management, environment, bioenergy and gender.
6 Njenga, M., et al., Keeping healthy and saving trees: “Cooking with a gasifier saves fuel and time, reduces smoke and produces charcoal for other uses.” Miti, The Tree Business Magazine for Africa. Issue No.26 April-June 2015, 37-39.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 37
Sustainable Standout
PanAfrican Investment Co: Collaboration in Action in sub-Saharan Africa
By Dana Reed, Chief Executive Officer, PanAfrican Investment Co., LLC
PanAfrican Investment Company was founded in
2012 by Ronald Lauder and Richard Parsons with the
mission of investing in businesses that provide strong
financial and social returns. Below, some of our high-
level thoughts and lessons learned.
African economies are grabbing headlines and
overtaking the BRIC countries as the hottest emerging
investment markets.
As Brazil, Russia, India and China grow into more
mature states, frontier investors are setting their
sights on the exciting opportunities Africa has to offer.
Since our inception three years ago we’ve strictly
invested in Africa, and we are seeing deals and capital
inflows abound. Our mission statement has been
prescient: “As PIC invests, Africa profits.” And we are
indeed profiting — in more ways than one.
Our firm, PanAfrican Investment Co. (PIC), was born
of the idea that capital put to good use in African
nations will produce good returns. Good returns for
us aren’t just financial, they are social, too.
We believe this is an important tenet of our
investment policy because in an emerging
marketplace such as sub-Saharan Africa, issues
traditionally considered “externalities,” such as
healthcare, education, access to food, corruption, and
human rights issues, aren’t really externalities — they
are intrinsic business issues tethered to productivity
and profits. Our founders, Ronald Lauder and
Richard Parsons, saw this tethering when they began
researching the potential to invest in Rwanda years
ago. That research gelled into our first formal fund
under PIC’s umbrella.
Why the Need for SRI in Africa?
As mentioned above, progress in “externalities” go
part and parcel with business progress. Without
healthcare, there is no labor force. Without education,
there are no business leaders. Without sustainable
agriculture, there is no proper diet to be had and
productivity wanes. Without corporate governance
and fair labor, corruption emerges. And human rights
abuses vanquish hopes and dreams for all. All of these
factors need to be considered when investing in
emerging economies like sub-Saharan Africa. In
addressing these issues with collaborative capital,
investment opportunities with attractive market rate
returns (or above) present themselves.
Opportunities & Lessons Learned
To be sure, investing in Africa is rife with challenges
and obstacles to go along with its opportunities. At the
micro level, infrastructure can be poor and business
management, accounting, and financial reporting
often must be honed to be in sync with US standards. We actually see this as an opportunity: The more
time we spend with our portfolio companies
standardizing their corporate reporting and
procedures, the more
©Bardocz Peter/Shutterstock
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 38
likely it is they will have an easier time raising their
next round of financing, allowing us to realize the
value we’ve helped to create.
At the macro level, conversations about investor fears
often involve words like corruption and geopolitical
risk. PIC factors in these concerns into its broader
approach to investing. We won’t, for example, be
involved in a large, politically tied and historically
contentious extractive industry like mining. In our
experience, the SMEs and the regions we target
(relatively politically stable, e.g. Kenya, Rwanda) are
generally under the radar of the words that scare away
investors. And where there is fear, there is
opportunity.
Further, many preconceived notions about investing
in Africa are simply without merit — for example, deal
flow. Some observers believe it is difficult to find and
attract solid investment opportunities. We find the
opposite to be true: our pipeline has continued to
grow with ever more attractive deals. The continent
abounds in entrepreneurs who need capital to fund
their SMEs. Due diligence, too, is often thought to be
challenging given the geographic reality that many
businesses operate in remote areas, or places lacking
basic phone or Internet service. Again, we have not
found this to be true. While our team has had to work
harder to conduct due diligence because of these
challenges, the rewards of evaluating a business from
the ground up have been worth it.
That said, we have learned that having a permanent
presence on the ground provides intangible and
tangible benefits to the investment process. It is
important to spend the time and resources on the
ground to figure out who’s doing what and where. To
that end, PIC will open an office in East Africa in early
2016. Having a footprint on the ground helps ideas
spawn, facilitates introductions and partnerships,
allows for ongoing monitoring of existing
investments, and speeds up the due diligence process.
Paths to Success: Hands-On Management
Our focus on management, operations, and
networking continues to be critical to our success. As
private investors, we seek passionate social
entrepreneurs with innovative products, designs,
and/or services. We are active shareholders who get
involved in every aspect of the businesses our
entrepreneurs run — from serving as human
resources to help build the right management team,
to sitting alongside the entrepreneurs to build their
financial and operating models, to helping to market
their products or services. PIC does anything it takes
to partner with these entrepreneurs in order to create
shareholder value alongside socially responsible
business practices.
Take for example, Mobius Motors, founded by award-
winning entrepreneur Joel Jackson. Mobius designs,
manufactures and sells durable, affordable vehicles
that are specifically made for Africa's terrain. PIC led
the Series A round for the company and obtained a
board seat. Mobius stands to employ more than
1,000 Kenyans for production work and to create
another 2,000 jobs for servicing and parts.
The impact goes further than job creation. Being on
the ground as often as we are allows us to see beyond
the headlines. For instance, while we read about all of
the large infrastructure projects being done, we know
that once outside of the big cities there are dirt roads
that make it difficult to maneuver on a sunny day
with the four-door imported cars being driven today
— not to mention navigating these roads when it
rains. Beyond job growth, this company is mobilizing
people that need to get to the market or elsewhere for
their livelihood by locally manufacturing cars
designed specifically for Africa’s terrain. PIC’s capital
allowed the company to produce its first 50 cars, of
which 37 have already been sold.
We view ourselves as partners with the entrepreneurs
in whom we invest. With Joel, we have lent our
Rolodex to help facilitate introductions to licensing
regulators and banks in an effort to provide financing
for these cars. We are actively helping to prepare the
company for its upcoming Series B financing, and are
also making several introductions to potential new
investors.
Or take biNu, a small company operating throughout
Africa that has developed what we believe is a big
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 39
piece of technology. biNu can turn regular/feature
mobile phones into “smart” phones, allowing news,
books or even fun apps like Facebook to be
downloaded.
While services and infrastructure may be scant in
many developing African countries, mobile phones
are not. Connecting people to the outside world and in
turn to information was a great goal and a powerful
proposition for us. As a further layer, we were able to
introduce biNu to African Ministers of Education and
Technology, all of whom are in need of more books in
classrooms, and face the cost-prohibitive challenge of
getting deadwood books into classrooms. biNu
provides an alternative via handheld devices.
We believe education is critically important to the
growth and investment thesis of emerging economies.
To that end we have invested in Bridge International
Academies, a low-cost private school operator in
Kenya, set to expand its operations further into East
Africa and soon to enter West Africa. Bridge is
receiving a great amount of press lately due to the
recent $10 million investment by Facebook’s Mark
Zuckerberg, and management reports that it expects
to go public in 2017.
Paths of success like these are what we seek and
celebrate. Connecting the dots for us isn’t just about
portfolio management logistics, it’s about cross-
marketing products and contacts to help people and
create new possibilities. Mostly we look to invest in
SMEs that stand to create job growth throughout the
healthcare, education, manufacturing and technology
sectors, but we are always broadening our horizons.
We have to do so. Africa is diverse, dynamic and big.
There is a plethora of investment opportunities.
Success will take more than money and investments,
however. It has to be linked to positive social change.
We’re seeing both, and Africa is prospering and our
portfolio is prospering. That’s increasingly headline-
worthy news. As PIC invests, Africa profits.
Dana Reed is the Chief Executive Officer of
PanAfrican Investment Co. LLC, a private
investment firm founded by Ronald Lauder and Richard Parsons that catalyzes positive social
impact across sectors in sub-Saharan Africa while
seeking target returns of 25-30%. PIC is based in
New York.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 40
Sustainable Editorial
Integrated Thinking in South Africa
By Leigh Roberts, Chairman of the Working Group of the Integrated Reporting Committee of South Africa
After six years of integrated reporting by listed companies in South Africa, it’s
clear that many of the benefits enjoyed are internal to the company. This is
because the process of preparing integrated reports has helped embed
integrated thinking.
Companies in South Africa cite the “external” benefits of integrated reporting
as improved dialogue with stakeholders, better alignment of external and
internal reports, and an improvement in balanced reporting and
transparency.
Many of the other benefits espoused relate to how the company is managed.
Companies talk about increased awareness of the impact of key resources and
relationships on financial performance and the company’s future, the focused
integration of KPIs relating to the management of key resources and
relationships, the breaking down of internal silos and promotion of sharing
of information, and a broader understanding of the business model and its
components.
These benefits are pretty much what integrated thinking is all about.
The International <IR> Framework1 contains an official definition for
integrated thinking. In essence, integrated thinking is where the key
relationships and resources are considered in the decision-making and
management of the business, with the awareness that financial performance
and business viability are dependent on the good relationships with key
stakeholders and the future availability of the resources relied upon.
In today’s connected world with its complexity of interdependencies and
trade-offs, a company needs broader information to make more informed
decisions. A recent survey of South African executives and non-executive
directors of the biggest listed companies to assess the benefits of integrated
thinking revealed there had been improved decision-making at the board and
management levels as a result of the enhanced information available. Other
benefits were improved governance processes and improved risk
management.2
One of the drivers of integrated thinking within South African companies has
been integrated reporting. When asked the question, companies invariably
say that integrated reporting has helped embed integrated thinking, with
some adding that the impact has been significant. Despite six years of
reporting, though, the companies are at various levels of integrated thinking.
At a recent meeting of top CFOs, one said he is happy with the degree of
1 International <IR> Framework, 2014, International Integrated Reporting Council, www.integratedreporting.org 2 Integrated Thinking: An exploratory survey, 2015, South African Institute of Chartered Accountants, www.integratedreportingsa.org
© NY Studio/Shutterstock
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 41
integrated thinking, while another confessed they had only achieved a “fair
degree”.
The mindset and system changes required for integrated thinking can take
time – it is a journey. A prime factor in the speed of the journey is whether or
not there is a champion: a strong and enlightened chairman, a chief executive
who voices integrated thinking as the way he or she runs the business, or a
strategy director who understands the importance of having mutually
beneficial relationships with key stakeholders in this connected world.
Embedding integrated thinking should happen at three levels: the board,
senior management, and staff members. The board sets the holistic strategy
that encompasses the key resources and relationships over the short, medium
and long term; senior management implements the strategy and is measured
and remunerated against it; and staff members are incentivised to carry out
the strategy in the daily operations of the company.
The challenges cited by South African companies in embedding integrated
thinking include overcoming silo mentality, the need to improve the
reliability of non-financial information reporting systems, and inappropriate
KPIs and remuneration which are often set primarily against financial
targets.3 Companies have invested time and resources in getting their non-
financial systems on a par with financial systems, with some setting up cross-
functional teams to enhance integration and eliminate silos.
On the issue of whether a company can prepare an integrated report without
having embedded integrated thinking …. The King Code of Governance for
South Africa (King III), released in 2009, required listed companies to
prepare integrated reports (the principles of King III fell into the Listings
Requirements of the Johannesburg Stock Exchange on an “apply or explain”
basis). For some companies this involved a first-time articulation of the
business model and its components and widened the range of risks.
Importantly, the process got boards involved in setting strategy and direction
– hence achieving the first of the three required levels of integrated thinking.
The South African experience shows that the integrated report can be a
significant catalyst for integrated thinking.
3 Integrated Thinking: An exploratory survey, 2015, South African Institute of Chartered Accountants, www.integratedreportingsa.org
Leigh Roberts, CA(SA),
is Chairman of the
Working Group of the
Integrated Reporting
Committee of South
Africa, the co-author
with Mervyn E. King of
“Integrate: Doing
Business in the 21st
Century (Juta),” and
presenter of the
“Integrated Reporting
Made Simple” series.
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 42
Sustainable Editorial
Ivory Pirates: Funding Terrorism by Plundering Africa’s Natural
Resources
By Buffy Redsecker, President & Co-Founder, SunLight Time Foundation
When delving into the complex economic evolution
taking place across Africa, one would be remiss to
omit a discussion of the blatant thievery of the
continent’s natural resources, including wildlife.
Wildlife poaching and illegal natural resource
exploitation not only decimate species and
ecosystems, but also drains billions of dollars from
legitimate economies across the African continent.
This destabilizes governments and threatens the rule
of law, which is crucial to financial investment,
economic growth and the societal benefits that come
with security, including education (see below).
Figure 1: The extent of environmental crime compared to the total envelope of official development assistance, and the total value of ecosystems
Estimated environmental crime may exceed the total envelope of Official Development Assistance (the aid of advanced economies to developing countries).
Source: UNEP, Dead Planet, Living Planet (2010) and The Environmental Crime Crisis (2014). 1
1 http://www.unep.org/pdf/RRAecosystems_screen.pdf and http://www.unep.org/unea/docs/RRAcrimecrisis.pdf
From gold in Darfur to mineral mining and
deforestation in Virunga National Park in the
Democratic Republic of Congo (DRC), Africa’s natural
resources are being pillaged at unparalleled rates to
fund terrorist groups across the globe. Elephants,
rhinos, and other wildlife are dying at the hands of
The People’s Liberation Army, in the DRC; Boko
Haram, in Nigeria; and al-Shabaab, the Somali
Islamist group behind the West Gate Mall attack in
Nairobi that killed 68 people. Each of these groups has
been designated a “Foreign Terrorist Organization” by
the US State Department. Each is funded, in large
part, by selling resources stolen from the people of
Africa. Al-Shabaab’s income from illegal ivory sales
alone is estimated at $600,000 per month.
These groups are stealing from the world as well. The
illegal wildlife trade is one of the most lucrative of the
black markets in the world today, after drugs, arms
and human trafficking. Despite its size, it is only a
fraction of the natural resource larceny taking place in
Africa and across our planet. The United Nations
Environment Program estimates the global trade in
illicit flora and fauna to be as much as 23 billion
© Alan Chung
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 43
dollars annually.2 The price of ivory has risen to an
estimated $2,000 per kilogram while the same
amount of rhino horn can sell for up to $90,000,
making it more expensive than cocaine or platinum.3
This lucrative market drives the murder of one
elephant every 15 minutes; 96 elephants are poached
each day. At this rate, the iconic species will be extinct
by 2026.
It is an established fact that elephants, rhinos and
other charismatic mega fauna are worth more alive
than dead (see Figure 2). All citizens share this
communal communal wealth, and many African
nations rely heavily on eco-tourism, which is driven
by the existence and protection of these animals and
their environments. Examples include Rwanda’s
mountain gorilla tourism, as well as safaris in
Botswana, Kenya, Namibia, South Africa and
Tanzania, to name a few. Angola, a country devastated
by a civil war notable for the vast acreage left covered
in land mines, is struggling to build infrastructure to
create its own tourist economy. As the mines are
cleared, elephants are returning to their traditional
territories.
2 http://www.unep.org/unea/docs/RRAcrimecrisis.pdf 3 http://www.scientificamerican.com/article/how-to-stop-the-illegal-wildlife-trade-from-funding-terrorist-groups/ and http://www.washingtonpost.com/apps/g/page/national/the-horn-and-ivory-trade/1163/
We in the West like to point to China as the culprit in
the decimation of elephants and rhinos in Africa, and
while Asia has a seemingly insatiable appetite for
these items; the US plays a large role in this global
trade. From sales on Craigslist to the dark underbelly
of organized crime (see the US vs. Michael Slattery,
EDNY) the US is a source country, a distribution point
and an important transit hub for illegally trafficked
wildlife and wildlife parts. The Endangered Species
Act, its numerous amendments, as well as the US
Department of the Interior’s Director’s Order number
210 has loopholes that are easily exploited.4
The African Wildlife Foundation (AWF), an
organization established by big game hunters, which
has traditionally supported the sustainable harvest of
wildlife as part of their conservation strategy, has
changed their position regarding endangered species.
As expressed by Patrick Bergen, CEO of AWF, “I think
the message we need to send during this time of crisis
is that we have to completely stop all human induced
mortality on endangered species and you can’t send a
mixed message about that. This needs to be a
universal message.”5
4 http://www.fws.gov/international/travel-and-trade/ivory-ban-questions-and-answers.html 5 The author notes that while the African Elephant is not currently listed as endangered on the IUCN’s Red List, there is great fear that this will change fast if the poaching is not stopped. http://www.cites.org/eng/prog/etis/index.php
Figure 2: Is an elephant worth more dead than alive?
Source: “Dead or Alive? Valuing an elephant.” (iworry.org, 2013)
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 44
It is time to close the trophy hunting loophole in the
Endangered Species Act. The NRA’s position that gun
handles have traditionally been made of ivory & that
big game hunting is a gun rights issue is not a
defensible position when these animals face
extinction and their decimation is funding terrorism.
There is hope, however. Besides AWF, there are many
organizations working with governments
internationally to stop the poachers, seize contraband,
and stem the demand. WildAid, a US-based NGO, is
working in China and Vietnam to curb demand for
exotic flora and fauna with great success. Their
campaign to stop the consumption of shark fin soup
has resulted in Chinese national legislation that
prohibits government officials from consuming or
purchasing shark fin soup. Demand for shark fin has
dropped up to 70% since the ban in 2013, and up to
82% in certain cities (see Figure 3). Building on their
work in Asia, WildAid is rolling out campaigns in the
US and in Africa about ivory and rhino horn this
year. Stopping (or reducing) the demand for a
product, will reduce the supply.
When we buy ivory, even when it’s sold as “legal,”
“antique,” “fossilized,” “faux,” or “oxbone” (a popular
way around the bots crawling eBay and Etsy to
enforce the bans both companies have implemented
on ivory), we are funding the very terrorists that
threaten the US. That’s a very serious piece of
hypocrisy and we can do better. Capitalism must land
on the side of profit, and the long-term profit in this
dangerous situation will be the survival of these iconic
species, the stabilization of governments and the
elimination of this primary source of revenue for
terrorists.
Figure 3: Why regulation enforcement matters: the
contrast between the shark fin ban in China and
current loopholes in ivory trade restrictions worldwide
Source: WildAid, “Evidence of declines in shark fin demand” (2014) and “Elephant Action League” (2012).6
6 http://www.wildaid.org/news/shark-fin-demand-china-down-report-finds and http://elephantleague.org/project/africas-white-gold-of-jihad-al-shabaab-and-conflict-ivory/
Buffy Redsecker is the President and Co-Founder of
the SunLight Time Foundation. In addition, she is the
director of the SunLight Fund, sits on the board of the
International League of Conservation Photographers
(iLCP) and is an advisory council member for the
African Wildlife Foundation (AWF).
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 45
Upcoming Events
Global ESG Calendar
Date/Time Event Location Information
6.25.15 UN General Assembly - GC+15:
Business as a Force for Good
Cornerstone Speaking Event
United Nations
New York, NY
https://www.unglobalcompact.org/NewsA
ndEvents/global_compact_15.html
6.25.15 The Private Debt Investment Summit The Princeton Club
New York, NY
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6.29.15-6.30.15 Fifth Annual Responsible Extractives
Summit
Hilton Tower Bridge Hotel
London, UK
http://events.ethicalcorp.com/extractives/
6.29.15-7.1.15 The Green Sports Alliance 2015 Summit McCormick Place West
Chicago, IL
http://greensportssummit.org/
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Leadership Institute
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http://www.resourcegeneration.org
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Cornerstone Speaking Event
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Hotel
Denver, CO
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investing
7.13.15 2015 Basic Compliance and Ethics
Academy
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Singapore
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emies
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Resort
Nantucket, MA
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8.4.15-8.6.15 The 2015 ACEEE Summer Study on
Energy Efficiency in Industry
Hyatt Regency Hotel
Buffalo, NY
http://www.aceee.org
8.8.15-8.13.15 AREDAY Conference – Racing Climate
Change: Green Bridge to China and the
Road to Paris
Westin Aspen Snowmass
Lodge
Aspen, CO
http://www.areday.net
8.14.15-8.16.15 Regenerative Investing Workshop –
Investing for People, Planet & Profit
The Omega Institute
Rhinebeck, NY
http://www.eomega.org/workshops/regen
erative-investing#-workshop-description-
block
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West Glacier, MT
http://www.climateride.org/events
8.25.15-8.27.15 Sustainable Brands – SB15 Rio Windsor Barra Hotel
Rio de Janeiro, Brazil
http://www.events.sustainablebrands.com
/sb15rio/
8.26.15 The Annual Women in Green Forum TreePeople Conference
Center
Coldwater Canyon Park
Los Angeles, CA
http://www.womeningreenforum.com
9.15.15-9.16.15 The Water Expo—Empowering WATER
in the Americas
Miami Airport Convention
Center
Miami, FL
http://www.thewaterexpo.com
Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 46
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Cornerstone Journal of Sustainable Finance & BankingSM / June 2015 / 50
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