“Redirecting Capital to Sustainable Investment” by Victoria Galeano and Jerry Haar

Published in the America Economia (March-April 2018), “Redirecting Capital to Sustainable Investment” discusses impact investing among Latin American businesses. To read this article in Spanish, click here

March – April 2018


Redirecting Capital to Sustainable Investment

Victoria Galeano and Jerry Haar

We are living at an unprecedented time in human history. Never before have consumers been so empowered to influence corporate behavior and firms’ impact on society and the environment. New market incentives driven by selective consumer groups such as millennials and women have begun to redirect capital towards enterprises the importance of being good corporate citizens.

To be a good corporate citizen is consonant with high standards of ESG (environmental, social, and governance). Many investors consider looking for ESG-oriented firms, believing they generate higher financial returns in the long term. More and more available information validates this correlation. For example, the Institute of Sustainable Investing’s extensive study of mutual funds found that sustainable investments in most cases equal or exceed the financial performance of traditional investments.

This has generated a search for sustainable investments and transactions of “green capital” and a proliferation of funds focused on sustainable investment. For example, the market for green equities reached a new historical record of over $200 billion in total issues in 2017. According to Bank of America, $21.4 trillion of global stocks embody ESG criteria.

There presently exist diverse strategies for selecting investments that incorporate ESG. In many funds, the selection process is based on monitoring sustainability indices. These indices compile a list of enterprises and score them based on ESG criteria. In the case of Latin America, the Inter-American Development Bank utilizes Index Americas, the first index to be launched by a multilateral development bank. Index Americas selects 100 enterprises that are both the most sustainable, and have the largest presence in the region.

It is noteworthy that the Latin American financial system has slowly embraced this worldwide tendency, and increasingly, pension funds and other investment funds are incorporating sustainability investments in their portfolios. The leading stock market in Brazil already has an index of corporate sustainability, and the stock markets in Argentina, Chile, and MILA (the integrated stock exchanges of Colombia, Chile, Mexico, and Peru) are in the process of developing similar criteria. At the same time, Latin American businesses are more and more cognizant of the importance of incorporating ESG in their operations. Firms such as FEMSA, Cemex, and Banco Itaú are industry leaders in attaining high standards of ESG.

These enterprises do not only allocate resources to improve their technological systems and internal processes but also invest in broadening their knowledge base of sustainability. In response to this need, various universities have incorporated sustainability into their MBA programs.

Attaining high standards of ESG brings multiple benefits to companies and helps firms achieve larger goals in many instances. Recognizably, however, the proliferation of rankings and standards requires significant resources in the generation of reports, scorecards, and audits. Additionally, obtaining results will invariably require the reconfiguration of internal processes or investment in costly equipment and technologies.

Nevertheless, enterprises that are able to integrate ESG principles in their business models and continually improve their sustainability are those that will be able to generate long-term economic benefits while engaging in behavior that is healthy and beneficial to people, the environment, and society at large.

Victoria Galeano is the founder and director of PRISSMA, a consultancy specializing in the financing of sustainable projects and products.

Jerry Haar is a business professor at Florida International University and a global fellow of the Woodrow Wilson Center in Washington, D.C.

Global Business: Exchange and Value

Here you are, visiting the ever beautiful London, when you come across a shop with the most beautiful pair of shoes in the window. You notice they’re designer, vintage even, and in the perfect condition, and look, the price says £150. That’s reasonable you say, until you get to the counter to pay for the shoes, only for your mom to point out that £150, is actually $200 in U.S. dollars. This is called an “exchange rate”.

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Country Overview: New Zealand Economy

from http://www.treasury.govt.nz/

New  Zealand’s high proportion of winter sunshine hours and
considerable rainfall provide an ideal resource base for pastoral
agriculture, forestry, horticulture and hydro-electicity generation.
Hydro-electricity provides a relatively cheap source of energy
and has allowed the development of energy-based industries
such as aluminium refinement. New  Zealand is also a popular
overseas visitor destination and tourism is an important source of
export income.
Over the last quarter of a century, the New Zealand economy has
changed from being one of the most regulated in the OECD to one
of the least regulated. The minority National Party Government
elected in November 2008, and re-elected in November 2011,
aims to lift the long-term performance of the economy through
six key policy drivers: a growth-enhancing tax system; better
public services; support for science, innovation and trade;
better regulation, including regulation around natural resources;
investment in infrastructure; and improved education and skills.

Real GDP strengthened further at the beginning of 2012, growing
0.9% in the March quarter. The growth in activity was reasonably
broad-based, including good pastoral growing conditions
providing a boost to agricultural production and food processing.
However, growth in the middle of 2012 was weaker with GDP
growth of 0.5% across both the June and September quarters,
supported by activity in the construction sector. The Canterbury
rebuild is expected to be a main driver of growth in the coming
year, gaining momentum in the first half of 2013.

In the December 2012 Half year Economic and Fiscal update
(HyEFu), the New  Zealand Treasury expected annual average
growth in the economy to be 2.3% in the March 2013 year and
2.9% in the March 2014 year, driven mainly by the Canterbury
rebuild and recovery in domestic demand. Recovering world
demand, as well as still-high commodity prices, should also assist
export growth, although this is dependent on the global outlook.

Geographic distribution of external Trade
New  Zealand’s trading relationships are becoming increasingly
based around Pacific Rim countries. New Zealand’s three largest
export markets – Australia, China and the united States –
accounted for 44.4% of New Zealand’s merchandise exports and
41.2% of merchandise imports in the year ended 30 September
2012. Japan remains an important trading partner, both as a
destination for exports and a source of imports. However, Asia
excluding Japan is growing rapidly in importance, with the region
increasing its share of merchandise exports to around 30%, up
significantly from a decade ago.

Record Philippines Growth Despite Devastating Typhoon

from Russia Today

The Philippines’ annual growth rate puts it close to the best-performing economies in Asia, just behind China which grew 7.7 percent last year, says Bloomberg.

President Benigno Aquino aims to achieve 8.5 percent growth by 2016 by turning the country into a manufacturing hub, expecting the recovery in advanced economies to support the GDP rise.

Stronger exports positively contributed to the recovery from Typhoon Haiyan, which inflicted an estimated $15 billion damage to the Philippines.

“The Philippine economy clearly still has strong momentum despite the typhoon,” Bloomberg quotes Edward Teather, an economist at UBS AG specializing on Southeast Asian markets. “That sort of strength in the context of an acceleration in developed nations increases the risk of overheating, something policy makers should keep an eye on,” he added.

Emerging challenges

In early December the World Bank warned against lower 2014 growth in developing markets which were exceptionally vulnerable to risk from US tapering .

The forecast has so far proved true. On Wednesday, the sell-off in emerging markets strongly intensified, after the US Fed said it would further scale back its massive monthly money injections to $65 billion per month.

In the Philippines, the peso lost 0.4 percent and plunged to 45.35 against the dollar at 11:51 AM, which is its lowest in more than 3 years. In the past six month Philippine stocks have fallen more than 10 percent, and is the sharpest drop after Thailand in the Asia-Pacific region.

Yes Virginia, the Ham Is Chinese (Part 3)

Another concern is more xenophobic.  Many Americans are worried about lessened American competitiveness and the rise of China. There were similar concerns about the wave of Japanese cars and the purchase of iconic real estate by Japanese investors in the 1980’s and 1990’s.  In fact, the success of Japanese brands, like Toyota, Honda, and Nissan, was mostly positive for Americans, particularly for consumers, as it was accompanied by new capital, more sophisticated domestic manufacturing, new product ideas, and, eventually,  improved competitiveness of American car companies. Now individual states in the U.S. have learned to compete to attract manufacturing and services company investment in their communities. No reason not to expand such activities into the agricultural sector as well.

Of even more interest is the reverse flow, where international investments have a spillover effect on home country markets. Why not eat Hunan pork with Smithfield ham during a picnic at the Yangtze river? What pork other than Smithfield’s should be specified when planning the Chinese  government-subsidized opening of  restaurant chains in Africa ? The Smithfield acquisition opens new markets both for the Chinese investors as well as for American ham. Such is the path of true globalization.

The recent meeting between Presidents Obama and Xi Jinping demonstrated, that the United States and China have more to gain from a cooperative, albeit competitive, rather than a conflict based relationship.  Given President Xi’s experience as a student living in Iowa, we can hope that he is instinctively more likely to be drawn to the value of a asymptotic relationship with the United States, rather than one based on abrasive disagreement.

One of the principal motivators for the deal from Smithfield’s point-of-view, was the ability to more successfully sell its products to the huge Chinese market. That such an approach can work is seen in the acquisition of European car-maker Volvo by the Chinese company Zhejiang Geely Holding in 2010.  Not only is Zhejiang looking to profit from the existing global business of Volvo, but it is also expected to help the brand further penetrate the Chinese market, the largest and fastest growing automobile market in the world.

This article is a part of a series written by Michael Czinkota and Charles Skuba. Read part 2 here.  Guest writer Charles Skuba teaches international business and marketing at Georgetown University. He served in the George W. Bush Administration in trade policy positions in the U.S. Department of Commerce.