Does Last Place Really Deserve a Participation Prize?

Capitol Hill is getting quite a bit of action lately.

Last week, U.S. credit bureau Equifax admitted to a security breach impacting nearly half of the entire United States population. The breach had leaked the personal information of 143 million people (44% of the U.S. population), inclusive of social security numbers, driver’s licenses, birth dates, you name it. In typical fashion, those with the lowest financial literacy and resources will be hit the hardest.

Equifax is the oldest of the three main U.S. credit bureaus, aggregating information on over 800 million people for insurance and credit reports.

“The Equifax data breach poses serious problems for consumers of all socio-economic levels, but in particular, those consumers who are less educated on the repercussions associated with data theft and identity theft. We are deeply concerned that Equifax – and all credit reporting companies – are not doing enough in a timely manner to protect under-served consumers who have been victimized by this data breach and stand to suffer the most.” – Thomas Hinton, CEO, American Consumer Council

Companies make mistakes. The implications of some mistakes larger than others, but the response to the mistake is always imperative. Equifax asked its customers to give up their right to sue the company in exchange for credit monitoring services. The company retreated from this stance shortly after, but the response has not yet been forgotten. Also not forgotten is the fact that Equifax let six weeks go by before announcing the breach. It should be noted, however, that the company’s interim CEO Mr. Paulino de Rego Barros Jr. wrote a nice apology in the WSJ and other media outlets, and the company is also developing free services to let consumers lock and unlock credit card file access. Not entirely consolation for having your identity stolen, but its a step in the right direction.

Behavior, Repeated 

As reported on CNN Money, “Scandal 101: Equifax repeated Wells Fargo’s mistakes”, we are witnessing an unfortunate repetition of bad behavior.

You might recall hearing about a certain $185 million scandal involving fake accounts last year.

What happened? Well, the story is that employees inside Wells Fargo created millions of fake accounts and credit card applications. Associated with these accounts were fees for customers which helped augment sales figures for Wells  Fargo employees. As result, 5,300 employees were fired and the company forced to pay a $185 million fine. Also as a result, Wells Fargo has lost over 550 financial advisors overseeing assets northward of $20 billion.

Adding insult to injury, just one month ago Wells Fargo admitted it had found an additional 1.4 million fake accounts, totaling to approximately 3.5 million fake accounts. What does this mean? About a year after its first congressional hearing, Wells Fargo is back in the hot seat and just yesterday, both Wells Fargo and Equifax testified at Congressional hearings. A simple Google search will lead you to a plethora of opinions and quotes from yesterday’s events.

Hindsight is 2020…and so is the MSCI ESG Index

Interestingly, if one had been following the MSCI ESG Index, one might have had a bit of foresight into both the Equifax and Wells Fargo Scandal (and Volkswagen, but who’s counting).

In fact, prior to scandal, Equifax had already been rated as an extreme underperformer according to both MSCI ESG Research and Sustainalytics, ranking in the lowest decile out of 93 firms. In August, MSCI ESG Research downgraded Equifax to its lowest rating “CCC”. Months prior to the scandal, the April MSCI ESG Rating Report stated:

“Equifax is vulnerable to data theft and security breaches, as is evident from the 2016 breach of 431,000 employees’ salary and tax data of one of its largest customers, Kroger grocery chain. The company’s data and privacy policies are limited in scope and Equifax shows no evidence of data breach plans or regular audits of its information security policies and systems…Equifax faces high exposure to regulatory and reputational risks associated with privacy and data security issues, primarily because of the company’s involvement in credit reporting…”

MSCI ESG Rating of Equifax
MSCI ESG Rating of Equifax

One might conclude that because two renowned predictors shared similar opinions about Equifax and Wells Fargo, the companies would surely be missing from ESG portfolios, right? Wrong. Somehow, both Equifax and Wells Fargo were included in top portfolios.wellsequifaxMSCIIt seems reasonable to conclude that there is an apparent disconnect between ESG investment research and actual investments, despite the fact that ESG research is proving to be quite predictive. Let this be a call to action for investors to fully embed ESG research into portfolios.

Investors as Stewards of the Commons?

Increasing social inequality and environmental deterioration, coupled with the failure of government to provide regulatory interventions to mitigate negative externalities, has led many to look to the private sector to alleviate environmental and social deficiencies. Such was recognized in the Sustainable Development Goals (SDGs).

In his working paper, Investors as Stewards of the CommonsHarvard Professor George Serafeim urges for the mobilization of investor voices towards positive social and environmental change.

“While companies are increasingly addressing environmental and social issues that also improve their economic value, for some of these issues individual company action is costly. At the same time, for a further subset of those issues, company action coupled with collaboration between companies is value enhancing, However, collaboration between companies is notoriously difficult and fragile requiring commitment mechanisms.

I suggest that a small set of large institutional investors, importantly, but not exclusively, index and quasi-index investors, could provide this commitment mechanism. Common ownership of competitors within industries and long-time horizons in ownership of shares are key characteristics for investors that could act as stewards of the commons. Social pressure fueled by socially responsible investment funds and non-profit organizations and customer pressure from individual investors are critical in mitigating free-rider problems among asset managers and sustaining engagement practices.”

Serafeim’s theory of change suggests that investors have a tremendous power to serve as the mechanisms by which corporations can collaborate for meaningful change.

Serafeim argues that pre-competitive collaboration would allow for an equal playing field when competition eventually occurs. For example, consider the effect of the big wigs in the fashion industry collectively managing resources to reduce water pollution caused by their manufacturing and supply chains. Such collaboration is not to be mistaken with collusion. Rather, as noted by Serafeim: “Similar to airlines cooperating by purchasing jets together in order to lower costs collectively, collaborations are mutually beneficial but do not affect the fundamental relationships of competitors.”

While we must not diminish the fact that business and government action has resulted in incredible commitments and actions on behalf of many companies and pockets of environmentally-positive legislation, the fact of the matter is that there is still much work to be done. The way forward is presumably a combination of investor action, conscious consumption, policy regulation, innovation, and private sector leadership.

One thing is for certain – the train heading towards protecting the planet’s resources for future generations has collaboration written all over it. Hop on board.

Does the market dictate the truth or does the truth dictate the market?

“Market activity is the manifestation of beliefs through executed trades. When enough investors buy into the belief that certain patterns signify where a resistance and support level are located for an index or stock, then such notions become very real. The market’s belief dictates the market’s truth” (The Market Capitalist).

The stock market has long dictated the alleged truth due to the human tendency to acknowledge a delta in stock price and alter internal beliefs accordingly. Often, investors can be heard stating, “XYZ stock price is up. There must be some facts that I don’t yet know about, or that I don’t understand.” Such investors often adjust what they “know” about XYZ stock to make sense of the stock uptick in their minds.

At the extreme, and not outside the realm of possibility, the stock market becomes a self fulfilling prophecy* , such that the alleged truth becomes the actual truth, e.g. if aforementioned investor then begins buying large portions of XYZ stock and the increase in XYZ stock paves the way for a certain sector.

“Bear Market for Oil Caused by ‘Fake News’ Says Raymond James”

Analysts at Raymond James recently espoused that the bear market for oil has been caused by overly concerned investors distracted by a plethora of bearish headlines following price declines. The analysts believe US inventories, demand, and production have been misinterpreted.

“The recent collapse in oil prices was triggered by a breakdown in the technical charts but fueled by the ‘negative feedback loop’ of bearish headlines that usually follow price declines. Some oil price headlines have been misleading, or outright wrong, and they have distracted investors from what we believe is fundamentally a bullish overall picture.”

News headlines, according to Raymond James, have “amplified the downside” of events such as output recoveries from Libya and Nigeria, resilient U.S. shale drilling, and OPEC’s ability to cap global oil inventories. The analysts point to the following list of myths:Screen Shot 2017-07-07 at 12.57.30 PM

Raymond James further contends that crude oil has the potential to rise by 45%. The analysts examined U.S. inventory data beginning in March to capture OPEC’s production cuts. Such data portrays that U.S. crude inventories have decreased by 280k barrels per day, compared to an average increase of 180k barrels a day during the same time period during prior years. “Moreover, factoring in stockpiles of refined products ‘would be more bullish than looking at the crude only trend.'” Raymond James reported that global oil inventories have been declining by about 1.2 million barrels a day for the past four months.

The company, however, is sitting lonely at the bullish table. Most other analysts are giving much more weight to rising U.S. production and Libya and Nigeria offsetting OPEC’s production cuts. As written one week ago by CNBC, “Don’t expect oil to reverse its bear market slump anytime soon, history shows”.

Predicting the short-term forecast of oil prices has always been a teetering game of seesaw, with winners and losers every day as new changes come to fruition. In the long run it seems reasonable to take a bullish view on oil. In the short-term? Only time will tell, but Raymond James sheds an important light on the phenomenon that can occur from a negative feedback loop caused by price declines and bearish headlines. Investors must ensure they are receiving a full story when conducting due diligence.

Fake News?

Exactly what quantity of the news we read is false? That question is beyond my realm of knowledge. In many cases, however, I believe it is not so much that the news is fake, but rather most news provides snapshots of specific data points riddled with opinions of a certain nature, and thus fails to fully explain an entire picture of reality. An article about the “threatening” oil output from Libya and Nigeria, for example, fails to detail OPEC’s production cuts successfully occurring elsewhere. Such an article isn’t lying to you, it’s just not providing the entire picture.

This poses a problem, as hundreds of thousands of articles are published every single day, many having an effect on market prices and subsequently investor action. Just how important is it that Tesla surpassed the market capitalization of GM and Ford? At the time, many articles were praising the future of electric vehicles. (GM, by the way, has already reclaimed its lead). One or two news sources is simply not enough for forecasting future prices.

Events, and reported news about such events, perpetuates a certain belief system until an event contrary to a prior belief occurs, and only when that contradictory event is strong enough in the opposite direction will the market change course.

So, I pose the question to my readers: Does the market dictate the truth or does the truth dictate the market?


Self-fulfilling prophecy: a prediction that directly or indirectly causes itself to become true, by the very terms of the prophecy itself, due to positive feedback between belief and behavior (Psychology Today).

China Flips the Switch

Solar power as a viable source of energy dates back to the year 1767 when Swiss scientist, Horace-Benedict de Saussure, invented a “solar oven” of sorts: a box, layered with glass, that could absorb heat energy. Nearly one century later, a 19-year old French scientist by the name of Edmond Becquerel discovered the photovoltaic (PV) effect: he noticed that when light hit the intersection of two dissimilar materials, e.g. a semiconductor and a metal, the result was an electric current. Viola – photovoltaic solar energy was born. In 1954, Bell Lab created the first functional solar cell and, by the early 1980’s, PV solar use had become widespread for a variety of consumer applications. (It should be noted: photovoltaic solar, the direct conversion of sunlight into electricity, was and remains the fastest growing solar technology, but another technology, known as “solar thermal” also exists.)

For many years, solar power was used only sporadically because of structural, temporal, and cost constraints – e.g., solar energy required a roof, the sun, and was more expensive than conventional “dirty” sources of energy.

…not anymore.

Introducing floating solar plants.

That’s right. Solar power plants that float. Such floating farms are becoming quite popular as cities continuously search for space. As you might imagine, a floating solar array frees up land, which is becoming ever-important for our rapidly growing population. In addition, floating solar farms reduce water evaporation from reservoirs and, because the surface area is cooler than that of a roof array, floating farms reduce the risk of performance atrophy and module degradation, which is sometimes caused from solar panels’ continued exposure to warm temperatures.

CHINA FLIPS THE SWITCH OF THE WORLD’S LARGEST FLOATING SOLAR FACILITY:

The world’s largest floating solar plant, at 40-megawatts, was just completed (built by Sungrow Power Supply Co.) and connected to the local power grid in Huainan, China. The panels are linked to a central inverter and combiner box. The icing on the cake? Ironically, the 40-megawatt facility was built over an old coal-mining region that turned into a lake from heavy rain. Out with the old, in with the new.

Floating solar plants are not novel, but the world has never before seen such a spectacle at this massive scale.

For size context, in March of 2016, England was installing the world’s largest floating solar array, at 6.3 megawatts. England’s solar farm still floats on the Queen Elizabeth II reservoir at Walton-on-Thames. This 6.3-megawatt-farm sprawls about eight soccer stadiums and its purpose is to power local water plants in order to provide clean drinking water to the residents of Southeast England. Today, the second largest floating solar farm is about 20 megawatts, also located in China.

China has surpassed even the largest dreams for floating solar farms. The nation, long reliant on coal and the perpetrator of an intense amount of pollution, has turned itself into a true solar leader over the last decade. In fact, China also houses the world’s largest land-based solar facility, a colossal 10-square mile grid known as the Longyangxia Dam Solar Park.

China’s Solar History, In a Nutshell 

In 2009, the Chinese government announced production in PV solar power a national priority, subsequently ratifying a number of solar subsidy programs. In just a few short years, China became the world’s largest producer of solar panels. Government subsidies allowed Chinese manufacturers to produce panels at below cost prices and the country began shipping so many panels to the U.S. that many of the panels sat unused in California warehouses until they became obsolete and eventually discarded. This, as one might suspect, had the unfortunate effect of driving solar panel prices to all-time lows, causing many manufacturers globally, even in China, to crash and burn.

China’s newest government plans fostered a dramatic purchasing of panels, establishing dominance in the global solar economy. In 2014, one-third of solar panels produced in China were installed locally. China has increased installations every year since, as shown in the chart below. In the first three months of 2017, the nation’s solar output increased by 80% to a whopping 21.4 billion kilowatt hours.

In 2016, China installed 34 new GW of solar energy, which was more than double the amount of installations in the U.S. and double the GW installed in China the year prior.Screen Shot 2017-05-26 at 1.52.02 PM

China has set forth fantastic energy plans, but challenges certainly exist. The nation’s power sector is crippled with overcapacity and slowing demand. Power generators are experiencing their lowest utilizations since 1978. Still, China’s floating solar facility exists as an example for the rest of the world, as urban planning and renewable energy sources become vital for the health and future of this planet. Progress has been made, and clean energy sources are increasingly making economic sense. Read more: Bloomberg published a bullish article on solar in January of this year, titled: “Solar Could Beat Coal to Become the Cheapest Power on Earth”.

According to the U.S. Department of Energy’s latest U.S. Energy and Employment Report, in the year 2016 – for the first time ever – the United States employed more people in solar power jobs (374,000 people, or 43% of the sector’s workforce) than in the coal, gas, and oil industries combined (22% of the sector’s workforce).

Apple pledges to do well by doing good

We are living in the world of the cool factor. It is reflected in the markets – Tesla is the ultimate example with bystanders hanging on to Musk’s every word and a market capitalization that recently surpassed that of Ford and GM. It is reflected in the massive consumption and use of technology from companies of the likes of Google and Apple. And it is reflected in the companies we deem exemplary.

The cool factor is ubiquitous and has tremendous implications for influencing behavior. Why else would one stand in line (or sit in a tent) overnight, waiting to purchase their seventh version of an Apple iPhone with roots over a century ago by Alexander Graham Bell? Because the emotional response of owning the coolest new gadget overwhelms the rational thought of staying in bed.

APPLE ASKS ITS CONSUMERS: PLEASE RECYCLE YOUR COOL GADGETS

Apple is often just one step ahead of everyone else, in terms of innovation, sexiness of products, and commitment to doing good by doing well. The company was founded upon the premise of telling consumers what they wanted, rather than asking for consumer insights – a phenomena that can truly only work for companies dripping in cool. And just in time for Earth Day, Apple recently stated its intent to make all of its products entirely from recycled materials and to “end our reliance on mining altogether.” The company has admitted this is no easy task and that it is taking a rare approach in stating a goal before fully knowing how exactly said goal will be achieved. But if anyone can do it, Apple can.

“Traditional supply chains are linear. Materials are mined, manufactured as products, and often end up in landfills after use. Then the process starts over and more materials are extracted from the earth for new products. We believe our goal should be a closed-loop supply chain, where products are built using only renewable resources or recycled material. We’re also challenging ourselves to one day end our reliance on mining altogether.” – Apple 2016 Environmental Responsibility Report

The world’s second largest smartphone maker is continuously trying to better its production process, using 27% less Aluminum and emitting 60% less carbon to make the Apple iPhone 7, as compared to the previous iteration of the Apple iPhone 6. In 2016, the company reported the use of 100% renewable energy use in powering its global facilities – the first major technology company to declare and fulfill such a commitment. The tech titan has also committed to helping its suppliers generate four gigawatts of renewable energy by 2020.

Apple’s new robot, which it calls “Liam”, has the ability to deconstruct nearly 2.4 million phones per year so that the iPhone parts can be reused. Liam will serve instrumental in helping the company produce all gadgets from recycled materials. However, Apple needs to influence its users to recycle more through its Apple Renew recycling program. (Apple users – take note!)

The force of positive externalities is strong. Corporations with vast influence and complex supply chains have the incredible power to influence the behavior of others. Apple’s seven largest suppliers have pledged to power their Apple production with 100% renewable energy by the end of 2018.

We wanted to demonstrate how business can lead in driving the reduction of global emissions.
– Apple

Apple won the 2016 Environmental Finance corporate bond of the year (yes, this accolade actually exists), with a $1.5 billion green bond – the largest ever US corporate green bond – issued in February, 2016, with lead underwriters Goldman Sachs, JP Morgan, and Bank of America Merrill Lynch.

Green bonds are a fixed-income financial instrument increasingly growing in popularity, as the capital raised from green bond issuance is dedicated to environmental programs.

The bond was the first green issuance from a U.S. technology company, eventually pricing at 135 basis points over U.S. Treasuries. The bond was 2.2x over-subscribed, reaching an order book of $3.335 million, and is expected to be fully allocated over two years. By September of 2016, $441.6 million had already been distributed to 16 projects, most dedicated towards green buildings and renewable energy. These projects are anticipated to generate over 20 MWh of renewable energy each year and save 237 MWh of energy. Moreover, these projects have been calculated to save 20.2 million gallons of water, divert 6,670 tonnes of waste from landfill,  and lead to a reduction of 191,500 tonnes of carbon emissions.

“Apple’s green bond is a terrific example of a corporation taking a comprehensive approach to sustainability. They’ve established their three environmental priorities where they believe they have the most environmentally positive impact and are ensuring that the use of proceeds fits within those parameters.” – Marilyn Ceci, Head of Green Bonds, JP Morgan

The financial markets and the role of big corporations are two of the most important levers for sustainable change. Ever the innovator, Apple is sure to develop some unique programs in the near future in order to fulfill its recycling mission. Stay tuned and Happy Earth Day!

Featured below: Earth day, 1970.

1970 earth day

This picture lends to the question: have we as a global society progressed or digressed in terms of environmental sustainability? On one hand, consumption has increased at a rapid rate, and the physical state of our Earth is in worse shape than ever before, as greenhouse gas emissions have increasingly destroyed our planet. On the other hand, sustainability has become a real focal point of conversation (for some), and advances in technology have enabled alternative energy uses never before deemed possible. Companies like Apple and Anheuser-Busch are committing to 100% renewable energy. Tesla’s market capitalization surpassed Ford and GM. Green buildings are cool and in fact, buildings like the Edge in Amsterdam generates more electricity than it uses. Paris recently made all public transportation free. So, are we progressing or digressing? Food for thought.

Efficiency at its Finest: Introducing the World’s Smartest Building

It has been called the smartest office space ever constructed (Bloomberg), the greenest building in the world (BREAAM ratings agency), and the most fully realized version of the Internet of Things that the world has ever seen (OVG Real Estate).

It is the Edge.

the edge atrium

Standing tall in Amsterdam, the Edge is an unprecedented, innovative office space (430,000 sq. ft) that uses less electricity than that which is created by the solar panels on its roof. The building was designed by OVG Real Estate for global financial and consulting firm, Deloitte, becoming the company’s brand-new Amsterdam corporate headquarters. The Edge was recently officially rated as the most sustainable office building in the world, receiving the highest ever BREEAM score of 98.36%, taking the crown from One Embankment Place in London.

Heating and Cooling:

The Edge utilizes 70% less energy than comparable office spaces and hosts the largest array of photovoltaic (PV) solar panels of any European office building. These solar panels, in tandem with 44,100 sq. ft of panels that OVG placed on surrounding university buildings, allows the Edge to produce more energy than it consumes.

Featured above is the Edge’s atrium, a gorgeous sprawling open space in the middle of the building. Mesh panels that are located between each floor allow office air to spill into the atrium, creating natural ventilation as the air rises. The building also uses the most efficient aquifer thermal energy storage system in the world, according to Robert van Alphan, OVG’s project manager for the Edge. This energy storage system consists of two wells: one well is used to provide heat, the other cooling. When it is warm, water is extracted from one well, pumped through a heat exchange, and then back into the well for storage until a cooler atmosphere requires the heat to be used. The second well reverses the process to cool the air when the atmosphere is warm.

Lighting:

The building’s ultra-efficient and highly connected LED panels are powered with the same cables that provide data for the Internet. The Edge encompasses roughly 28,000 sensors, including motion, light, temperature, infrared, and humidity. These sensors create, as quoted by Bloomberg, “a digital ceiling that wires the building like synapses in a brain.”

Information Technology

Automation systems throughout the building collect data on, essentially, everything. Such automation enhances efficiency beyond belief. The Deloitte data analytics team presents the data to the facility manager on a dashboard so that the facility manager can monitor every single aspect of the building. Such data reveals very specific energy use (precisely when and how), but also when the coffee machines need to be refilled, when lights are brighter than they need to be, you name it. When someone walks into an office space, the connected lighting system provides 300 LUX of illumination. On days when less people are expected in the building, an entire section of electricity might be turned off, vastly decreasing heating, cooling, lighting and cleaning costs.

Employees can customize lighting and temperature through an app on their smartphones. The multifaceted and very talented app is the grand key into the Edge. This app also allows employees to view and monitor their individual sustainability behavior, making suggestions as to how to improve. Not only can employees customize all preferences and monitor energy use, the app also allows employees to manage their gym routines, and even order a dinner recipe and pick up the exact groceries needed when leaving the office at the end of the day.

The innovation continues. Rainwater is captured for flushing toilets, public transportation is highly encouraged with 500 bicycle parking spaces on-site. Beehives and bat homes located on the surrounding grounds support the local pollinators. No employee has his/her own desk, known as “hot desking”: a ploy to encourage new interactions and collaboration. It is also highly efficient. Approximately 2,500 Deloitte employees share 1,000 desks. Workspaces are provided through the app based on your schedule.

“We are planning to build a lot more buildings like this. And the next one will be smarter,  and the one after that will be smarter as well. And we won’t stop until all cities in the world are filled with buildings that are intelligent and not using any energy. We connect them, we make them more efficient, and in the end we will actually need fewer buildings in the world.”

– Coen Van Oostrom, Founder and CEO, OVG Real Estate

THE FUTURE OF WORK:

We are living in a world in which “work”, as we know it, is rapidly changing. Companies are increasingly competing on unique ways by which to encourage innovation, collaboration, and employee satisfaction. As such, a plethora of companies are offering unlimited vacation days, “Googlers” are eating all their meals for free, Nike employees are found biking through campus and playing basketball during the day, and Patagonia employees are encouraged to go mountain climbing and surfing as often as they please. Companies are increasingly realizing that their greatest assets are their people, and that today’s people are demanding more.

The Dutch have a phrase for this: het nieuwe werken, or the new way of working.

According to a 2015 study by the Bureau of Labor Statistics, the average Baby Boomer switches jobs 11.7 times in his or her career, and Millennials have, thus far, changed jobs every two years or less. Moreover, the workplace is being altered by technology at an unprecedented pace: machine learning, artificial intelligence, and sensors are increasingly present – and, some fear, replacing humans. In this somewhat overwhelming environment of an immense amount of technology and connectivity (today, our colleagues can reach us through Twitter, Skype, Whatsapp, Slack, Facebook, Gmail, Outlook – you name it), the office building itself plays a tremendous role. As such, new buildings are being constructed to create a place of calm and productivity. The Edge, embodying het nieuwe werken to the highest utility, is an exemplar for buildings that will succeed as the future of work transforms.

“A quarter of this building is not allocated desk space, it’s a place to meet. We’re starting to notice that office space is not so much about the workspace itself; it’s really about making a working community, and for people to have a place that they want to come to, where ideas are nurtured and the future is determined.” – Ron Bakker, architect of the Edge, London-Based PLP Architecture.

THE MASTERMINDS BEHIND THE GLASS BUILDING:

Constructing an office building as such is no penniless task. It is tremendously expensive. Deloitte, without disclosing the exact costs, proclaimed that anything with a return on investment of less than ten years was “worth it”. The digital ceiling, the most expensive part of the building to build, was estimated at a 8.3 year payback.

“There is no doubt that in the future all buildings will be connected, both internally and to other buildings. The multi-billion dollar question is who is going to do it. Whoever is successful is going to be one of the most successful companies in the world.”

– Erik Ubels, Chief Information Officer, Deloitte.


Receive TheSustainableInvestor content directly in email, as well as notifications for new posts! Subscribe by entering your email address on the top right of the home page. Thanks for following along. 

Let My People Go Surfing

Yvon Chouinard never saw himself a businessman.

In fact, it is he who refers to himself as an “accidental businessman.” Yet, in 1973, the fortuitous businessman architected outdoor apparel company and paradigm of sustainable business, Patagonia. The company has since witnessed over four decades of success, developing into what has been proclaimed by some as the most beloved brand of all time.

“[Our mission is to] build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.”

A false dichotomy exists between the ability of business to thrive and simultaneously advance environmental and social progress. Indeed, it is difficult for a business – an entity that thrives on human consumption and the utilization of a colossal amount of resources and energy – to act with utmost environmental stewardship. By the raw nature of producing jackets, for example, Patagonia is inflicting a certain amount of environmental harm. Companies that are publicly traded are faced with an even greater constraint in living as environmental stewards, as such companies must listen and react to shareholder demands. A long-lived legacy has existed for decades that shareholder value is synonymous to share price and profit maximization. Indeed, this is not necessarily true. But- such legacy has led Corporate America to witness an unyielding quest for short-term profits. (Read more here.) For this reason, Patagonia has openly declared it will never go public. While one could still point fingers at Patagonia’s carbon emissions, one must also consider the ability of such an influential company to inspire other businesses to exhibit transparency and fashion impact, and to inspire consumers to make responsible choices. If consumers work for, and buy from, companies that are committed to the environment, and investors invest in such companies, competitors that are “more harmful” will eventually be forced out of business. The influential power of certain brands that exist in today’s world is grander than most speculate about. If we must wear something (and we must), Patagonia provides us the option to consume products from a company that is actively and everyday taking massive strides to be an environmental steward.

LIVE AN EXAMINED LIFE.

Patagonia employees live and breathe by this very mantra. To them, living an examined life involves a deep sort of mindfulness regarding every single action taken throughout every link of the supply chain. In 1988, Patagonia entered the Boston area, opening a store in prime real estate on Newbury Street. Within a few days of the store opening, many of the employees were getting headaches. An engineer relayed to the company that the problem was with the ventilation system: more specifically, the air that was being recycled in the store was full of formaldehyde from the finished cotton clothes in the basement. The company spent a tremendous amount of resources to study conventional cotton, unearthing that cotton grown with pesticides is one of the most destructive crops in the world. Equipped with this knowledge, the company felt strongly that it could not continue using conventional cotton and in 1996, Patagonia went completely organic.

“From cotton, we moved to what happens in Patagonia’s name in every step of the supply chain, from crop to fabric, to finished garment. We learned how to make fleece jackets from recycled plastic bottles and then how to make fleece jackets from fleece jackets…”

The biggest step we can all take to reduce our impact is to do more with what we have. 

Patagonia has taken massive strides to not only mitigate its impact, but also educate its consumers about how to make their products last as long as possible. There is a certain authenticity to the way that Patagonia goes about its business that inspires trust. For example, Patagonia would likely make more money if consumers bought a new jacket every week. But, I truly believe the company cares deeply about this planet. And would not only prefer to produce clothes that last, but feel it is their duty to do so. On Patagonia’s website one can find: Repair and Care Guides aiming to help readers understand how to make their clothing last as long as possible, as well as Reuse and Recycle Instructions, striving to make it easy for consumers to rid of their items.

Patagonia (alongside Walmart) is adhering to its mission of inspiring other businesses to do good by championing the Sustainable Apparel Coalition: an ensemble of companies dedicated to developing a universally accepted approach to measuring performance of sustainability. The Coalition’s core product is the Higg Index, easy-to-access online tools for brands, retailers, facilities, and consumers to measure, and compare over standardized performance scores, the environmental and social impacts at all stages of production. Read more here.patagoniaCommunication is paramount. In order to build a trusted brand, consumers must know about the wonderful things you, as a brand, are doing. Companies are increasingly being coerced to be creative in the way in which they disseminate information to customers and consumers. In today’s highly stimulative world, time and attention are the greatest commodities with which we trade. People are busy. Rushed. Unfocused.

Pictured above is an advertisement that Patagonia released in The New York Times on Black Friday (2012). If we assume positive intent, the purpose of this ad was to dissuade consumers from buying things they didn’t need. I say if we assume positive intent, because there certainly exist a camp of people that find it hard to believe the creators of this ad didn’t anticipate that it would lead to increased sales. Reverse psychology 101: people love to do things they are told not to. Anyway, let’s assume positive intent. After all, the ad was highly transparent, educating consumers that in order to produce and distribute the jacket shown, the company required 135 liters of water (enough to meet the daily needs, or three glasses per person, for 45 people), and generated approximately 20 lbs of carbon dioxide and 2/3 of its weight in waste.

But the result of the ad? Skyrocketed sales. People both signed the “buy less” pledge and bought the jacket. In fact, in 2012, after 9 entire months of “buy less” marketing, Patagonia’s sales increased approximately 30% to $543 million. In other words, encouraging consumers to buy less resulted in an increased $158 million of additional products sold.


Patagonia’s business ethos lends to an increasingly vital question: how can a company successfully provide – but not overload – consumers with accurate information?

The paradox of choice. We are inundated with ratings, categories, true and false news articles, you name it. Third party providers exist in attempts to aggregate the plethora of existing data and help consumers sort this information – but the same issue of trust arises – how can consumers trust the methodology used by third party aggregators?

As a consumer who deeply cares about the how, why, and from where when it comes to purchasing goods and services, it is increasingly difficult to unearth net impact. Even if we want to make all the right choices, it is difficult to understand what those best choices are.

Rick Ridgeway, Patagonia’s Vice President of Environmental Affairs, recently spoke at the Massachusetts Institute of Technology (MIT), to an audience in which I was in attendance. Someone asked him this very question – how does Patagonia think about its consumers and transparency? The paraphrased version of Rick Ridgeway’s very astute answer was as follows: It’s all about building trust. If you are a consumer and you trust that Patagonia is a environmentally friendly brand, than even if you don’t know that we know where every feather comes from, you get a sense that we know.

Patagonia does, in fact, know where every feather comes from and released a video called What the Pluck? in hopes of educating consumers.

warren buffet

Building and maintaining a trusted brand is no easy task. In fact, it’s near impossible. Nobody and no company is perfect. Patagonia exists as a paradigm for other businesses: it is completely transparent about its shortcomings, and about the fact that the company is continuously learning how to do the right thing. Importantly, Patagonia is committed to its customers and committed to this planet.

LET MY PEOPLE GO SURFING:

The accidental businessman wrote a book (some might call it a memoir, or manifesto) called “Let My People Go Surfing: The Education of a Reluctant Businessman”, in which he details Patagonia’s commitment to the environment.

I’ve been a businessman for almost sixty years. It’s as difficult for me to say those words as it is for someone to admit being an alcoholic or a lawyer. I’ve never respected the profession. It’s business that has to take the majority of the blame for being the enemy of nature…Yet, business can produce food, cure disease, control population, employ people, and generally enrich our lives. And it can do these good things and make a profit without losing its soul. That’s what this book is about. 

My company, Patagonia, Inc., is an experiment. It exists to put into action those recommendations that all the doomsday books on the health of our home planet say we must do immediately to avoid the certain destruction of nature and collapse of our civilization. Despite a near-universal consensus among scientists that we are on the brink of an environmental collapse, our society lacks the will to take action. We’re collectively paralyzed by apathy, inertia, or lack of imagination. Patagonia exists to challenge conventional wisdom and present a new style of responsible business.

– Yvon Chouinard, Founder, CEO, and Reluctant Businessman, Patagonia


Receive TheSustainableInvestor content directly in email, as well as notifications for new posts! Subscribe by entering your email address on the top right of the home page. Thanks for following along. 

The Future of Food: AgTech

We have reached the ultimate demand-supply imbalance and it has huge implications for tomorrow’s dinner.

Migrant Workers Farm Crops In Southern CA

The United Nations forecasts that the global population will reach a colossal 9.7 billion by the year 2050. Meanwhile, the Food and Agriculture Organization (FAO) has predicted that global agriculture production must increase by 70% in order to feed this 9.7 billion population. Moreover, the FAO predicts that in developing economies where population growth is increasing more rapidly, and poverty and malnourishment is most prevalent, global agriculture production must grow by 100%. Simultaneously, consumer preferences (particularly the millennial generation) have shifted to demand sustainably sourced, chemical-free food, that is produced by guilt-free, transparent supply chains. In other words, more people are demanding “better” food.

Striving to increase crop yields without having to clear more land for agriculture (or “sustainable intensification”) has been emphasized as the favored resolution. Yet, crop yields are plateauing and it’s not clear we will be able to increase production within the current system at the pace required.

The increasing number of extreme climate events – from droughts to floods to extreme temperature variations – are serving to exacerbate the issue. The implications are tremendous.

Let’s rewind.

On October 2nd, 2013, multinational agrochemical  biotechnology firm, Monsanto, purchased weather insurance company, Climate Corp, for a hefty price tag of $930 million. The acquisition would forever change the way investors and farmers considered the intersection of technological innovation and agriculture. Monsanto stated its motivation for the purchase as the ability to leverage Climate Corp’s expertise in agronomy, data acquisition, and data analytics to provide value-added services to the farmers already purchasing Monsanto chemicals. One year later, in 2014, the AgTech sector grew 170% as it attracted a total investment of $2.36 billion across the entire agriculture value chain. In 2016, AgTech as a sector experienced total investment of $3.23 billion: 580 deals across 670 unique investors.

agtech4

THE OPPORTUNITY

According to McKinsey & Company, the food and agribusiness market is $5 trillion and growing. Yet it remains the least digitized.

The agribusiness industry has generated significant negative environmental effects, such as ecosystem destruction, soil erosion, biodiversity loss, pollution, natural resources and water waste, in addition to social consequences, such as obesity, poverty, gender inequality, and labor injustice. Today’s agribusiness accounts for about thirty percent of global greenhouse gas emissions, a 75% increase from that of 1990.

Yet, agribusiness need not be destructive. Sound agriculture practices can protect biodiversity, sequester carbon, increase soil health, create jobs, and produce delicious, nutritious food.

The opportunity to build such a food system is driving innovators to AgTech. Five chief global developments have enthused investment in AgTech over the latter half of the past decade:

  • Increasing demand for food from a growing, urbanizing population
  • Changing characteristics of this demand, including for healthy, protein-rich food produced by transparent supply chains
  • Increasing effects of climate change and the urgency to mitigate said effects
  • Growth of private funding for agriculture innovation from ag-specific and traditional tech funds, as well as corporates
  • An advent of technologies applicable to agriculture

agtech2

THE FUTURE OF OUR FOOD SYSTEM:

The Internet of Things (IoT), a rapidly emerging ecosystem of sensors connected to the Internet, offers tremendous efficiency and profitability advantages for agribusiness. IoT providers are working to deploy connected sensors across farms to measure and monitor on-farm conditions, such as soil moisture, animal health, and grain quality. An IoT use case is also emerging around finance as companies explore ways to use sensors to lower the risk or lending to farmers and the supply chain. Vast potential exists in this space for sensors and algorithms that are able to provide real-time insights to the conditions of soil, plant and animal health, pest and disease presence, and predicted yield. Sensors and algorithms can also help agronomists and farmers optimize their businesses.

Precision Agriculture technologies, loosely including drones, irrigation, satellite & aerial imagery sensors, and smart hardware, have the potential to remove excess human labor and improve operating margins. Although precision agriculture is not new, the space has room to mature. Farms and supply chains must become more comfortable with aggregating and using data, and startups must find relevant, commercially viable solutions to help farmers and agronomists use these technologies. The problem that remains unsolved is that while data and technologies exist, companies are struggling to articulate a value proposition that will resonate with farmers and solve a real problem. The vital question that must be asked is how farmers can use this plethora of technology in an integrated approach that effects the bottom line.

Aerial and Satellite Imagery in particular show potential to enable greater supply chain transparency and risk assessment. Deep learning, or machine learning that uses neural networks to extract patterns from data, can help farmers make sense of images taken from satellites, e.g. to identify diseases and anomalies.

Coupled with other technologies such as blockchain and virtual or augmented reality, we start to see the potential to go beyond the farm, transforming agribusiness transactions, supply chains, and even customer experiences. Companies are working with these technologies to decrease costs, time delays, and risks in supply chains, as well as to improve the experience of producing, transporting, and eating food. The technologies are immature and compelling use cases are still emerging, but the anticipated benefits are exciting: lower transaction and financing costs through digital payments, readily available provenance information across the supply chain, and enhanced eating and purchasing experiences.

At the consumer end, the sharing economy and other e-commerce and direct to consumer marketplace models have transformed both developed and developing countries. These technologies help farmers access equipment (e.g. tractors), inputs (e.g. fertilizers), and finance, as well as create new supply chains that connect farmers to consumers.

CHALLENGES:

Building this technology-enabled future is already happening, but challenges remain.

  • Interoperability: Although massive amounts of technology and data exist, solutions are highly specific in nature and the industry has not yet been able to build integrated solutions. In other words, there is a lack of interconnectivity between existing technology solutions. The desired future is a world in which data is aggregated from multiple sensors, analyzed by many algorithms, and compared across time zones and geographies. In this world, farmers easily make use of multiple technologies to drive decisions that are integral to the profitability and sustainability of their businesses.
  • Funding Pipelines: Due to the consolidated nature of the industry (i.e. there are only a few, and increasingly fewer, “big ag” companies), investors are concerned about the small number of exit opportunities for their investments. While Climate Corp propelled the industry forward by $1 billion, few others have exited as successfully. The uncertainty around exit pathways is a potential advantage for investors with larger wallets able to fund longer-term investments (i.e. across multiple rounds of financing.) Optimistically, as the industry evolves, exit opportunities will become more commonplace.
  • Farmer Hesitation: One major hurdle to achieving broad-scale data integration is a hesitation on behalf of farmers to share their data. Some have cited a fear of large corporations exploiting their data, or commodity futures traders leveraging data for investment. In response, twelve major AgTech providers and farm organizations have crafted ground rules for data: a voluntary “Privacy and Security Principles for Farm Data,” attracting big names such as John Deere, The Climate Corporation, and DuPont Pioneer. This is a start, but overcoming this challenge may not be so simple.
  • Timeframes: field trials based in natural systems have a fundamentally different time frame than that which is required for testing software. Thus, achieving sufficient results and return on investments might take longer (and be more expensive). This poises a problem for investors desiring short-term returns and startups on tight budgets.

future

Progress is evident and exciting, yet slow. Funding has increased and technologies are advancing, but exits are few and far between. Moreover, the pressing issues facing our food system are not slowing down. Businesses are continuously striving to offer an integrated data aggregation platform, farmers are increasingly becoming more comfortable and adept in using technology and data to drive bottom-line decisions, and investors are increasingly gaining comfort in the space as the financial opportunities are becoming evident. While there are certainly challenges, solutions exist, and farmers, technology providers, investors and companies in the space are actively working together to leap these hurdles. The future is bright.


Editor’s Note: This post, co-authored by Sarah Nolet and Jen Ballen, was originally published on AgThentic.com. You can learn more about food systems innovation at agthentic.com.

The Flat Earth Society in a World Proven Round

“Ships will sail around the world, but the Flat Earth Society will continue to flourish.” – Warren Buffett

In 1984, renowned investor and multi-billionaire, Warren Buffett, delivered a speech at Columbia Business School to share his insights about the Efficient Market Hypothesis (EMH).

The EMH, or the mantra that stocks reflect all available information, suggests that investors attempting to beat market indexes are merely wasting their time because stock prices follow a “random walk”. This theory further postulates that, in the long-run, the most adept hedge fund manager will perform just as well as a monkey throwing darts at the newspapers’ financial pages. The implications are as follows: if stock prices reflect all available information, investors need not conduct any research about companies, sectors, nor the macroeconomic environment. Due diligence, in essence, is meaningless, as are the hundreds of high-paying jobs on Wall Street dedicated towards researching companies for potential investment.

warrenbuffet

In 1984, Warren Buffett attempted to put the Efficient Market Hypothesis to rest, attesting: “I’m convinced there is much inefficiency in the market…superinvestors of Graham-and-Doddsville have successfully exploited gaps between price and value.” (Note: Benjamin Graham and David Dodd were Professors at Columbia Business School and the authors of a renowned book, “Security Analysis”, which is thought to have laid down the intellectual framework for the philosophy that later became known as value investing.) Buffett reported how nine investors he had studied over a 26-year time period had independently achieved returns far superior than that of index funds, all nine investors exploiting the difference between the intrinsic value and the market price of their investments. Buffett concluded his speech by stating: “Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.”

While this quote was specifically directed towards current and future investors questioning the validity of the Efficient Market Hypothesis, Buffett’s quote can be extrapolated to many different scenarios, as his words speak volumes about truths that have been proven, yet are still denied.

Can fixed mindsets ever truly be altered?

Scientific American published an article in January of this year, How to Convince Someone When Facts Fail, in which Michael Shermer wrote:

“Have you ever noticed that when you present people with facts that are contrary to their deepest held beliefs they always change their minds? Me neither. In fact, people seem to double down on their beliefs in the teeth of overwhelming evidence against them. The reason is related to the worldview perceived to be under threat by the conflicting data.”

Shermer continued to discuss the following examples: creationists who dispute evolution, “anti-vaxxers” wary of big pharma, those who blame the U.S. government for 9/11 and, of course, climate deniers who erroneously point to tree rings and ice cores. “In these examples, proponents’ deepest held wordviews were perceived to be threatened by skeptics, making facts the enemy to be slayed. The power of belief over evidence is the result of two factors: cognitive dissonance and the backfire effect.”

brain-tension

Cognitive Dissonance, resulting from an individual’s desire to hold beliefs and attitudes in harmony, is the tension that occurs when an individual’s beliefs and opinions contradict. In 1956, social psychologist, Leon Festinger, presented cognitive dissonance theory, stating that individuals are prone to seek consistency among their cognitions (opinions and beliefs), sometimes resulting in irrational, and even maladaptive behavior. In other words, individuals often seek to remove the displeasing tension known as dissonance by forcing their views to align, even if it is illogical to do so.

Five decades later, social psychologists Carol Tarvis and Elliot Aronson documented a series of experiments in the book, Mistakes Were Made (But Not by Me), demonstrating live examples of how subjects twisted facts in order to reduce dissonance and fit preconceived opinions.

When Corrections Fail

In 2006, Professors Brendan Nyhan (Dartmouth) and Jason Reifler (Exeter) conducted a series of experiments leading to the realization of a related factor they called the backfire effect: such that “corrections actually increase misperceptions among the group in question.” Think about this for a moment. If true, the existence of the backfire effect implies that attempting to amend incorrect truths with credible evidence often has no effect in changing preconceived inaccurate beliefs. In these experiments, subjects were presented with false newspaper articles that “confirmed” widely held misconceptions, for example that there were weapons of mass destruction in Iraq prior to the 2003 U.S. invasion. When subjects were later presented with a corrective article stating that these weapons were never found, liberals accepted the new article, but conservatives reported feeling even more convinced of the existence of weapons of mass destruction subsequent to reading the corrective article, twisting facts in order to make the new story align with previously held beliefs.

The implications of cognitive dissonance and the backfire effect for climate change advocacy are important. Climate change has become a highly politicized issue, an issue that has become bigger than the warming atmosphere. If correct facts only magnify disbeliefs, how is one to convince naysayers of the severity of the issue? Scientific American proposes six suggestions: 1.) listen, 2.) leave emotions out of the conversation, 3.) do not attack, rather discuss, 4.) be respectful, 5.) acknowledge an understanding of an opposing view and 6.) attempt to relay how changing facts need not be synonymous will changing entire worldviews.

It has been proven that individuals, when seeking to relay pertinent facts or convince others of specific opinions, often forget the most important aspect of conversation: listening. My anecdotal observations allow me to believe that the ensemble of society which outright denies human-contributed global warming, while certainly exists, is small. The greater skepticism exists as to confusion, uncertainty, and/or disbelief regarding the magnitude of the problem. Climate change feels temporally and geographically distant to many. Yet, climate change is arguably the greatest challenge humanity has ever faced: exacerbating inequalities, heightening poverty, threatening national security, and destroying the livelihood of plants, animals, and humans. See here. It seems reasonable to conclude that the worldview to “alter” is not an outright denial of climate change, rather a misunderstanding of just how much is at stake.

To my readers struggling an uphill climate advocacy battle, empathy is paramount. What Scientific American implies, yet fails to specifically state in its thought-provoking and intelligent article, is that in order to successfully employ suggestions 1 through 6, one must empathize. Why might someone hold an opposing view? Can you wear another pair of shoes for a day? Moreover, consider incentives. If not sustainability, what do people care about? Security, children, money, happiness, and “success” as defined by the individual, come to mind. As once stated by Bill Bullard: “Opinion is really the lowest form of human knowledge. It requires no accountability, no understanding. The highest form of knowledge…is empathy, for it requires us to suspend our egos and live in another’s world. It requires profound purpose larger than the self kind of understanding.”

Better Food for More People

A cup of yogurt won’t change the world, but how we make it might. 

Hamdi Ulukaya, owner, founder and CEO of Chobani, had an ardor for yogurt as a young boy growing up in Turkey, only to be disgusted by the overly sugary and overly watery American yogurt when he moved to the U.S in 1994. In America, the only yogurt he enjoyed was that which he made himself.

In March 2005, Ulukaya stumbled upon an advertisement for a fully equipped yogurt factory that was for sale. The factory had belonged to Kraft, who had decided to exit the yogurt business, and was serendipitously located in upstate New York, about 65 miles from the feta cheese company Ulukaya had started a few years prior. While a closed factory embodies economic decline to many, it represents a low-cost opportunity to entrepreneurs who require expensive capital to architect their visions into reality. Curiosity burgeoned.

chobani

THE CHOBANI JOURNEY: GROWTH SANS EXTERNAL INVESTORS

One fascinating and unique aspect of the Chobani journey is the fact that nothing became something without the reliance on external investors that so many early-stage ventures simply cannot succeed without. Ulukaya bought the old yogurt factory with borrowed money, primarily through a bank loan backed by the U.S. Small Business Administration. His first move? Hire a yogurt maker from Turkey.

By late 2007, Chobani was ready to introduce its yogurt to the world. Led by Ulukaya, the company attempted to differentiate at the onset: the packaging was wider than that of normal American yogurt. Product placement was important: the product was stocked in the dairy aisle alongside other existing yogurt brands, even though many Americans had never before heard of Greek yogurt. (In fact, interestingly, Greek yogurt is known as “strained yogurt” around the world, but the delicious food happened to be introduced to the U.S. by a Greek company, FAGE).

Chobani quickly realized that its biggest problem wasn’t going to be selling enough yogurt – it was going to be producing enough yogurt. Ulukaya continued to finance growth through bank loans and reinvested profits back into the company. Many private equity and venture capital firms called Ulukaya, attempting to convince him that he would need their assistance. “Eventually, I simply stopped returning calls from potential investors. There really wasn’t anything to talk about (Ulukaya).”

Today, Chobani is a multi-billion dollar business and prior to giving away partial equity to his employees (to be discussed later in this post), Ulukaya owned the entirety of the company. In fact, nearly 100% of Ulukaya’s net worth was invested in Chobani – a financial planner’s nightmare due to complete lack of diversification, but an impressive and astonishing vote of confidence in the company from its brainchild. Chobani is revered by many as the propeller of the Greek Yogurt Phenomenon, a trend that is still flourishing and growing today, as competitors of the likes of Dannon and General Mills have eagerly ramped up production in order to hop on the rapidly moving greek yogurt train.

AN ORGANIC BREAK UP: WHOLE FOODS RIDS ITS SHELVES OF CHOBANI

In 2013, two of the biggest success stories in the entire food industry parted ways: Whole Foods announced it would be eliminating Chobani products from its shelves, grasping the attention of the Wall Street Journal, The New York Times, the Washington Post, and a plethora of other news sources, each attempting to define the cause of the tension.

The WSJ reported that Whole Foods only wished to sell organic or non-GMO Greek yogurt. Whole Foods did not approve of Chobani’s sourcing of milk from traditionally-raised cows that consume genetically engineered feed. For context, over 90% of cows in the U.S. eat GMO feed. Under the Whole Foods logic of what constitutes a GMO, animal byproducts from an animal that has at one point consumed GMO feed is now a GMO, which means that you and I and anyone else that has ever eaten GMO food is also a GMO. Whole Foods asked Chobani to source its milk elsewhere, to which Ulukaya retaliated it would be impossible to do so in a cost-efficient manner. Ulukaya stated he would rather sell nutritious food to everyone at an affordable price, rather than selling the same product with more expensive ingredients to fewer people – thus, adhering to the company’s mission of better food for more people.

Whole Foods reported that the cause of the tension was that the retailer had asked all of its Greek yogurt suppliers to create a brand specific for Whole Foods, to which Chobani had said no thank you.

THE SOCIAL STIGMA OF GMOs

GMOs – genetically modified organisms – are increasingly being avoided by consumers. As buyer skepticism has grown, so too has the pressure on companies to exhibit transparency and label all products and ingredients. Although there exists no real evidence of GMO-induced health catastrophes, the negative social stigma towards GMOs is overwhelmingly strong. A 2015 study from the Pew Research Center reported that 9 out of 10 scientists stated that GMOs were “generally safe” to eat. Yet, over 50% of the surveyed adults reported a belief that GMOs must not be consumed for health reasons. In the food industry, perceived effects are arguably more relevant to company profitability and reputation than actual effects. If there existed a certain food that was extremely healthy for humanity, but humanity believed it was terrible for their health, that food would not be consumed. Perception trumps.

THE MISSION BEHIND THE YOGURT:

After the Whole Foods breakup and subsequent attack from anti-GMO organizations, such as GMO Inside, which accused Chobani of being dishonest by labeling its products as “real” and “natural” despite its indirect use of GMOs through its cows, Chobani put its money where its mouth was. In 2014, the beloved yogurt maker partnered with Green America in order to better understand milk sourcing options from cows that have not consumed GMO feed. Chobani launched three certified organic Green yogurt flavors in 2015.

We’ve been dedicated to open and honest conversations to evolve the country’s milk supply, from increasing the number of cows not treated with rBST and improving animal welfare to exploring how to increase non-GMO feed options. While this remains an upstream agricultural issue, we are proud to partner with Green America to help make meaningful changes across the dairy industry. – Peter McGuinness, Chief Marketing and Brand Officer, Chobani.

In addition to working towards complete use of non-GMO ingredients, Chobani is also fulfilling its mission of better food for more people by adhering to local sourcing, donating a portion of profits to Chobani Foundation, which focuses on empowering small business owners, and exhibiting strong transparency through careful labeling of all products and ingredients.

AT CHOBANI, NOW ITS NOT JUST THE YOGURT THAT’S RICH”

In April of 2016, The New York Times published an article about an unusual generosity on behalf of the CEO of Chobani: Ulukaya had announced he was offering Chobani shares to all 2,000 full-time employees, equating to 10% of the entire company’s equity. The shares came directly from Ulukaya’s own portion and the number of shares were bestowed to employees based on tenure. The company’s value is between $3 and $5 billion, which means Chobani’s earliest employees received equity shares worth well over $1 million. While employees were rejoicing, private equity firm TPG Capital, who had provided Chobani a loan two years prior, was less than pleased as the PE firm had a warrant to buy at least 20% of Chobani shares – this percentage would now be calculated from the 90% of the remaining shares, as 10% of the company was now in the hands of its employees, thus diluting TPG’s potential equity stake. TPG refused to provide a comment.

Employee stock ownership is not unusual, as exemplified by the many technology startups that often pay employees in equity throughout the early days, often times a strategy to recruit talent. But it is rare that businesses with such established value, such as Chobani, grant shares to employees after said value has been established. NPR reported an immense amount of hugging and crying at the announcement ceremony. “There’s a very emotional bond and an emotional connection that you don’t typically associate with a manufacturing facility, or a yogurt plant.” The loyalty and satisfaction among Chobani employees represents the immense power of the brand.

greek-yogurt

Per capita yogurt consumption has augmented 400 percent over the past three decades (IbisWorld) and Greek yogurt has rocketed to approximately 35% of the overall yogurt market (Bernstein Research). As consumers become more and more health conscious, the low-sugar, high-protein “Greek” yogurt is becoming increasingly “worth” the higher price point.

Nielsen revealed that while the overall U.S. retail yogurt category experienced a decline in revenue of 0.9% in 2016, Chobani’s U.S. operation experienced both significant volume growth and double digit sales. According to experts, Chobani’s performance was driven in large part by the non-GMO Flip yogurt and the company’s successful foray into yogurt drinks. Chobani has extended its reach: its yogurt tubes have been added to McDonald’s Happy Meals and the yogurt itself is used in McCafe smoothies in over 800 retail locations. Chobani yogurt is also offered on American Airlines, United, Delta, and Jet Blue flights. This represents a tremendous expansion for the brand. While the company is continuously innovating and one day will likely be known for a broader food category than that of yogurt, greek or strained yogurt lovers should not forget the company that was responsible for the uproar of Greek yogurt in America: Chobani.

To me there are two kinds of people in this world. The people who work at Chobani and the people who don’t. -Hamdi Ulukaya, CEO, Chobani.

 


Featured Image sourced from Chobani.com

Limits to Growth, Part II

The global economy has pushed the limits of linear consumption so far that the question as to whether or not we can sustain our current model of economic development is one that can no longer be ignored.

The current economic model of development, based primarily on linear growth, has been criticized on the basis of an overwhelming fixation on profitability, GDP, and labor productivity as indicia of success. GDP growth has long been the natural goal of many different societies across the globe. Many postulate that in our world anticipated to grow to 9.7 billion humans by 2050 (United Nations, 2015), the current GDP growth rate cannot continue at its current pace, as such a pace will deplete much-needed nonrenewable energy and material resources. Somewhat paradoxically, energy production is both a determinant of economic growth (e.g. through revenue generation and positive employment), as well as an instigator of harmful environmental effects.

The fundamental question that must be asked is if it is possible to simultaneously increase economic growth and advance environmental and social prosperity.

Limits to Growth, Part I

The first widely recognized intuition of the potential negative effects of exponential economic growth was introduced to the world in the form of a novel, “Limits to Growth,” written in 1972 by Donella H. Meadows, Dennis L. Meadows, Jorgen Randers, and William W. Behrens III.

Limits to Growth used system dynamics theory and the World3 simulation model to examine the consequences of exponential economic and population growth, specifically analyzing twelve scenarios of different environmental outcomes from global development over two centuries: 1900 to 2100. The conclusion was that the world had already overshot* many of our limits and that business-as-usual would result in an eventual global collapse in the 20th-21st century from resource constraints and increasing pollution, including hazardous effects from climate change.

While the book was criticized by academics, economists, and businesspeople for the methodology, projections, and conclusions, four decades later, in 2014, The Guardian published an article discussing a Dr. Graham Turner who had gathered data from the United Nations, the Food & Agriculture Organization, the U.S. National Oceanic and Atmospheric Administration, and many other sources, in order to test the Limits to Growth scenarios. The results showed a world very closely matched to the “business-as-usual” scenario espoused in the book: the data was strikingly similar to the forecasts put forth in Limits to Growth.

green-economy

The Degrowth Movement

Sustainable degrowth is defined by renowned environmental scientist, Giorgios Kallis, as: “A socially sustainable and equitable reduction (and eventually stabilization) of society’s throughput.” Kallis further defines throughput as: “The materials and energy a society extracts, processes, transports, and distributes, to consume and return back to the environment as waste. Throughput is the “food” of the social body’s metabolism.”

While sustainable degrowth is not synonymous with GDP degrowth, sustainable degrowth should ultimately lead to the natural decline of GDP. It is important to note that the argument for sustainable degrowth is not synonymous with an argument for negative GDP growth. Rather, degrowth can and should, as hypothesized by Kallis, increase welfare and improve environmental conditions under the appropriate conditions and policies. The chief concern of the degrowth movement is the manner in which GDP can decline in a socially and environmentally sound way. The degrowth defense is not an argument for recession; rather “a vision of a smooth process of downshifting the economy through institutional changes, managing collectively a ‘prosperous way down'” (Odum and Odum).

One answer, it seems, is selective degrowth, such that resources are redistributed between public and private consumption and even between generations. Selective degrowth is complex. Who decides which consumption activities should and should not continue to grow? The government? The people? A third party environmentally-focused organization? Someone else?

This so-called selection cannot be left to market forces alone. Kallis argues that degrowth will only be possible through radical institutional changes, such that the resulting system can no longer be called capitalism. It seems reasonable to conclude that the capitalist markets we live among today will not voluntarily choose the path of degrowth. The market tends to avoid or ignore risk until faced with abrupt crisis: a lost lawsuit, legal predicament, or act of violence. The terrifying question that is unaddressed by most researchers is what it will take to spur action. What catastrophic event needs to occur to shake the markets awake?

The Green Economy Movement

Some assert the manner in which to transform the industrial state is a movement towards a green growth economy.  In fact, the green growth proponents (Giorgos Kallis, Dr. Peter Victor, Dr. Tim. Jackson, among others) suggest such an economy is the only way forward. The three further argue that the following key structural economic changes are necessary:

  1. a reduction in working hours
  2. the encouragement of society to engage in more unpaid work
  3. the replacement of private-sector funded economic activities with community-funded investments in more sustainable enterprises

The green economy crowd believes that the green economy has the potential to create and accelerate meaningful and revolutionary change towards sustainable development. The movement suggests policies and incentives to create a low-carbon state of economic activity.

Yet, other equally-as-adept economists contend that green growth will be inadequate to achieve sustainable development. Sylvia Lorek and Joachim Spangenberg express their doubt as such: “Green economy/green growth…is a new terminology for what is known since 40 years as ecological modernization. It is indeed overdue, but with its focus on efficiency and innovation, it cannot guarantee to fulfill the Brundtland sustainability criteria. A factor analysis based on the I*P*A*T formula demonstrates how optimistic the assumptions regarding future technologies must be to support the green growth concept.” Lorek  and Spangenberg argue that “green growth” is nothing more than a buzz phrase, and a true sustainable economy is formed by a society that lives within its ecological boundaries. As such, sustainable economies are formed through sustainable forms of consumption, including the resource consumption necessary for production. Efficiency gains are needed along supply chains in addition to, and not instead of, living and working conditions which allow for a “decent life”. Importantly, a sustainably-developed economy shifts resources and meets the needs of everyone.

Looking Ahead:

In 1987, the World Commission on Environment and Development defined a sustainable society as: “one that meets the needs of the present without compromising the ability of future generations to meet their own needs”. The idea “bigger is better” is a mantra of the past. Economic progress is being redefined, as businesspeople, policy makers, investors, and consumers are beginning to realize that our current model of linear consumption has pushed the boundaries. What, then, is the best way forward?

A multifaceted government approach focused on both a green economy and selective degrowth is necessary in order to achieve the careful balance of simultaneous economic growth and environmental/social prosperity.

Market prices are key. Incorrect prices produce too much or too little and do not maximize utility. Government is needed to adjust prices to reflect real costs (including externalities), whether by tax or subsidies or both. Government could ration or restrict resources, which would effectively raise prices. Mandating miles per gallon for car manufacturers would, for example, raise the price of the gas guzzlers relative to efficient cars to inventive the adoption and manufacturing of efficient vehicles. Similarly, a carbon tax on emissions would raise the price of carbon.  However, raising prices does not lower overall utility. A shift in tastes might be needed, such that people value doing good by the environment. Social advertising might be necessary to shift utility curves.

In such a price-adjusted economy, the poor will get hit the hardest. The rich can afford the Tesla, the poor cannot. In a global context, what is needed is a reallocation of resources from the “haves” to “have nots”. Subsidies are a must.

Such a multifaceted approach should consider the following:

Incentive structures (taxes, subsidies, penalties) to punish negative environmental behavior. Government could shift the allocation of capital away from energy-inefficient industries and towards industries and businesses that are contributing to a green economy. While both positive and negative incentives should be in place, taxes and regulations are imperative, such as a tax on carbon emissions. This is a complex proposal, to be discussed in further detail in a future blog post. Access is also important, such as policies that make aspects of a sustainable lifestyle convenient at the local level: ease of recycling, infrastructure for public transportation, encouragement of ride-sharing or reusable items in a society. Employment research (Ashford, Kallis) suggests that a shorter work week can potentially lead to a more sustainable future through higher productivity, less energy-intensive activities (including, for example, commuting to work) and happier employees.

Government should also lead by example, exerting positive low-energy activity, as well as serve to put policies in place to strengthen the community. For example, government could establish community projects around urban planning, community clean-up projects, and/or community-based renewable energy projects. Projects should focus on the sharing and limited use of energy sources. Actions at the community level play a crucial role, as such actions can stimulate changes at the national level, either by community-applied political pressure, or by setting examples of successful local implementations of policy. A sound policy must focus on strengthening local economies. Health, Education, and Natural Resource Protection are imperative for a prosperous society and aforementioned multifaceted government approach must also set policies in place to increase access to health and education, and to preserve species.

Resource reallocation towards the developing world is vital, as today’s largest economic issues include increasing unemployment, and heightening income, poverty, and education gaps. Government should strive to decrease the pervading economic inequality between the developing and developed world. While fossil fuel and energy intensive activities should still be regulated in developing economies, it is clear struggling nations need political help. One suggestion would be to create maximum production ceilings for certain energy-intensive industries. In this way the developed world, already likely hitting such ceilings, would be forced to curtail production and consumption, allowing the developing world to catch up. Another important policy implementation for the developing world is subsidies, such as those in place to help foster easy trade and access to resources.

Note the above policy suggestions are just a brief overview of suggested regulatory changes, barely scratching the surface of the intricacies of each, but for the context of this already very long blog, hopefully sufficient. It should be noted that such recommendations fall short in mentioning the utter complexity in implementation, particularly across geographies and classes.

Is it already too late?

There is a school of thought, oozing with skepticism, that no matter what actions are taken from here on forward, the amount of carbon already emitted in the air, and the amount of human-contributed environmental destruction, is too vast. That nothing can be done to reverse the damage that’s already occurred.

This thinking is faulty, as it only leads to inertia.

This what’s-the-point mantra will lead to our eventual demise. We must move forward. It is not too late and there are amazing sustainable initiatives being implemented across the globe, as well as countless missed opportunities created mostly by lack of knowledge and/or effort. The adoption of rapidly improving technology, business incentives aligned with environmental friendliness and social prosperity, shifting mindsets at the community level regarding consumption and production habits, and appropriate regulatory procedures in place can and will help mitigate the current climate crisis. No one stakeholder can “solve or fix the climate crisis” alone, a collective group effort is needed. The future of humanity is dependent upon this.


The content of this article has been inspired by the teachings of an MIT Sloan Class, Course 15.657, taught by Professor Nicholas Ashford, “Technology, Globalization, and Sustainable Development.”

*To overshoot means to go too far, to grow so large so quickly that limits are exceeded. When an overshoot occurs, it induces stresses that begin to slow and stop growth. The three causes of overshoot are always the same, at any scale from personal to planetary. First, there is growth, acceleration, rapid change. Second, there is some form of limit or barrier, beyond which the moving system may not safely go. Third, there is a delay or mistake in the perceptions and the responses that try to keep the system within its limits. The delays can arise from inattention, faulty data, a false theory about how the system responds, deliberate efforts to mislead, or from momentum that prevents the system from being stopped quickly” (Limits to Growth, 1972).