Mark Brandon is the Managing Partner of First Sustainable (, a registered investment advisory catering to socially responsible investors. In addition to Socially Responsible Investing (SRI), he may opine on social venturing, microfinance, community investing, clean technology commercialization, sustainability public policy, green products, and, on occasion, University of Texas Longhorn sports.

Wednesday, September 27, 2006

Green Net National Product

Discussing economic statistics and accounting principles are usually not useful for driving blog traffic and newsletter subscriptions. However, if investment decisions on the corporate, government and individual levels are based on the numbers (and they are), and the numbers have a serious flaw that ignores environmental degradation (and they do), then we have a problem. If the world truly wants to move to sustainability, one of the most effective measures we can adopt is an update of economic statistics and accounting measures.

One of the most widely cited economic statistics in Gross Domestic Product (GDP), which as the name suggests, is supposed to be a reflection of the production occurring within the borders of a country. To illustrate, pretend that we have two countries: Country A, whose chief export is database software, and Country B, whose chief export is aluminum cans. If Country A sells $100,000 worth of software, its GDP goes up by an equivalent amount. If Country B produces $100,00 worth of aluminum cans, the same happens. However, Country B's process of making those cans destroyed several acres of cropland because aluminum extraction is a dirty business. It does not take a ph.D in economics to see that these two undertakings are not equal in benefit to its country. Yet, GDP measures them equally.

To use a real life example, many small African countries have experienced an explosion in GDP because their (often corrupt) rulers have made deals to develop the oil infrastructure. The resulting oil sales explode the country's GDP. But, when you consider that the lion's share of the profits either went to foreigners or corrupt rulers, what do you have? The country liquidates its natural resources, thus becoming poorer by one measure, while not that many people share in the wealth. A recent Fortune article cited the case of a gold and copper mine which resulted in huge gains in GDP for Papua New Guinea. Much of the income went to BHP Billiton, while the indigenous population was left with a poisoned river from mine tailings, destroying the livelihoods of at least 40,000. Most would argue that the country is poorer for the experience, yet national statistics do not reflect it.

This phenomenon works at the corporate level, too. For the last two years, the media has focused on multi-billion dollar quarters for oil giants such as Exxon (NYSE:XOM), Chevron (NYSE:CVX), and British Petroleum (NYSE:BP). Yet, the stock prices have not really reflected the exuberance in their earnings reports. The reason is that they are only liquidating reserves that were already carried on their balance sheets. They have not been able to replace these reserves with new oil field finds (the recent discovery of a giant Gulf of Mexico field excepted). Shell Oil (NYSE:RDS.B) was embroiled in an accounting scandal a few years ago over the exaggeration of proven reserves. Again, earnings reports are not telling the full story.

Another mercilessly flogged number is the trade deficit. Here, the equation tries to make two countries look like individuals. For the U.S., much of the public is convinced that we are becoming poorer because of our trade deficit with China. For example, if China sells us a $1,000 laptop, the trade deficit goes up $1,000. However, probably 90 percent of the profits from this $1,000 went to one of a few U.S. behemoths, Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), or Apple (NASDAQ:AAPL). Which country is better off? The more useful measure is what these countries (or companies) are doing to add value to the raw materials. Apple has had a significant trade deficit with its component suppliers since the company's founding, but that is not a useful measure. It is useful to know what Apple does to add value to its motley collection of components. The same should be evaluated when two countries are being compared.

Despite the apparent shortcomings, economists and the media continue to use them only because they have always used them. It is also convenient to keep compiling it the same way, so as to compare it with last year's figures. A movement is afoot to more adequately account for environmental degradation. One of these measures, Green Net National Product (GNNP), not only adjusts for environmental degradation but also for the flow of earnings. This would not only mitigate the flaws in GDP, but also the trade deficit numbers.

Among its chief proponents is The World Bank. They have provided an excellent 235-page manual "Estimating the Cost of Environmental Degradation", which is free. Warning: this publication may induce sleep.

Tuesday, September 19, 2006

MIT Technology Enables Far-Out Wind Farms

Offshore wind turbines have huge promise. Just a few miles offshore, the winds are far more steady than onshore, and turbine size (which has a proportionate effect on power generation) can be increased dramatically without being an overly burdensome eyesore, noisy, or dangerous to birds. Yet, despite the promise, NIMBY-ism has prevented construction of large-scale wind farms. Most notoriously, a proposed farm off Massachusset's Cape Cod has met opposition by rich coastal homeowners because of the blight it would bring to their ocean views. Although conservatives like to point out that liberal icon Edward Kennedy is opposed to the construction, NIMBY-ism in Massachussets is mostly bi-partisan.

The National Renewable Energy Lab, along with MIT Researcher Paul D. Sclavounos have unveiled a new design that would enable locations much farther out to sea, and thus out of sight. The system relies on tethering the turbines to concrete blocks on the bottom of the ocean, up to depths of over 600 feet. Currently, wind turbines are in relatively shallow water and built on a sea-floor foundation, similar to a bridge or oil platform. Sclavounos claims that having the turbines further out will double the power generation because of the steadier and faster winds farther out to sea. However, their press release does not mention what kind of power losses would occur when transmitting longer distances.

Although birds may find their migratory paths still interrupted, these offshore turbines are much less likely to kill them. First, the size of the turbines means that the blades turn more slowly so that the chances of striking a bird mid-flight is much decreased. Second, whereas near-shore and on-shore wind turbines are frequently mentioned as bird-killers, far fewer flocks of birds are found that far offshore.

As for sea life, the best evidence shows that wind platforms create an artificial reef that is beneficial. Oil platforms have become havens for ocean eco-systems. Wind platforms would most likely be un-manned and therefore, less polluting. Both types create a haven for sea life from commercial and recreational vessels.

The vast amount of ocean real estate, available for a relatively benign use makes this breakthrough much needed. Now, we just need policies that can allow for rapid construction and testing.

Wednesday, September 13, 2006

Dueling Viewpoints About the Future of Retirement Savings

While Reading my Sunday Austin American Statesman, I happened to notice two stories that offer two wildly different perspectives on the state of Americans' retirement dilemma. In one story, Pension Plans Go By the Wayside (syndicated), LA Times reporter Jonathan Peterson bemoans the abandonment of the traditional pension plan by large companies. As the story goes, corporations are greedy entities for allowing workers to be responsible for their own retirement. The intimation was that the public is not equipped to handle this responsibility. Yet, on a facing story Long-term 401(k) savers sit on six-figure nest eggs, the Investment Company Institute cites statistics that 401k participants who save for only six years now have an average balance in the six figures. This represents an increase of 50 percent since 1999, despite the most brutal market correction in a generation. Although it is politically popular to berate corporate America for abandoning the traditional pension, for several reasons, it is the correct course of action. However, this opinion also comes with a few qualifiers.

First, let's differentiate the companies who are "abandoning" the pension plan. The first kind, companies such as DuPont (NYSE: DD)and IBM (NYSE: IBM), are halting new participants into their pension plan, slowly buying out the pension so as to guarantee benefits for the current participants, and shifting focus for new participants to the defined contribution (401k and 403b) plans. Nobody is losing out on promised benefits. These companies are wholly different than the companies, such as Bethlehem Steel and United Airlines, who dumped their pension plans onto taxpayers because they over-promised benefits and failed to contribute enough to meet them. Instead, they opted to use bankruptcy laws to turn over their pension obligations to the federally backed Pension Benefit Guarantee Corp, itself a woefully misguided bureaucracy. The latter group rightfully deserve our scorn.

Pensions have become a relic of yesterday's economy for the following reasons:

  1. Over-promised benefits. Taking a cue from our federal government (though still not nearly as brazen), corporate executives have not shown the backbone to either keep a lid on promised benefits or keep contributing enough to meet them. Managements in the auto and airline industries are notorious for buckling under to union pressure to up benefits because someone else will be in charge when the bill comes due.
  2. Employee Turnover. In the postwar "Company Man" era, it was far more common to spend one's entire career at one company. In many cases, the amount of benefit depends on years of service. Since the average adult now changes jobs every 5-6 years, almost nobody is getting the maximum benefit of a pension plan.
  3. Pensions affect a company's earnings. Stay with me on this. GAAP rules require that a company report investment gains or losses on its earnings statements. This not only unfairly ties a company's operating performance to the vagaries of the market, it opens up the plan funds and the earnings reports to manipulation. Verizon (NYSE: VZ)is one company that used investment gains to essentially manufacture earnings. They did so by just changing some basic assumptions on their plan performance. Presto! A quarter with no earnings suddently had bountiful earnings.
  4. Size has become a problem. Despite their much publicized troubles, General Motors (NYSE: GM) has a pension fund about 6 times larger than the market cap of their own company. AND IT IS STILL UNDERFUNDED! Any investment manager knows that size is the enemy of returns.
  5. Lack of Appropriate Allocation. Pension managers make decisions based on their upcoming obligations in the next 10-15 years. This means that they are managing for people in their 50's. If you are in your 20's, 30's, or 40's, you would probably benefit immensely by having a more aggressive allocation, but since you don't, your investment performance will likely underperform.
The 401k data clearly shows that participants can manage effectively, if only they would. Nationwide, only about 17 percent of eligible employees are both participating in their plan, and making the necessary allocations that are appropriate to their age and risk tolerance. This is where the political hand-wringing needs to focus. The problem is entirely fixable if companies and government focused on educating workers to make the right decisions.

Friday, September 08, 2006

Cynical House Debate About Horse Consumption Ban

This post is for the animal rights crowd

In the eighth century A.D., Pope Gregory III banned the consumption of horse meat. Historians debate whether the ban was the result of a continent-wide horse shortage, or that the practice resembled pre-Christian pagan rituals. Today, even though horse meat is as nutritious as any hoofed animal, in plentiful supply, widely consumed in much of Europe and Asia, and quite tasty (so I've heard), Americans still adhere to the religious taboo. Yesterday, the House of Representatives voted to ban the slaughter of horses in the U.S. for human consumption. Almost all of the slaughtered horse meat is exported to tables abroad. As is typical of our elected heroes, they took a complex issue and tried to make it into a "my-opponents-love-to-club-baby-seals" mockery of the issue at hand. A wonderful report from NPR can summarize.

Animal right activists could justifiably line up on either side. On the one hand, the U.S. Humane Society claims that the 3 horse slaughter plants (all foreign-owned) in operation on domestic soil are unjustifiably cruel in their operation. They allege that old and feeble animals are transported in cramped conditions to the plants. Since federal mandates require that the animals be unconscious, a metal rod is then injected into their brains before they are hoisted by their hind-quarters to a hideous machine that then cuts their throat. Some claim that not all animals are unconscious. On the other hand, veterinary groups oppose the ban because, in their opinion, slaughter is more humane than growing old and sick. As any horse owner knows, care and feeding of a horse is not an inexpensive pursuit. True, we would wish that humanity would treat our animal companions better, but we know that tens of thousands of animals are discarded after their usefulness ceases. Even former Kentucky Derby winners have been rendered into food.

Curiously absent from the debate was the question of commercial interests rounding up wild horses on public lands for sale to the slaughterhouses. Even more absent was the chance to talk about the inefficiency, corruption, and environmental damage caused by all meat consumption. Those would be worthwhile debates, even considering other pertinent issues in front of the house, like... oh, say... the Iraq War, the Hezbollah-Israeli War, nuclear proliferation, social security, and health care. Instead, we just had representatives recalling their days of rugged, outdoorsy horse companionship. So much for the substantive debate.