Sustainable Solutions to Poverty

In this entry I have two recent experiences to write about. This weekend I attended the Net Impact Conference in Philadelphia, PA. I had the opportunity to attend a variety of panels on topics ranging from microfinance to “greenwashing.” In addition, last week at Haas the Net Impact club hosted the second in our Capitalism Next Speaker series. The topic of the session was how private enterprise can sustainably fight poverty in emerging economies.

During these two events, I started thinking about sustainability in a new way. We hear a lot about how companies can make their products more sustainable by reducing packaging or using recycled materials. We also frequently hear about how homes and business can become more sustainable by using better insulation, adding more natural light, and using environmentally friendly materials. But we don’t often think about how aside from products and buildings, the structure of the organizations we create must be sustainable for them to truly succeed. Obviously with respect to the core operations of for-profit businesses this is intuitive. If a business consistently spends more money than it takes in, has trouble paying its suppliers, and treats its employees miserably, the business is likely on a fast road to failure. However, many organizations whose mission is to address poverty, whether the philanthropy arm of a large company or an independent non-profit, are recently realizing that creating a sustainable organizational model can drive extremely successful results. It’s the mentality of teaching a man to fish rather than giving him the fish to eat, so that he can feed himself after you row your boat off into the sunset. This week I have seen evidence that more and more organizations are developing innovative, creative, and sustainable models to address social problems.

On Saturday at Net Impact, I attended a session about measuring the business value of social impact led by Jason Saul, the founder of Mission Measurement. Mr. Saul consults with large companies that want to drive better results from their corporate philanthropy and social responsibility programs. The old way companies looked at these efforts was to do less bad (i.e. pollute less) and use their foundation to do good deeds that were generally unrelated to their profit making endeavors. The budget for these traditional corporate foundations could find themselves at the chopping block during challenging business environments. Such philanthropic efforts were not sustainable because at the end of the day they did not add business value. The emerging trend in CSR is to solve social problems by generating business value. Mr. Saul gave the example of Kraft Foods, which began issuing microloans to Latin American entrepreneurs to open small stores. These store owners then have the option of stocking Kraft products. The communities in Latin America win because new jobs are created. The entrepreneur and his family win because they achieve a higher standard of living. Finally, Kraft wins because they have created a new distribution channel in a region where they had not previously sold product. Responsibility programs that drive shareholder value will be more sustainable and less likely to face budget cuts. Why would Kraft cut their microloan program when it increases their revenues by opening a new market?

At Capitalism Next, I learned about how for-profit social ventures are creatively addressing poverty for the 72% of the world’s population with a total family income under $3,000 per year, also called the “bottom of the pyramid.” Katie Schmitz of water health international, a profit based organization that provides clean water for communities lacking access, made an interesting comment during the session. She said that the challenge with communities relying on the generosity of donations to meet basic needs is that funding levels are subject to fluctuations caused on philanthropic trends. As Africa has become the “it” region for philanthropists, developing nations in other regions of the world have seen money for their communities dry up. Profit based organizations that address poverty are more sustainable and can continue to meet the needs of the community when the non-profits shift their funds elsewhere. Families at the BOP are willing to buy clean water, and WHI has found a way to provide that water cheaply and profitably. With access to clean water, families then experience less illness. Since physical labor is the primary source of income for these families, good health increases earning capacity. Families win because they experience less illness and earn more money. WHI wins because it earns a small profit off the water it sells.

My last example strays a bit from the two above but was a trend I found very interesting. At Net Impact I attended a panel on the role for for-profit businesses in conflict regions. I learned that multi-national organizations operating in conflict regions are finding ways to make their business operations in those regions more sustainable. Generally companies building operations in conflict regions don’t intend to make the region more unstable. It is common for multi-nationals support programs to reduce poverty in those communities. However, as NI panelist, Melissa Powell from the UN Global Contract mentioned, “the road to hell is paved with good intentions.” To address this, the UN has developed a resources guide to teach multi-nationals how to improve their daily business operations in these countries. For example, the UN encourages the companies to create sustainable relationships with local communities and governments by partnering with them. In the past, some multi-nationals with good intentions built infrastructure for the community. But without government participation these institutions were susceptible to collapse, especially if the multi-national were to leave the region. It is far more sustainable to partner with the government so that the government will build schools, hospitals, and other infrastructure. Obviously most businesses operating in conflict zones are doing so for self-serving, rather than philanthropic reasons. Multinationals would not be operating in these regions if they did not have a powerful reason to do so, such as needing access to valuable natural resources. But bringing business operations to former conflict zones can be an effective way to grow the economies of those areas and promote stability if multinationals operate in a sustainable way.

I think it is wonderful that organizations are finding new, sustainable ways of addressing poverty. The creativity of the social entrepreneurs driving this change by founding their own organizations or by influencing the actions of existing organizations is truly inspirational to me. While I don’t believe that all poverty initiatives should be self-serving or generate a profit, and I definitely believe there is still an enormous role to be played by non-profit organizations helping our world’s poor, I find the growth of innovative approaches to addressing poverty to be an exciting phenomenon.

Who Knew Green Wine Could Taste This Good?

Last weekend, I toured two eco-friendly wineries in nearby Napa, California. From my blog entries you may have the impression that all I do is tour “green” businesses. Yes, I do attend actual classes here at UC Berkeley. But as my grade on the upcoming finance midterm is bound to demonstrate, I have definitely been taking advantage of the extra-curricular activities.

We visited two wineries:

• CADE is a new winery located in the Howell Mountain appellation of Napa. Still under construction, CADE has been open to visitors for just two months. The winery is being constructed with recycled materials including walls of fly ash “concrete,” denim insulation (recycled from old jeans), and recycled plastics that resemble wood. CADE is pursing LEED Gold certification for its buildings and is using sustainable farming methods in the production of its grapes.

• Founded in 1982, Peju is a familiar site along Napa’s highway 29. In 2006, Peju’s owners installed a 126 kW solar system on the roof of the winery. Peju prides itself on the organic and sustainable farming methods they use to grow and farm their grapes. Our tour at Peju was unique. After an overview of the winery and a tour of the grounds, the owner of Akeena solar, the company that installed Peju’s system, taught us about solar energy. Afterwards, Sara Fowler, Peju’s head wine maker gave us an overview of the organic farming methods used at Peju.

I want to reflect on two interesting themes I noticed during my winery visits.
First, wineries face tradeoffs between the unique needs of their business and existing certification programs. In this way, the wine business is similar to the hospitality industry. During my visit to The Orchard Garden hotel, I noticed the tradeoffs between one person’s evaluation of what truly makes a product or service “green” versus the one-size-fits all recommendations of a certification board. While CADE and Peju are using organic and sustainable farming methods for their grapes, they are not producing organic wine. Sara Fowler from Peju explained that to have wine certified as organic, it must be produced without the use of sulfites. However, without this ingredient the wine simply isn’t high quality. Wineries aren’t willing to commit product suicide by compromising the quality expected by their customers in favor of eco-friendly production methods. As a result, they go down the path of sustainability, but not far enough for organic certification. Because ‘organic’ is not on the label, customers can’t distinguish between a winery that grows organic grapes and one that uses no organic farming techniques whatsoever. In my mind this raises a question: Should certification programs be developed that reflect the unique needs and constraints of different industries?

On the other hand, creating too many certification programs or bending the rules of a single certification program for different industries can be confusing and misleading for consumers. A great example of this is frozen meals that are certified organic under USDA guidelines. The frozen food industry successfully petitioned the USDA to allow it to include many non-organic chemicals and preservatives in their frozen meals. They claimed that without such chemicals they would not be able to produce organic frozen dinners at all. However, many consumers don’t realize that when they buy a frozen meal labeled “organic” they are purchasing many of the chemicals they probably hope to avoid. Plus it seems unfair to require the exclusion of certain chemicals in some organic products but not others.

A second theme was the carbon footprint implications of creating a new, “green” product versus using an existing, already manufactured product. I’ve read that when a family disposes of their Hummer to purchase a Prius, unless a new car was already needed, it takes 7 years of fuel-efficient Prius driving to equalize the carbon footprint caused by manufacturing the new car. Something similar could be claimed about solar panels. Solar manufacturers estimate that it takes between 4 and 7 years of operation to equalize the carbon footprint created by the manufacturing and distribution of the panels. However, I don’t think we should write off solar for several reasons. First, while it may take up to 7 years for solar panels to become carbon neutral, their expected lifespan is 25-35 years. Next and very important, panels on residences and business reduce demand on the power grid and even contribute more power to the grid. As the U.S. population grows demand for energy increases. Thus the footprint of solar installations can’t just be compared against the status quo but against the presumably very large carbon footprint of building new power plants to meet increased demand. Finally, in business school we learn about the experience curve. As companies produce greater cumulative volume of a product over time, the cost of making each unit decreases due to increased experience manufacturing, marketing, and distributing the product. I wonder if there is a similar carbon experience curve. As more solar panels are made and companies become more efficient at their production, the carbon impact of solar panels could decrease.

What it means to be green...

This week, I had the privilege of touring San Francisco’s Orchard Garden hotel, California’s first LEED certified hotel. Leading our tour was General Manager, Stefan Muhle, who has been active with the property since conception. Comparing Orchard Garden to Arterra, the LEED certified condo development I toured several weeks ago; there were both similarities and differences. Obviously, being a hotel, the builders and managers of Orchard Garden face some unique challenges. However, there were two striking similarities. First, similar to the low expense of LEED certification at Arterra, building to LEED standards cost only $100,000 extra on a project totaling $21 Million. Secondly, though marketing the property as a green hotel gives it a competitive advantage in terms of increased publicity and high occupancy rates soon after the hotel opened, Orchard Garden is not able to charge a premium for each room.

Designing and operating an eco-friendly hotel involves tradeoffs. As Mr. Muhle walked us through the hotel, it became evident to me that he faced many tradeoffs between the requirements of official certification programs and his own judgment of green products and services. Certification rules and guidelines do not always guarantee a product or service is actually the best environmental choice. While some products or service providers may have met the requirements of certification programs, the OG team often decided the requirements were not enough, and went further to be more ‘green.’ There is a difference between being green on paper and green in spirit. Some examples:

• The Orchard Garden team wanted their restaurant to represent the ‘green’ ideals of the hotel. One way to do this would be to serve only foods certified as organic. However, Mr. Muhle and team determined that it was more important to serve local, in-season food, and after those requirements are met, serve organic food when possible. Many local farmers grow food that is pesticide free, however due to the effort and expense required to pursue organic certification, the growers do not do so. Thus, the OG team is using their own discretion to determine what it means for food to be ‘green’ rather than strictly following guidelines set out by organic food certification organizations.

• Green Seal encourages hotels to use environmentally friendly detergent for their laundry. However, the nearest such provider was extremely far from the hotel. The OG team determined it was decidedly not green to truck their laundry so far each day. Consequently, they partnered with a nearby vendor that agreed to change detergent for the Orchard Garden. By using the first vendor, the OG may have technically met the requirement for green certification, but it was their personal initiative that really 'greened' the hotel.

• Mr. Muhle and the Orchard Garden team had to decide how to ‘green’ the toiletries hotels provide to the guests. Green Seal encourages hotels to use mass dispensers, which do not maintain the image of a high-end hotel. Mr. Muhle also explored compostable containers out of corn, but the team decided that it was not green to use corn in packaging when so many people lack sufficient food. Finally, they identified a local manufacturer of shower products that worked with Orchard Garden to create a 360 recycling program for the bottles.

The owners, architects, and operators of the Orchard Garden also had to make tradeoffs because of the cost, quality, and availability of sustainable materials. For example:

• Existing sustainable wallpaper was not washable. Because guests often scuff the wall with their suitcases, it is critical that hotel staff be able to wash the wallpaper to maintain the hotel appearance.

• Organic cotton sheets are not durable enough to withstand commercial use. Mr. Muhle has continued to test new brands of sheets, including those containing bamboo, without success.
  

• The team had wanted to place solar panels on the roof; however, the roof was too small to accommodate solar panels in addition to the generator, chiller, and everything else needed there.

Other sustainable elements of the hotel included:

• The hotel has European key card systems, where after opening the door, guests must insert the key card into a special slot to activate the lighting. When guests leave, because they must take the key, electricity is automatically turned off.
  
• Partitioned waste paper baskets in room allow guests to recycle their waste. These are not currently available commercially so the Orchard Garden team designed their own small, three section waste baskets, with separate bins for paper, bottles, and non-recyclable trash.
• All wood used in building materials and furniture is Forest Stewardship Council certified.
• Curtains, cover-lets and other in-room fabrics are machine washable to avoid the chemical-laden dry cleaning process.
• Carpets are made from recycled materials.
• Citrus based cleaners are used by the housekeeping staff.
• Recycled toilet paper.
• Each guest room contains vents to supply fresh air to room the room since San Francisco building codes require that windows be sealed.
• VOC free paint used throughout the hotel.
• CFC and LED lighting

Another challenge the OG team faces is measuring the success of the hotel in reducing its environmental impact. While some metrics exist and are very useful, others are lacking. For example, OG management measures the electricity saved due to the green hotel design and energy saving features. OG Managers also measure the amount of garbage diverted from landfills due to their recycling measures. However, some ‘green’ benefits are more difficult to measure. For example, staff receives PTO rather than dedicated sick days, so it is difficult to tell if employees experience less illness by cleaning with organic products.

Some good news is that environmentally friendly products and building materials have improved in selection, availability, and quality in the two years since the hotel was built. Because the Orchard Garden team is committed to being ‘green’ both in spirit and on paper, they continue to evaluate these new products for use in the hotel. For example, when a better shower head system was introduced, Mr. Muhle upgraded all of the showers in the hotel. I was truly impressed with the dedication of the owners, builders, and management of the Orchard Garden to environmentally friendly practices. The Orchard Garden is a beautiful hotel and the guest rooms are extremely serene. I would be thrilled to stay in a hotel such as this one!

Here are some links if you want to learn more about the hotel, Green Seal, or LEED:

http://www.theorchardgardenhotel.com/

http://www.greenseal.org/programs/lodging_projects.cfm

http://www.usgbc.org/DisplayPage.aspx?CategoryID=19

Post-Financial Crisis Regulation: Stultifying Innovation in the Name of Safety?

This week, Michael Callen, CEO of Amcap, a financial services company headquartered in NYC, spoke at Haas about the financial crisis. I can't do justice to his entire speech in this blog, but I did want to comment on one point he made toward the end. Mr. Callen spoke about government regulation, a theme touched upon by many recent speakers at Haas. What I found striking was that even in light of the tremendous loss of wealth and jobs over the past few months, Mr. Callen was adamant that government regulation is not needed.

Mr. Callen said, "Regulators will not be capable of doing anything but stultifying innovation in the name of safety." He went on to say that he has never seen regulation be effective, and "markets get it wrong, but they correct. Regulation is very slow to change."

Of course like any speaker, Michael Callen comes with a personal bias. As CEO of a financial services company, Mr. Callen could experience personal financial gain or loss depending on goverment's policies. However, he does have a valid point about government regulation's speed to change. In corporate America, I wasn't elected to my position, and the number of people I had to influence to make change was relatively small. Even in my role as a business analyst, the choices I made and the decisions I helped to facilitate could influence big dollars on the bottom or the top line. My job often required convincing my business partners to change their processes in response to new business realities. Unlike a politician, my arguments for change were not reduced to sound bites. Often I feel like politicians who recognize that an existing policy has good intentions but needs to evolve to be effective have a difficult time doing so because their aims can be distorted. Suddenly the politician with good intentions and great ideas is against children, the economy, the environment, Joe the Plumber, or American manufacturing. And who would re-elect a politician who doesn't stand for our children? It is difficult to change a law from good to better or to update a law that was good in the past but needs to evolve to be effective.

Our government failed to recognize the threat presented by CDOs, highly leveraged banks, and non-traditional bank activities. How could we regulate to prevent a threat we didn't even see? Now that the crisis has occurred, I agree with Mr. Callen that to some extent the market will self-regulate. Each financial institution will seek to minimize its own exposure to such risks in the future. However, I disagree with Mr. Callen that no regulation is needed. In my mind, perhaps the role of government should be to better facilitate this self-regulation by requiring more transparency.

Regardless of what policy is implemented, in 18 months I need another job, and thanks to a pricey business school education, I will have some big loans to pay. My fingers are crossed that the economy turns around by then!