Browse posts by category
Lessons from Kraft’s Cadbury takeover
Jonathon Porritt, February 12th 2010, Business, Finance, Forum founders, General
So the first blow has fallen on Cadbury’s from its new owners, Kraft.
The Keynsham plant near Bristol (pictured) will close, despite the fact that Kraft promised to keep it open (that was actually a bit weird, as Cadbury itself had announced that Keynsham would be closed at some stage in the future).
And the fear, of course, as much in the mind of Peter Mandelson as in the minds of all Cadbury’s workers, is that this is just the first of many cuts that will be brought forward during the next few years.
I haven’t written about this since the takeover. Apart from the odd sardonic chuckle as the process unfolded (with that arch-globaliser Mandelson shedding a few crocodile tears at another ‘great British company’ being gobbled up by ‘predators’ like Kraft – or Warren Buffet (who owns about 9% of Kraft) complaining that it’s a really bad deal for Kraft shareholders, however good a deal it might be for Cadbury shareholders), it’s been too bloody miserable.
The optimists would have curmudgeons like me cheer up a little. They point to the pledges made by Kraft to stick by Cadbury’s ethical and Fairtrade commitments. Just before the Cadbury’s Board accepted the bid it announced that Green & Black’s would be moving its entire range to Fairtrade by the end of 2011, which elicited the following emollient words from Kraft:
“We strongly support certification as a way to improve sustainability in cocoa farming, so we welcome this step by Green & Black’s. Cadbury and Green & Black’s have proud histories in ethical sourcing, and if our offer is successful, we look forward to maintaining this heritage.”
Just so long as you ignore the unmistakable sound of grinding teeth behind the reassuring words, perhaps that really is something to be optimistic about.
But it is still a wretched outcome. And surely a complete failure on the part of Cadbury’s shareholders to tell the difference between ‘a good price’ and ‘lasting value’.
Roger Carr, who has just stepped down as Chairman from Cadbury, having felt ‘obliged’ to recommend to shareholders the offer of £11.7 billion (up from the opening bid of £9.8 billion in September last year) has now weighed in with some ‘radical ideas’ to ensure that something similar doesn’t happen again. He has suggested raising the ‘victory margin’ from 50% plus one share to 60% plus one share, and that simultaneously there should be a rule that those who bought shares during the course of any takeover battle would not be permitted to vote until the battle was over.
Useful ideas. But the lack of any genuinely radical ideas during the takeover battle was very noticeable. “This is just the way it is with markets”, as one commentator put it. Indeed! Which is why we go through the same nightmarish process with every single takeover proposal.
Why don’t we, for instance, have more John Lewis look-a-likes in the UK? The John Lewis Partnership is hugely admired even by people in the City – even if they don’t really approve of its ‘bizarre’ employee benefit Trust. But this example has been followed by very few companies over the years. As is the case with Scott Bader (a successful chemicals company), and Tullis Russell (a successful paper company in Scotland).
But there is still Royal Mail, which currently has only one shareholder (the Government), which would make it easier to think of some kind of employee ownership basis. Allan Leighton, Royal Mail’s Chairman, has indeed hinted at the possibility of some kind of employee share-ownership.
The interesting thing is that employee-owned companies regularly outperform those in the FTSE All-Share Index. Over the last 17 years, employee-owned companies have outperformed FTSE All-Share companies each year by an average of 10%. In the third quarter of 2009, for instance, employee-owned companies’ share prices were up 27.6% compared to FTSE All-Share companies share prices, which were up 21.3% over the quarter.
But we are still so stuck in our wretchedly unsustainable ways when it comes to ownership structures within the capitalist economy.
A step closer to sustainable financial markets?
Alice Chapple, January 27th 2010, Finance
President Barack Obama has shaken up the banks with his plans for radical reform just as they seemed to be settling back into their cosy business-as-usual ways, but it’s just a small step in the right direction.
No doubt the banks will respond with warnings over the coming days, weeks and months that regulation of their activities or their remuneration policies would hurt us more than it does them - by damaging our pensions and the tax take. If we want the financial system to deliver a sustainable future, we should be prepared to pick those arguments apart.
Obama wants to see the banks where you and I put our money prohibited from engaging in certain risky activities, which can make a lot of money in the short term but which can put the their entire finances at risk over a longer time-frame. He singles out hedge funds, private equity and proprietary trading.
He is right to try (however difficult it may be) to distinguish between the ‘oil’ that makes the system run smoothly - basic banking services - and the speculative ‘cogs’ that put the system at risk and only create short-term returns for the finance sector itself.
But the principle could be taken further. The finance sector's short-term perspective on money-making stores up all sorts of other long-term risks for us as tax-payers and future pensioners, by overlooking factors which will have a major impact on our economies like climate change and the depletion of scarce resources like clean water, fertile soils and forests. Unless our financial system takes these risks into account, and begins to value these assets better, the system will collapse and our 'wealth' will collapse with it. This needs to be part of the conversation.
The discussions on financial reform provide an opportunity to shine a light on the sector's activities. Which parts deliver value for shareholders and the wider public in a stable and sustainable way and are required for the system to run smoothly? Which only serve to create short-term returns for the finance sector itself?
If we can have an open debate of this kind, we may emerge with a financial system that manages risk, values the things that matter and provides capital to the activities that can deliver a sustainable future.
Read more about Forum for the Future’s work to create a sustainable financial system.
Ethopia’s take on carbon tax funding might win in Copenhagen
Jonathon Porritt, December 16th 2009, Climate change, Finance, International, Leadership
Everyone but everyone out there in Copenhagen today agrees that a precondition of reducing emissions of greenhouse gases is to ‘get a realistic price on every tonne of CO2 just as soon as possible’.
Nick Stern’s report on the Economics of Climate Change rammed home this point so effectively that some misguided economists would now have us believe that’s all we need to do. Not so.
But it’s true that nothing much will happen without it.
Listen to Jonathon's phonecast of this blog
Many people (including most EU Heads of State) still think the fastest route to getting a realistic price for CO2 is to create a global trading scheme – like the EU’s Emissions Trading Scheme, scaled-up, or the proposed ‘Cap-and-Trade’ scheme in the US.
But more and more people are now losing confidence in the trading route. Those with long memories recall that it was only included in the Kyoto Protocol in 1997 as a way of keeping the Americans on board, with most EU countries actually feeling very queasy about it at the time. Ironically, when the Americans subsequently pulled out of the Kyoto Protocol, the EU was left holding the trading baby! Twelve years on, it still looks like a pretty sick little baby.
Many economists have long been of the opinion that it would make a lot more sense to tax carbon, levying a charge on the carbon content of all energy sources upstream at the point where they enter the supply chain. And more and more business leaders are coming to that same conclusion – on the grounds that they would then know what the cost of carbon would be over time, ratcheting up from a low base line to ‘a realistic’ level (i.e. behaviour-changing and innovation-driving!). This would be brought forward as soon as economies could cope.
Such tax would simultaneously generate a shed load of revenue, some of which could then be used to provide the funding required for developing countries.
In that regard, we know one thing for sure: in the current economic crisis, rich world countries are not going to be able to find big enough sums to provide the poor world with what they now need. As the EU Summit on Funding so clearly demonstrated last week – the funds just aren’t there.
So we need some new sources of funding. The current favourite in Copenhagen, being advanced by Ethiopia (on behalf of African nations) and warmly supported by Gordon Brown and Nicolas Sarkozy, is a mixture of taxes on aviation, shipping and financial transactions (the so-called Tobin Tax) – “get the bloody banks to pay for dealing with climate change”, as the populists put it!
Forgive the pun, but this one could just fly! If Gordon’s on board (as a man who refused to countenance any discussion about the Tobin Tax over the last 12 years) then anything could happen. And the truth of it is that there isn’t any alternative anyway, so we might as well bite the bullet and get on with it.
Insurance industry takes action on climate change
Alice Chapple, November 26th 2009, Finance
The worst floods in Cumbria for decades have devastated people's homes and businesses. As the clean-up operation begins, communities are counting the cost. Not just in terms of property but also because of the effort required to revitalise a local economy with such damaged infrastructure. Insurers are counting the cost, too.
Heavy rainfall of the kind we have seen over recent days in Cumbria has always happened and will always happen, at irregular intervals. This specific event may or may not be the result of climate change. But insurers need to know whether these events are becoming more frequent and/or more severe. Otherwise they can't make the right decisions on what premiums they should charge, who and what they should cover, and what they should put in the small print of exclusions.
It is therefore not surprising that many insurance companies are supporting wide-ranging research into climate change. The members of ClimateWise, a global collaboration of leading insurers focused on reducing the risks of climate change, have committed to lead in risk analysis. Forum for the Future has just completed its review of the second year reports by the 37 insurance companies that make up ClimateWise, and found lots of evidence of this type of activity. The ClimateWise initiative does seem to have had a real impact on members' responses to climate change, particularly for those at the earlier stages of developing their strategy. Recognising the risks of climate change, ClimateWise has also produced statements calling for governments to implement strong and immediate measures to reduce greenhouse gas emissions. And members are measuring and reporting on their own emissions.
This is important progress. But insurers know that on current trajectories the risks of climate change will continue to increase, premiums will rise, and more and more risks will become uninsurable. They know that in the medium- to long-term this is a very poor recipe for growth in their industry. They know that preventing this will require changes in our carbon-intensive behaviour across the economy. So ClimateWise members understand the need to help drive these changes, through their interactions with government, with their customers and through their investments.
Events such as those we have seen in Cumbria over the last few days further underline the urgent need for action.
The ClimateWise report contains much more information about what ClimateWise members are doing, and Forum's recommendations.
Help us design sustainable capital markets
Alice Chapple, June 30th 2009, Finance
It’s less than a year since our entire financial system was on the verge of meltdown, yet I’m constantly amazed by how many in business and government seem prepared to ignore the fundamental flaws the crisis exposed.
We hear today that the British Banking Association is urging regulators not to tighten the rules on holding cash and capital for the time being, because this will impact on recovery.
And we are told that the remuneration package agreed for Stephen Hester, the CEO of Royal Bank of Scotland is acceptable because it is based on the 'long-term' performance of the bank over the next three years.
These events provide dismal confirmation that little has been learned from the financial crisis and that the focus for most of our business leaders and for government is on getting back to 'business as usual' as quickly as possible.
No-one wants the painful recession to be prolonged. We all recognise the need to get RBS onto a strong footing so the bank can provide funding to businesses and we, as taxpayers, can start to get repaid.
But I find it mind-boggling that powerful people can assume that we can simply revert to the old models of unsustainable growth funded by ever-increasing credit and incentivised by inappropriate remuneration.
Forum for the Future's new publication, Rethinking Capital, challenges this assumption. Building on themes from Jonathon Porritt's booklet, Living within our Means, it outlines the key areas where the finance sector needs to focus its attention in order to avoid 'the ultimate recession'.
In our view, it is simply inappropriate to put the finance sector back together without embedding some really fundamental changes. The financial crisis showed how shaky the foundations of the finance sector are - in valuation of assets, assessment of risk, investing in a sustainable future. We have to rethink these foundations urgently before we can rebuild.
So we’re calling on people with an interest in the finance sector, whether within or outside it, to help us design practical steps that can bring about capital markets that deliver what society actually needs. We outline our ideas for action in Rethinking Capital, and we hope that this will help create dialogue around the changes required. We know from the financial crisis that the capital markets tend to be misaligned with the public interest. Now is the moment to rethink them.
Cutting carbon with smart finance
Will Dawson, June 19th 2009, Finance, Innovation
Smart, efficient finance has huge potential to help public sector organisations cut their carbon footprint cost-effectively, so it’s surprising it’s so little used at a time when budgets are under pressure.
We’ve set out to help councils and other public bodies meet their carbon targets for less money, and today we publish Smarter finance: how to get more carbon savings for your cash. This report shows how smarter ways of raising and using finance – like revolving funds and services companies – can make money go further, saving both carbon and cash.
We’ve gathered rare examples of pioneering initiatives from as far afield as Lithuania – where groups of tenants club together to fund energy efficiency measures – and we now know what is special and worth repeating.
For instance, Kirklees’ Re-Charge scheme loans householders money to install low-carbon technologies in their property, such as solar panels to heat water. It is successful because there are no interest charges and the money does not have to be repaid until the property is sold. The council only has to subsidise the interest on the loans and this costs around three times less per home than using a grant scheme.
In parts of Milton Keynes developers pay a levy into a fund to offset the carbon emissions from the use of new properties. The money is spent on local schemes such as insulating older homes which are much less energy efficient. It works because it is cheaper to save carbon in older homes than make new homes carbon neutral and it raises capital from the developers.
Perhaps most famous of all is Woking Borough Council and its service company, Thameswey Energy Ltd. Thameswey installs combined heat and power plants which supply heating and electricity to households, businesses and council buildings in the centre of Woking. It used just £38,000 of council funds to borrow £1 million from private investors. The story has been widely celebrated, yet there are few other councils establishing service companies.
Rather than wondering why Thameswey isn’t being copied elsewhere, we wanted to identify the replicable ingredients which allowed Woking to take this bold step in the first place. The answer is of value to all public sector organisations – it’s because the council leaders and executives actively supported innovation.
The most important lesson from Woking isn’t the technicalities of establishing a private CHP network, it’s that top-level leadership, which encourages staff to be inventive and take risks, can lead to exceptional, progressive solutions. Of course, thorough research, risk management and feasibility analysis are important too, but this release from the bureaucratic leash is a vital and, until now, overlooked success factor for smarter finance and cost-effective carbon savings.
We have used many more practical insights like these to develop ten success factors for getting smarter with finance, and a staged process for developing new initiatives which we'll use to work with public sector organisations as part of our Climate Finance project.
I’ve seen first-hand, whilst working in the European Commission, how creativity can be stifled by hierarchy and procedures. So when we launched Climate Finance at the Corporation of London earlier this year, I was delighted to see that UK public servants have such free-flowing enthusiasm, passion and creativity. After barely an hour of our ‘fantasy finance’ game we had developed new financial models to save carbon. These included a new service company which supplied water, heat and electricity to the NHS and invested in energy savings and generation across its estate, and a trading scheme for waste. The winner was a community-run social enterprise which generated energy locally and used the profits to provide insulation to households.
Many who joined us that day said that having a broad range of expertise in the groups was the catalyst to the success. This is why we are offering interested public sector organisations the opportunity to work with our advisory group to help them create schemes like this for real.
The public sector faces the prospect of a cash-starved decade, yet carbon reduction targets will stiffen. This recession is the opportunity to move from grant to pay-as-you-save schemes which generate returns. This sort of smarter finance is our solution and this report is a practical guide to making it happen.
In the future, public income will be as important as expenditure when it comes to funding carbon savings. “Cash out – cash in”, is the new way to save carbon.
Financing the rainforests
Alice Chapple, June 12th 2009, Finance
Today Forum for the Future is publishing a report which we hope will help governments and business to take urgent action to save the rainforests.
The Forest Investment Review was commissioned by the UK government, and sets out to shape thinking in the run-up to the UN’s conference on climate change in Copenhagen and beyond.
Protecting the world’s forests is a crucial part of the fight against global warming - deforestation and forest degradation account for around 18% of all global greenhouse gas emissions.
But the fact is that all over the world deforestation is driven by people’s need to make a living, whether it’s clearing land for subsistence farming or for intensive agriculture. So we have to find ways to reward people for looking after what is a vital global resource.
We’ve looked at how to finance the conservation of forests and generate sustainable economic development for the communities which depend on them. And we’ve looked at how government spending can unlock private investment to achieve funding on the scale we need.
The Forest Investment Review was commissioned by the UK's Department of International Development (DFID) and Department of Energy and Climate Change (DECC), which are heavily engaged in climate change discussions with other governments ahead of Copenhagen. The report will help inform government policy-makers, in both developed countries and in the developing forest nations.
It’s the work of a team of experts in finance and forests, brought together by the Forum to assess the different areas in which private sector finance can be mobilised. They’ve each contributed a chapter focussing on a different aspect of the issue, for example what might encourage big institutional investors like pension funds to invest in forests.
We’re publishing each chapter as a separate paper on our website and we plan to make them available as a full report in a few weeks' time.
Image: STILLFX
Asset managers begin to see climate change as business opportunity
David Bent, May 28th 2009, Finance
Mainstream asset managers - the people who decide how to invest pension funds and so on - are asking companies questions about climate change. This was the surprising fact I learnt at an event on climate change as business opportunity last week.
If you know your BEX from your IWEX from your NEMEX then you were probably at the SustainabilityLive! exhibition in Birmingham last week. The enormous hall in the NEC was given over to every variety of environmental technology business, covering Brownfield development (BEX), water and waste water (IWEX), energy management (NEMEX). The sheer number and variety of companies taking part was proof of the scale and scope of the environmental technology sector in the UK.
I was chairing a session in the Sustainable Business event on the business opportunity of climate change. One speaker was Adrian Wilkes, Chief Executive of the Environmental Technologies Commission. He showed how higher environmental regulation induces innovation and profitable businesses by contrasting the abject failures of the US car companies with the successes of their Japanese competitors. (A point we made about California in our publication with the ICAEW on Competitiveness and Sustainability.)
The other speaker was Stephanie Meier, the Head of research at EIRIS, the independent provider of investment research on sustainability issues. She had the surprising fact about fund managers. I had always been told that they weren't interested in sustainability, even the relatively hard and investment-critical facts about climate change. But no, they are increasingly asking 'what is the company's climate change strategy? How might a changed climate affect the business?'. At last! Apparently, the fund managers are looking to invest in the best-in-class performers, and the new sectors that will flourish as we move to a carbon-constrained world.
Other key points:
- climate change opportunity for a business is specific to that business (see Leader Business Strategies for more on this).
- there will be losers and winners. The losers will be incumbents who try to defend the status quo or are unable to change. The winners will be the businesses who really do innovate, and ones in emerging sectors. Obviously, we hope that the finalists of the recent FT Climate Change Challenge will all be winners.
- the opportunities are really uncertain. and therefore really difficult for organisations to know what to do. That is why we created a set of scenarios to help organisations understand their risks and opportunities, and plan for them in a strategic way.
I left Sustainabilitylive! in good heart that there is a UK environmental technology field ready to take us to a sustainable future profitably, if only we can get the right systems in place to accelerate the change we need.
Budget - missed opportunity?
Peter Madden, April 22nd 2009, Finance
Gordon Brown promised that this would be a green Budget. Does it merit such a claim? The chancellor had three main tools at his disposal to move the economy in a more sustainable direction – policy targets, taxes and spending.
On targets, this was the first Budget to contain legally-binding budgets for greenhouse gases. It is important – indeed a world first – for the UK to have such firm, long-term targets. Unfortunately, the government plumped for a 34% reduction by 2020, the lowest figure in the range of emissions cuts proposed by the Committee on Climate Change. The latest science suggests we need much tougher action, and we now have to ensure that our unilateral targets are ramped up as we negotiate with other countries.
Although the Budget increases overall taxation substantially, there was little sense of a strong move to increase tax on the things we want to discourage – like pollution and waste – and no real push to raise the price of carbon in the economy. The small fuel duty increase was welcome, but must be set against falling fuel prices. So, despite a desperate need to fill a gaping hole in government finances, there is still no serious green tax shift.
As far as spending goes, the chancellor clearly didn’t have a lot to give away. He announced £1.4 billion of extra low-carbon spending. This included an additional £375 million to support energy and resource efficiency in businesses, public buildings and households over the next two years, and £70 million for decentralised small-scale and community low-carbon energy. We have some of the least energy-efficient building stock in Europe. People pay through higher fuel bills and the planet pays through climate change. So, spending in this area – which is four times better in carbon saving terms than the next most effective measure – is very welcome.
Darling also promised a few hundred million to support low-carbon industries and advanced green manufacturing, such as wind. This is a welcome injection. We have the best wind and wave resources in Europe. We have high-tech engineering, and offshore skills from North Sea Oil. And green technologies are a growth sector – set to expand even during the downturn, so, investing in those technologies of the future where the UK has a comparative advantage is a sound move.
However, in the grand scheme of things, and considering the money thrown at dealing with the financial crisis, spending on averting the environmental crisis is still woefully inadequate. While all the announcements are welcome moves in the right direction, they just don’t go far or fast enough. The UK remains near the bottom of the global league table for green stimulus spending. And we are not yet on course for the transition to a low-carbon economy.
One hell of a week
Jonathon Porritt, April 20th 2009, Finance, Forum founders
This is going to be one hell of a week. Big announcement on industrial policy from DECC today, followed by the Budget on Wednesday. Most of the discussion will, understandably, be focused on the state of the public finances, budget cuts and projected rates of growth and unemployment, but despite all this the whole sustainability agenda is hanging in there and may even be rising in significance – not least because the Tories are back into 'proactive mode' on sustainability issues.
Last week, the shadow chancellor George Osborne laid down his marker as to what a Green Budget would need to look like to create any kind of real forward momentum. The 10 main action points (some of which bear an uncanny resemblance to some of the principle recommendations in the Sustainable Development Commission’s advice to government on building a low-carbon, sustainable economy!) cover a wide range of energy efficiency, renewable energy, green technology and transportation ideas – and if any chancellor really did deliver all of that in one fell Budget swoop, it would indeed represent a serious step change.
There is one massive caveat: not one of the 30 billion pounds identified as the level of investment required would (according to George Osborne) be a taxpayers’ pound. So the totality of the funding required for a new high-speed rail link (circa £5 billion) will come from the private sector, and the totality of the £20 billion required to retro-fit one million homes a year for energy efficiency over the next 10 years (at £6500 a house) will be liberated through a new mechanism to recoup the cost of the improvements made through a charge on future fuel bills. To be honest, that strikes me as privatised pie-in-the-sky.
That said, it’s great to have the Tories mixing it with Labour on this particular territory – and the Lib Dems have got a thing or two to say.
As to what Mandelson and Darling come out with this week, watch this space.
Registered charity number 1040519