The EU ETS double potential

Reducing GHG emissions and raising funds for international climate finance


In this blogpost I would like to investigate if and how the EU ETS (European Union Emissions Trading Scheme) could represent a tool to drive financial funds to climate actions besides being a flagship programme in the EU to reduce the emissions and move forward towards a greener and low carbon society.

The EU ETS is the largest carbon market worldwide (75% of the total) and covers about 50% of the total EU emissions. It is a market-based mechanism that – putting a price on carbon – has created a financial incentive for the big emitters (mainly power plants and factories) to reduce the emissions. Since 2005 it sets a cap on the emissions of the total amount of certain GHG (GreenHouse Gas) that companies can emit each year. A fixed amount of allowances (the EUAs, the currencies of the European carbon market) are issued or auctioned. Each year companies can use those allowances to meet their targets or else buy more credits from other emitters or on the market or funding other projects to get the corresponding offset credits (CERs, Certified Emission Reductions, from CDM Clean Development Mechanism projects – implemented in non-annexe1 countries, mainly developing and emerging economies – or ERUs, Emission Reduction Units from Joint Implementation projects – in annexe1 countries: but there are tighter limits on the amounts of credits possible for these two offsets). Therefore, the EU ETS provides flexibility in the means and it is cost-effective because emissions are cut where it is most convenient.

The key points I want to highlight are that the cap will be reduced over time (thus causing more investments in clean technologies or increased purchasing of allowances) and since phase 3 of this system (2013-2020) fewer allowances are grandfathered (free allocation) as the default method for allocating EUAs allowances will be through auctions: more than 40% in 2013 and then growing year after year.

Actually, during phase 2 (2008-2012) the annual quantity of the allowances that have been auctioned was only about 3% in average: Germany about 9%, UK 7%, The Netherlands  3,7%, Austria 1,3%, Ireland 0,5%, Hungary 2%, Czech Republic (2million). (EU Commission, 2014).

Yet, with the new mentioned regulations of phase 3 the revenues related to the auctions could be consistent – upon the condition that the demand for allowances will pick up (as at the moment there’s a large surplus of about 2 billion allowances). Estimates of the total value of these revenues obviously depend on the carbon price, whose price is currently very low, about €4/tonne. To have a figure, as of 2012 (with a price of €7/tonne) estimates of revenues of the next trading period were of about €10 billion per year (CAN-Europe, 2012).

Now my point is to focus on how member states use these resources: could the revenue streams of these auctions be used to have a further positive impact on climate change?

In 2008 the EU Commission and the environmental committee of the EU Parliament had tried to introduce a binding earmarking of the EU ETS revenues to finance climate action (with about 50% in developing countries and the rest in EU climate projects) but this had been opposed especially by some new EU members, and at the end it was left as a voluntary tool, left open to the decisions of the Member States, i.e., it is voluntary.

This is reflected in the EU ETS Trading Scheme Directive which reports a non-legally binding recommendation according to which member states should spend at least 50% of auction revenues on measures addressed to tackle climate change “..to reduce greenhouse gases; to develop renewable energies, and other technologies contributing to the transition to a low-carbon economy; measures to avoid deforestation and increase afforestation and reforestation; forestry sequestration; capture and geological storage; a shift to low-emission and public forms of transport; research in energy efficiency and clean technologies; improvements in energy efficiency and insulation; to cover administrative expenses of the management of the European scheme” (Emissions Trading Scheme Directive, Article 10, Directive 2009/29/EC)

Unfortunately it is very difficult that voluntary allocation will work properly. There’s a lack of international cooperation. What are member states doing? Have they earmarked the EU ETS revenues either through budgetary or political decisions? Apparently only seven countries have done so. In the EU, Germany is the only country that decided to fully allocate the ETS revenues to climate financing. It set up a the Special Energy and Climate Fund (EKF) which receives since 2012 basically all the revenues from the EU ETS and – through a separate budget structure – operates climate related expenditures at national and international level. France has earmarked its revenues but for national political expenditures and social objectives. Poland might set up a special fund and address 50% of the revenues to national climate actions. Romania has an Environmental Fund and about 70% of the revenues go to it for national actions. Czech Republic earmarks at least 50% for national energy efficiency and international climate finance through and existing State Environmental Fund. Finland is addressing 100% of the resources to international ODA on climate change, through political earmarking. Hungary through political earmarking has addressed 50% of the auction revenues national spending for climate change (Esch, 2013).

Yet, the global arena is eager for climate finance. For instance, at the climate conferences (UNFCCC COP) made in Copenhagen in 2009, in Cancun 2010 and at every single summit since, countries of Annexe-1 (mainly the EU and other developed countries such as the USA, Japan and Australia) committed to provide by 2020 US$ 100 billion a year to developing countries from a variety of sources to fund mitigation and adaptation measures. But no clear way to fund that was set! Again, the revenues of EU ETS auctions could be one way to fund that commitment.

To mention that at the same conferences the EU and other developed countries “pledged jointly to provide nearly $30 billion in ‘fast start’ finance to developing countries in 2010-2012 to support immediate action on the ground”, commitment that has been already respected by the EU that managed to “pledge €7.2 billion over 2010-2012” (about ⅓ of the total pledged) despite difficult economic circumstances. This money is being spent on concrete climate actions in developing countries” (EU Commission, 2014).

Another example of a climate change mitigation policy that might benefit of binding earmarking of EU ETS revenues to climate change actions is the REDD program (reducing emissions from deforestation and forest degradation). Global emissions are roughly 25-30 billion tons of CO2 equivalent and deforestation accounts for about 15-20% of these: the potential relevance of REDD is quite obvious. Yet, how is it funded? REDD at the moment is funded through voluntary pledges / bilateral compensations, with Japan and Norway being the most “generous” countries. Cutting deforestation by 50% in the next five year period 2015-2020 would generate emissions “savings” between 3,300 and 9,900 Million tons of CO2e (IPAM GCP, 2014): these tons represent the supply available to be funded. But the actual total potential demand for REDD emission reductions for the same time period (based on voluntary pledges as of January 2014) is only 253 Mt CO2e. Therefore there’s a large gap between supply and demand. To make REDD working it would be necessary to link it to a direct market-based mechanisms (such as a carbon market) for those jurisdictions ready for it. Therefore, the EU ETS could provide the solution to address to REDD the necessary amount of money. Yet, with the actual surplus, it is necessary to look at the 2030/2050 timeframe: in this perspective the REDD credits could serve both to meet future compliance obligations and represent a reserve of allowances to hedge risks.

Therefore, to conclude, the EU ETS system – besides having a positive impact on emission reductions and investments in green technologies – it might also play a relevant role in channeling money towards international climate finance in the medium-term. To unleash this second potential and provide predictability of resources, policy makers should solve the current issues of the EU ETS (which is determining for instance such a low price of the allowances) and probably set for the member states a tighter regulation with stronger binding commitments and earmarking of the revenues.

References

A. Esch, Using EU ETS auctioning revenues for climate action, GermanWatch, May 2013 – http://germanwatch.org/en/download/7749.pdf

CAN-Europe Position Paper -Best use of auctioning revenues from the EU Emissions Trading Scheme, July 2012 – http://www.climnet.org/resources/doc_view/2056-can-europe-position-paper-best-use-of-auctioning-revenues-from-ets-july-2012

Emissions Trading Scheme Directive, Article 10, Directive 2009/29/EC – http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32009L0029&from=EN

EU Commission, Climate Action, Policies, Phase 2 Auctions, 2014 – http://ec.europa.eu/clima/policies/ets/pre2013/second/index_en.htm

European Commission, Climate Action, Policies, International climate finance, 2014 – http://ec.europa.eu/clima/policies/finance/international/index_en.htm

IPAM GCP Report 2014 – http://www.globalcanopy.org/about/press-enquiries/press-releases/new-report-calls-us12bn-boost-pre-2020-emission-reductions-fore

 


CSR in SMEs

Initiatives in favour of the workforce as a win-win option

SMEs, Small and Medium Enterprises. Despite their name, they play a very influential role in the economy and have a relevant impact as they represent the more widespread form of enterprise in the European Union. According to the latest EU annual report on SMEs, in 2012 there were about 20 million European companies in this category: they provided employment to about 87 million people – being two thirds of the total jobs in Europe for that year – and delivered almost 60% “of the gross value added generated by the private, non-financial economy in Europe during 2012”.

What is the role they can play in sustainability and Corporate Social Responsibility (CSR) initiatives?

An important factor to be highlighted about SMEs is their set of characteristics differentiating them from large corporations. Generally speaking, large companies might benefit of scale economies, be more structured, and have more resources, to name a few. On the other hand, being smaller it can mean to be more agile and flexible – having fewer rules, less bureaucracy and more efficiency – to be closer to the territory and to the people, as well as to enable more personal relationships in the workplace.

Due to these features – and to the fact that CSR practices not necessarily need complex or costly programmes – it implies that the important role that SMEs play economically can also be translated into a strong potential to leverage sustainability – as well as grant a return (in terms of both intangible and tangible benefits) to the company itself.

In this blogpost I would like to focus on CSR actions tuned in favor of the workforce: even simple and straightforward initiatives can have a relevant positive impact for both parties. How?

A SME could improve the working conditions and the atmosphere of the workplace, for instance providing time and space to relax or rest, parental benefits, flexibility in the working hours (technology facilitates this), possibility to work from home and to find the right work/life balance.

Then it might be easier for a SME to be open to the dialogue, call the employees to participation and give them a voice: this process can provide mutual valuable information. For a SME it could also be easier to empower employees and give them trust, make them feel part of the company. Promoting shared values to stimulate employees and drive their actions could be another big driver to have the workforce aligned with the company’s vision and mission.

It is interesting to note that these processes – opposite than in larger corporations where CSR is developed with formal structures and sets of procedures – are often informal and more intuitive in SMEs.

And what are the results of implementing these actions? On one side, it can clearly improve the employees’ job satisfaction but also increase their creativity and innovation. In exchange, the company gains from the increased motivation, commitment and engagement of its workforce, which becomes more loyal. Passionate and motivated employees who share the company’s values can become also the first and free-of-cost advocates of the company’s products / services (advocacy is an important and growing trend in the purchasing patterns, driven by the social media and eased by the digital interconnectivity).

With simple and successful CSR initiatives a SME over time can attract the best talent, create a stronger bond and increase retention, lowering the employee turnover (which is a big big issue in China at now for instance). A fair remuneration is obviously important but not enough on its own.

As a result, there is an increase in employee productivity as well as in competitiveness of the company. CSR addressed to the employees is a win-win option and the agile structure of a SME might even make it easier to implement it.


Why did I not think it myself?

The potential of the Social Enterprise to turn social issues into resources


Social EnterpriseOne of the main reasons why I came here to do the IMSD Master is that I wanted to focus my career on something I felt more passionate about, to give a new “meaning to my Monday mornings”. Something really motivating and engaging would be to find a job whose outputs are useful to the society. A dream. Well, I recently found out that this dream might have a name: it’s called social enterprise.

The Social Enterprise starts from a really powerful and game-changing approach. The perspective is radically different: rather than looking at opportunities to find a successful business idea, why not to look at one of the (unfortunately many) social problems in order to tackle it through an innovative business idea?

The message I got is very strong: you can succeed in turning issues into resources and generate revenue streams out of it. How? Focusing on a social issue through a creative and innovative idea (even more, it must be a dream, a vision of change), the highest motivation (as high as putting your life at stake for it), a holistic approach (targeted to the root causes of the social issues) and the right capacity and capability to implement it and make it scalable and replicable. Moreover, it should be social in the end as well as in the means.

I have discovered many examples of success stories and what was striking is that many of them were not made of rocket science, they were very pragmatic, made of basic building blocks, so straightforward that you could ask yourself: why did I not think it myself?

Well, a social enterprise might be made of basic blocks but they are composed in such a way that they change the usual framework and the traditional pattern. A social enterprise works across the traditional sectors breaking down the classic separated silos of economy and social: it creates blended value, mixing social and economic benefits.

To make it economically sustainable you could/should find as many revenue streams as possible. To do so you can try to involve many stakeholders aligned with your vision, for instance linking the social issue at the base of your project to other issues they are interested to. Yet, at the end, the measure of the success is more the social impact than the money generated.

Another major difference of the Social Enterprise is that the way the work is carried out is all about sharing and collaboration. The final goal is simply to improve the solution and spread it as much as possible to reduce the impact of the social problem. And today’s technology offers many online platforms or “glocal” (global and local) places where to get connected, share and find the inspiration for new ideas.

A social enterprise should be innovative also for the tools used in the phase of the promotion of its vision: being where the crowd is – on the social media – and promoting it through an open, assertive and constructive dialogue, not through the old-style monologue of a website.

Finally, what matters most for a social enterprise is that it focuses on something real, not on numbers, indexes or percentages. It is a completely different layer: the social enterprise is not serving customers, it is serving people.


When in China, behave as the Chinese do (part 2 of 2)

Chinese strategy and trends to tackle imbalances and reach a sustainable growth

Chinese are very quick to react and adapt to a changing environment. China is hectic, it moves really fast. There are amazing ROI rates: you can recover a capital investment in 2-3 years (Melia Hotel Group recovered a 10 USD million investment in hotel renovation in only one year!).

Yet China has huge imbalances: geographically agriculture is not equally spread, moreover the natural resources are located more in the middle of the country while their use is mainly needed in the East (due to poor domestic connections and moreover to the amount of resources needed for its industries, China has been importing resources). The East now is about 3 times richer than the West: unequal share of income and opportunities creates problems, social and economic.

How is China facing these issues and what are the future strategies and trends?

There are signals China will move away from privatization and reform the SOEs (State Owned Enterprises) because they are not efficient, not competitive. Main goal of SOEs is to secure employment, not to be profitable and reward the shareholders. SOE will take the money of the investors but use it for their purposes and not care about dividends: there are no incentives for shareholders to invest in SOEs.

Talking of SOEs, China had initiated a privatization process in the 1990s but it had kept the largest companies fully owned by the state (example of Baosteel, the steel giant we visited) or the ones in strategic sectors with only the possibility for foreign investors of having a 50% of a Joint Venture (for instance in the automotive industry Volkswagen has a strong presence but only through a JV). Almost worrying to see – as a confirmation to what I knew about the control over the information – how difficult it was to have even basic information (such as the number of employees of a plant) of SOEs or JVs compared to wholly private companies.

Another important aspect is that China is changing the direction of its 5 year growth plan. The general guidelines of the 2010-2015 plan were to boost export and investments but they are shifting towards boosting the domestic consumption, key economic driver for the years coming. Exports and FDI have been central pillars of Chinese fast growth, but these are not working as well anymore. Relying on exports and foreign investments has many downsides: gap rich-poor, dependency from other countries, risk of financial bubbles. For instance the property market in China is a risk: if the bubble bursts it might bring down the whole global economy. But luckily there is a difference with the collapse in the US where people were leveraged, buying houses with loans and mortgages; here they buy mainly by cash.

How to boost domestic consumption?

Increasing the salaries, that are growing up to 15% per year (this fact, and the consequences of the one-child policy that might cause a shortage of workers, determine that China as the factory of the world will not be true anymore).

And pushing for urbanization to provide people with jobs: the National People’s Congress is incentivizing this shift so people have a higher income and can increase the consumption levels. In fact China has experienced amazing urbanization rates: 200 million of people moved to cities between 2010 (650m) and 2012 (850m) – biggest migration ever – and yearly about 70-80 million people are still moving.

The good news for the companies is that urbanization and an increased income brings potential new customers. Very interesting opportunity when considering that in China brand differentiation is at its infancy. People who move to cities have no real knowledge about the brands, once they increase their income they go out and look for the best options. Moreover, low brand awareness translates also in really low loyalty rate to brands (especially true in the countryside): exposed to so many brands, they are like adventurous shoppers who do not know which one is best for them and keep trying out new ones. They rely on the bouche-à-oreille and on the social medias (Renren and Weibo are the Chinese surrogates of Facebook and Twitter that in China are blocked like many thousands of other social and information sites, even Bloomberg has been banned after they published an article in which they mentioned social and political issues to explain economic trends. Something obvious for a Western mentality but not accepted here). Chinese consumers also have a skeptical approach: they don’t know what the real value proposition of a brand is. The final purchasing decision for a notebook for instance could arrive even after 6 months of thinking over and gathering info.

One advantage for foreign brands is that Chinese people have a perception of low quality of the Chinese products (or else a good perception of products of foreign brands and products made abroad), especially for luxury goods and health related products. Also, perception that big large companies are more trustworthy. Interesting to note also that China by 2015 might overtake Japan and become the largest consumer of luxury brands in Asia, 2nd in the world only after the US.

In the case of consumer products, if the companies want to take advantage of these opportunities, when defining the communication and promotion approach it is important to have a strong online presence and a social media strategy, especially if targeting younger demographics who spend most of their free time online and hardly watch television (not allowed in the colleges’ dormitories). Besides, they should identify the local media and tv broadcasts because each province has its own and many consumers prefer to watch regional and local tv (tv still relevant for older people). Worth to mention that China offers many chances for creative and design related jobs: creativity is not part of their DNA.

Talking of products, impossible not to mention the counterfeiting issue. China is the homeland of counterfeiting (if you go to one of the fake-market malls in Shanghai, you get a very good picture of this). For the Chinese imitation is a good strategy. Yet lately there is a lot of pressure from the international arena and also internal pressure to stop this phenomenon because it is starting affecting also local manufactured products sold in China. Now the rules are out there, clear, but the problem is the implementation.

This said, there is also another point of view when talking of counterfeiting of luxury goods. On one hand the counterfeiters make money and the government does not have to subsidize them; on the other hand counterfeiting is not seen as bad from brands, not affecting them: sometimes from the companies point of view counterfeiting make products affordable to more people and “keep the brand dream alive”. You know you are successful if your products are imitated: it means a stronger desire for that brand. But a fake good does not provide the same status. So in a country where the “face” and the appearance are so important, people will buy the real product as soon as they can afford it.

To introduce the next two trends I want to highlight, it is very interesting to see the role of the Chinese fiscal policy as a tool to push the geographical development in some provinces or supercities (Go West trend) or to drive the investments towards certain sectors of the economy (high technology trend).

Based on its Western Development program started more than 10 years ago, China has been investing a lot in infrastructure in the West and now incentivizes investments to make companies “Go West”. From the business point of view, now the West provides more opportunities (for instance Chongqing within the Sichuan Province is the new developing supercity whose growth is stimulated and incentivized by the central government policies) but there are more challenges as there are less clear regulations. West can already be a good option for large sized companies but it is still complicated (risky, far away) for small ones.

Another trend is the switch to services and higher added value products / high technology, pushed by fiscal incentives as mentioned above. Until 2008 there has been a push on attracting foreign investments for manufacturing options (2 years tax holiday, then half taxes). Then various reforms to push for capital investments (for instance they made representative offices more difficult and expensive, because they do not bring capital expenses) and offer a lower income tax rate for enterprises with new/high technology. This shift is nothing new though, it’s a world path toward success, look at Japan after WW2, or Korea more recently: depreciate currency to boost export, get cash, and move up the value chain from cheap to high value added products.

Internationalization is the next trend I would like to highlight, and it comes as a consequence of this switch towards higher added value products: China needs to create local brand champions and to do this the only way in a globalized economy is to play internationally. China incentivizes acquisition of foreign companies and brands to get technology, brand reputation and heritage. Examples of acquisitions are: Volvo by Geely, Weetabix by China’s Bright Food ($1.2 billion deal), Smithfield Foods’ bacon by China’s Shuanghui International ($4.7 billion deal).

China is also signing commercial treaties with other Asian countries to favour the trade. Some companies are already taking advantage of this, take the examples of Piaggio that set up a manufacturing plant in Vietnam to export to China and to the rest of Asia; and Ducati who is trying to do the same in Thailand.

Finally, what are the impacts of all these trends? Growth for growth’s sake does not work for a long time as rich gets richer, it gives room to speculation and increases the pollution (which is an environmental and social problem). Pollution is actually the element that could bring to protests and create problems to the Government (main concerns of people in China are pollution and children’s health and education). That’s why the new policies also dedicate relevancy to anti-pollution measures.

The current President of the People’s Republic of China, Xi Jinping (since March 2013) aims at the completion of becoming a “moderately prosperous society”. China should slow down its growth (big challenge for the current president) to make it sustainable but in a way it needs to grow (how to create jobs for the 8 million graduates out of college each year?).

In this amazing path of economic growth in China many companies have made lots of money, even if many players in the same sectors: until now the lower cost of labour and the high demand enabled most of the players to be successful and profitable. There was room for everyone. Yet, looking ahead, there will be many M&A (Mergers and Acquisitions) and only the companies that are looking outside of China, that are better structured, managed and organized, only the ones that are trying to diversify and implement practices for environment and social issues will survive and succeed. That’s why we could already see in large companies (such as Wolkswagen Shanghai and Mann+Hummel) a good level of respect of quality controls and EHS policies (Environment Health and Safety) and the first steps of CSR practices.

These practices are also a tool for the companies to create a brand culture, to try to retain employees and thus tackle the high turnover ratio (consultants say employee turnover is about 20% but the managers say it can go up to 110%). With salaries growing up to 15% per year, it’s not always possible to offer too much more than market prices to be competitive they said at Mann+Hummel. In Mondragón they manage to provide salaries 15% higher than the minimum set by law (it changes by province) but they leverage also on better working conditions (in Orbea warmer areas, music… More responsibility and engagement: in the assembly line every employee in charge of one bike, no production chain; for the frame finishing, each one is responsible of the quality of his/her product).

We saw that compromises are an imperative in the negotiations. Will China be able to find a compromise itself to solve its imbalances? Will the competition rules of a global market (which China, even if it is a socialist country, has to comply with) really succeed in bringing environment and social topics at the top of the companies and government’s agenda?

With the size of this country and the importance of its economy, I really hope so.


When in China, behave as the Chinese do (part 1 of 2)

“Being in China means respecting the culture, customs and societal rules (in business and elsewhere)” (J. Inch, 2014)

Here I am, back from my study trip to China. Enriching experience. As a tourist, I really enjoyed what we visited in Shanghai and Beijing, I was fascinated by the diversity I could spot and I loved the mix between the Asian touch and modernity: for instance, street food on improvised stalls blending into an environment of record-high skyscrapers (2000 skyscrapers built in the last 5 years in Shanghai…), innumerable shopping malls and super efficient and clean metro/train stations.

As for the objective of the study trip – “How to make business in China” – I learnt many interesting and peculiar things of the Chinese culture, their habits, and the business opportunities this country still provides.

Focusing on this aspect, what are my main takeaways from the lectures we had and the company visits we made? I’ll try to merge into a consistent speech all the inputs I got.

The first thing to mention is the scale: almost 1.4 billion people, 170 cities with over 1 million inhabitants (Shanghai, the most populous with its 24 million inhabitants, has other 3 more cities with more than 5 million people within 1 hour drive). Due to this, the magnitude of the market is just amazing and the dimension of the business is totally different. Numbers are too big to consider all China as a single target. You need to segment. When approaching China for business, you should regard it more as a continent than as a single country, not only for its dimensions but also for the differences. Each province and supercity (large metropolitan areas that due to their size have rights as provinces) is different for the dialect, people, needs, demand and regulations (sometimes even within a city: in Shanghai for instance they can differ based on the district). Also, be careful about minorities because even if small numbers, they are very important for the country stability and the business environment. Many of the ethnic problems China has to face come from these minorities.

Business in Asia and China is different, it is critical to understand the habits and consequently adapt if you want to have stable and profitable relationships. It’s necessary to prepare culturally to adapt our behaviour to China (and to the Asia Pacific region); besides, you can look at the local markets as well as at the “export consumers” that spend their money abroad on holiday and shopping (often cheaper than in Shanghai for instance, due to high import taxes and positioning strategies of the brands: Orbea, a bicycle manufacturing company part of the Mondragón group, decided to adopt prices even 20% higher than in Europe to position itself as a high quality brand in a market where consumers who can afford these products are richer than European ones). Then, what are the main cultural characteristics?

In China it’s all about connections, the Guanxi. More than a network, it’s a reciprocal obligation or a power relation to open back doors. In order to build up your Guanxi you need to go out and attend events, go to functions and moreover you have to do favours: be generous and give presents, food gifts during festivals, invite out for dinner. And of course keep good relationship with the Chinese government. Guanxi is everywhere, it is how the business is done. Maybe of decreasing importance for the new generations but still very important and it takes time to develop it. All the lecturers we had stressed the importance of the Guanxi but there can be a thin line between Guanxi and bribery. And the current government of Xi Jinping is actually trying to fight corruption with the “Tigers and flies” program addressing both large and small players. Trying to understand whether Guanxi and at what extent could affect the business practices of a large company, I asked this question to the manager of a multinational filtration company we visited, Mann+Hummel Group. The official answer was that they have to deal with suppliers that comply to the code of conduct and thus (officially, Ed.) avoid others that still rely heavily on Guanxi: the point is that bribery infringement can be prosecuted in Spain Germany or UK even if carried out in China.

Another relevant cultural concept is the Mianzi, the Face. For Chinese people their perception in the eyes of others is very important. It decreases if we don’t know the other person. When relating to a Chinese, the preservation of face must be taken into account. It’s all about face. Never, never say something bad or critic someone in public (even in private, be cautious), never say no directly, never fire people… this would cause a “loss of face” which is hard or impossible to repair. Face can also apply to a company or to a country. For instance in a dispute between the Chinese government and Google, the latter refused to comply, this caused a loss of face for the government, hurting the feelings of the people. As a consequence, Google for many years has been doing a relatively small business in China.

Also related to face is the show-off principle: you have to impress people, buy a luxurious car (apparently people prefer to invest money in an expensive car before than into an apartment) so that people think your business is successful and trust you as a partner. The car become a status projector: it’s an investment, it generates respect.

Other peculiarities: Chinese are more cooperative and with closer boundaries, China is a group oriented society, Westerners are more individualistic. They have a hierarchical culture, relationship oriented. They make decisions in a group and don’t want to take responsibility of the decision, fearing the consequences of a potential failure/mistake. This makes the decision making process very long and difficult. In China there is a lot of mistrust, they assume all the basket is full of rotten apples.

There are differences in the negotiation process, they are less direct. You should accept compromises: don’t drive too hard the bargain, try to maintain harmony and not make lose face. You might win one deal but no chances to make further business in the future. Every party has to win something. And it’s better not to discuss the business at the meeting table, but to make the deal at the dinner table… So you should learn their table manners (who should seat where – from the way you are seated at a table you can know how well you are regarded – toast with your glass lower to show respect) and apparently very important learn holding your drinks! (if you don’t drink with me,we are not friends…).

One special mention of course goes to the barrier language. As for the written Chinese, the pictograms are something fascinating but totally unintelligible. The sound of the spoken Chinese also is something really far from the European languages. As for the business world, according to the lecturers we had, there are still good opportunities for no-Chinese-speaking professionals. Yet, once you start working in China, you should really make the effort and start learning it, even just as a sign of respect. It will help your relationships.

In the second part of this blog post I’ll analyze the trends of the Chinese economy and the related business opportunities.


Study trip to Shanghai: my biases and expectations

Since January it has been a busy two-month period here at the IMSD Master at EOI but now suddenly after all the projects, presentations and exams the time has come to pack and get ready to go… where? To Shanghai for a study trip!

The “theme” of this study trip is “How to make business in China”. The plan is to have academic sessions and conferences at a partner University (Shanghai Jiao Tong University, apparently one of the top 5 in China) to learn about China’s history, culture and values as well as about its political, economic system and regulations, in order to be able to negotiate and build on business partnerships accordingly. Then, with the goal to have a bigger picture, the program provides also to perform visit to companies to have a look at practical cases.

I have not really had time to think about the trip but now I am quite excited about this opportunity. I am open to what it will provide. Actually, what are my expectations from this trip? What are my biases when thinking of China?

I think of China and what first hits my mind is its economic power: the second largest economy since 2011. In fact, China has experienced an enormous economic growth. Data are clear and are striking: in current USD currency the Gross Domestic Product in 1990 was 356.9 million; in 2012 its GDP is 8,227 trillion USD (World Bank data). It means a tremendous and continuous growth rate always higher than 7,6% with peaks of 14,2%.

The second thing is that China – with its 1,351 billion people – it is the most populous country in the world. This massive economic expansion also drove a massive pollution in the industrial areas and in the cities: I hope it will not be as bad as in some pictures online…

But right after this I am invested about China’s paradoxes. First, the inequality. The benefits of the economic growth of the last 20-25 years have not been spread and shared equally among all the social classes: even if the GDP per capita increased from USD 314 in 1990 up to USD 6,091 in 2012, the growth has not been homogenous. The income gap between rich and poor has raised with a peak in 2008 as it was finally publicly recognized last year by Ma Jiantang, the head of the National Bureau of Statistics in this article from Reuters (Yao and Wang, 2013). The value of the GINI coefficient (a measure of income disparity) now stands at 0.474 with strong differences especially between rural China and urban context and Ma said this urges for reforms of the income distribution system.

Then its peculiarity of being a socialist country but open to capitalism: a single party state, ruled by the Communist Party of China (CCP). The party has the monopoly and runs a policy of strict control on the people and on the information they can access.

This leads to the next point: I think of the issue of human rights and labour conditions and about its limitations of freedom of editorial content and access to the information. For instance, as reported by BBC (BBC News, China Country Profile) China has the largest online population, yet the most extensive monitoring and control over the Internet through an advanced and extensive filtering system (called the “Great Firewall of China” by Reporters Without Borders, RSF) with thousands and thousands of web sites blocked. China is one of the few countries where Google is not the first search engine: it comes third behind Baidu and Soso. Well this is indicative but actually not necessarily a bad point.

Do I have only negative thoughts? Not at all, I have great expectations from its culture that stretches back 4000 years. I am curious to see how the university addresses the students. Here at EOI we are continuously stimulated to “wear our critical hat”, participate to the classes making questions and – in a constructive way – doubting what the professors, the professionals and the lecturers are illustrating. Is this is the same approach we will find at the Chinese partner university? I doubt it but I am curious to experience the Chinese teaching way.

As for the visit to the companies, over Europe and in the US there is a growing trend towards the implementation of corporate social responsibility: the implementation of these practices is more and more regarded as a competitive advantage. What is it like in a Chinese company? Well, it will be interesting and challenging to spot how they manage them.

I was really insecure whether to choose Portland in the US (the other option for the EOI study trip, with a program more focused on sustainability and thus closer to my IMSD Master), or Shanghai. At the end I picked the Chinese destination because I felt Portland closer to my experience – cultural and professional – but I am attracted by diversity, a concept which – as a passionate traveller – I always find enriching.

So, with these pictures in mind, I am sure it will be very stimulating to “touch and feel” directly such a different environment.


Conditional cash transfer: impact over food security and poverty reduction

The Bolsa Familia programme in Brazil as a social policy fostering economic development

There is a tight link between rural development and poverty: hunger, poverty and health vulnerability are usually concentrated in rural areas. How can governments break the vicious circle connecting these three elements? How to interrupt their intergenerational transmission and reduce future poverty?

Social welfare and safety net programs for sure can help a lot in the short term but there are concerns over their effectiveness in a durable way, with criticisms saying they create dependency, disincentives for work or make poverty “more comfortable” (Schneider, 2014).

Yet the conditional cash transfer programme Bolsa Familia (PBF) launched more than 10 years ago in Brazil so far proved to be successful in reducing poverty and increasing food security. The PBF is one of the three policy pillars of the wider national cross-sectorial strategy called Fome Zero (Zero Hunger, launched by the former President Lula in 2003) which recognizes the strong connection between poverty reduction, food security, and support for small-scale agriculture (the other two pillars being The Alimentação Escolar – for free school meals – and The Fortalecimento da Agricultura Familiar – strengthening family agriculture) (Oxfam case study, 2010).

The PBF consists of a stable monthly allowance granted to families below the extreme poverty line (US$ 1,25 per day according to the World Bank) of about US$19 per child to a maximum of 5 children. The money is credited on electronic cards preferably issued on behalf of women. The conditionality consists in the strict obligation for the children to attend school until they’re 17 and to have regular health checks.

According to this presentation (FAO, 2011) as of September 2011 the PBF programme had already reached more than 12 million families and 48 million people over 5500 municipalities, making it the largest cash transfer programme in the world.

With a total cost of 1% of its GDP Brazil has managed to promote the immediate relief of poverty and – through the conditionalities – it strengthened the access to basic social rights (education, health and social care). This program has helped million of people to buy adequate food in a country where the main problem is the access to it, not the production (Oxfam case study, 2010) and it also supported the emergence of small businesses in poor areas (due to the increase in household consumption).

“Between 2003 and 2009, over 20 million people were removed from poverty, particularly in rural areas, where 5 million people found a way out of it” (Da Silva, Del Grossi, De Franca, 2011). PBF helped Brazil progress: inequality cut by 17% in just five years; poverty rate fallen from 42.7% to 28.8%. (Bunting, 2010). To note that Brazil it is the only BRICS country in which income inequality has decreased from the early 1990s to the late 2000s (Ivins, 2013)

These positive achievements over food security and poverty reduction recalled a large interest: this approach was taken as a model and internationalized as a tool for hunger reduction (Kilpatrick, Beghin, 2010) with adaptations in almost 20 countries such as Chile, Mexico, Indonesia, South Africa, Turkey, and Morocco. Even New York City announced its “Opportunity NYC” conditional transfer of income program. (World Bank, 2013).

From this perspective, the PBF can be seen as an example of how emerging economies can play a leading role in the international arena of aid and development (Bunting, 2010).


Deforestation in Madagascar: a threat to its biodiversity

The role of governance and international trade in tackling illegal logging

Madagascar is the 4th largest island in the world and – given its isolation and separation from other land masses for about 60-80 million years – it has 3 biosphere reserves listed in the UNESCO and it also presents one of the highest numbers of endemic species, both fauna and flora: Madagascar’s various ecosystems are home to more than 250,000 species of plants and animals most of which do not exist anywhere else (according to this case study).

Therefore, no doubt that it has an extremely rich and unique biodiversity which though – unluckily – is also highly in danger.

The role of mankind is posing serious pressure on its ecosystem and a threat to its biodiversity. Take the Rainforests of Atsinanana, comprising 6 national parks with an endemic rate of species close to 80%: they have been inscribed in the World Heritage List since 2007 “for their importance to both ecological and biological processes as well as their biodiversity and the threatened species they support. Many species are rare and threatened especially primates and lemurs”. (Unesco World Heritage Centre)

Due to deforestation practices, these Rainforests since 2010 have been also inscribed in the (sad) World Heritage list of the threatened species.

The deforestation process in Madagascar has started long ago and even accelerated since the end of the 19th century with the French colonization and conversion to coffee fields. The country has lost about 80% of its original forests and the primary forest now covers only about 12% of the country.

Deforestation is a major threat to Madagascar’s biodiversity as 90% of Madagascar’s endemic species live or heavily rely on the forest (North Carolina State University, 2010).

Deforestation has an impact on both factors of its ecosystem: on the abiotic factor (deforestation accounts for 35% of soil degradation according to UNEP) and on the biotic one (affecting the abundance and also the variation – reducing the biodiversity). Biodiversity is important because it makes the ecosystem more resilient and thus more “elastic” and able to maintain or recover its ecological function.

The biodiversity also provides enormous other benefits to Madagascar because of its ecological services (more than “18 million people are dependent on it for their subsistence needs, with 80% being essentially entirely dependent on natural resources. At least 70% of the population is dependent on resources derived from agriculture and other vegetation.), as a source of medicinal plants (2,300 plants used for medicinal purposes in the country; the export of medicinal plants is based on 50 species, of which 33 are forest-based) and attracting eco-tourism flows (income generated by the tourism industry represents the 3rd source of foreign currency). (Convention on Biological Diversity – Madagascar country profile).

There are various causes of the exploitation of natural resources through the deforestation process, mainly linked “to the economical and subsistence-related benefits the people gain from the ecosystem” (based on this post, 2011): agriculture of subsistence, commercial agriculture, energy, logging.  Some are structural to the country: high population growth rate – implying increasing needs of lands for cultivation – coupled with being one of the poorest countries in the world (with a GDP per income of 447 USD in 2012 according to the World Bank, ranked 6th last) with 92% of Malagasy living on less than $2 per day cause “competition for agricultural land and put pressure on the island’s dwindling forests, home to much of Madagascar’s unique wildlife and key to its emerging tourist industry” (BBC Country profile)

Others reasons are the production of fuelwood and charcoal for cooking fires, slash-and-burn agriculture (called tavy acording to this post: it turns tropical rainforests into rice fields, technique not sustainable beyond a certain population density), over-grazing and ranching, with an increasing international pressure from the so called “land grab” deals (15 deals registered according to Landmatrix.org).

One more reason of the deforestation is illegal logging, deplorable as the largest part of the benefits usually do not go to local communities but to private interests of large corporations (“rainforest destruction goes hand in hand with social conflict around the world as large corporations and other powerful interests expropriate the ancestral lands of forest peoples” as stated by the Rainforest Action Network).

As mentioned above the Rainforests of Atsinanana are part of a World Heritage site therefore Madagascar – as a signatory of the World Heritage Convention – should be formally committed to their protection (UNESCO World Heritage Centre – News, 2009 ) and thus have clear and coordinated management plans in place to control “agricultural encroachment and resource exploitation from logging, hunting, and gem mining”. (UNESCO, Rainforests of Atsinana)

Yet the illegal logging of precious wood species (ebony and rosewood) has increased since 2009 due to the coup d’etat and the following political crisis in Madagascar which also resulted in a halt of the international aid by the EU and the World Bank and a suspension from the African Union. (BBC News, country profile)

A weak or corrupted government and a lack of funds could not guarantee the protection of the forests within the parks as it should have happened and made it difficult to Madagascar to implement its National Strategy for Sustainable Management of Biodiversity (NSSMB) and to respect other international conventions related to biodiversity they had ratified.

International regulations can help stopping illegal international trafficking. As reported by Unesco World Heritage Centre (in its 2013 SOC State of Conservation report on the Rainforests of the Atsinanana) the CITES Convention on International Trade in Endangered Species has been changed during the 16th Conference of Parties (COP16) in order to “…ensure that illegal timber from Madagascar is both forbidden and cannot enter their domestic markets”.

Even if UNESCO has confirmed its decision to retain the Atsinanana Forests in the List of World Heritage in Danger (see SOC report 2013) let’s hope that these changes in the CITES and the new Government elected in 2014 in Madagascar (hopefully strong enough to provide protection of the parks, alternatives to local communities – such as eco tourism – and promote new agricultural techniques) will at least stop illegal logging, decrease the deforestation rate and ensure a better preservation of the rich and unique biodiversity of these rainforests in Madagascar.

 

 


Examples of voluntary and mandatory tools to preserve the environment

Certification schemes and Extended Producer Responsibility

A responsible management of natural resources is a key driver in the path towards sustainable development. When applying this concept to the business world, it is interesting to note how there are both voluntary schemes and mandatory regulations pushing companies into this direction. In this blog post I would like to outline the main characteristics of voluntary sustainability assessments – certification schemes – and then show a mandatory regulation at European level – the WEEE Directive, Waste Electrical and Electronic Equipment.

ISEAL logoCertification schemes are voluntary market driven mechanisms used by the companies to reduce their risks and get closer to the sustainability concept. Independent third-party verifiers certify the applying companies that can prove that their products or processes (considering the whole chain of custody) meet the sustainability standards. Without going into details of the certification process, I would like to highlight three aspects that I find noteworthy. These Certification standards often are “forerunners of sustainability” as they rise the threshold above simple compliance to law requirements. It happens that governments and institutions often follow and adapt their regulation, especially if the sustainability standards have a strong credibility because defined through a wide discussion process involving all the stakeholders.

Then, it could be somehow surprising to see that there are sustainability certification schemes basically for each industry sector (also mining, oil and gas…): even if controversial, still it is a positive thing thinking that even these industries can try to improve and have a responsible management because sometimes legislation is not enough to preserve the environment.

Lastly, even if these certifications represent a cost in the short term for the companies (costs to meet the standards, auditors, fees…), when looking at the medium long term time scale they can turn into an investment: both for the company itself (consumers, markets and investors are more and more rewarding these practices) and for the society (at some extent they include externalities therefore future generations can theoretically “save” on conservation or restoration).

Now, for a snapshot of a sustainable mandatory regulation, I would like to mention the WEEE, Waste Electrical and Electronic Equipment Directive. The WEEE Directive 2002/96/EC promotes the collection and recycling of hazardous substances in electrical and electronic equipment, those substances whose use is restricted by the EU legislation (RoHS Directive 2002/95/EC). In force since 2003, it has been recently recasted: the member states now have the obligation to reach the collection targets to 85% of WEEE generated (about 20kg per capita up from 4kg per capita of the previous Directive) ensuring the separate collection of about 10 million tons of hazardous so-called e-waste from 2019. The new Directive also sets stricter documentation rules and clearer measures to try to tackle the illegal export of e-waste to dumping sites in poorer countries (such as the Agbobloshie dumping yard in Accra, Ghana)

This Directive falls within the environmental policy approach of the EPR, Extended Producer Responsibility, according to which governments force manufacturers to internalize the cost of recycling/disposal within the product price, shifting it away from the municipalities: “a producer’s responsibility for a product is extended to the post-consumer stage of a product’s life cycle.” Usually incentives are provided to producers to take into account environmental considerations when designing their products (OECD definition). As highlighted by a recent report by the European Commission EPR schemes can support reaching a more resource efficient society, decreasing the impact of the products on the environment.

These two examples show that even if the path towards sustainability is tough and steep there are voluntary and mandatory tools that can support the ongoing process of having a more responsible management of natural resources.


If continued growth is not sustainable, would its opposite – degrowth – be the right alternative?

Generally speaking, degrowth is an economic, social and political movement promoting a decrease of both the production and the consumption (thus rejecting the widespread idea of the necessity of “growth for growth’s” sake) with the goal to improve human well being, increase social equity and safeguard ecological conditions.

The first appearance of the actual term in the economic theories dates back to the ‘70s with Nicholas Georgescu-Roegen (The Entropy Law and the Economic Process, 1971) who stated: “The human activity transforms energy and materials of low entropy or good quality into waste and pollution which are unusable and have high entropy. Degrowth could slow down this process of material degradation”.

Other important theoric signposts are represented by: the output of the Club of Rome (Meadows, D. et al. The Limits to Growth, 1972: an exponential increase in the use of limited resources would soon deplete them no matter how big the reserves are); Herman Daly (Toward a Steady-State Economy, 1973; Steady State Economics, 1977; and Beyond growth, 1996) provides that the economy should “conform to the rules of a steady state – seek qualitative development, but stop aggregate quantitative growth.”

Theories turned into activist movements after year 2000, with Serge Latouche’s thinking inspiring most of these initiatives. He started publishing articles on “Le Monde diplomatique” since 2003 and published the book “Le Pari de la Decroissance” in 2006.

I was curious to check what was happening in my context/country. Well, In Italy there is the presence of various associations and organizations: Associazione per la Decrescita set up in 2004, Decrescita Felice Social Network, and the Movimento Decrescita Felice who are mainly supporting Latouche’s ideas. These concepts found a political outlet in the M5S Movimento Cinque Stelle (Five Star Movement) who even got the third place at the Italian elections at the beginning of 2013.

Reading about all the degrowth theories and the proposals of the degrowth movements, I actually found myself agreeing on some of them, especially when they call for a focus on quality rather than on quantity, for the need of implementing non-monetary indicators to measure the degree of development and well-being of a country and for their will to pursue an economic system respectful of the earth’s biological capacity.

Yet, how could a widespread degrowth affect the urgent development challenges we have to face as of today at a time when “the poorest one-third of humanity still needs to considerably increase its consumption to achieve a decent quality of life”?

Quoting Amartya Sen (Nobel prize in economics 1998) “Development is to expand people’s freedom by removing restrictions that limit their ability to make free choices…”. Development is not only about Growth but it requires a number of mechanisms to “enlarge people’s choices and enhance human capabilities (the range of things people can be and do) and freedoms” (UNDP).

Næss (professor at the Danish Aalborg University) points out the risk that degrowth policies without proper redistribution mechanisms will have negative impacts on poorer parts of society. It would be necessary to target overconsuming societies but also adopt “regulations to ensure a gradually more fair and equitable distribution of wealth and income between the inhabitants locally, nationally and – through UN adopted international taxes and distribution mechanisms – between nations”.

The European Commission warns about possible consequences of degrowth on increased unemployment unless adequate preparation and conditions are set up.

Prof. Cornia (member of the Committee for Development Policies at the United Nations) criticizes Latouche’s idea that the rich countries need to degrowth to make room for poorer countries: “we are intertwined with those less developed countries: we import raw materials from them, so if we reduce the consumption of our goods it is necessary to implement policies to increase the prices of what they exported, otherwise they will be in even more trouble.”

In the same direction, I find extreme the degrowth idea that Southern societies should look for disentanglement from Northern countries to cut their dependency and that it is necessary to pursue food sovereignty, energy independence, relocalisation of economies (to reduce costs and pollution of goods transport).

Just with these few examples it is clear that there are many challenges and controversies about a sudden switch to degrowth and its impact on development.

A degrowth approach would require profound and radical changes both voluntary from individuals, as well as new policies at country levels. And it should be global, change the values, and modify the consumption patterns: not something you can solve with a decree, you need education and a long process.

And changes are difficult. A partial picture of how much individuals are willing to change the market rules and move towards cooperation rather than competition is shown by the result of the recent referendum in Switzerland that rejected a proposal to set a threshold to executives’ pay of 12 times the salary of junior employees…

So, if continued growth is not sustainable (see my previous blog post on this) and degrowth is more a long term process, what to do in the meanwhile? Maybe apply a mix of the two? Or an effective sustainable development policy? To tackle the pressing development issues we need all the possible resources. These can come also from profitable growing businesses if managed sustainably and with the focus on CSR strategies.

Let’s see if the next degrowth conference in Leipzig in September 2014 (the 4th of its kind since the 1st one held in 2008 in Barcelona) will offer more alternatives or clearer options. Now, let’s take a look at this video to relax and think whether – for each of us – slowing down could be feasible and beneficial.



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