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2003 Past and 2004 Outlook

This synthesis provides a top down perspective of issues relevant to investment and sustainability. It advises a strategic approach sympathetic to global economic and political tensions. It recognises increasing relevance of national and international regulation and practise on local decisions. It provides a framework for considering investment, business development and strategic planning in 2004. For specific countries, sectors or businesses, please contact GRI Equity.


2003 was dominated by the war in Iraq. It brought refinement to political thinking, particularly in investment management. Current events are dominated by energy, trade and financial markets.

The evolution of war in Iraq through invasion, victory and ongoing reconstruction kept people's attention for most of the year. It may be seen by history to be a milestone in the evolution of the variously termed Global Justice Movement because of the disregard for UN protocol which focussed public attention on the UN and its inability to act because of control by the US's veto.

This war catalysed millions of people from thought to action – peace marches, information websites, changing political colours and so on. This accelerating behaviour change continues as people choose more equitable approaches to global resource management than traditional confrontation. This fundamental change in public opinion is creating volatility for managers in all spheres of economic and political life. While many of us disregard these “alternative” approaches without consideration because they are unfamiliar, there is a serious danger that the unwillingness of those of us in positions of power and responsibility to behave in a globally responsible way will result in a gross destabilising confluence of events.

Many people concerned about the viability of current economic and political systems want wholesale change - they are not interested in adapting current technology and systems to the balanced world of fair trade, environmental preservation and poverty alleviation. And they often reject concilliatory engagement with incumbent power holders for fear of “sleeping with the enemy”. For example, James Wolfensohn, President of the World Bank and a vocal proponent of sustainability, was refused participation in the World Social Forum because of the fear that his institutional credentials would compromise the WSF objectives. If people, both volatile and calm, who seek sustainable solutions are not heard, it is likely that they will force radical change, including the use of economic terrorism. This would be chaotic, not managed, and would cause dangerous regression. The effect of economic terrorism would be far more indiscriminate and destructive than bombs and chemicals that we now fear. This tension between traditional and alternative approaches to management of resources increasingly affects economic change and alternative markets are becoming increasingly powerful.

Globalisation” is increasingly recognised and studied. At the end of 2003 research findings were published indicating that Europeans, while generally in favour of globalisation, are concerned about the over influence from 3 players: America, multi national companies and financial institutions. This confirms media and private opinion and indicates that these players will need to manage their behaviour and external communications most carefully. SMEs will be less exposed to this public opinion risk though regulations are becoming more stringent across the board. Cooperative growth strategies are more sustainable but less familiar to incumbents. Those that adopt the latest management technology, that optimises triple bottom line performance, will be successful.

The consumer markets continue to change. The LOHAS sector, not even defined a decade ago, is estimated to be $ 227 billion and growing. Traditional sectors are rapidly adopting more planet and people friendly policies. The call for globally responsible behaviour has been felt strongly by the drinks industry in 2003. With increasing calls for restraint in advertising of alcohol, particularly to younger audiences, producers are changing their message to “be sensible” rather than “your dreams will come true”.

The scandals in financial services did not abate in 2003. They are continuing to surface in businesses that have the resources and reputation to have higher standards. We expect with equanimity that more unsavoury revelations will surface. The $ 8 billion hole in Parmalat that hit the headlines as the year closed will keep interest for a few weeks and we can expect more news.

Consumer credit has been accessible at low nominal cost. Stock markets have blossomed. The US dollar has weakened, the Euro and others have strengthened. Climate change is now a significant risk to be managed by businesses, especially insurers. By the end of 2003, the equator principles were adopted by lenders accounting for the majority of project finance.

The harbinger of change in the tech sector is Linux and the open source movement. 2003 is the year that Linux became a viable alternative for everybody. GRI Equity made the transfer, while using and retaining legacy systems, to a multi-platform, predominantly open source structure. The benefits of stability and security (no viruses) are excellent and the cost is competitive. We cut our teeth on Lindows and quickly moved on to a full server distribution, SuSE. We have a high value and cost effective system, which an intermediate computer user can maintain.

In September a presentation by an Executive Director responsible for IT at a bulge bracket investment bank waxed lyrical on the value of Linux in the IT backbone supporting their high volume, transaction processing business. Questions about the time it would take to implement desktop Linux, elicited a pessimistic response, but further inquiry discovered that this was based only on the recognition of political pressure being inappropriately applied by revenue generating divisions on IT. This may be curtailed by governance supervision, but, even if Linux is not accepted quickly in mature IT markets like North America, emerging markets are quickly adopting open source standards. Governments and businesses in emerging markets see no reason to pay more for a restrictive standard and are adopting Linux and open source standards. Businesses investing in and serving these fast growing emerging markets are encouraged to liberate their IT strategy.

What we expect from 2004


In 2004 politics will be dominated by the US election, and this will affect global economics. The events that put Bush et al in to the White House remain contentious – including losing the popular vote and election corruption. While there is significant discomfort with the policies of the current administration, the political establishment remains inflexible. The Republican election machine has no start-up hurdles, since they are backing an incumbent, they are well funded and the opposition is still trying to establish an identity and leadership.

For the last 50 years the Christian Coalition has been instrumental in determining which candidates get selected to run and which candidates get elected. Bush, as President, presents himself has a conservative Christian who has brought religion into the White House. The ideology advocated by the Christian Coalition underpins US foreign policy, particularly the Iraq war and Israel/Palestine engagement, and this tends to be divisive rather than conciliatory.

However, the precarious state of the US economy and embarrassment among many voters for the policies of the incumbent government are force of change. Whoever is elected at the end of 2004 will reflect the degree to which change is desired by Americans. The impact of the election in 2004 will be the extent to which electioneering draws attention from business and economic issues such as the costs of paying the war in Iraq and its rebuilding, the controlling role of the USA in UN, World Bank and IFC, and the evolution of trade agreements and law.

Business and Economics

While confidence has improved and stock markets performed well in 2003, the structural fundamentals of the global economy remain volatile and in a state of change, reflecting the immense pressures on natural capital. Increasing demands by all customers - individuals rich and poor, SMEs, MNCs, NGOs and governments - for ethical governance, environmental probity and community support require that externalities are disclosed and priced. In the world of finance, triple bottom line benchmarking is becoming a minimum standard. And the phenomenon is global, not restricted to developed markets. In fact, emerging markets are able to take the lead in this area because they do not have so much traditional infrastructure to redevelop.

The power house of America may continue to lead global development, but only if it adopts more sustainable development policies. Trade and budget deficits are high and rising with neither being tackled by policy initiatives. The startling depreciation of the US dollar has affected multi currency asset and share portfolios and signals the decline of the US dollar as a global currency of choice as the Euro presents a viable alternative.

American economic management levers of both demand and supply are fully open. Interest rates can only go up and the massive liquidity injections from tax cuts, refinancings and credit card initiations are used up. As Fred Hickey notes, “Total U.S. debt is $33 trillion, or three times GDP. No major nation has ever carried such a sum (in dollars or as a percent of GDP). The consumer savings rate is almost negligible at 2%. The debt is a ticking time bomb." In addition, there are no untapped markets in which to create demand for US products. There is no new consumer class in America and export markets have been accessed. Low cost manufacturing bases have been accessed and costs can only go up as international wages tend towards equity. European producers have already started to change their strategy from East Europe to Asia where the productivity/cost equation is more attractive.

Developed economies' work forces are experiencing an unfamiliar phenomenon: there is unemployment at all levels. Not only are simple jobs scarce, but technical and executive roles are less available. Expectations must be managed by example from our leaders. America's cultural profile is traditional and it will be more difficult to implement institutional change here, though the popular demand for change is more widespread and, in fact, significant sustainable business and technology is coming from America, including energy, waste management, materials and services. Europe, having been practising shared national responsibilities for over 30 years and having suffered the consequences of belligerence on their own soil within current lifetimes, are more inclined to seek compromise. Development of sustainable systems in institutions is likely to be led by Europe, though there are lessons to be used from America's federal systems and history. Unfortunately, the reaction to polluting behaviour is regulation and regulation is by its nature inflexible. And so we can expect to see increasing regulation of behaviour in all spheres of life from environment and business to consumption patterns.

Global business and investment will flow where opportunity demands; and on the global stage, this is Asia. China and India are providing the markets and the resources that enable jobs and wealth creation. The businesses that will prosper in developed economies are those that are evolving from the inflexible, industrial models of incumbents and provide community engaged products and services which benefit from disclosure. They must be authentic in their delivery of product and service because the risk of market implosion from damaged reputations has been shown to be mortifying.

The WTO's role of facilitating trade, particularly among emerging economies, was disappointing because its success is expected to contribute $ 200 – 800 billion to global welfare. Failure by all parties to prepare and to compromise at Cancun was to blame. The impetus for a Fair Trade Organisation (which could emerge from the WTO, but only if developed countries allow this) is growing because past accepted wisdom has been shown to be false. The opportunity cost to developing countries of exporting their natural resources (including oil) has been discounted in trading relationships. The need to develop indigenous secondary and tertiary sectors in emerging economies is now accepted as a reason to protect markets. But protectionism should be directed at building assets domestically rather than restricting operations of players. We can not expect much from the WTO until developed countries make it their responsibility to learn from its own history.

However, the tool to force wholesale change is in place and the first attempt at organising to use it was made by emerging economies in 2003. The outstanding debt to emerging economies by developed economies and their businesses is a persuasive bargaining chip that may be used, but only by coordinated effort, i.e. default. In 2003, coordination by developed economies at the WTO stymied progress. If this is type of coordinated action is taken with respect to debt, it would solve developing countries' problems, but the repercussions are unsavoury. It is in the interest of developed economies to work to build wealth among the world's 2 billion poor before they exercise the traditional tool of poor and oppressed people. And given the rate of change of global systems and the ease of communication via the Internet, we would be naïve to assume it couldn't happen, even in 2004.

Stock markets will be strongly influenced by US markets, as usual. And this introduces another risk for investors because US markets are highly priced. The Wall Street Journal reports that the S&P 500 is trading at 28 times trailing earnings and 20 times 2004 estimates, the Nasdaq is at 63 times and 39 times, respectively, and the Russell 2000 is at “0” (-ve trailing earnings) and 41 times respectively, all well above historical averages. The multiples are especially high in some of the “tech” sectors of the previous boom like internet, biotech and semiconductors. It is not likely that the expected growth will materialise and thus earnings and multiples will be below predictions. We are, of course, long term investors and generally risk averse so read our comment in this light, but caution would be a pragmatic approach to stock investing in 2004 – buy and hold what you know.

Sectors to observe for signs of rapid change are energy, financial services and education. Energy because awareness of the rapidly tipping balance of demand and supply of fossil fuels is becoming widely accepted. Even Shell has started stating in its business marketing that fossil fuel supplies are inadequate for global development needs and alternatives must be commercialised. Oil companies are now “energy” companies and their community risk profile is rising fast as they are challenged to reduce pollution and invasive extraction, processing, transportation and distribution. Related businesses, such as transport, will be effected by changes in the energy marketplace.

Financial services are still exposed to a chaotic marketplace. Since 2000, when the “tech boom” ended, participants have sought direction but are being buffeted by scandals, increasing scrutiny and regulation, and rapidly changing technology and global risks. The greatest of these, whose profile became prominent in 2003, is climate change (note this is not just global warming but more complex phenomenon of volatility – peaks and troughs of many weather characteristics occurring in many places). In particular, the heightened risk is impacting insurers whose current operating cost structure is grossly inadequate for the losses now expected from weather related accidents resulting from high climate volatility. Thus, we can expect insurers to suffer, and the repercussions will be impacted directly upon financial markets as insurers investment portfolios react to these costs. Global liquidity will be reduced by this and trends will change.

The other related financial service sector is mutual funds, whose fiduciary failures are finally being recognised by the retail investor. Poor performance, failure to disclose, client partialities, misleading marketing and other intentional and negligent failures to match operations with customer expectations will continue to register in the news until managers take responsibility for their actions. It was only in 2003 that we saw any significant media coverage of the lapse of fiduciary responsibilities by fund managers – previously it had been accountants, brokers and others, while it was the managers that actually makes the decisions to invest in businesses like Enron, WorldCom, Tyco, Parmalat etc.

Vanguard is an example of a mutual fund business whose structure and operations are more coherent with the objectives of investors and which has avoided introducing characteristics which exacerbate moral hazard. Their website and commentary by the founder are recommended. They are generally risk averse and only invest in listed companies. Their performance is competitive.

Education is an area that we expect to seeing growing and continuing demand for the foreseeable future. Current educational technology and infrastructure requires upgrading globally. Continuing education has demand from all consumer groups either to improve skills and career opportunities or for leisure. And production and consumption of the principal ingredient, technology, does not deplete natural resources. The challenge here is to recognise that the technology itself can not be a sustainable competitive advantage because it is becoming costless – the Internet provides access to an increasing volume of technology (and even its soft products like Linux) and data at decreasing costs accessible globally. Sustainable business will be built on the delivery of education rather than the technology itself. While the trend may not be fully recognised in 2004, it will be soon, and the viability of the sector is attractive now.

The science of spiral dynamics is particularly relevant to business management. Those concerned with strategic development, including all company directors, should make at least a cursory review of this leading technology that facilitates the evaluation of risk and return profiles and development and management of strategy. Introduced by Clare Graves in the 1960s it has been developed, in particular by Dr Don Beck who used it in managing negotiations that ended the apartheid era in South Africa. It is a values based framework that matches cultural profiles to behavioural characteristics and business effectiveness. You may find it to be a surprisingly effective tool that simplifies increasingly complex decisions at all levels of human activity. (Some materials are introduced on our website including Christopher C. Cowan's and Natasha Todorovic 's useful paper The Layers of Human Values in Strategy.)


Volatility will be high in 2004. High tension events that affect global welfare are uncertain. In particular, America's election, stock markets, and economy will make headlines and send reverberations globally. European enlargement will complicate planning. And emerging economies will increasingly find their own voices in international politics and economics. We do not expect wholesale defaults by developing countries but there must be more cooperation in redistributing resources and opportunity among the world's poor if tension is to be relieved.

Businesses of all types should expect increasing regulation. Responding to new governance and environmental challenges on top of profit requirements requires multi-disciplinary thought. Sustaining business in a volatile market place requires consideration for all stakeholders. Those that implement triple bottom line enhancement systems and culture will be reducing their risk profile today and raising their expected returns. Those that do not are risking fines, excessive restructuring charges and loss of reputation. Investors should screen for authentic management who have breadth of perspective – traditional uni-directional thinking (“flat-earther” mentality) is declining in desirability because it can not adapt to unfamiliar situations.

Those of us managing businesses will be more concerned with immediate issues like hitting revenue targets and controlling costs in a volatile market. This should be coherent with the long term viability of business. The market increasingly values costs and benefits to all stakeholders. As consumers become better informed, the risk increases of losing business because of the failure to deliver value for money. We recommend building infrastructure with sustainable technology, so that investment today remains relevant in subsequent product or technology cycles, and building business before cost (i.e. avoiding hype).

We expect to see continued rapid emergence of sustainable technology and methods in business. Governance and community benefit will continue to be challenges for traditional managers. Long term investors, including managers responsible for the strategic development of business, should consider sustainable options, which are now proven to have more attractive risk-return profiles. In an increasingly risky environment, developing business in the right way will be as important as what business is developed.

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