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June Comment

Who can get any work done with the early summer extravaganza of Euro 2004 going on? Watching football is enjoyable though playing is more fun. Some of us had a kick about on the lawn at BT; it was great fun but revealed a need to train!

Note on our activities

In June we started a number of collaborative venture capital initiatives, and as they develop I hope to share news. For now, let me mention one collaboration with Cogbusiness, a part of Cognosense, which focusses on capitalising startups, including businesses commercialising frontier science, and providing access to business development resources of Cogbusiness. Cogbusiness has very similar objectives and philosophy, to GRI Equity, but has a greater focus on startups, even seed capital, that compliments its business experience. Cogbusiness also focusses on frontier science and aims to create a structure to allow greater participation by all stakeholders - cooperative ownership (like, for example, Visa) in an investment and business development vehicle. Cogbusiness is currently screening businesses and advisors. (So if you (or friends) are interested in building emerging businesses focussing on sustainability, please let me know so that we may match people with opportunities were possible.) The business is screening for experienced entrepreneurs, executives, scientists, engineers and so on who have heart and interest to build sustainable businesses from scratch. It is also reviewing business plans for startups in this space.

Perspective and Market Commentary


The transatlantic relationships are tense. This was demonstrated by the visible display of concern about US foreign policy during Bush's visit to Europe. Certainly there was tension in Ireland, where numerous small gatherings took place in the midst of a massive security operation. The US has always been viewed as positive, friendly and engaging but now there seems to be a vacuum of enthusiasm because US policy has become monopolistic – there is no place for the little guy, or even other views, in the US administration. There is contrast between the vacuum of humaneness in US policy compared to the remembrance of Ronald Reagan's tenure which was eulogised by Baroness Thatcher at his memorial: “Ronald Reagan carried the American people with him in his great endeavours because there was perfect sympathy between them. He and they loved America and what it stands for - freedom and opportunity for ordinary people.”

There is concern that the deceptions and dishonesty associated with the Iraq war could be for one of two unpalatable reasons: the administration is dishonest or its self-deceiving. This sense of dislocation of the administration from reality is felt within the US and is reason for the fall in Republican favour. It seems that transatlantic relationships are “treading water” learning the reality of compromise and cooperation and waiting for an event to allow progress.

Against this backdrop of tension, D-Day remembrance took place – a time to remember a different war. But the same lesson will be learnt from this Iraq war as from the Second World War: we are all in this together. The globalisation of ethics, with that of economics, will be more sophisticated, not less, and while minimum standards will rise, respect for variety and diversity will also be needed far more. The results can be impressive and and fortunately this is taking shape as America (a majority of Americans) and Europe have surprisingly similar values when it comes to the war in Iraq and the ethics of globalisation.

On a personal note, I experienced my first “march” in June. To see what it was all about and if these events were peaceful or confrontational and who goes, I went to a Dublin gathering. It was a beautiful evening as thousands of people from all walks converged on Parnell Square to disapprove of the government's lavish spend on hosting Bush's sojourn in the emerald isle. There were certainly a significant contingent of more radical groups and they seemed to provide the sponsorship that allowed the event to occur – the permissions, marketing and equipment. They expressed strong sentiment and often in strong language. But the overall sense was provided by the majority of people, young and old, conservative or radical, who wanted to make a small visible gesture for peace. The media impact was modest, but the expression of concern by the march may have dented the positive repercussions for which an electioneering president may have hoped. Next time perhaps I'll take the family – the children would be amused by the colourful gathering of people, the music and speeches, the carnival atmosphere!


Elections season seems to be in full swing. With EU elections dominating June, plus Canada's (Liberal beating Conservative) and results of the Indian election (Congress beating BJP), the Philippines' election (Arroyo remains) a significant part of the world has had a major democratic event recently. In Hong Kong, June 4 memorials drew more than double the normal volume of people: 50,0000 – 80,000 depending on the source. And upcoming elections in the UK and USA indicate great similarities between Conservative/Republican and Labour/Democrat, to such an extent that UK's labour is accused of adopting conservative policy (which is commendable because it demonstrates an willingness to compromise).

The apathy of the European election is perhaps the most telling. Voters feel that they have no choice, or they'll make no difference or the options are too partisan; but they obviously care as demonstrated by peaceful public gatherings. Incumbents and the parties they represent are not inspiring personal commitment and new offerings are generally receiving most interest, including independent candidates who may be seen as closer to their communities. This will motivate development of democratic methods in developed economies. And in the meantime people's choices will be manifested through their wallets and feet: buying what they like and marching for change.

It is ironic to compare Europe to China but based on the recent low voter turnout it is appropriate. The connect between voters and the EU institutions is weak, with no democratically elected policy makers. Similarly in China, as the economic reform powers ahead, democratic or even due process is limited: it is still common for executive decisions to be made regardless of the interest of the most affected parties for the good of all, eg factory closure or relocation. China's politics are evolving but the taoist culture tends to stability and is reflected in the “one country two systems” approach: not a black cat or a white cat but a cat that catches mice, as former paramount leader Deng Xiaoping was famous for noting.

The global decision making process is not yes/no, black/white but a more complex human challenge. Initiatives like public interest polling and simultaneous policy are growing in importance as their effectiveness and utility are realised. Overall a positive trend is emerging as our global social model becomes more sophisticated and many views are represented: politics is beginning to imitate the dynamics of a market economy where people vote everyday with their spending/consumption for what they want: If people (like us) buy a product it is supported and developed, if not it dies.

Terror Risk and War

The war and associated issues like middle east policy and terrorism are the crucible of political change. Issues are not about right and wrong. There is a trend away from partisan politics to collaborative politics, from a “them and us” mentality to a multilateral, considerate approach to public policy development. Popular values are moving away from a clash of cultures. We have to resolve these issues together.

War: The news in Iraq is generally more of the same except for two events: the release of Farenheit 911 and the handover of Iraq and Saddam Hussein to Iraqis. More of the same means continued fighting, kidnapping, execution and deaths. The media attention seems to have waned somewhat, although countries like Korea and Italy have mourned executions. Generally, activity seems to have remained the same.

The handover of Iraq to "self-administration is a step in the right direction. Move from the nation state's having a monopoly on the use of force some new dynamic. And with this new self-government ...

President Saddam Hussein is back! Or at least so he claims. The soap opera of his trial will be amusing. Will he claim that the war was illegal (as many respected authorities have publicly stated) and thus the trial is illegal? He will certainly have some domestic following. But, we don't think Saddam is a principal issue, far more important is resuscitation of Iraq's economic infrastructure – transport, energy, food, banking just to begin with.

Against the backdrop of rhetoric about improving life in Iraq, which has not yet happened, the following note on democracy is useful:

“The last two decades have seen an historic shift in the global spread of democracy: 81 countries - 23 in Europe, 29 in sub-Saharan Africa, 14 in Latin America, 10 in Asia and even 5 in the Arab states - took steps toward democratization, often by overthrowing an authoritarian one-party regime and introducing multi-party elections.

Today, more than 140 countries, more than ever, hold regular multi-party elections. But democracy's triumph makes it the incumbent; not the anti-establishment vision for change, but the clumsy status quo that often cannot deliver health care, schools or jobs, let alone make the trains run on time.”

Mark Malloch Brown IHT

Farenheit 911 is the documentary film which won the Palm d'Or at Cannes. It has received significant discussion, not least because its distribution was initially blocked. We're looking forward to seeing it whatever its merits, it provides another perspective on the mechanism of the current US administration and it discusses Carlyle Group, a private equity group of which we have been cautious because of the apparent conflicts among its politically connected directors.

The terrors of Abu Gharib are a window on the reality of war. This extract gives a feeling for what kind of war is being fought. This is from an editorial titled Natural Born Killers by Charles Clover ofGeneration Kill by Evan Wright, a book about the contemporaries of the Columbine high school massacre in Colorado, blitzing their way across Iraq to spearhead the US campaign last year.

"[They] represent what is more or less America's first generation of disposable children", says Wright, who estimates that half his platoon are from absentee, single-parent homes: "Many are on more intimate terms with the culture of video games, reality TV shows and internet porn than they are with their own families." This group of socially maladjusted, heavily armed youths become America's main international liability The 374 men of the First Marine Recon battalion, in which Wright was embedded, epitomise the violent youth subculture. "We've been brainwashed and trained for combat. We must say 'Kill!' 3,000 times a day in boot camp. That's why it's so easy", a soldier tells Wright.

The terror activity has been muted since March and even media coverage of the war seems to have moderated. I'm afraid that it has been quiet for too long and we may expect some terrible news during the summer. But that's the risk aware view.

Venture Capital, Investment Management and Sustainability

Meetings with several different sustainable VC initiatives have further backed up our view that there are tremendous opportunities in sustainability, and teams gathering to support development. Interestingly some of the teams interested in the sector are unfamiliar with, even repulsed by, the world of money. This is a challenge which they should face.

The discomfort with money is natural – the reputation of financiers and investment advisors is generally not laudatory (though individuals may be praised) and, as with other professions, the language and posture of professionals and practitioners is often confusing and idiomatic. But, one soon comes to the realisation that money is merely a tool for exchanging value (of all kinds) and the nature of its use is in the hands of the person exchanging it, whether consumer, corporate, organisation or government. Then creating attractive social solutions becomes exciting. Those that see money as an end, are in a different frame of mind and are unlikely to appreciate life.

There is a growing use of community capital markets, in which local currencies are created and used for transactions within a community eg sustainable living community, craft community, barter community etc. These are positive because they do encourage local production and consumption, which is inherently more sustainable behaviour. However, they are also often presented as if they are somehow more ethical than other money, which is not the case – all currencies are only as ethical as those that use them, and they still act as a vehicle for exchanging value.

Venture capitalists had made moves to get “back to basics": longer due diligence, a greater focus on experienced management teams, etc. That discipline was driven by a poor market which has since relatively recovered. New capacity may allow a trade off of diligence for speed.

The continuing emergence of the BDC phenomenon in the US has had a valuable effect on investors: it has raised awareness of management fee structures and brought pressure on managers, particularly private fund managers, to have self-discipline in charging inappropriate fees. This has occurred because BDCs are marketed to public investors, who question the rationale of paying a fee on funds not invested.

U2 front-man Bono will join Elevation Partners, the Silicon Valley investment shop recently launched by Roger McNamee (founder of Integral Capital Partners and Silver Lake Capital) and John Riccitiello (former president of Electronic Arts Inc.)

Stock Markets

Stock market performance is volatile and we continue to be conservative in our enthusiasm for stock market performance, though stock selection, with diversification, can offer attractive risk adjusted returns.

Some of the volatility of capital markets is attributed to hedge funds unwinding carry trade – borrowing at low interest rates on the presumption of rates being held down by the central bank, and investing in higher volatility opportunities. There will be some pain – there always is in a volatile environment. This deflation will help capital markets from getting overoptimistic.

Morgan Stanley Capital International:

The rise in the cost of housing is increasing risk to global economies, and this will be exacerbated by increasing interest rates.  Real house prices have risen fast in many countries.  While the US may not have a housing bubble yet, house inflation has been noticeable, particularly in some areas, like the north east.  Price increases in other countries is higher, like the UK, Spain and Australia where house prices have more than doubled since 1997.  (Irish prices have increased significantly, though industry commentators note the boom in demand from first time buyers created by the economic boom.) The current concern is that house prices will flatten, rather than drop; this would be healthy.


The US Securities and Exchange Commission (SEC) adopted mutual fund reforms requiring independent mutual fund board chairs and 75 percent of mutual fund boards to be independent and amending short selling regulations and requiring disclosure to shareowners regarding approval of investment advisory contracts by mutual fund directors. This should help control fees and costs and the new rules will affect 80% of boards. These and other reforms may rekindle interest in US equity and mutual funds whose inflows in May and June (estimated and forecast) were the lowest for the past year. For well managed mutual funds operating on competitive fees and more aligned structures, we recommend investors review Vanguard funds.

The Google IPO prospect has been interesting for a couple of reasons: It is an auction process that is not normally used but is more in line with open systems; it will be interesting to see the outcome. And there will be 2 classes of share, one with more votes per share available to founders and insiders which is intended to stabilise the business. While libertarians and those with equality concerns may denounce the tiered structure, it is transparent and seems perfectly reasonable. Investors in the simple A shares will be pricing them on the basis that there are B shares with leveraged voting power, and the market will find the right price. The Google approach should be acceptable SRI investors, and others. Whether or not their transparency and disclosure reflect good governance remains to be seen.

A recent study, coordinated by Wharton, found that “large ownership stakes in insiders’ hands do tend to improve corporate performance, while heavy control by insiders weakens it.”

The Equator Principles, the corporate responsibility framework for financial institutions for their project financing, has come under attack by a BankTrack, a group of NGOs for having made little difference to business behaviour, not showing any degree of compliance with the set standards, continuing to finance projects that cannot be justified, and an ongoing lack of transparency about implementation.The report was timed to coincide with the first anniversary of the Principles.

Specific projects that come under criticism include the Baku-Tbilisi-Ceyhan (BTC) oil pipeline in Turkey where the authors said the 9 signatory banks supporting the project had patently failed the key tests laid out by the Principles. Key companies had also lobbied the World Bank to reject, according to the authors, pro-poor reforms.

Sustainability Snippets

This book on sustainable business success deserves a mention, though I've not read it, the pedigree is relevant: Sustainability: A Critical Component of Successful Business Models in the 21st Century by Travis Engen, President and Chief Executive Officer, Alcan Inc. The WBCSD reviews it as follows: ... offers a succinct description of how sustainability and innovation are fundamentally linked, and highlights that sustainability is feature that challenges us to innovate by finding new and better ways of dealing with our increasingly complex and interconnected world. http://www.wbcsd.org/includes/ getTarget.asp?type=DocDet&id=6039

AuthenticBusiness.co.uk launched Authentic Guides a networked resource of professionals who have demonstrated commitment to sustainability. This kind of self managing network has great value to all users and is simple to develop. Visa is perhaps the best example.

The World Business Council for Sustainable Development reports that some 37,000 people in southern Africa, 82% of whom would otherwise be unemployed, collect and sell aluminium and other recyclable cans, an activity that helps both the can collectors and the environment. http:// www.wbcsd.org/ includes /getTarget.asp? type=DocDet&id=6037

Interest Rates

Interest rates in the US are rising. At the end of June the base rate was raised by 0.25%, and we expect further inching up over the coming year so that a gradual adjustment takes place. European rates are not expected to increase in lock step – European rates are already slightly above US rates and inflation is not such a challenge. This news is important for those watching the trends of the cost of money. It is good news because the US rate policy will dampen capital market volatility, but it will take some of the shine from some equities.

Inflation is increasingly on watchers' radars. It isn't a problem yet but it is helping launch the rise of rates in the US, which will affect other central banking systems too. China is reflecting on whether or not its economy is overheating, among other things (see below). The effect of rate rises in Japan could be more troublesome than elsewhere because of the very high government debt levels at ~140% of GDP.


We are all noticing that the cost of energy is rising. Some people are profiting from that but most of us feel the squeeze. The upward trend is expected to continue, though it may be volatile.

There is good news: Esso has started advertising themselves as an energy company! This is quite a turnaround since they have been pursuing fossil fuels technology and infrastructure as if there wasn't a hole in the ozone layer. They may have recognised the changing market dynamic but I've yet to hear positive news about their R&D budget.



China is increasingly influential on global welfare. It is a massive consumer of energy products, industrial commodities and even high end luxury goods. While the US is raising interest rates, China is also considering tightening monetary policy. There are concerns over high inflation which is affecting the bulk of the population.

China is also considering moderating the pace of development because of pollution and environment problems, particularly as it prepares for the 2008 Olympics when it will be showcased. China has 6 of the world's ten most polluted cities where children breathing air that its equivalent to smoking 2 packs of cigarettes a day. (The River Runs Black,

China's growing pains call for birth of a green revolution. A quote from an article by James Kynge in the Financial Times is instructive: “China's industrial development is unsustainable because its people, resources and environment cannot cope. This assertion, published yesterday, was not the intellectual musing of a green pressure group. It was the conclusion of the State Environmental Protection Administration, a branch of Beijing's Communist government not known for rhetorical bombshells.” .

BusinessWeek reports in The Dangers of Too Much Success that World Bank President James Wolfensohn has shared an unusually blunt view with China's nouveaux riches: Share the wealth, or risk a backlash from a huge population of desperately poor people who have no legal means of expressing their frustration. (FEER By David Murphy/SHANGHAI Issue cover-dated June 10, 2004).

In Hong Kong calls for democratic process are rising. David Webb notes "Either join the call for democracy, or suffer the lack of choice of Government for years to come. A low turn-out on July 1 would be a significant set-back to the democracy movement. Your presence will count, but simply claiming that you were in moral support will not. " http://webb-site.com/articles/suffrage.htm


Thailand is facing some growing pains, which is not unexpected given its buoyant performance last year. There have been some reconsideration of the strong tactics employed in the south. Conciliation seems to be on the agenda now. This is in line with Thaksin's earlier indications of greater provincial representation, and is likely to meet with success. His football aspirations have met with some popular support but are inappropriate. Asset-price inflation is a concern as a boom in condominium construction in Bangkok seems to be underway. There is certainly speculation and some people will make money, particularly the developers, especially if they are well connected. But investors should be wary!

IT and CT

Open source reports in mainstream media are positive signs of a more competitive marketplace. The Economist's coverage of Open Source in June noted the applicability of open technology development model to knowledge based businesses other than software, such as biotech. The open source revolution in software is well established; products like OpenOffice and Mozilla are comparable and even superior to proprietary offerings. The current area of interest appears to be biotech and medicine. And there are even initiatives in financial services, as associates of ours will know.

Recent developments in automating trade finance is bringing efficiency which is putting pressure on banks. The boring back-bone of global trade is being simplified by just-in-time finance where payments are routed automatically between buyer and seller as goods trade. With trade documentation accounting for up to 5% of world trade it is a significant market whose development will save costs and may result in trade administration facing a surplus of human capital.


It seemed that health occupied the media unusually much in June. “Super-size Me: A Film of Epic Proportions” has reverberated. This story of a 30 day diet of McDonalds and growth of 12kg catalysed discussion. Certainly McDonalds menus have improved since the company's future was in question in recent years: salads abound, organic and veggie options have been sighted! The Atkins rage has also raised awareness. And these are symptoms of greater care over lifestyles. Authentic lifestyles of health and sustainability are becoming respected and increasingly sought after. This consumer trend is backed by regulation of food labelling and preparation requiring greater disclosure.

In June we noticed reports of growing water shortages in China and the Philippines driven by growing economies and worsening pollution. Both countries are now seeking solutions including privatisation and greater restrictions on water consumption. This trend in Asia is likely to continue and opportunities in water purification, monitoring, measuring and distribution are growing.

China is on the radar again: a soap opera boom is taking root. Programmes are being produced by brand manufacturers to promote their product, from cars to cosmetics. This will fuel consumption of non-productive assets – luxuries. Certainly China deserves them but the rapid growth will create greater social pressure not less. Inflation pressure will also be exacerbated. It will be interesting to see whether people react to the product placements by getting wrapped up in “modern consumerism” or will see through the psychology and just enjoy the programming.


Education is critical to development: it develops values which influence actions, whose consequences we live with. Get the ethics right and all else follows. Here are some new recommendations for your summer reading. For more see our bibliography.

Cradle to Cradle: Remaking the Way We Make Things by William McDonough and Michael Braungart (North Point Press)

Dancing With the Tiger: Learning Sustainability Step by Natural Step by Brian Nattrass, Mary Altomare, and Nicholas C. Sonntag (New Society Publishers)

Environmentalism and the New Logic of Business by R. Edward Freeman, Jessica Pierce, and Richard Dodd (Oxford University Press)

Industrial Ecology (2nd Edition) by Thomas E. Graedel and Braden R. Allenby (Prentice Hall)

Our Stolen Future: Are We Threatening Our Fertility, Intelligence, and Survival?— A Scientific Detective Story by Theo Colborn, Dianne Dumanoski, and John Peterson Myers (Plume)

The Natural Step for Business: Wealth, Ecology and the Evolutionary Corporation by Brian Nattrass and Mary Altomare (New Society Publishers)

The Sustainability Advantage: Seven Business Case Benefits of a Triple Bottom Line by Bob Willard, Oliver Dudok van Heel, and John Elkington (New Society Publishers)


For those of you that miss the nature report, as do I, after six weeks the drought is over: rain, including thunderstorms, has come and the vegetables are bursting forth. The blossom of honey suckle scents the warm breezes. And the roses are blooming. Summer is here.

This report has been prepared for information purposes and is not an offer, or an invitation or solicitation to make an offer to buy or sell any securities. This report has not been made with regard to the specific investment objectives, financial situation or the particular needs of any specific persons who may receive this report. It does not purport to be a complete description of the securities, markets or developments or any other material referred to herein. The information on which this report is based, has been obtained from publicly available sources and private sources which may have vested interests in the material referred to herein. Although GRI Equity and the distributors have no specific reasons for believing such information to be false, neither GRI Equity nor the distributors have independently verified such information and no representation or warranty is given that it is up-to-date, accurate and complete. GRI Equity, associates of GRI Equity, the distributors, and/or their affiliates and/or their directors, officers and employees may from time to time have a position in the securities mentioned in this report and may buy or sell securities described or recommended in this report. GRI Equity, associates of GRI Equity, the distributors, and/or their affiliates may provide investment banking services, or other services, for any company and/or affiliates or subsidiaries of such company whose securities are described or recommended in this report. Neither GRI Equity nor the distributors nor any of their affiliates and/or directors, officers and employees shall in any way be responsible or liable for any losses or damages whatsoever which any person may suffer or incur as a result of acting or otherwise relying upon anything stated or inferred in or omitted from this report.

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