Category: Investment

Environmentally sound and financially rewarding? Key findings from an exploratory study on the Science Based Targets Initiative (SBTi)

By Milena Bar, Ottilia Henningsson, & Dr. Kristjan Jespersen

◦ 5 min read ◦

The Science-Based Targets initiative aligns firms’ emission reduction targets with a net-zero emissions pathway. Firm commitment yields significant abnormal returns which are larger for firms committed to larger emission reductions and for high-emitting firms. 

The IPCC’s sixth assessment established a code red for humanity and provided mounting evidence of widespread, rapid, and intensifying climate change. The Paris Agreement, ratified by over 190 states and non-state actors in 2015, formally stipulated the goals of limiting global warming to ideally 1.5°C and at a minimum well below 2°C with the aim of reducing the most catastrophic damages related to climate change onto the natural environment, human health and global financial market. The need for climate action is urgent and requires engagement from governments, individuals as well as corporate and investor participation.

Combatting climate change requires voluntary private sector engagement

Incentivizing corporations and investors to act voluntarily on climate change is critical to redirect private capital towards environmentally responsible business practices. The Science Based Targets initiative (SBTi) is becoming the global standard for firms seeking to set emission reduction targets aligned with the required global decarbonization targets established in the Paris Agreement. By encouraging voluntary corporate carbon emission reductions, the SBTi is a critical tool to reduce the private sector’s reliance on fossil fuels. 

2021 record year for new approved targets and committing firms for SBTi

Since its founding, just seven years ago, SBTi has experienced exponential growth in the number of committing firms and has mobilized firms representing more than a third of global market capitalization to reduce their carbon emissions. In 2021 the initiative took steps to increase the ambition level of firms’ emission reduction targets. When first established, firms could commit to reduce their emissions either aligned with the reduction targets of 1.5°C or 2°C. However, from summer 2022, the initiative will only be accepting the more ambitious emission reduction target, as set out in their campaign Business Ambition for 1.5°C.

Since company engagement ultimately comes down to whether committing to SBTi will drive wealth for shareholders, understanding the stock market response to firm commitment to the SBTi is essential not only for businesses looking to commit, but also for investors. To justify the integration of a climate credential such as the SBTi in investment management, it needs to be able to provide excess returns. To understand the stock market reaction to firms’ announcement of SBTi commitment, we conducted a short-horizon event study on a portfolio of 1.535 firms.

Firm commitment to the Science Based Targets initiative aligns environmentally sound practices with financial viability 

Firm commitment to the SBTi indeed yields a positive announcement abnormal return and thus speaks to the credibility of SBTi in constituting a credible signal of firm commitment to sustainable business practices. Even more encouraging is the finding that firms committed to the 1.5°C target experienced substantially higher returns, indicating a stronger positive market reaction when exhibiting a higher cost of commitment and higher target ambition level. The market evidently differentiates between ambition levels by rewarding businesses that are pledging themselves to more demanding emission reductions and a more climate-friendly business strategy. These findings are particularly relevant in light of the SBTi making the more stringent emission reduction target the new standard for all firms via their campaign Business Ambition for 1.5°C and may encourage more firms to increase their efforts in reducing their greenhouse gas emissions.

Stock price reaction in response to commitment to the Science Based Target initiative

In turn, high carbon emitting firms, proxied here by firms identified by the CA100+ list, reaped the largest reward in their stock price following commitment. This finding further confirms the market’s more sensitive reaction to costlier commitments, but also creates concern about whether the SBTi may have to rethink a recent strategic decision. The SBTi announced that they will not be accepting targets set by firms operating in the Oil and Gas industry, thus abandoning the industry specific methodology for fossil fuel firms which had been in development for several years. Fossil fuel firms have a key role to play in successfully achieving the goals of the Paris Agreement, thus begging the question of whether the SBTi is not missing out on covering an industry critical to combatting climate change and a sector of firms who are highly rewarded by the market for committing to reduce their emissions. 

As climate disasters become more prevalent and more severe, firms who fail to transition to a low, or zero, carbon business model can be expected to become more vulnerable in the long run. To expand the analysis, we further tested the performance of a portfolio strategy screened for firms committed to the SBTi. Despite the underperformance of an SBTi screened portfolio against a portfolio consisting of only non-committed firms in the medium-term, there is reason to believe that a portfolio with SBTi committed firms may provide higher returns in the future. Given that SBTi commitment represents a commitment to aligning the firm’s operations with the net-zero emissions pathway, it can be perceived as a safer bet in the long run. Moreover, portfolios consisting of SBTi firms were shown to be characterized by lower volatility. The objective of investors is shifting to increasingly sustainable and impact focused investment profiles, hence portfolio and asset managers may use SBTi commitment as a filter in security selection to achieve their client’s demand.

Looking Ahead

Financial institutions have a key role to play in driving systematic economic transformation towards a global net-zero carbon emissions economy in their power to lend and invest. As evidenced, firm commitment, ambition level and cost of commitment are reflected in the stock’s pricing mechanism, making the business case for the firm to set ambitious targets for decarbonization, and providing rationale for investors to in the short run utilize the market’s reaction to firm commitment in investment processes and strategies. 

About the Authors

Milena Bär is a recent graduate in MSc Applied Economics and Finance and is working as a student researcher in ESG and Sustainable Investments at Copenhagen Business School. Her research projects are mainly within the field of ESG metrics and regulation, with a focus on the investor’s side.

Ottilia Henningsson recently graduated with a MSc in Applied Economics and Finance from Copenhagen Business School with a keen interest in the transition towards a more sustainable financial industry. 

Kristjan Jespersen is an Associate Professor at the Copenhagen Business School. He studies on the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance.

Photo by Matthias Heyde on Unsplash

Constructing Social Portfolios: A Quantitative versus Screening Approach

By Alina Hofer, Lea Katharina Kasper & Dr. Kristjan Jespersen 

◦ 5 min read ◦

When we talk about ESG, one could argue that there is a strong bias focused on climate investing, reaching net zero targets as well as good corporate governance and diversity themes. But there is much more to ESG. The “Social” dimension of ESG is hugely under explored and developed and covers under studied issues such as how companies treat their employees and care for the responsibility of their products. Still further, assessments linked to human rights codes and social impacts is only now receiving the attention it truly deserves. Although the importance of these topics is undisputed, we see that attention to particularly address the social dimension has been lacking, whereas awareness of other ESG risks has been rising immensely during the past years. 

Not only is the general knowledge and focus on the social dimension of ESG limited, its overall  implementation in portfolio management has not been sufficiently experimented with and addressed.

The delay to properly implement the “S” in ESG is often explained because of the challenges to quantify, assess, and integrate social factors generally.

However, this argument should not be a sufficient justification for neglecting the “S” in ESG and for investigating a possible relationship between a good social rating and superior financial performance. To tackle this lack of awareness, we constructed two portfolios which integrate Refinitiv’s Social ratings based on different integration strategies and test their performance towards the market between 2012-2021.

When integrating social – or other ESG – ratings into the investment process, we find there is often disagreement on how to best consider these factors in portfolio construction. Currently, it is most common to apply screening or best-in-class strategies. These approaches aim to remove assets that do not fulfill certain criteria from a defined investment universe. Negative screening would mean to remove those companies that perform worst from the pool of assets. Inversely, an investor could also only continue with those firms who at least have a certain minimum rating. For both approaches, the portfolio weights are then allocated to the assets that remain. This is done using conventional indicators such as value, size or expected risk-adjusted returns. In our study, we, however observe a clear shortcoming of this approach: After screening out the worst 10% “social performers” and allocating weights based on a risk-return trade-off, the portfolio does not necessarily promise a higher overall ESG score than a portfolio would reach which does not consider the ratings at all. Although the portfolio yields a solid financial performance, this raises the question whether any ESG-related impact has been made with this integration approach.

To make sure an investor can improve his exposure to assets that score well in the social dimension, we integrate the rating scores directly into the optimization problem of our second portfolio. This leads to a very different outcome on the social rating:

Looking closer at the mechanics of this approach, we extend the traditional Sharpe Ratio with the ESG factor, meaning to add by how much it a company “outscores” the market average. This results in the following “Social Sharpe Ratio”:

We add a fifty percent weight split, which can be flexibly adjusted towards investor preferences. And we now balance a risk-return-social trade-off. This explains why the second approach over 9 years constantly beats the market average in respect to the integrated Social factor without sacrificing any performance on the financial side. In fact, we find that in 5 out of 9 years, the second strategy would have also led to higher risk-adjusted returns measured by the Sharpe ratio. Moreover, returns were consistently higher compared to the market benchmark. This result is quite remarkable, given that it is often questioned whether investors need to sacrifice returns in order to make their investments more socially responsible. 

Lastly, our study resulted in one more unforeseen twist when it comes to integrating ESG ratings. That is, the question whether we can actually trust the rating scores. To answer this, we must first understand how scores are created. Rating providers look at an immense amount of publicly disclosed information, reports and policies. And based on what company’s report, rating scores are aggregated. However, it is clear that a firm would only report on things they do well. In fact, we observe that with increased reporting, ESG scores also improve. But what about the real-life actions and impacts? Some rating providers offer a combined score, which also considers media reports on the involvement in controversial actions. As these scores are only available at an aggregate level, we calculate them on a single-pillar level using Refinitiv’s methodology, which adjusts for firm size and industry. Looking at specific examples in our portfolios, we found that the impact of such controversy involvement on the overall score could still be larger. Nevertheless, we stress that in order to have a complete picture of a firm’s ESG behavior, the impact of these controversies needs to be reflected in investment decisions. 

To sum up, given the results of our research, there are three things we aim to highlight:

  • It is crucial to increase investors’ awareness of “Social” matters and provide a better landscape for impact investments in this specific dimension.
  • Integrating ESG ratings does not always promise a better ESG performance for the whole portfolio. Therefore, it is necessary to focus on strategies that lead to actual impact.
  • Third, looking beyond the information that is disclosed by companies themselves, more attention should also be addressed to “real life actions” when making investment decisions. 

About the Authors

Lea Kasper has recently graduated with a MSc. in Finance and Investments (cand.merc.) from Copenhagen Business School. Her interest and enthusiasms about sustainability and how to more efficiently integrate non-financial factors in investment decision-making contributed to her choice to further investigate this topic throughout the master thesis. 

Alina Hofer has recently graduated with a MSc. in Finance and Investments (cand.merc.) from Copenhagen Business School. Being passionate about creating impact through ESG-aligned investments, she was excited to further focus on her interest in this field throughout the master thesis.

Kristjan Jespersen is an Associate Professor at the Copenhagen Business School. He studies on the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance.

Image source: SustainIt

ESG investing in a changing regulatory environment: investing in active or passive ESG financial products?

By Marco Morazzoni and Dr. Kristjan Jespersen

◦ 8 min read ◦

The impending climate crisis emphasizes the need to mobilize large-scale investments to finance the transition towards a more sustainable and inclusive economy. The financial sector plays a pivotal role in this context, as it allocates capital from investors who wish to pursue financial and non-financial objectives to corporations and stakeholders who need these resources to empower the sustainability transition.

Over the past decades, individual investors have become aware of the risks inherent in unsustainable business practices, being increasingly interested in financial products that combine a competitive risk-adjusted return with Environmental, Social and Governance (ESG) criteria. Despite the increase in funds, indices and benchmarks that include ESG dimensions, the universe of ESG financial products remains difficult to navigate for individual investors due to the range of investment strategies that can be used to pursue ESG goals, such as negative and positive screening, best-in-class, ESG integration, impact investing and ESG engagement. In addition to ESG strategic considerations, investors ought to consider the level of active management inherent in their ESG products, since it has considerable implications for financial returns and the ESG objectives pursued.

In fact, while some financial products have an active investment approach, trying to beat a reference benchmark, others merely aim to replicate the ESG impact and financial performance of an index.

‘Active versus passive’ debate

The literature on conventional active and passive investing is almost unanimously in favour of long-term passive investing, due to active managers’ inability to consistently beat the market and to the lower fees charged by passive funds. However, the ‘active versus passive’ debate in the context of ESG investing is more nuanced.  This is because ESG investing entails the pursuit of intangible and hardly quantifiable goals that go beyond the achievement of mere financial returns. Furthermore, due to the different definitions and methodologies used in the assessment of ESG performance and the resulting unrealiablity of ESG data, the trade-off between impact and financial returns can be difficult to reconcile. 

A study conducted on 78 ESG active mutual funds and 15 ESG exchange-traded funds (ETFs) seeks to contribute to the debate by illuminating the financial and non-financial features that characterize these sustainable financial products. The funds were selected from Morningstar Direct according to specific criteria, such as: availability of an ESG rating, European domicile, invested in equity, active investment approach (for mutual funds) and passive investment approach (for ETFs).

By constructing an equally-weighted portfolio for the selected ESG active mutual funds and ESG ETFs, the study used the CAPM, three-factor, four-factor and five-factor model to compare the portfolios’ risk-adjusted perfromance before and after fees. To increase the robustness of the study, the regression analysis was conducted on various market benchmarks, such as MSCI World, STOXX Europe 600, MSCI World ESG Leaders and MSCI Europe ESG Leaders.  

The regression results indicated that the ESG active portfolio outperformed the ESG passive portfolio both before and after accounting for management fees. Controlling for the criteria used in the selection of the funds, the active outperformance could be attributed to the funds’ instrinsic characteristics, such as investment orientation, ESG investment approach and ESG scores. Accordingly, 77% of the ESG active portoflio had a global investment orientation compared to 27% of the ESG ETF portfolio. This entails that the active portolio covered more geographies, exhibiting higher diversification and improved risk-mitigation.

Further, 83% of the active portfolio practiced ESG engagment, a strategy that previous literature associates to superior financial returns and improved ESG impact.

By engaging with companies on ESG issues, ESG active funds may have been able to help ‘lagging’ firms improve their ESG performance, while enabling ‘leading’ firms to address their ESG issues. With respect to ESG scores (Morningstar and MSCI), the active portfolio displayed a lower overall ESG score compared to the ESG ETF portfolio. This finding could suggest that the active portfolio invested in lower rated companies on average, with the objective of helping them transform their ESG strategy and thus pursue higher risk-adjusted returns.

Insights to individual investors in ESG financial products

Recognizing the limitation derived from the small sample size and the fact that the active outperformance might be due to the specific funds selected, the findings were used to provide a set of insights to individual investors who wish to invest in ESG financial products.

Firstly, individual investors were categorised into ESG-unaware, ESG-aware and ESG-motivated, according to the investor labels used by Pedersen et al. (2021) “Responsible investing: The ESG-efficient frontier”. This categorization simplified reality to the extent that it became easier to derive actionable insights. Furthermore, it provided more granularity with respect to investors’ prerogatives regarding the trade-off between the pursuit of an ESG impact versus a risk-adjusted return.

Based on this categorization, investors who disregard ESG information (ESG-unaware) should invest passively in broad conventional ETFs or in a diversified portfolio of more specific conventional ETFs.

Investors who consider ESG information for risk-mitigation purposes (ESG-aware) ought to focus on the level of selectivity displayed by active managers in their stock-picking activity, measured in terms of high/low R-squared. If active managers are highly selective (low R-squared), ESG-aware investors may consider foregoing part of their return, due to the higher active management fees, and thus benefit from managers’ ability to pursue a greater ESG impact and potentially higher risk-adjusted returns.

Conversely, if active managers exhibit low selectivity with respect to a reference benchmark (high R-squared), investors would be better off investing passively in broad ESG ETFs or in a diversified portfolio of more specific ESG ETFs. Lastly, ESG-motivated investors may be better off investing in ESG active funds who practice ESG engagement, as the higher fees charged by these funds would worthwhile, given the superior ESG impact inherent in ESG engagment strategies.

Regulatory considerations

In addition to the empirical findings, the study also included regulatory considerations in the assessment of the suitability of active versus passive ESG financial products for individual investors. This was critical, since the new MiFID for sustainability preferences will come into force on the 2nd of August 2022.

According to this regulation (2021/1253), investment firms will be obliged to ask their clients about their sustainability preferences and find out whether they are interested in sustainable financial products. If the answer is affirmative, financial advisors will only be allowed to offer MiFID-aligned products to their clients. A MiFID-aligned product will have to include a minimum portion of ‘environmentally sustainable Investments’ (SFDR article 9), EU Taxonomy-aligned investments, or enhanced article 8 investments, consisting of article 8 investments (SFDR article 8) which also include Principal Adverse Impact (PAI) indicators.

Linking the new regulatory requirements to the findings of this empirical research, it is reasonable to expect that ESG-unaware investors will no longer exist, as investment firms will be legally required to inform these clients about the ESG implications inherent in their investments. This will give rise to an increase in supply of sustainable financial products (MiFID-aligned), as investment firms strive to keep up with the increased demand for these products. The rise in supply will most likely be larger than the increase in demand, since a portion of the new ESG-aware investors might continue disregarding ESG information, if ESG financial products are priced unreasonably (excessively high management fees). This will ultimately lead to higher competition among investment firms, with a consequent downward pressure on fees in the long-run. Lower investment costs could subvert individual investors’ incentives, as they decide on whether to invest in ESG active or passive funds. Accordingly, it might become desirable for ESG-aware investors to invest in ESG active funds who practice ESG engagement, as opposed to it being a strategy exclusively suitable for ESG-motivated investors.

The information contained in this blog post is not to be taken as constituting the giving of investment advice or recommendation. The reader is acting for its own account, and they will make their own independent decisions as to whether any investment is appropriate based upon their own judgment.

About the Author

Marco Morazzoni is a recent graduate in MSc Applied Economics and Finance from Copenhagen Business School. Having an interest in finance and ESG, he wrote his master’s thesis on “ESG exchange-traded funds versus ESG active funds: how can individual investors pursue ESG objectives while achieving competitive risk-adjusted returns?”

Kristjan Jespersen is an Associate Professor at the Copenhagen Business School. He studies on the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance.

Photo: Khanchit Khirisutchalual on iStock

Sustainability enabler or complexity blinder?

By Milena Karen Bär & Dr. Kristjan Jespersen

◦ 5 min read ◦

The first step of the EU Action Plan of Sustainable Finance

New regulations in the ESG sphere are on the upswing especially in the EU. To reach the commitments of the Paris agreement, the European commission has introduced new regulations as the first step of the EU action plan: the Sustainable Finance Disclosure Regulation (SFDR). The first level was already implemented on March 10th 2021. The implementation of the regulation is an extension of the EU Taxonomy, amending the issue of greenwashing among financial market participants (FMPs). The new reporting requirements are profound and will be fundamental to almost any participant on the European markets, whether you are in the financial, or for that matter, the manufacturing, retail, service, non-governmental and governmental sectors.

The European Union’s experiment in defining what is sustainable and in directing markets to more sustainable investments, is putting pressure on market players to keep up with the quickly paced regulative developments.

Two main issues are subject to the debate of appropriate implementation of the SFDR, which entail firstly, the uncertainty of product classification and secondly, the complexity of data collection and usage. Not only all those affected must revise their whole reporting regime, but the EU must ultimately also ask itself the question whether the regulations have nurtured the intended behavior of the market. 

SFDR and PAI in general

The SFDR is implemented to benefit clarity for investors and asset managers, by improving their ability to compare investment options from a sustainability point of view. Therefore, the SFDR provides a collective framework, which requires FMPs to disclose the way they are taking sustainability risks into consideration in its business practices (entity level) and in its financial products (product level) in a consistent and curated fashion.

Additionally, the FMP must report on the principal adverse impacts (PAIs). These contain a list of mandatory and voluntary adverse impact indicators, covering environmental issues and the field of social and employee matters, respect for human rights, anti-corruption, and anti-bribery matters. Based on the SFDR disclosures, the product offerings can then be classified within the three categories referred to as article 6, 8, or 9 products, which indicate the level of greenness ranging from article 6 which does not consider sustainability at all, and article 9 which must follow a sustainable objective.

Issues arising 

The objective of the EU Action Plan and the SFDR is to reorient financial capital towards sustainable products and solutions. However, certain challenges raise the question whether the regulation can indeed serve this very purpose. To begin with, the mechanics of defining light and dark green products is lacking a foundation and boundaries, allowing for self-interpretation. The differentiation between light and dark green is ambiguous, and thus instead of serving as a guideline, is increasing uncertainty about what the articles constitute. 

Issue 1: The color palette of light and dark green assets

One might say, just as colors are perceived differently by each human, light and dark green assets can be various shades of green and thus, on completely different sustainability levels. The regulatory product declaration is not yet methodologically sound, the lack of distinction of the two leaves room for interpretation of the classifying entity. So far, no specific classification mechanism or framework exists that FMPs can apply and are thus able to approach the classification in more prudent or more generous ways. One may put a product under article 8, while at the same time another FMP might classify the same product under article 9. 

It seems the darkness of green is up for preference of the asset manager. Although there may be consensus that exclusion strategies are minimum requirements for both classifications, the scope of exclusion criteria varies greatly. This allows for instance some article 9 products to still be involved in controversial actions, such as fossil fuels, tobacco, and controversial weapons. 

Secondly, collecting relevant data poses a challenge, and even if data is available, its variety used to report on the SFDR and the PAI, makes the curation inconsistent and biased. An investor might have a full PAI statement to assess its investment, but can one trust the accuracy and relevancy of the data? 

Issue 2: Quality of data fades into the background

The PAI statements can be considered as a curation tool for asset managers (AM) to filter for the most sustainable products and steer capital towards green transition products. Even though the framework of the PAI indicators might be well structured, what is important is the quality of inputs. But the complexity of PAI indicators poses challenges for almost any market participant. PAI data is often not readily available, and this is aggravated by the fact that this data needs to be tracked on a continuous basis. Data collection and maintenance can thus become costly for the underlying portfolio companies. Large cap companies can overcome this issue, but small cap players are confronted with an expensive data collection for a wide range of PAIs or with the need to opt out due to lack of data availability.

Hence, large cap companies may gain competitive advantage without indicating greater performance. AMs incorporate the PAI data in a screening process to extract the most responsible products of the investment universe. However, some asset managers are simply selecting those assets with the highest coverage of PAI indicators. Again, leaving large cap companies in favor, although the high coverage of indicators not necessarily correlates with sustainable performance. The quality of the data fades into the background and investments with higher sustainable and financial potential can be missed out on. Ultimately, businesses leading the market today, may stay right where they are, without enabling opportunities for more innovative and greener solutions.

While the intention of the SFDR is to further restrict greenwashing, current practice may raise the question whether there are still loopholes for FMPs to label their products as greener as they actually are. Although we have seen regulations to be great drivers of sustainable corporate and market action, guidelines must be established to provide more specific and narrow pathways. The weak structure of product classification and the complexity of data may prevent the SFDR to provide a framework for more coherent and uniform information of sustainability risks. The European commission must clarify actual implementation practices, to enable the entire effect of capital reorientation. No market participant is exempted from the need to be aligned with the SFDR today, as new waves of regulations will follow, and it is to start paddling.

About the Author

Milena Karen Bär is a student researcher in ESG and Sustainable Investments, absolving a Master’s degree in applied Economics and Finance at Copenhagen Business School. Her research projects are mainly within the field of ESG metrics and regulation, with a focus on the investor’s side.

Kristjan Jespersen is an Associate Professor at the Copenhagen Business School. He studies on the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance.

Photo by Freddie Collins on Unsplash

How do we think about sustainable investing? Suggestions from an exploratory study

By Margherita Massazza & Dr. Kristjan Jespersen

◦ 4 min read ◦

From the outset, this blog post takes the perspective that behavioral finance is required to assess the perceived tension in sustainable investing (SI). Our work investigates the extent to which sustainability considerations are included in investment decisions, and the drivers behind SI approaches.

Sustainability is increasingly integrated in financial markets, with the acronym “ESG” (Environment, Social, Governance) becoming an all-encompassing term widely used in all phases of the investment process. According to a recent global review, sustainable assets [1] reached USD 35.3 trillion at the end of 2019, representing 35% of total professionally managed assets, and they are set to grow further in the coming years. Yet, despite its growth and the positive sentiment associated with it, there is an inherent tension in sustainable investing.

This tension stems from the apparent disconnect between the theoretical assumptions of classical financial models, focused on risk and financial returns as the predominant determinants of investment decisions (e.g., Capital Asset Pricing Model, Modern Portfolio Theory, etc.), and the empirical evidence of SI, where portfolio allocations are affected by non-financial aspects like personal values and social pressures. How can we make sense of this tension? 

Usually, the contradiction is formulated in terms of a tradeoff between financial returns and ESG impact: in order to achieve one, investors must forego the other. However, this view is still rooted in a traditional finance perspective, according to which including ESG considerations or seeking a non-monetary impact comes at the expenses of returns.

There needs to be more nuance in how sustainable investing decisions are investigated and assessed. Given the pervasive and engaging nature of ESG issues, sustainable investing is likely shaped by internal and external forces that go beyond the financial-vs-impact debate. By acknowledging the role that cognitive limitations, biases, and the external context play for investments, behavioral finance allows to capture the financial impact of factors that tend to be overlooked in mainstream financial theories. 

Under this perspective, the authors carried out a study based on primary data from European retail and professional investors. It focused on two main questions:

To what extent are sustainability considerations included in investment decisions?

Firstly our analysis broke down the relative importance of four attributes for the investment choice, i.e. the relative weight (expressed in percentage) that each characteristic exert on the investment decision. Sustainability attributes carry a relative importance of about 38%, with ESG score displaying a 26% relevance, and the investment’s end objective a 12% relevance. Taken together, these parameters display a larger role than standard financial attributes of risk level (relative importance of 33%) and expected returns (relative importance of 29%) (Figure 1). The results confirm the significance of ESG aspects for a well-rounded assessment of an investment, arguing against the traditional perspective of risk and returns as the sole determinants of investment choices.

Figure 1 – Relative importance of investment attributes for investment choice, by investor type
What drives investors to invest sustainably?

Secondly, we identified the main tendencies leading investors to engage in SI. Starting from a set of 16 heterogeneous motives, 4 main drivers emerged: a desire for self-expression, a financial-strategic rationale, the influence of the external context, and an opportunistic motive (Table 1). These drivers depict SI as a multifaceted phenomenon that unfolds along various dimensions, and not only on the financial and impact layers. They propose a novel perspective to think about SI, which takes into consideration how endogenous (e.g., alignment with values) and exogenous (e.g., role of regulation) forces may affect investments. 

Table 1 – Drivers of Sustainable Investing
How can the findings help us better assess sustainable investing?

This analysis shows the extent to which ESG aspects are integrated in investments, confirming their importance for investment choices. It also shows the multidimensionality of SI drivers, which eschews the rigid perspective of traditional finance and accounts for the impact of relevant internal and external factors. 

With this understanding, it is possible to formulate practical insights for industry participants to address the current challenges of SI. In fact, there are concerns related to the over-inclusion of sustainability in investment decisions at the expenses of fundamental financial analysis, which may lead to mispricing, inflated asset evaluation, and potentially an “ESG bubble”.

  • Standardize definitions and improve sustainability communication. Social context emerged as one of the drivers of SI, and regulators have a strong role to play in harmonizing the meaning of sustainability in finance. Legislative and non-governmental bodies are working to overcome the lack of standard definition and frameworks in SI – e.g., via the European Union’s Sustainable Finance strategy. Their effort to create a common vocabulary and shared understanding of what SI entails will help to align incentives, concepts, and strategies. In parallel, the financial-asset supply side (e.g., fund providers, financial advisors, etc.) should communicate clearly and extensively on the sustainability aspects of financial products. Given the importance of ESG characteristics for investment choices, this will ensure investors have reliable and trustworthy information to guide their investments. Together, the agreement in terminology and the availability of sustainability information will reduce the possibility for misinformation and opportunistic tendencies to sway investment decisions.
  • Recognize the existence of complex drivers behind sustainable investment decisions. Investors, both professional and retail, should evaluate how different motives affect their investment choices. Knowing that multiple drivers exist will ensure that investment are aligned with goals, limiting the influence of irrationality and misinformation. This will not only benefit investment strategies, but also curb counter-productive results such as the emergence of an ESG price bubble. To explore what drives investor’s decisions, an ad-hoc survey could be submitted ahead of opening investment accounts, mirroring the logic of the MiFID directive. This may have positive effects, such as involving more retail investors in sustainable investing [2].
  • Finally, consider adopting a behavioral approach when studying sustainable investing. The flexibility of behavioral finance may allow to grasp further insights and help to think about this timely topic in a novel way.

References

[1] The Global Sustainable Investing Alliance (GSIA) considers defines “Sustainable” all assets that integrate ESG factors in the analysis and selection of securities. More detail in their latest global report.

[2] Retail investors still face barriers to fully engage in SI: the topic is investigated in the paper “Investment Barriers and Labeling Schemes for Socially Responsible Investments” by Gutsche and Zwergel (2020).

About the Authors

Margherita Massazza is a CBS and Bocconi graduate in Economics of Innovation, with a focus on Sustainability. Her research investigates the links between traditional investments and behavioral finance to understand how sustainability decisions unfold. She is currently working in the Foresight team of AXA, an insurance company, where she studies the role that corporations will play in the future and how the concept of sustainability will evolve. 

Kristjan Jespersen is an Associate Professor at the Copenhagen Business School. He studies on the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance.

Photo by PiggyBank on Unsplash

No Trees, No Future: How can we unlock the full potential of conservation finance?

By Dr. Kristjan Jespersen, Dr. Izabela Delabre, Dr. Caleb Gallemore, and Dr. Katryn Pasaribu

◦ 3 min read ◦

Tropical deforestation continues at alarming rates, with 12 million hectares of tropical tree cover loss recorded in 2018. Much of this deforestation is linked to large-scale agricultural development. Palm oil companies are seen as key deforestation culprits due to high-profile media campaigns being led by NGOs and, in response, recent years have seen the proliferation of private sector pledges and initiatives to address deforestation in the palm oil value chain. There has also been growing international focus on forest conservation in the context of climate mitigation, with countries at 2021’s United Nations Climate Change Conference (COP26) pledging to halt deforestation by 2030. Multi-billion dollar initiatives, such as the Bezos Earth Fund are investing in nature-based solutions to address climate change, including through the protection and reforestation of forests and other ecosystems. 

Given these ambitions, an important question for corporate sustainability and conservation research and practice is how to link financing mechanisms for conservation and value chains, two policy streams that are generally disconnected. Actual methodologies for understanding appropriate, long-term financing for forest conservation remain elusive, and this knowledge gap hinders the clear assignment of responsibility, accountability and sustainability of conservation efforts.

Articulating “conservation finance” (the “mechanisms and strategies that generate, manage, and deploy financial resources and align incentives to achieve nature conservation outcomes”) with value chains could help align incentives between actors and facilitate increased financial flows from the private sector to conservation. 

Introducing No Trees, No Future – new research project

An ambitious new research project “No Trees, No Future – Unlocking the full potential of conservation finance”, funded by the David and Lucile Packard Foundation, seeks to design and test a rigorous methodology for understanding the responsibility for conservation finance of influential firms in the palm oil value chain. It addresses important knowledge gaps that currently impede effective conservation finance, examining questions such as: Which firms are responsible for financing conservation? What are the motivations of firms to engage in different types of conservation finance initiatives? To what extent are companies willing to internalize conservation costs? What might cost-sharing models look like? 

This novel, interdisciplinary research project uses a mixed-methods design that combines in-depth case studies, surveys and remote sensing to explore how the costs of conservation may be shared effectively and equitably between palm oil value chain actors, and provides a resource for external stakeholders seeking to identify firms’ contributions to land cover change, in Indonesia to start with.

The research will involve the development of data-intensive methods to assess the spatial footprint of the supply chains of a set of lead firms in the oil palm value chain, as well as in-depth interviewing of stakeholders across the palm oil value chain to identify the feasibility and possible impacts of adopting new methods for conservation finance. 

Our goals are: (1) to develop a methodology that can be readily applied to estimate lead firms’ responsibility for contributing to conservation finance in the palm oil sector, and (2) that business models and strategies integrate conservation finance effectively, supporting more equitable cost sharing. 

The research will identify several possible models for assessing spatial footprints of firms’ supply chains in the oil palm sector, testing their feasibility with a selected group of investors and conservation project proponents. Following this initial project, which focuses on the palm oil value chain, we intend to explore possibilities in other commodity sectors, and how to scale up efforts to support effective and equitable conservation finance.

To what extent will companies be willing to absorb the costs of conservation finance into their supply chain transactions? How might potential barriers be overcome? It is our intention that the project contributes to companies taking on greater responsibility for conservation finance, embedding long-term conservation costs into the palm oil value chain (that are currently externalized), disrupting ‘business as usual’ to support forest conservation, given their critical role in climate mitigation and biodiversity conservation. 

We will share our interim findings on this blog as the project progresses. We would be delighted to hear from researchers from different disciplines and practitioners working in this field. If you have any questions or comments, please get in touch! 

About the Authors

The two-year project is led by Dr. Kristjan Jespersen, Associate Professor at the Copenhagen Business School (CBS). The research team includes Dr. Izabela Delabre, Lecturer in Environmental Geography at Birkbeck, University of London; Dr. Caleb Gallemore, Assistant Professor in the International Affairs Program at LaFayette College, Pennsylvania; and Dr. Katryn Pasaribu, seconded from Universitas Prasetiya Mulya to CBS.

Photo by Franz Schäfer on Unsplash

How Should Arctic Drilling Be Defined? The 3 Key Problems with Formulating Investment Exclusions

By Zuzanna Lewandowska and Dr. Kristjan Jespersen

◦ 7 min read ◦

Oil and gas development in the Arctic has long been a subject of controversies, due to the vulnerability and pristineness of the arctic ecosystem, as well as the challenges that the region faces because of climate change. In the light of growing pressure from stakeholders, legislators, and the public, an increasing number of banks, insurers, and investors have been committing to restricting financing of arctic drilling. Typically, this is addressed by formally excluding the funding of oil and gas development in the Arctic from the firm’s investment universe. 

However, several key issues with the current formulations of financial actors’ investment exclusions, make the restrictions potentially ineffective in curbing oil and gas expansion in the Arctic. Firstly, the exclusions typically apply only to financing and coverage, allowing for unrestricted provision of corporate support. Secondly, imprecise financial proxies are used to specify the activity levels at which an exclusion should be applied. For example, exclusions are often based on a revenue threshold, which does not cover early-stage exploration activities that typically do not generate revenue. Lastly, most restriction policies do not refer to a specific definition of the Arctic, which allows for the use of a case-by-case approach when making financing decisions. Where a definition of the Arctic is used, justification is rarely provided for why a specific exclusion zone had been chosen.  

Arctic restriction policies of 10 banks listed among the top supporters of arctic expansionists from 2016 to 2020 (Source: Reclaim Finance, 2021). 
Problem 1: How should the Arctic be defined?

Figure 1 below shows the geographic definitions of the Arctic which arctic restriction policies are most commonly based on. It is evident that they differ significantly in terms of scope. 

Definitions of the Arctic (Source: Nordregio, 2021). 

When choosing which definition of the Arctic to use in their exclusions, financial actors are presented with a difficult choice.

Selecting a wide-reaching exclusion zone, such as the arctic region monitored by the Arctic Monitoring Assessment Programme (AMAP), helps ensure that all assets located in the Arctic are covered. This said, however, such broad exclusions place investors at risk of missing out on profitable investments in ambiguous locations such as the Barents Sea, which has been argued to not be significantly different from the Norwegian sea in terms of oil spill response preparedness or ecosystem vulnerability. This dilemma becomes especially relevant in the context of asset managers’ fiduciary duty. 

At the same time, if the exclusion is based on a definition of the Arctic which is too narrow, the policy is rendered largely ineffective, as it fails to restrict the financing of arctic oil and gas projects which continue to have negative environmental and social impacts. Which definition of the Arctic should be used as basis of a restriction policy, needs to establish based on a nuanced understanding of the geographic distribution of material issues associated with oil and gas development in the area. 

Problem 2: Identifying the negative impacts of arctic drilling

To be able to argue for a targeted exclusion as part of a responsible investment policy, financial actors must credibly prove that the environmental and social impacts of a given activity are particularly dire. Indeed, the discussion is still ongoing as to what extent the documented harmful social and environmental processes in the Arctic can be categorized as by-products of arctic drilling, rather than as cumulative consequences of other activities.  

One of the most common environmental concerns regarding arctic drilling is that it contributes to the melting of the polar ice caps. However, research has found that while black carbon emissions from oil and gas exploration in the Arctic reduce the ice cover’s reflective properties, polar caps are primarily melting due to the increases in global temperatures. As such, one could argue that for an exclusion to significantly tackle the issue of polar ice cap melting, it should extend to investments in all fossil fuel developments worldwide. 

The negative environmental impacts which have been uniquely linked to arctic drilling (e.g., offshore oil spills, black carbon emissions, and biodiversity threats) are notably difficult to capture within a territorial exclusion zone. This is due to the lack of consistent data on their dynamically changing distribution. 

Black carbon emissions in arctic waters in 2015 (Source: ICCT, 2019). 

The issue with addressing the negative social impacts of arctic drilling (e.g., land conflicts, threats to food security) in an exclusion policy, is that similar issues are faced by local and indigenous populations in other vulnerable areas, where oil and gas extraction also takes place, and where investments are not subject to restrictions. Here, a notable example would be the Amazon. 

An additional complication results from the differing perspectives on arctic oil and gas development, with many local stakeholders crediting it with having improved infrastructure and employment opportunities in the region. 

Problem 3: A double materiality perspective – addressing the risks to oil and gas development operations in the Arctic 

From a risk management perspective, a comprehensive investment restriction policy should also account for the unique material risks to profitability of oil and gas projects in the Arctic, which make financing and coverage more volatile. This also falls in line with the double materiality approach to impact assessment. 

The most significant material risks to oil and gas operations which are distinctive to the Arctic are caused by permafrost thawing, sea ice and icebergs, and extreme weather conditions. Similarly to negative environmental impacts, the dynamic nature of these arctic risk factors makes them difficult to capture within a geographic exclusion zone.

The monthly arctic sea ice index for December 2021 (Source: National Snow & Ice Data Center).
What have we learned?

Based on the discussion of the complexities associated with arctic exclusions, it can be concluded that the weakness of key financial actors’ arctic policies is that they deploy ex ante investment restrictions as standalone policy solutions. Arguably, exclusions can be an effective instrument, but only as part of a comprehensive responsible investment strategy, which covers all stages of the investment process and addresses the extensive information needs regarding material issues. 

A well-formulated exclusion can help streamline the pre-investment negative screening process by filtering out investments which:

  1. Have been proven to be associated with unique material risks and negative impacts,
  2. Can be identified with high precision, accounting for the dynamic changes and complexities in the underlying material issues.  

Those of the material risks and impacts which cannot be captured in an exclusion policy should be addressed using other pre-investment (positive and negative screening, information requests and questionnaires) and post-investment (active ownership and thematic engagements) measures.

Such a nuanced approach to policy exclusions could provide a powerful responsible investment tool for financial actors in areas and sectors which require additional due diligence. 

About the Authors

Zuzanna Lewandowska is a student researcher in ESG and Sustainable Investments at Copenhagen Business School. She studies responsible investment strategies and the state of the art of measuring and reporting information on ESG factors. She has a background in international business and strategy, global market intelligence, and policy consulting.

Kristjan Jespersen is an Associate Professor at the Copenhagen Business School. He studies on the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance.

Photo by Annie Spratt on Unsplash

How the EU Taxonomy Impacts Businesses Beyond Europe

By Andreas Rasche

◦ 4 min read ◦

In 2020, the EU launched its classification system for environmentally sustainable economic activities, the so-called “EU Taxonomy Regulation” (hereafter: the Taxonomy). The Taxonomy is part of an integrated system of new EU-wide sustainability regulations, including new disclosure requirements for investors. While the Taxonomy is based on EU regulation, it can be expected that it will also have effects on businesses beyond Europe. 

Basically, there are two ways in which the Taxonomy can affect non-EU companies. First, there are direct regulatory effects on non-EU companies. Because of the global nature of financial markets and the existence of global trade flows, non-EU companies will be directly exposed to the Taxonomy in different ways. Secondly, there will also be more indirect consequences, which I call “ripple effects”. Such effects exist because the Taxonomy raises the bar globally for how sustainability information should be disclosed, by whom it should be disclosed, and it which ways it can be disclosed. I briefly discuss both effects. 

Direct Effects 

In the short run, some non-EU companies will be exposed to the Taxonomy because of direct regulatory effects. Consider the following two examples: 

  • A non-EU investor or financial advisor that wants to offer products on the European markets will be exposed to the Sustainable Finance Disclosure Regulation (SFDR) which requires an alignment with the EU Taxonomy. To offer financial products on European markets non-EU investors will therefore have to align with SFDR and hence the Taxonomy.  
  • A non-EU company with EU-based investors is very likely to receive questions from these investors about the company’s alignment with the Taxonomy. Investors need this information to meet disclosure requirements under SFDR, for instance to classify their financial products in terms of their sustainability exposure. In other words, at least some non-EU companies will start disclosing more on Taxonomy-related indicators. 

I could list more examples here (e.g., non-EU asset managers wanting to raise money in the EU), but the message is clear: the effects of the Taxonomy are not limited to businesses located in Europe. Particularly, the Taxonomy’s interaction effects with SFDR will affected non-European companies as well as investors.  

Ripple Effects

Ripple effects are more indirect effects. They occur if an intervention, such as the introduction of a new regulation, creates further effects that reach beyond the system that was supposed to be influenced by the intervention. Such regulatory ripple effects can occur in different ways.

In the context of the Taxonomy, one important ripple effect is related to the practices of European businesses. Many of these businesses are global players, and they will apply the Taxonomy to their global operations regardless of whether these operations occur in a country that is legally covered by the Taxonomy. Sustainability reporting is usually done at the corporate level and therefore also includes firms’ non-European operations. The EU’s new disclosure regulation the Corporate Sustainability Reporting Directive (CSRD) will require that such reporting at the corporate level is taxonomy-aligned. In this way, European global players will “export” the Taxonomy to other parts of the world.

There are also ripple effects at the political level. The system of new EU legislation – including, the Taxonomy, SFDR, CSRD and other regulatory elements – is unique in the world. So far, no other region or country has a comparable system. However, the major economic regions in the world have also realized that future business will be difficult without sustainability-related regulations that enhance transparency and prevent greenwashing.

Consider two recent examples: In June 2021, the UK announced the creation of a Green Technical Advisory Group. This Group is supposed to develop and implement a UK green taxonomy, which is expected to be based in part on the EU Taxonomy system (e.g., in terms of metrics). In the US, President Biden signed Executive Order (EO) 14008 during his first days in The White House. While this EO does not aim at creating a US-based taxonomy, it has created a National Climate Task Force across different federal departments, which at least some see as an important step into the direction of more rigorous ESG-related regulation. 

Other countries and regions are likely to look to Europe when thinking about how to design a workable taxonomy regulation, as the challenges that have driven the creation of the EU Taxonomy are the same throughout the world: we need more transparency around sustainable economic activities, we need to better benchmark firms’ sustainable activities, and we we need to prevent greenwashing.

It is too early to say whether there will be convergence among the taxonomies developed by different countries and regions, but one thing is for sure: they are here to stay… 

About the Author

Andreas Rasche is Professor of Business in Society and Associate Dean for the Full-Time MBA Program at Copenhagen Business School. More at: www.arasche.com. 

Photo by Krzysztof Hepner on Unsplash

Social impact bonds in the Nordics: insights from ‘Copenhagen Impact Investing Days 2021’

By Mikkel M. Andersen and Ferran Torres

◦ 5 min read ◦

A social impact bond (SIB) is an innovative model for public service delivery characterized by flexible service interventions and an outcomes-based payment structure. SIBs use private investments to drive new types of welfare activities, shifting the risk from the public to the private sector. Today, several SIBs are emerging in Nordic countries, but do rich welfare states even need these financing mechanisms? And in case they do, for what? These questions were discussed by three leading SIB-experts during the ‘Copenhagen Impact Investing Days’ 2021.

During the last few years, the use of social impact bonds (SIBs) and other social finance-instruments has increased dramatically in Nordic countries. SIBs were originally used as financing tools supporting public organizations in the UK experiencing budgetary restraints. Thus, as the model spread into other contexts, the question begged whether this tool would be appropriate for Nordic countries as well. The following piece summarizes some key reflections from the panel discussion regarding this question at Copenhagen Impact Investing Days 2021 (CIID). 

SIBs in the Nordic countries: an emergent but fast-growing field 

While more than 200 SIBs have officially been developed worldwide, they are still an emergent phenomenon in most Nordic countries. Currently, 17 SIBs have been initiated in Finland, Sweden, Denmark, and Norway – primarily within employment, preventive health, and social welfare. Also, at least 7 additional SIB-projects have been announced. The first SIB-evaluations are also starting to come up; for example, the assessment of the first Swedish SIB in Norrköping shows promising social effects, despite not creating a financial return for investors. Finnish intermediary-organizations are also planning to develop SIB-projects within environmental areas, including recycling and energy efficiency in housing.

Overall, Finland seems to be on the forefront in the Nordic regions, followed by Sweden, while Denmark and Norway are a few years behind. On the investment side, significant progression is also being made. A Finnish fund-of-funds is currently being developed with an expected capital of 100 million Euro. In Sweden, work is also being done to set up a national outcomes financing structure to ensure the scaling of future outcome-based initiatives. Last, legislative action to ensure social finance practices has been taken – most recently in Denmark with Børnene Først promising more focus on social investment-practices to ensure preventive social welfare.  

Emerging practices for Nordic SIBs 

Some early experiences regarding the relevance and usage of SIBs in the Nordic countries were discussed during the CIID-conference. First and foremost, SIBs seem to be a part of a much larger trend in public welfare, oriented towards measuring, incentivizing, and resourcing towards long-term social outcomes. While SIBs might constitute effective solutions in themselves, they are also catalysts for evolving social investment practices because they can 1) showcase the benefits of new types of welfare services by linking social and economic outcomes, 2) provide practical solutions for realizing preventive and proactive welfare services, and 3) facilitate cross-sectoral coordination through new procurement frameworks by bringing new stakeholders to the table. 

The SIB can be a useful way to show the municipalities, and the government, how to buy the solutions that actually work. 

Hans Henrik Woltmann, Investment Manager, The Social Investment Fund (DK)

What seems to be critical is also the perception that SIBs in the Nordic countries should not function as a replacement to or a privatization instrument for public welfare services. Instead, SIBs should be understood as a supplement to these, allowing public actors to change how they buy public interventions while testing new welfare solutions through de-risking strategies. Still, the novelty of the method, and its experimental character, makes it challenging to assess its true potential.

Does the SIB really allow us to scale or is it just a fancy way of financing projects? I think the question is still out there 

Tomas Bokström, Project Manager, Research Institutes of Sweden
Looking into the future: necessities for a social finance-ecosystem 

Summarizing the points from the debate, SIBs in the Nordics are on the rise and have the potential to become welfare instruments themselves, and a vehicle for promoting a social investment agenda. Looking ahead, three key aspects will be important for enhancing the Nordic social finance ecosystem: 

  1. Establish more evidence from practice and leverage these actively with public organizations to spark discussions. 
  2. Insist on experimentation and a methodological openness towards the SIB-model. Its value also resides in its ability to test innovative social interventions to later diffuse them through public practices fitting better into specific welfare situations. 
  3. Follow and engage in political discussions regarding the ambitions for SIB-practices. The SIB market is still in its infancy and relies heavily on market-maturement initiatives to develop better infrastructure.

Panelists for the discussion of Nordic Impact Bonds at ‘Copenhagen Impact Investing Days 2021’:  

· Tomas Bokström, Project Manager, Research Institutes of Sweden
· Hans Henrik Woltmann, Investment Manager, The Social Investment Fund 
· Mika Pyykkö, Director, The Centre of Expertise for Impact Investing, Finland
· Mikkel Munksgaard, PhD Fellow, Department of Management, Society, and Communication, CBS (moderator)
· Ferran Torres Nadal, PhD Fellow, Esade Entrepreeurship Institute & Institute for Social Innovation, ESADE (moderator)

About the Authors

Mikkel Munksgaard Andersen is PhD Fellow, at CBS Sustainability, Department of Management, Society and Communication (MSC) at CBS. Through his PhD-project, Mikkel studies the development and implementation of social impact bonds and payment-by-results methods in Denmark. His work centralizes around the distinct characteristics of Scandinavian impact bonds and their role in supporting and financing public services. The research is driven by a participatory research design and is co-financed by Region Zealand. Mikkel has earlier worked in the social finance-field both on an academic and practical level.

Ferran Torres Nadal is PhD Fellow at the Entrepreneurship Institute and the Institute for Social Innovation, ESADE Business School in Spain. His PhD advisors are Lisa Hehenberger and Tobias Hahn. His work is focused on understanding and explaining tensions and paradoxes around complex phenomena. He is particularly interested in studying the challenges and opportunities that come with cross-sector initiatives, such as social impact bonds.   

Photo by Katt Yukawa on Unsplash

Unaccounted Risk: The Case of Sulfur Hexafluoride (SF6) in Offshore Wind Energy

By Esben Holst & Dr. Kristjan Jespersen

◦ 5 min read ◦

Carbon accounting provides a science-based measurement of greenhouse gas (GHG) emissions, achieving greater accountability of companies’ emissions causing global warming. GHGs are reported in CO2 equivalents (CO2e), meaning GHGs with widely different chemical qualities and environmental impact can be presented in a single understandable metric. However, the underlying methodology is debatable. This article questions whether the CO2e of Sulfur Hexafluoride (SF6) is misreported.

What is SF6 and why is it a hurdle for a green energy transition?

SF6 is used as an insulator in a wide variety of electrical equipment, mainly to prevent fires in incidents of short circuits. It is found in transformers inside windmills, offshore and onshore substations, and in power cables.

(Illustration to the left shows a sideview of a windmill turbine – Source: CAT-Engines. Right: an offshore wind energy system – Source: Nordsee One GmbH)

SF6 is a synthetic man-made GHG and cannot be reabsorbed naturally like CO2, meaning once emitted, it does irreversible damage. Most GHGs remain in the atmosphere around 100 years – SF6 remains for 3,200 years. These numbers are given by the Greenhouse Gas Protocol (GGP) based on calculations by the Intergovernmental Panel on Climate Change (IPCC). 

The IPCC’s metric Global Warming Potential (GWP), reveals environmental harm of a given GHG in CO2e. What then, makes SF6 problematic when converted into CO2e? SF6 has a GWP 23,500 times higher than CO2 – a value that is difficult to comprehend. The GWP metric is calculated using a 100-year timeframe based on GHG’s environmental harm. Yet, SF6 has an atmospheric lifetime of 3,200 years, essentially leaving 3,100 years of environmental harm unaccounted for. Using a simple logarithmic function incorporating IPCC data accounting for the missing 3,100 years, the GWP almost doubles. As illustrated below, this indicates how SF6 may be misrepresented in terms of environmental harm in CO2e emissions reporting.

As found by AGAGE – MIT & NASA, other worrying trends are observed. The atmospheric concentration of SF6 has more than doubled in the past 20 years. Luckily, its current concentration in the atmosphere remains low relative to other GHGs such as Methane or Nitrous Oxide.

Source: AGAGE

Regardless, the GWP of these two GHGs pales in comparison to the mindboggling detrimental effect of SF6 on the environment. Emitting this gas should therefore be strictly regulated.

Greenhouse Gas Emissions Reporting – Diverging Approaches

It only takes a little digging into offshore wind energy players to uncover diverging conversion methods of SF6 into CO2 equivalents (CO2e). The GHG emissions reporting methodologies of industry leaders use different emissions factors to convert SF6 into CO2e. An example of underreporting is illustrated by Vattenfall in their 2019 sustainability report, reporting SF6 as 15,000 times more potent than CO2. The emissions factor given by the GGP is 23,500. Ørsted uses a GGP emissions factor for the same gas in their 2019 ESG report. Yet, while Energinet also states it uses the GGP reporting framework in their 2020 CSR report, it uses an emissions factor of 22,800. The ownership distribution between Vattenfall and Ørsted in the Danish wind farm Horns Rev 1 of 40% and 60% respectively, thus blurs accountability and severity of reported emissions. As highlighted by the BBC, atmospheric concentration of SF6 is ten times the reported amount by countries. The IPCC and GGP are also aware of this.

During the past decade…actual SF6 emissions from developed countries are at least twice the reported values. (Fifth Assessment Report of the IPPC)

Measuring Impact of SF6 Leaks by Offshore Wind Players

SF6 emissions will rise exponentially alongside expanding electrified energy infrastructure using equipment containing this gas. This, together with repeated SF6 leaks, perpetuates the worryingly steep upward trend in atmospheric content of SF6 shown above. In 2020, Energinet reported a leak of 763.84kg SF6, or 17,950,240kg CO2e. The environmental impact of this leak is about the same as the emissions of 53 SpaceX rocket launches. Energinet has since admitted to years of underreporting of SF6, leading to amended SF6 emissions related to normal operations doubling.

Leaks of SF6 are too common. In Ørsted’s 2020 ESG report, a major leak at Asnæs Power Station was mentioned without disclosing the actual amount – withholding important risk-related data from investors. However, Energinet disclosed an SF6 leak of 527kg at that same facility in their 2020 CSR report. The leak for which Ørsted is responsible, yet feels is not material to disclose, is therefore potentially around 12,384,500kg CO2e. Indicating light at the end of the tunnel, Vestas has included SF6 on their Restricted Materials list since 2017, as well as introducing a take-back scheme for infrastructure containing this gas – setting a better example for business models of our green energy transition leaders.

Strengthening the Global Response to Climate Change Risk

It is vital that we understand SF6 is so detrimental to fighting climate change beyond 2100 that it has no place in sustainable business models today. Even if CO2 emissions are reduced in alignment with 2100 Paris Agreement goals, reporting in a 100-year timeframe will not save a planet billions of years old. GHG reporting must be better regulated and scrutinised in order to deliver a truly green energy transition. Releasing a gas causing irreversible damage cannot be an acceptable trade-off for a short-term “green” transition. While most company reports claim no alternatives exist, this is not true. Therefore, SF6-free equipment must be mandatorily installed.

A green transition goes beyond 2100, yet poor regulation enables energy companies to present SF6-CO2e favourably by using lower emission factors. Offshore wind energy players have not provided comparable, accountable, and transparent reporting – indicating stricter regulations on GHG reporting are necessary.

The Way Forward: Better Regulation

In 2014, an EU regulation banned the use of SF6 in all applications except energy after lobbyists argued no alternatives exist. The EU acknowledges the environmental harm of SF6, yet EU action has been described as inadequate. Asset managers, institutional and retail investors are exposed to hidden environmental risks related to SF6 in terms of double materiality. Double materiality referring to the financial costs related to management of SF6 incurred once completely banned. Non-financial reporting of GHG emissions and CO2e needs to be regulated far more than current global regulations. Investors, society, and most of all our environment deserves better protection.

NOTE: This article is based on a Copenhagen Business School (CBS) research paper in the course ‘ESG, Sustainable & Impact Investment’ taught by Kristjan Jespersen – Associate Professor at CBS – as part of the newly introduced Minor in ESG. The paper questions the greenness of wind energy by using the case of three large offshore wind energy farms in Denmark: Horns Rev 1 & 2 and Kriegers Flak. The findings are based on ESG, sustainability & annual reports from 2015-2019 of all involved OEMs, manufacturers, operators, and energy grid providers. Implications of the findings point to a coming hurdle within the electrification of a global green energy infrastructure transition. 

About the Authors

Esben Holst, an SDG and CSR research intern at Sustainify, is a Danish-Luxembourgish masters student at Copenhagen Business School. Besides attending the newly introduced Minor in ESG at CBS, his past studies focus on international business in Asia and business development studies.

Kristjan Jespersen is an Associate Professor at the Copenhagen Business School. He studies on the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance.

Photo by Karyatid on Unsplash

SFDR, NFRD and the EU Taxonomy – What is their relationship?

By Andreas Rasche

◦ 5 min read ◦

The new Sustainable Finance Disclosure Regulation (SFDR) is on the minds of many investors these days. While a lot has been written on SFDR itself, I discuss how it relates to the Non-Financial Reporting Directive (NFRD) and the EU Taxonomy on sustainable economic activities. Taken together, these regulations can be overwhelming and maybe even confusing. While this is not the right place to comprehensively discuss all three regulations, I make some clarifications on their interlinked nature. 

SFDR, NFRD, and the EU Taxonomy – What are we Talking About? 

To start with, let us briefly review the three legal instruments, all of which belong to a series of EU regulations under the EU Action Plan on Sustainable Finance.

  • NFRD is the EU legal framework for regulating the disclosure of non-financial information by corporations. It was adopted in 2014 and states that corporations have to report on ESG information from 2018 onwards (for the 2017 financial year). NFRD is rather flexible – it applies only to so-called “public interest entities” (basically rather big corporations) and it contains so-called comply-or-explain clauses (allowing for non-disclosure of information if this is made transparent and reasons are given). 
  • SFDR is the new EU regulation that introduces rules for financial market participants (FMPs) and financial advisers (FAs) to report on how they account for sustainability risks. SFDR applies at the “entity level” (i.e. requiring financial firms to report on how the whole organization deals with such risks) and also on the “product level” (i.e. requiring firms to report on how their financial products are affected by such risks). SFDR contains few comply-or-explain clauses (e.g., smaller firms, with less than 500 employees, can opt out of reporting on due diligence processes). The regulation asks all FMPs and FAs to report on sustainability risks even if they do not offer ESG-related products. If an entity offers ESG-related products, SFDR requires additional disclosures depending on how “green” the product is considered to be. SFDR came into force on 10 March 2021. 
  • The EU Taxonomy regulation (hereafter: the Taxonomy), which entered into force 12 July 2020, reflects a common European classification system for environmentally sustainable activities. Basically, the Taxonomy tried to answer the question: What can be considered an environmentally sustainable activity? Answering this question is essential for investors to prevent “greenwashing” – i.e. a situation in which financial products are marketed as being sustainable without meeting sustainability criteria. The taxonomy defines six environmental objectives, and it defines an economic activity as sustainable if this activity contributes at least two one of these objectives without, at the same time, doing significant harm to any of the other objectives. 
Differences and Commonalities 

To start with, it is important to note the different legal status of SFDR/the Taxonomy as well as NFRD. NFRD is based on an older EU Directive (2014/95/EU). Directives imply that EU member states have to translate the broad requirements into national regulation. By contrast, SFDR (2019/2088) and the Taxonomy (2020/852) are both based on European regulation, which is immediately enforceable and does not require transposition into national law. 

To understand how the three legal frameworks relate to each other, look at the Figure below. NFRD applies to corporations of all kinds. Hence, for investors NFRD is mostly relevant because it stipulates how investee companies report ESG data. SFDR, by contrast, most concerns financial market actors and ensures transparency about how these report on sustainability risks to their audiences (e.g., retail investors). The Taxonomy was introduced to have a common reference point when trying to figure out whether an economic activity really is sustainable. The Taxonomy therefore has the power to further specify the regulations set out in SFDR and NFRD. 

source: Andreas Rasche
Emerging Relationships  

The linkages between the three frameworks will be further specified throughout the coming years. While SFDR has been in force since 10 March 2021, it is only in the so-called “level 1 stage of development”. As with many EU regulations, level 1 development sets out the basic framework principles for a regulation, however without specifying technical details. SFDR level 2 will come into force once the regulation is complemented with Regulatory Technical Standards (RTS), which are developed right now. The RTS will also specify the linkages to the Taxonomy in more detail (e.g., related to the “do-no-significant-harm” concept inherent in SFDR). 

So, what can we say right now? The current versions of SFDR and NFRD do not yet link disclosures to the Taxonomy. This is likely to change, especially with the SFDR RTS being further specified and rolled out (in early February the European Supervisory Authorities released their final draft of the SFDR RTS). Moreover, the NFRD regulation is currently under consultation and will be revised in the near future. However, two important linkages are important to consider right now.  

  • First, the scope of the Taxonomy is defined through NFRD and SFDR. In other words, if an organization is affected by NFRD and/or SFDR, the Taxonomy will also be relevant for its disclosure practices. It is important to note here that the EU Taxonomy defines further mandatory disclosures in addition to what is laid out by NFRD and SFDR. 
  • Second, the Taxonomy asks companies (incl. asset managers) to report the percentage of their turnover and capital as well as operational expenditures that are aligned with the Taxonomy. It also asks asset managers to report the percentage of their portfolio which is invested in economic activities that are aligned with the Taxonomy. 
The Future

We will witness a good deal of technical specifications of all three regulations throughout the next years. SFDR level 2 reporting will kick in once the RTS standards are part of the reporting (probably by mid-2023); also by 2024 year-on-year comparisons of data points under SFDR will be likely mandatory. The six environmental objectives of the Taxonomy will be specified through technical screening criteria, some of which will be released very soon. 

It is good to see non-financial reporting and sustainable finance being backed by strong European regulations. It allows for more comparison and benchmarking and hence transparency. But, of course, we should also be prepared for a good deal of clarifications that will be necessary until institutionalized reporting cycles can fully kick in and unfold their potential. 

About the Author

Andreas Rasche is Professor of Business in Society at the Copenhagen Business School (CBS) Centre for Sustainability. His latest book “Sustainable Investing: A Path to a New Horizon” (with Georg Kell and Herman Bril) was published recently. Email: ar.msc@cbs.dk Homepage: www.arasche.com

Portfolios at risk of Deforestation

How can financial investors better understand underlying risks and act accordingly

By Amanda Wildhaber, Dominik Wingeier, Jessica Brügger, Nico Meier, and Dr. Kristjan Jespersen

◦ 4 min read ◦

Forests play a crucial role in tackling climate change and protecting biodiversity. Around 12 million hectares of tropical forest worldwide were lost in 2018 and approximately 17% of the loss stem from the Amazon alone. The main drivers of deforestations are soy, palm oil, cattle and timber production. As deforestation may harm a company’s reputation, directly affect its supply chains and increase regulatory risks, many institutional investors are concerned about the impact deforestation can have on their portfolio companies.

How can deforestation be measured?

The definition of deforestation risk from an investor’s perspective is difficult to lock-in because different frameworks and approaches focus on different aspects of the risks. The amount of information and the lack of transparency can be overwhelming to financial investors. Therefore, a helpful framework for financial institutions to systematically evaluate the deforestation risk management of portfolio companies has been developed. The framework is divided into two parts, an internal assessment of a company’s commitments and achievements regarding deforestation and an external assessment of outside policies related to deforestation, namely binding laws and private sector initiatives. The framework may serve to complete a scorecard which gives an overview of how well prepared a specific portfolio company is and if it is able to deal with deforestation risks and future regulatory changes. The final scorecard reflects the deforestation risk of financial institution’s portfolio companies.

Is voluntary support sufficient?

Many companies voluntarily support sustainability initiatives and follow zero deforestation commitments (ZDCs) to signal their intention to reduce deforestation associated with the commodities in their supply chain. The reasons behind their commitments include demonstrating corporate social responsibility (CSR), reducing the risk of potential reputational harm and supply chain disruptions. To understand the value of these commitments in mitigating deforestation and associated risks, it is important to critically analyse them in terms of their scope, effectiveness, monitoring and achievements. This includes for example, assessing how companies define deforestation and whether they systematically measure the compliance with their commitments.

External pressure to facilitate internal commitments

It is valuable to see companies implementing robust internal policies and commitments to manage and monitor their deforestation risk. However, it is also important to have external policies in place to hold companies accountable. There are two types of external policies the proposed framework is based on.

  1. The first type are binding laws which apply for portfolio companies and thus represent a regulatory risk. The EU Timber Regulation (EUTR) of 2010, which prohibits the sale of illegally logged wood in the EU, is one example for such a binding law.
  2. The second type are initiatives by third parties, which are of a non-binding nature and complement the binding law. One such initiative is the Roundtable for Sustainable Palm Oil (RSPO), which is an initiative by private companies as well as external parties targeted to eliminate unsustainable palm oil production.
How do the companies score?

Based on the assessment of the two pillars of the framework – internal and external – a scorecard is derived which assists investors to better understand how a portfolio company or a new potential investment is managing its deforestation risk. Answering questions with scores from 1 to 3, whereby 1 is the best score and 3 the worst, the proposed scorecard allows the quantification of the deforestation risk management of a company. While the distinction between 1, 2 or 3 is not always straightforward, the final score gives a tangible assessment of how well a company is positioned to manage its deforestation risks and associated future regulatory changes. The following scorecard provides an overview of the assessment and indicates how well Nestlé is managing deforestation risks.

Having such a scorecard allows investors to manage and mitigate the deforestation risks they face in their portfolios. In addition, the final scorecard enables investment analysts to directly compare potential investments with other companies and can be used as a parameter in the investment process.

The call for action is getting louder

New regulatory requirements, growing public scrutiny and extended private sector initiatives (such as the investor-led initiative Climate Action 100+), mean that it is becoming increasingly important to properly manage deforestation risks. This is also becoming a key concern for financial investors and it is time to think about systematic approaches on how to include deforestation into the investment process. The proposed framework is intended to serve as a starting point for just that. It allows a quantification of deforestation risk and the identification of critical factors. Building the basis upon which investors can engage with companies. This is a first step to support the mitigating of not only financial but also ecological risks.

About the Authors

Amanda Wildhaber is completing her masters in Economics at the University of St. Gallen. She works as a Junior Consultant in the Strategy team of Implement Consulting. Her interest in ESG and sustainable investments developed when she wrote her bachelor thesis on social enterprises in India.

Dominik Wingeier is studying master’s in Banking and Finance at University of St. Gallen. Dominik has been working for BlackRock where he was responsible for executing and monitoring primary, secondary and direct investments in infrastructure projects.

Jessica Brügger is studying master’s in Business Innovation at the University of St. Gallen. Jessica is currently a board member of the Private Equity & Venture Capital Club of the University of St. Gallen and is particularly interested in making the financial industry more attractive to women.

Nico Meier is studying master’s in Accounting an Finance at the University of St. Gallen. Nico has been working at BLR&Partners where he is responsible for private equity investments. Additionally, he has experience providing M&A, ECM and DCM services.

Kristjan Jespersen is an Associate Professor at the Copenhagen Business School. He studies on the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance.

Source: photo by Justus Menke on Unsplash

Can we pay for success in healthcare?

By Mikkel Munksgaard

Demographic megatrends, such as ageing populations, challenges public health budgets in developed countries. Currently, health costs in OECD countries are growing at roughly double the rate as the average growth in GPD. ‘Pay for Success’ is an emergent, and highly innovative, partnership model promising both increased cost-effectiveness and patient-centric services in healthcare. Whether or not the model will constitute a critical feature of future health systems, only time will tell. 

Due to critical leaps in modern healthcare and medicine, the average life expectancy in developed countries has doubled since 1900 [1]. While this is an important success, it also challenges public health systems because chronic diseases occur much more often at old age. In fact, a Danish report states that the average health costs for an 86-year-old are 16 times higher than for a 20-year-old [2].

In addition, public health sectors are experiencing structural challenges inhibiting their capacity to deliver services effectively.

The lack of systematic assessments towards quality and outcomes of services creates disproportionality on financial priorities. Evidence indicates that up to 30% of healthcare expenses are wasted on unproven or unnecessary treatments.

World Economic Forum 2017

An example of this is the general de-prioritization of preventive health interventions over short-term illness treatment. 

Introducing ‘Pay for Success’ 

‘Pay for Success’ (PFS) has emerged as an organizational solution to the problems of asymmetry and ineffectiveness in public health.  A PFS-program is fundamentally a public commissioning model based on two distinctive features 1) an outcome-based contract and 2) the engagement of an external ‘investor’.

In an outcome-based contract service delivery is outsourced to a provider and the public commissioner pays for the realization of long-term health outcomes. Hence, the public “pays for success”. Because services, such as preventive interventions, could take several years to deliver the PFS-model involves an ‘investor’ that provides working capital for the provider – and thus, takes the majority of the financial risk. This could either be a non-profit organization, a for-profit organization, or both.  The first PFS-program was developed in 2010 and since then 200 programs have been initiated mobilizing a total capital of 420 Million Dollar [3]. Especially in the UK, the PFS-market has grown and is predicted to soon reach a total value of 1 Billion Euro (Carter 2019).

A simplification of the PFS-model inspired by Third Sector (2016) 
Challenges and future directions of ‘Pay for Success’ 

While empirical studies from the UK and US does indicate that the PFS-model performs better than other commissioning models [4], they also highlight a more complex organizational structure that takes time and resources to develop – which, consequently, creates high transaction costs ultimately challenging the model’s cost-effectiveness. Technical problems related to valuating health outcomes, and creating a payment structure around such, has proven difficult and time-consuming. Additionally, the complex governance structure of PFS-programs in the UK and US has been criticized for being too rigid and focused on short-term performance – thus, inhibiting innovation. 

The emergence of PFS-programs in Scandinavian countries poses an interesting field as emerging research indicates that these programs are fundamentally different from traditional PFS-models. The tendency to utilize more networked practices as well as the existence of comprehensive public data systems in Scandinavian welfare states could potentially solve some of the most critical challenges currently faced in PFS-development. What would seem critical for future PFS-development is to leverage these emerging insights and shine more light into the ‘black box’ of PFS-development.

References

[1] World Economic Forum 2017

[2] Kjellberg and Højgaard 2017

[3] The Brookings Institution 2021

[4] Albertson et al. 2018

About the Author

Mikkel Munksgaard Andersen is Ph.D. Fellow at CBS, MSC. Through his Ph.D.-project, Mikkel studies the development and implementation of social impact bonds and payment-by-results methods in Denmark. His work centralizes around the distinct characteristics of Scandinavian impact bonds and their role in supporting and financing public services. The research takes a point of departure in the Danish research- and innovation project PreCare which seeks to develop new services and organizational models for preventive and digitalized healthcare.  See more here.

The Uberization of corporate political action

By Dieter Zinnbauer

With more than USD 12 billion spent the 2020 US election cycle may well have been the most expensive political campaign in the world so far. Yet in the shadows of this epic political contest another campaign unfolded that in my view provides some really interesting early signals on emerging trends in corporate political activity.

Alongside the national election Californians went to vote on a number of plebiscitary ballot measures. Among them Proposition 22 that like no other exemplifies how business lobbying unfolds in the era of what is often called the gig-and platform economy.

Prop 22, as it is known for short, was spearheaded by Uber and Lyft as a last ditch effort after exhausting all judicial and legislative tactics to win an exemption from a new Californian labor law that aimed to force these companies to classify their drivers as employees, rather than independent contractors.

A special type of thing

Leaving aside the merits of the argument – as consequential and hard to defend the position of Uber and peers may be-  Prop 22 is remarkable on many fronts.  It exemplifies the growing use of what was once meant to be a plebiscitary counterweight to corporate influence by these very corporate actors to advance their own interests.  

It saw platform companies that connect millions of drivers and tens of millions of passengers in so called two-sided markets take fully advantage of these relationships by intensely lobbying and mobilizing these constituencies for their cause.

It witnessed the deployment of targeted push messages and suggestive survey snippets through the proprietary app infrastructure, administered and tracked by a black-box algorithm that also sets prices and assigns business opportunities and thus commands Foucauldian-like disciplinary allure. Which driver would want to be seen and classified to be unsupportive of the company’s political project while the day’s earnings depend on being assigned this one lucrative trip to the airport? 

Ballot 22 also starkly illustrates the chimera of political equality or of even the resemblance of a level playing field in a world with unconstrained campaign expenditures that resulted in the gig-side outspending the labor side by a factor of 10 to 1.  And it is truly remarkable in its brazen disregard of democratic legitimacy. It aimed to expressly derail a provision that was not hidden on page 1205 of a large body of complex legislation and stealthily whisked through without much public scrutiny. Instead it took aim at a piece of legislation that had been in the public, even international spotlight for quite some time, extensively discussed and lobbied on and resoundingly tested and confirmed in court.

Even more astounding, Prop 22 sought to prevent any future democratic course correction through including a clause that would require an unprecedented 7/8 supermajority in the legislature for overturning it – a much higher hurdle than is set for amending the US constitution.

All these features are fascinating in themselves and deserve a much more detailed examination which has already begun in academic circles, for example with regard to platform-led mobilization  or data-driven corporate advocacy and to which I hope to contribute to in a longer essay elsewhere soon. Here and now I just wanted to offer some very early and unpolished ideas on one more, largely overlooked angle that makes Prop 22 and the corporate political actions of Uber et al. so fascinating.

In very broad brushes the thinking here goes as follows: 

Businesses that are not explicitly chartered as public benefits corporations derive their social license to operate primarily by making a positive economic contribution in terms of innovation, resource efficiency et al. (and yes, by doing this as responsible corporate citizens that respect the spirit of applicable laws, planetary boundaries etc.). The longer-term ability of a company to be financially self-sustaining in a competitive, externality-free market situation is – absent any other claims about achieving non-financial societal benefits – a first approximation for such a positive economic contribution.

Society puts a higher economic value on the contribution of the corporation than the costs of its fairly priced inputs. The business model adds overall economic value, the business organization – not just the people involved in it as individuals claiming their citizenship rights – can invoke this overall economic contribution to justify a certain degree of standing in the democratic discourse.  

Yet this is precisely not the case with companies such as Uber and Lyft.  They have been losing vast sums of money for years, bleeding cash on every ride even while exploiting many regulatory gaps that lower their cost structures relative to their competitors in the ride-hailing business. All this was made possible by enormous sums of venture capital funding – USD 26 billion for Uber alone up until April 2020. Venture funders bet on those companies to eventually achieve a winner-takes-most status and commensurate pricing power in a market characterized by strong network effects and economies of scale /scope. 

The envisioned route to economic dominance, however, also requires to simultaneously build and assert the political influence necessary to stave off regulatory efforts such as categorizing drivers as employees and many other pricey regulations that threaten to close the very regulatory arbitrage opportunities on which large parts of the business model  of Uber, Lyft and other gig companies are ultimately built. 

Overall this results in a situation where venture-funding is at least as much about blitz-scaling political power as it is about financing hyper-growth for market dominance. Both are necessary, both reinforce each other. The build-up of political good will and supportive constituencies is not a by-product of building customer loyalty. It is an essential part of the strategy to architect a business model that critically depends on regulatory accommodation and complicity. Yet, all along and rather ironically this heavy reliance on political action and political success stands in stark contrast to the relative normative weakness of claims made by companies without a clear route to profitability that cannot convincingly back up their political voice with an obvious net positive contribution to overall economic welfare. Stripping away all ornaments what’s left is a story of VC-funded particularistic political rent-seeking. 

Now, much more needs to be explored here and there are many holes that can be punched into this storyline as described in these very broad terms. So please check back here soon for a more developed version of this argument. In the meantime I would love to hear your comments and criticism to help advance this conversation. 

 Epi-epilogue

Uber et al. won Prop 22 by a large margin of 58% to 41%. Prop 22 turned out to be the most expensive ballot initiative in US history. So far.  After the vote Uber’s CEO announced in an analyst call that the company will “more loudly advocate for laws like Prop 22  [and] work with governments across the US and the world to make this a reality.”  The company continues to loose large sums of money.

About the Author

Dieter Zinnbauer is a Marie-Skłodowska-Curie Fellow at CBS’ Department of Management, Society and Communication. His CBS research focuses on business as political actor in the context of big data, populism and “corporate purpose fatigue”.

Photo by ryan park on Unsplash

Delivering and Financing Better Societies

How can cities self-finance environmental and social solutions?

By Luise Noring

Every week, more than three million people move into cities looking for places to work and live. This puts an enormous strain on cities’ finances and capacity to provide for their residents. We can no longer – if we ever could – assume that taxes will pay for growing urban populations with growing demands for public infrastructure, goods and services. We need to find new ways of delivering and financing good societies for the billions of people living and working in cities.

Therefore, the challenge is not only to find the best environmental and social solutions for cities, but also to address how these solutions can be delivered and financed. All too often, for example, brilliant climate solutions are presented, but nobody wants to take responsibility for delivering and financing them. All too often, we hear of good solutions for social preventive action and public health that are never put into action. The solutions are there. The challenge is that the business case and investment proposition are either weak or non-existent. As a result, the only one with the incentive to implement the solutions is the cash-strapped government itself.

Hopeful scholars demonstrate how investing taxpayers’ money today could prevent massive expenditure tomorrow. Yet today’s tax revenues are already accounted for to pay for schools, roads, housing, hospitals, etc. This leads me to my principal research question and mission in life:

How do we deliver and finance better societies?

All too often, the only financial solution on the table is to increase and spend tax revenue. But there is no financial innovation in increasing and spending taxes. This ‘solution’ just means that bonds are repaid with future taxes even though we know full well that, in the future, taxes will still be needed to finance schools, roads, housing, hospitals, etc. Spending future taxes today only jeopardizes future generations’ ability to finance their schools, roads, housing, hospitals, etc. The same applies to tax increment financing (TIF), which is a common practice in urban development and economic revitalisation used in the US and subsequently adapted across much of the world.

The idea behind TIF is that local governments issue bonds based on future tax revenue increases. TIF assumes that urban regeneration can be financed by bonds that are serviced and repaid by future tax revenue increases. The proceeds of the TIF bonds are thus used to stimulate economic development through investments in urban regeneration, infrastructure and other public goods. The bonds are repaid mainly through property taxes resulting from investments and development activities. What happens though when the public investments fail to increase tax revenue paid by private owners? In such cases, local governments remain obliged to repay the government- guaranteed bonds.

Conventionally, in the US, local property taxes fund elementary and secondly education, supplemented by federal and state contributions. However, when future property taxes are used to finance infrastructure, public investment capital is in effect flowing from elementary and secondly education to infrastructure and other development activities in order to secure projected tax increases.

Thus, while TIF creates new economic development opportunities in one area, such as derelict neighbourhoods, it hollows out potential future investments in other areas, such as education.

Finally, it is common in many US cities for governments to woo private investment by offering tax reductions or exemptions. This amounts to making investments today with the tax revenues of tomorrow. This is how cities acquire unfunded liabilities.

The above paints a bleak picture of future financing of good solutions for better societies. However, during my research, I have come across many sound finance mechanisms. For instance, land value capture (LVC), which is commonly used in Northern Europe. LVC bundles publicly owned land, such as former port and military areas, or areas over which the public can take ownership, such as derelict areas. Once the local government has secured land ownership, it rezones and repurposes the land.

For example, former industrial land can be repurposed for commercial and residential use. This increases land values, which enables the government to take out loans based on the increased value of the land. With renewed borrowed capital, local government can make infrastructure and other investments in the land. This again increases land values. Once the land has been properly matured, it is sold to private investors and developers, including institutional investors, such as pension funds. Revenues from land sales are used to service and repay the debts. You can read more about this model in my Copenhagen City & Port Development report.

Another solution is for local government to raise seed capital, for instance from philanthropies, pension funds and other large institutional investors that invest with long time horizons. This seed capital is used in projects as low-yield and high-risk investment capital that is capable of attracting other investments that are more high yield and low risk. Once projects have been realised, they are refinanced, and the seed capital is withdrawn and put into another project. This is a kind of project-by-project financing. You can read more about this model in my Cincinnati Development Corporation report.

This blog post has offered a snapshot of several research projects I have conducted over the years. All my works contain key enabling features for replication, which allow me to scale solutions to other cities. If you want to learn more, please visit this page or get in touch with me: lno.msc@cbs.dk.

Further Reading

Luise Noring (2019) Public asset corporation: A new vehicle for urban regeneration and infrastructure finance. Cities.

Bruns-Berentelg, J., Noring, L., & Grydehøj, A. (2020). Developing urban growth and urban quality: Entrepreneurial governance and urban redevelopment projects in Copenhagen and Hamburg. Urban Studies.

About the Author

Dr. Luise Noring is an Assistant Professor at CBS, where she also attained her Ph.D. in supply chain partnerships. Noring challenges taken-for-granted and commonsense solutions – which are only ever taken-for-granted and commonsense within their specific contexts. Part of what makes her work innovative and has assured its impact in research and practice is precisely her insistence on reaching across national and sectoral contexts, drawing experiences from a great diversity of urban systems. This has allowed Noring to identify what kinds of city solutions work best in particular contexts and how certain kinds of institutional vehicles and finance mechanisms can be adapted to diverse cities and countries.

Photo by Denys Nevozhai on Unsplash

I Am What I Pledge – The importance of value alignment and crowdfunder behavior

By Kristian Roed Nielsen

Together with my colleague Julia Binder we recently published a paper on the role of values in driving crowdfunding backer behavior. The study found that altruistically framed campaigns have a higher chance for funding as compared to campaigns that emphasize egoistic or environmental motives, but even more importantly, that message framing needs to be aligned with the personal values of the backers. As such, our study highlights important similarities between resource mobilization in social movements and in crowdfunding.

The growth of reward-based crowdfunding as an alternative source of innovative financing has recently triggered great enthusiasm for its potential to enable a greater diversity of entrepreneurs to access to important seed funds (Gerber and Hui, 2013; Sorenson et al., 2016). This enthusiasm is in part related to the fact that – as compared to other forms of innovation capital and indeed other models of crowdfunding, such as lending or equity-based – the consumer plays a central role as a financier of the reward-based innovation. Considering that consumers represent a different kind of investor (Assenova et al., 2016), they are also driven by a wider and distinct range of motivations as compared to traditional investors (Lehner, 2013).

Understanding this new kind of investor has thus been subject to increasing academic debates, especially regarding the success criteria of reward-based campaigns (Mollick, 2014).

However, empirical evidence to date has produced mixed results – while some studies suggest a social- or environmental value orientation of a given reward-based campaign to significantly increase its odds of receiving funding (Calic and Mosakowski, 2016; Lehner and Nicholls, 2014), other studies have found no such effect (Cholakova and Clarysse, 2015; Hörisch, 2015).

Thus, despite enthusiasm from a range of actors, it is unclear under which conditions reward-based crowdfunding campaigns are successful in receiving funding. In this respect, the role of message framing has received little interest, despite its potential for shedding light on the criteria for crowdfunding campaign success. Against this background, we sought to examine how founders’ framing of a reward-based crowdfunding message affect the mobilization of backers and what values are conveyed in successful crowdfunding efforts.

The study in a nutshell

The study draws on framing theory as utilized in the literature of social movement mobilization, which focuses on how messages attract audience attention and in turn plays a pivotal role in securing movement participation (Benford & Snow 2000). Considering that in reward-based crowdfunding entrepreneurs are equally concerned about mobilizing backers for their campaign, we investigate whether entrepreneurs’ framing affects backer’s attention and influences their interpretation and action towards the crowdfunding campaign.

Based on the theoretical literature on human values (Schwartz 1994), we operationalize these linguistic frames as egoistic, altruistic, and biospheric (Axelrod, 1994; Groot & Steg, 2008;  Stern, 2000). These three values respectively reflect considerations on “what is in it for me”, “what is in it for others”, and “what is in it for the environment” when purchasing a given product (de Groot and Steg, 2008). In order to observe causality between these three linguistic value frames and individual pledging behaviour the study employed an experiment which replicated an online crowdfunding platform to better resemble what individuals would see in the real world and thus providing us with what we hope are more external valid observations (Grégoire et al., 2019).

More specifically, we investigated how the framing of reward-based crowdfunding messages as either egoistic, altruistic, or biospheric affected the success of eight hypothetical projects seeking financing in return for the respective product. Especially this designing of a realistic experimental setting represented a huge hurdle, but also a necessary one.

We find that too often experiments lack the realism of what they are seeking to study which we believe is a real detriment to results they yield. We thus wanted to move outside not only the lab but also create a user experience that best captured what an actually crowdfunding platform looks like.

For researchers entering with minimal programming experience it was a steep, but really rewarding learning curve. If a professional programmer saw our work, they would likely have a meltdown over the messy coding, but it worked and inspired many new ideas. 

Fresh insights

The results provide fresh insights into an emerging debate relating to the potential of crowdfunding to support entrepreneurship.

Firstly, our findings show that while some consumers respond positively to campaigns emphasizing intrinsic benefits, an emphasis on such collective benefits cannot be seen as a silver bullet for crowdfunding success. Indeed, while we find that an emphasis on altruistic benefits leads to an overall higher willingness to support the campaign, we find no such effect in the case of products emphasizing the benefits for the environment, but rather that the attractiveness of a crowdfunding campaign is dependent on the alignment with the values of the respective target audience.

Secondly, when seeking to garner funding via a crowd, the importance of customer segmentation and a thorough understanding of these customers’ values and expectations remains the most relevant task before designing and launching the crowdfunding campaign.

Our results clearly show that the willingness to invest in a campaign largely depends on the alignment between backers’ values with the values transmitted in the campaign.

Finally, the findings provide implications for sustainable entrepreneurs, for whom crowdfunding has been emphasized to provide a relevant fundraising opportunity (Testa, Nielsen, et al. 2019).

On the one hand, the fact that crowdfunding is driven largely by consumers rather than professional investors does not in itself change consumer demands; demands which more often than not fail to correlate with sustainable behavior (Sheeran 2002; Webb & Sheeran 2006). While one may argue that the motivations of funders for pledging towards a campaign may be different from those of a professional investor, our results seem to confirm that consumers seek to satisfy their own values when deciding to invest in a crowdfunding campaign. On the other hand, this does not imply a lack of significant potential for sustainable entrepreneurs’ success in reward-based crowdfunding.

Considering the increasing concern for sustainability and because of our finding that value alignment has a particularly high potential in a crowdfunding context, sustainable campaigns focusing on a clearly delineated target group have a high likelihood to reach their aspired funding goal.

About the author

Kristian Roed Nielsen is Assistant Professor at the Department of Management, Society and Communication at Copenhagen Business School. His research strives to examine what, if any, potential role the “crowd” could have in driving, financing and enabling sustainable entrepreneurship and innovation. Kristian’s Twitter: @RoedNielsen

References

Assenova, V., Best, J., Cagney, M., Ellenoff, D., Karas, K., Moon, J., Neiss, S., Suber, R., Sorenson, O., 2016. The Present and Future of Crowdfunding. Calif. Manage. Rev. 58, 125–135.

Axelrod, L., 1994. Balancing Personal Needs with Environmental Preservation: Identifying the Values that Guide Decisions in Ecological Dilemmas. J. Soc. Issues 50, 85–104. https://doi.org/10.1111/j.1540-4560.1994.tb02421.x

Benford, R.D. & Snow, D.A., 2000. Framing Processes and Social Movements: An Overview and Assessment. Annual Review of Sociology, 26, pp.611–639. Available at: http://www.jstor.org/stable/223459.

Calic, G., Mosakowski, E., 2016. Kicking Off Social Entrepreneurship: How A Sustainability Orientation Influences Crowdfunding Success. J. Manag. Stud. 53, 738–767. https://doi.org/10.1111/joms.12201

Cholakova, M., Clarysse, B., 2015. Does the Possibility to Make Equity Investments in Crowdfunding Projects Crowd Out Reward-based Investments? Entrep. Theory Pract. 39, 145–172.

de Groot, J.I.M., Steg, L., 2008. Value Orientations to Explain Beliefs Related to Environmental Significant Behavior: How to Measure Egoistic, Altruistic, and Biospheric Value Orientations. Environ. Behav. 40, 330–354. https://doi.org/10.1177/0013916506297831

Gerber, E.M., Hui, J., 2013. Crowdfunding : Motivations and Deterrents for Participation. ACM Trans. Comput. Interact. 20, 34–32. https://doi.org/http://dx.doi.org/10.1145/2530540

Grégoire, D.A., Binder, J.K., Rauch, A., 2019. Navigating the validity tradeoffs of entrepreneurship research experiments: A systematic review and best-practice suggestions. J. Bus. Ventur. 34, 284–310. https://doi.org/https://doi.org/10.1016/j.jbusvent.2018.10.002

Hörisch, J., 2015. Crowdfunding for environmental ventures: an empirical analysis of the influence of environmental orientation on the success of crowdfunding initiatives. J. Clean. Prod. 107, 636 – 645. https://doi.org/http://dx.doi.org/10.1016/j.jclepro.2015.05.046

Lehner, O.M., 2013. Crowdfunding social ventures: a model and research agenda. Ventur. Cap. 15, 289–311. https://doi.org/10.1080/13691066.2013.782624

Lehner, O.M., Nicholls, A., 2014. Social finance and crowdfunding for social enterprises: A public-private case study providing legitimacy and leverage. Ventur. Cap. 16, 271–286.

Mollick, E., 2014. The dynamics of crowdfunding: An exploratory study. J. Bus. Ventur. 29, 1–16. https://doi.org/http://dx.doi.org/10.1016/j.jbusvent.2013.06.005

Schwartz, S.H., 1994. Are There Universal Aspects in the Structure and Contents of Human Values? J. Soc. Issues 50, 19–45. https://doi.org/10.1111/j.1540-4560.1994.tb01196.x

Sheeran, P., 2002. Intention—Behavior Relations: A Conceptual and Empirical Review. European Review of Social Psychology, 12(1), pp.1–36. Available at: http://dx.doi.org/10.1080/14792772143000003.

Sorenson, O., Assenova, V., Li, G.-C., Boada, J., Fleming, L., 2016. Expand innovation finance via crowdfunding. Science (80-. ). 354, 1526 LP – 1528.

Stern, P.C., 2000. New Environmental Theories: Toward a Coherent Theory of Environmentally Significant Behavior. J. Soc. Issues 56, 407–424. https://doi.org/10.1111/0022-4537.00175

Testa, S. et al., 2019. The role of crowdfunding in moving towards a sustainable society. Technological Forecasting and Social Change, 141, pp.66–73. Available at: http://www.sciencedirect.com/science/article/pii/S004016251831953X.

Webb, T.L. & Sheeran, P., 2006. Does changing behavioral intentions engender behavior change? A meta-analysis of  the experimental evidence. Psychological bulletin, 132(2), pp.249–268

Photo by Ian Schneider on Unsplash

Why consultations on large projects should matter to citizens as well as companies

By Karin Buhmann, Sanne Vammen Larsen and Anna-Sofie Hurup Skjervedal. This article is based on their previously written piece for the Centre for Business and Development Studies.

Insights into the concerns or needs of communities or individuals who may be affected by planned or proposed private or public energy projects or infrastructure projects is important for those who will eventually decide whether the project will be approved to make an informed decision. Such insights can be gained through consultations carried out as part of assessments of the environmental or societal impacts of projects.

This begs the question: what is a good process for stakeholder engagement of local communities and citizens in impact assessment processes? This is a global issue that in recent years has come to be high on the agenda in countries from the Arctic to the Global South.

Consultations as part of impact assessments

Consultations allowing for stakeholder involvement in impact assessments are common in regard to private projects concerning the establishment of mines, windfarms, sun-power farms and dams for hydro-power. The same applies to public infrastructure projects such as airports, roads and ports, which are often necessary for the transport of the products to be gained from private projects.

Societal impacts of projects are typically assessed through social impact assessment (SIA), environmental impact assessment (EIR), or human rights impact assessment (HRIA), or combined approaches such as ESIA or ESHRIA. All aim at identifying and preventing or mitigating adverse impacts and advance positive impacts, of planned projects or extension of existing ones. It is customary and often mandatory for the impact assessment to involve local stakeholders who are or may become affected by the project.

This typically takes place through consultations, which may take a variety of forms to enable public participation in the identification of the impacts of the planned activities. Consultations are organized by authorities or the organization having applied for a permit to engage in the new activity. In addition to environmental impacts, impact assessments often include the project’s effects on a range of broader societal issues, such as health and safety in the local areas, employment, local business and sources of income generation, etc.

The Nordics and many other countries have introduced mandatory consultations of local communities. Some international development banks, e.g. the World Bank, have made certain loans conditional on impact assessments.

Uncertainty about consultations

Despite the great significance of consultations for stakeholder involvement, there is often uncertainty with local communities and other groups of affected stakeholders in regard to what exactly a consultation is, what it entails and what to expect of the process. Moreover, even when consultations have taken place it is not infrequent that affected communities are unhappy with the process or the extent to which authorities take their concerns or needs into account.

For example, Sami groups living in the High North have complained to authorities in Norway and Sweden because they are concerned that windfarms disrupt the grazing areas of their reindeer and, as a consequence, the traditional way of life of the Sami. Authorities and business enterprises can also be unsure about what constitutes the proper process or ‘best practice’ for consultations with affected stakeholder.

Photo: Reindeer at Kvalsund, Norway/ K. Buhmann, 2019

What is a consultation?

Consultations on project activities are carried out to provide an informed foundation for decisions to be made. In providing access to participation in decision-making on activities that will affect one’s life at the everyday level, consultations contribute to a form of very direct democracy and can be argued to be part of the human right to public participation.

Consultations provide citizens with an opportunity to ask questions and express their views on a project. But as is the case for other democratic processes, one does not have a claim to seeing one’s views winning out. This is an important aspect for the appreciation of what to expect of a consultation; how to engage in a consultation process; and the information that authorities, companies and consultants must or should provide when conducting consultations.

It is not infrequent that consultations are conducted by a company involved in the project. A good consultation process marked by sincere dialogue and appreciation of local concerns can build understanding and acceptance of the final design of the project. A process that does not live up to local stakeholders’ expectations of influence can lead to the opposite result.

Accordingly, it is important for involved companies as well as authorities to ensure that stakeholders are given the information necessary to understand and assess how the project may affect them, what their rights are and what they can expect of the consultation process.

Local stakeholders’ expectations and understandings

Our investigations have demonstrated that it is not infrequent for actually or potentially affected stakeholders in a local community to be uncertainty of what a consultation entails or what to expect of the process and result. Others have shown that frustration results when authorities do not seem to take views made during a consultation into consideration in their decisions.

During meetings in northern Scandinavia in June 2019, we met with several inhabitants in Sápmi, who expressed frustration with consultation processes. Sápmi is the cultural region traditionally inhabited by the Sami people, an indigenous people who traditionally live from reindeer herding and fishing. Grazing areas on which the Sami’s reindeer depend are adversely affected by the establishment of windmills and mines.

Sami communities are involved and asked for their views through consultations, but they also see authorities granting permits to put up windfarms and new mines on contravention of the contesting views and concerns presented by the Sami during consultations. Authorities in Norway have granted permission to open a new copper mine in Northern Norway despite the opposing views submitted by the Sami Parliament (Sametinget). The motivation to engage actively in future consultations easily gets reduced, even with those who are aware that a consultation does not equal a claim to one’s views to be granted when central authorities are seen to make decisions affronting local democracy.

Some of our other meetings have shown that when English is a working language or the common ’lingua franca’ in an area that does not have English as its main language, mistranslations may occur and lead to misunderstandings about the process and objectives. For example, the Danish term for consultation, ‘høring’, often gets translated into English as ‘hearing’. This may give unintended associations to the conflict-oriented type of ‘hearing’ that takes place in courtrooms and it’s objective of determinations leading to a winner and a looser, thereby disrupting the understanding of the consultation’s objectives of dialogue and developing workable solutions. Our fieldwork in Greenland and elsewhere offers several examples of this mistranslation.

Consultations and the corporate ’social license to operate’

Consultations can contribute to risks of adverse impacts being identified and addressed before they develop into actual problems because consultations offer opportunities for local stakeholders, including those who are actually or potentially directly affected by the proposed project or project idea to express their concerns.

Because of this consultations not only matter to the longer-term well-being of the local community, but also to relations to the organization that is behind the project giving rise to the consultation.

For example, a consultation concerning a proposed mine matters not only for local stakeholders who are concerned with the mine’s impact on grazing areas or the quality of water, but also for the perception of the company that wants to carry out the project, and for trust in authorities who will be granting the permit or prescribe changes and conditions.

Authorities often delegate the task to conduct a consultation to the company that applies for an exploration or exploitation permit. One the one hand, this may strengthen the consultation process because the company conducting the process knows the project very well and is able to reply to questions of a technical character. On the other hand, participation in the consultation and trust in the process may suffer if local stakeholders, who are worried about contamination or other harmful effects, suspect that the consultation may be influenced by the company’s interests.

‘Fox in the henhouse’

Allowing the company that applies for a permit for the project to conduct the consultation can appear like letting the fox into the hen house.

However, if performed well, the company will obtain a better appreciation of the project’s impacts and will be able to make relevant adaptions. Likewise, authorities often lack both the necessary technical knowledge and other resources to conduct consultations. Companies lack knowledge, for example in regard to local issues are expected to purchase relevant expertise through consultant advice. The company thereby invests in establishing the necessary informed knowledge foundations for the permit to be granted by authorities.

When companies are given the responsibility to conduct consultations that may affect the decisions to be made by authorities, it is important that they carry out a correct and good consultation process that allows local stakeholders to participate at times suitable to them. If a consultation takes place during normal working hours many local stakeholders may decide to stay away because participating would mean a loss of income.

Likewise, participation may be limited if the consultation takes place in a location that requires long transport. Consultations conducted in another language than the local one reduces the opportunity for local stakeholders to engage in a dialogue. Unless technical or health-related issues are explained in a manner that matches the prerequisites of local stakeholders, risks arise that they will not obtain an adequate understanding of the impacts of the project. This will increase risks of misunderstandings and that relevant questions remain unasked, or that relevant concerns are not voiced.

Photo: Sheepfarm in Qassiarsuk, Narsaq area /K. Buhmann 2018

During field workshops in Southern Greenland in August 2018, we were given insights into a diversity of local experience of consultation processes and expectations. The point of departure for our meetings was a proposed mine in Kuannersuit (Kvanefjeld) by the town Narsaq. Greenland’s eight largest towns, Narsaq has a population of around 1,500 and is placed in an area with extensive sheep grazing and tourism based around ruins of the Norse settlers. The mine will produce diverse minerals and rare earth elements, with uranium as a by-product due to high uranium contents at this specific site.

Consultations have been conducted by the company. We met with several sheep-farmers and actors in the emergent tourism sector who expressed concern whether uranium dust from the mine would harm their business, income and human and animal health in the area. Several individuals were frustrated with the process of the consultation, such as meetings taking place at locations or times of the day or year that made it difficult for the sheep farmers to travel to the meetings and take part in them. Moreover, as the Sami noted above, several people in the Narsaq area were basically concerned that the authorities do not seem to take the concerns voiced into account. Several questioned whether the process is accordance with the ideals of a democratic society.

Ups and downs of consultations

When consultations work well they can contribute to a sense of common or including decision-making. Research shows that this underscores the acceptance of the resulting activity, related to what is sometimes referred to as the legitimacy of the activity.

When consultations do not work well they can have the opposite effect and undermine trust, not just in the specific project but also in the company or companies involved. This relates to what is sometimes referred to as the ‘social licence to operate’. The term ’social licence to operate’ relates to the risk of loss, that a company (or companies) run as a result of local protest or opposition to a project for which they have applied for a legal licence.

Even if a company has obtained a legal licence, for example, to undertake the exploration of minerals, local opposition may be present. There are indications that a weak social licence to operate is on the rise in Greenland, thereby affecting the local legitimacy of projects like the Kuannersuit mine in Narsaq (Bowles and MacPhail, 2019).

Greenland is a country based on the rule of law with strong institutions and regulation and traditionally a relatively high level of trust in authorities and their decisions. Observations that in such a society and despite formal requirements, there is lack of trust in consultations and arms-length between authorities and companies conducting the consultations, and that concerns voiced by local stakeholders during consultations are taken seriously and acted upon are severe indications that formal procedures are not sufficient for a good consultation process. Accordingly, it is important to understand what constitutes a good consultation process from the perspective of the individual stakeholder, even if there is still no claim to having one’s way in regard to the final decision.

References

Bowles, P & MacPhail, F (2019) Coming to the Surface: The Social Licence to Mine in Greenland. Paper submitted for international seminar ‘Problems and Perspectives of social responsibility in natural resources exploration, exploitation, and management’, Pskov State University, Pskov (Russia) 23-25 October 2019 (on file with lead author).

About the authors

Karin Buhmann is Professor at Copenhagen Business School, where she is charged with the emergent field of Business and Human Rights. Her research interests include what makes stakeholder engagement meaningful from the perspective of so-called affected stakeholders, such as communities, and the implications for companies and public organisations carrying out impact assessments.

Sanne Vammen Larsen is an expert in the field of environmental planning and impact assessment, with a focus on integration of climate change in Impact Assessment, local processes and social impacts, and dealing with risk and uncertainty. She is employed as an associate professor at The Danish Centre for Environmental Assessment at Aalborg University, Denmark.

Anna-Sofie Skjervedal is PhD from Ilisimatusarfik – the University of Greenland and Aalborg University, and special consultant in public participation within the Municipality of Sermersooq, Nuuk, Greenland. Anna-Sofie specializes in public participation within impact assessment processes in relation to extractive industry development in Greenland with a focus on meaningful youth engagement.

Photo by davide ragusa on Unsplash

Female entrepreneurs & reward-based crowdfunding: Offline inequality and online equality?

By Kristian Roed Nielsen

Traditional sources of entrepreneurial finance tend to favor men, while female entrepreneurs are often bypassed. Thielst, G.H. (2019), for example, found that Danish investors tend to be more skeptical towards female entrepreneurs and place higher demands on them for details, numbers, and forecasts. However, with the emergence of reward-based crowdfunding we are witnessing an outcome contrary to this offline gender inequality, that women are systematically more successful than men (Gorbatai & Nelson 2015, p.1). Let us explore why.

Reward-based crowdfunding – how does it work?

Reward-based crowdfunding is an increasingly common source of finance for a diversity of entrepreneurs and creative projects, where individuals invest a pre-defined amount of money with the expectation that if successfully funded, they will receive a tangible (but non-financial) reward often in the form of a product or service.

In reward-based crowdfunding hitting ones funding target is thus of critical importance as the campaign, as otherwise the pre-invested (or pledged) money would be returned to the backers.

Reward-based crowdfunding, like other forms of crowdfunding, is thus dependent on the successful interaction between a number of actors including the central organizing platform, a number of content providing campaigns, and a large diverse group of funders/backers.

(Nielsen 2018)

The growth of reward-based crowdfunding has moved it beyond a niche phenomenon exemplified by the fact that in the past decade it has resulted in more than $10 billion in pledges from over 75 million backers (Blaseg et al. 2020) and has thus rightly captured researcher attention.

Female founders and reward-based crowdfunding

A diversity of studies into the antecedents of success in a reward-based crowdfunding context have all observed similar results – that women are significantly more likely to achieve their funding goals as compared to men (see Gorbatai & Nelson 2015; Marom et al. 2016; Greenberg & Mollick 2016; Nielsen 2019). Some of the reasons we have uncovered thus fare include differences in funding goals, communication styles, and activist female backers.

Both my recent research into crowdfunding in Denmark (Nielsen 2019) and the work by Marom et al. (2016) find that women tend to ask for less and thus also subsequently raise less through successful campaigns as compared to men.

For example, in a Danish context women had an average funding goal of 23.746,00 DKK as compared to men who set it at 27.960,00 DKK. Men therefore also experienced, when successful, more financial support earning on average 6.000,00 DKK more than women.

However, these differences in funding goals also mean the women are significantly more likely to actually hitting their funding goal and thus actually being financed. Women’s financial expectations of what they can raise through crowdfunding thus seem better aligned with reality. However, these differences in funding goals only account for parts of the overall picture.

In addition, Gorbatai & Nelson (2015) found that the communication style of women on crowdfunding platforms trended towards more inclusive and emotional language which in turn is positively associated with funding success. They thus propose that “the institution of crowdfunding may reduce gender inequalities in the fundraising arena by benefitting the communication style of women.” (Ibid, p.1).

Finally, both Marom et al. (2016) and Greenberg & Mollick (2016) found that female backers showed a significant preference for supporting women-led projects. Moreover, Greenberg & Mollick (2016) suggest results from “activist choice homophily” where “women are more inclined to fund women entrepreneurs because of perceived shared structural barriers that come from a mutual social identity.” (Leitch et al. 2018, p.110). They find this trend especially strong in industries in which they are least represented (e.g. technology industry).

Reward-based crowdfunding favors female founders

Thus, unlike many other forms of financing (Sorenson et al. 2016), women appear to benefit from reward-based crowdfunding for the noted reasons: communication style, activist female backers and not least financial expectations that are better aligned with crowdfunding as a financing tool.

However, as with all other research, these initial findings are not universal nor have many of them been validated by follow-up studies and the results are therefore far from conclusive. Nonetheless, we can with a certain degree say that reward-based crowdfunding contrary offline source of innovation finance systematically favors female founders.

About the author

Kristian Roed Nielsen is Assistant Professor at Copenhagen Business School and visiting researcher at Mistra Center for Sustainable Markets at Stockholm School of Economics. His research focuses on consumer behaviour, crowdfunding, sustainable consumption & innovation and user innovation. He strives to examine what, if any, potential role the “crowd” could have in driving, financing and enabling sustainable entrepreneurship and innovation. Seeking to uncover what role the consumer could have in enabling and financing sustainable innovation.

More about crowdfunding

Reward-based Crowdfunding for Sustainable Entrepreneurs: A Practitioner’s Guide

Crowdfunding for Sustainability: Creating a platform for sustainable ideas

The Winners and Losers of Reward-based Crowdfunding

Photo by Authority Dental

When business is not as usual – why companies should engage with humanitarian crises

By Verena Girschik and Jasper Hotho

As evidenced in places such as Syria and Yemen, humanitarian crises are becoming ever more complex (OCHA, 2017a). In response, international and humanitarian organizations increasingly call upon the private sector to help alleviate human suffering. As we describe in our recent article (Hotho & Girschik, 2019), many companies have answered this call. In the past, the role of companies in humanitarian crises tended to be limited to financial or in-kind donations. Today, more and more companies seek a direct role in the delivery of humanitarian action, often through collaborative partnerships with humanitarian organizations. 

Why invest in business-humanitarian collaboration?

Companies that engage in humanitarian initiatives often do so for philanthropic reasons. However, these companies may fail to appreciate that engagement in humanitarian initiatives can also provide them with longer-term strategic advantages (OCHA 2017b). 

To begin with, business-humanitarian collaboration likely has reputational and motivational benefits. Contributions to humanitarian relief efforts send positive signals to external stakeholders, including customers and governments, as well as internal employees. 

However, companies may also benefit in more tangible ways.

First, engaging directly in the delivery of humanitarian assistance can provide firms with the opportunity to learn about new countries and markets. For example, MasterCard’s payment solutions for humanitarian crisis situations allow the company to contribute to a good cause while developing a more detailed understanding of under-explored areas that may at a later stage become potential markets.

In addition, humanitarian engagement provides opportunities for relationship building with international organizations, governments, and local communities. Such connections can enhance a firms’ competitiveness as they may unlock or facilitate interesting market opportunities down the line.

Humanitarian crisis contexts also provide companies with opportunities to develop new skills and competencies or strengthen existing ones. For example, by participating in the Logistics Emergency Team—a business alliance providing UN agencies with vital logistical support—companies such as A.P. Møller-Mærsk have the opportunity to push their logistical capabilities while providing life-saving support during complex emergencies.

Business-humanitarian partnerships must address three fundamental challenges

Notwithstanding the potential of business-humanitarian partnerships, the extreme conditions of humanitarian crises renders such collaboration especially complicated and risky. Humanitarian assistance is often delivered to vulnerable populations in politically complex and volatile contexts. As a result, partners face three fundamental challenges that they need to be prepared to address if they are to leverage the potential of their collaboration.

1.     Securing ethical engagement

The first challenge is to ensure that private-sector involvement is ethically sound and aligned with the humanitarian principles of humanity, impartiality, neutrality, and independence. Companies and their humanitarian partners need to uphold these principles in spite of commercial interests and practical constraints.

2.     Realizing effective engagement

Collaborations between humanitarian organizations and companies are complex to navigate. Partners need to find ways to build mutual understanding and trust and create a favorable climate for mutual problem-solving. In addition, both sides may need to adjust processes and operations in order to align capabilities and enable effective collaboration.

3.     Sustaining business-humanitarian partnerships

Companies and their humanitarian partners often struggle to demonstrate measurable benefits from their collaborations. Companies need to sustain internal support for such partnerships even when there is no immediate business case. In addition, humanitarian organizations need to engage companies in the right place at the right time; namely, where humanitarian needs are greatest.

Addressing these three challenges is neither quick nor easy. It is through strong mutual commitments and innovative responses that business-humanitarian partnerships can leverage their potential and deliver humanitarian assistance ethically, effectively, and sustainably.

References:

Hotho, J., & Girschik, V. (2019). Corporate engagement in humanitarian action: Concepts, challenges, and areas for international business research. critical perspectives on international business, 15(2/3), 201-218.

OCHA (2017a). Annual Report 2017

OCHA (2017b). The Business Case: A Study of Private Sector Engagement in Humanitarian Action

About the authors

Verena Girschik is Assistant Professor of CSR, Communication, and Organization at the Department of Management, Society and Communication, Copenhagen Business School. Verena’s research focuses on the responsibilities of companies in the contexts of complex societal problems and humanitarian crises. Interested in relations between companies, governments, NGOs, and other societal actors, her research explores how companies negotiate their roles and responsibilities, how they perform them, and to what consequences. Verena’s Twitter: @verenaCPH)

Jasper Hotho is Associate Professor at the Department of International Economics, Government and Business at Copenhagen Business School, and Senior Editor for the top-tier academic journal Organization Studies. Jasper’s research focuses on the opportunities and challenges that arise from private-sector involvement in the delivery of humanitarian assistance.

Image by  Colourbox.dk

Is it a right policy to focus on SDGs during Economic Slowdown?

By Anirudh Agrawal and Ashish Tyagi

Economic problems of India were not addressed either in the 2019 electoral debates or in the recent annual budget. Markets are showing a deep imbalance between demand and supply, leading to a significant rise in loan defaults, banking crises and job losses.

MSME has not shown a tendency to grow or create jobs along expected lines despite a nationwide program of targeted lending. Indiscriminate lending in the past has increased Non-Performing Assets (NPAs) in the banking sector. The industry is still adjusting to the new GST regulations while the real estate sector has still not recovered from the demonetization shock. On top of all this, pollution is at an all-time high and climate change is manifesting itself in the form of droughts and floods in different parts of the country.

In such a slowdown, a knee-jerk policy reaction is to spur investment and growth through any means possible, including reversals on climate and Sustainable Development Goals (SDGs). Quite recently, the government allowed 100 percent FDI in the coal mining sector to spur a revival.

But in this article, we argue that a renewed focus on Sustainable Development Goals (SDGs) presents an opportunity to revive the economy, create a new wave of jobs and potentially increase the competitiveness of Indian economy vis-à-vis the SDG laggards. The discussion that follows is in the context of India but is equally relevant for the rest of the developing world.

NPA crisis and an opportunity towards SDG oriented portfolio

The main reason for a steep rise in credit default rate is that while industries expanded capacity over time, domestic and global demand has slowed down considerably, stranding the new assets. The lack of market demand causes firms to default on loans. This increases the stress on the banks, which consequently, stall the liberal credit lines to firms, further weakening the economy.

One of the significant factors causing the NPA crisis in India is the MSME loan portfolio. MSME is the backbone of any economy. In developing countries, MSME account for 90 percent of job creation and economic activities. Over time, through hard work, market and government support, these MSME entrepreneurs are able to grow, engage in employment creation, disruptive innovation and ultimately become unicorns, which are nascent businesses with high market valuation and growth potential.

>>>However, despite the important role in job creation and liberal credit lines, MSME entrepreneurs in developing countries generally remain poorly skilled, lack proper business support, access to markets and are many times bullied by bigger firms. In the end, a great deal of capital channelled to MSME is not converted into higher value. <<<

To transform the MSME sector, government and other business-sector actors must treat MSME as students who need to learn and adopt skills related to competitive management, sustainability, marketing and financial reporting so that competitiveness and sustainability become inherent within the firm. MSME entrepreneurs can aspire globally through exposure from government-sponsored programs to attend MSME events in Denmark (for their dairy and animal industry), Germany (manufacturing), Italy (leather and fashion). They can learn more about international market trends and technologies where the bottom lines are firmly grounded on SDG compliance.

Unlike bigger players which are slow, suffer from legacy issues; MSME is flexible enough to embed elements of sustainability and SDGs in their supply chains and value creation processes.

To survive and grow in a world with increasing climate change regulations, better cooperation is required between public institutions, banks and MSME entrepreneurs to work hard in sync, learn new practices and standards. Long-term growth requires MSME to make sustainability and SDG compliance inherent in the business plan, business model, management structure and type of service and product offered.

>>> Indian banks must actively focus on new industries creating products with lower environmental footprints. <<<

For example, instead of providing loans to typical plastic manufacturing SMEs, they must provide loans to entrepreneurs setting up green-materials factories, alternative plastic (biodegradable) factories, bio-diesel, or EV vehicle factories, which are environmentally efficient, follow international standards and are helping the nation achieve its Paris Agreement targets. The growth of competitive, innovative and greater SDG compliant MSME would make Indian economy stronger and mitigate job crises.

SDG focused Real-Estate Sector Regulation

Another cause of NPA crises in India is the rising real-estate inventory. Real estate sector was one of the largest employers during the 2004-2016 boom years of India (which is also true for most of the developing world). The assumption among investors during that period was that the real-estate will continue to grow and their investments will remain secure and ensure above-market returns. However, in the boom period, real-estate prices far exceeded their value, causing market failure in the current economic downturn.

But during economic downturns, it is relatively easier for politicians to make difficult decisions (as the public mandate is easier) and enforce innovative policies.

To address the issue of real estate inventory, the government must introduce regulations in the real estate market with quality controls, sustainability measures, green building codes, controls on the number of floors constructed, the green area within the apartment, restrictions on distance from the essential public services like a train station, police station, college, hospital, schools.

The regulations must forcefully move the industry towards significant sustainability goals (like those in Western Europe) with higher compliance on long-term sustainability, energy efficiency, and reliability. In addition to explicit sustainability actions like certification, greenified surroundings; firms and the government must focus on developing the real-estate sector, which is firmly embedded in a social, cultural and artistic milieu. Research has shown that housing where the communities have active social and cultural interaction tends to have higher value and lower crime.

Specific SDG driven controls would decrease the supply, increase the quality offered, and would significantly increase the value of the real-estate sector. If the buyers feel that their real-estate investments have greater value for a more extended period, the buyers and sellers will invest in the sale and purchase of the real estate, which would relieve the banks from possible NPA risks. The increased transactions in the real estate market would generate liquidity in the market that would further spurn growth. This suggestion on regulating the market stands in contrast to current appeals for liberalizing the real-estate sector. The liberalization of the real-sector has led to a rise in indiscriminate investment, increased half-built and abandoned sites which are causing a rise in water pollution, dust pollution and even dengue.

Pollution and Climate Change

Extreme climatic events and increased pollution are related to externalities that are threatening the sustainability of the Indian economy. The winter smog around the national capital Delhi significantly reduces the productivity of the city while putting residents under severe health risks. Lengthening of summer and unpredictability of monsoon is increasing water stress, as well as floods, which is putting households under stress and decreasing the overall national productivity.

To address these challenges, research-based and region-specific adaptation and mitigation investments will enable different regions to transform towards climate-resilient economic societies.

The government must invest in energy-efficient, global standard-compliant power plants to reduce smog around North India.

In addition, the government and private sector must invest significant capital in solar panel production, the infrastructure of EV automobiles, greener-sustainable materials, circular economy and responsible consumption. The green climate fund (GCF) has a specific mandate for adaptation finance for climate resilient agriculture and flood resilient infrastructure. The GCF is an interesting and evolving repository of knowledge which should help governments in designing and implementing climate mitigation and adaptation policies and investments.

Businesses around these emerging technologies are most likely to generate the next wave of job growth in the manufacturing sector.

In conclusion

Economic downturns are stressful times, but it is also said that “never let a crisis go to waste”. The downturns offer opportunities to re-write innovative policies as the public mandate is stronger for a change. India must use its current economic downturn as an opportunity to re-write public policies by incorporating elements of SDGs at each level of conception and decision and transform towards a greener, climate-sensitive and sustainable space. Sustainability at each level is the new competitive advantage and the emerging nations must capitalize it.

About the authors

Anirudh Agrawal is a doctoral fellow at CBS. His research interests are MSME finance, impact investing, social entrepreneurship and organizational 4.0. He is a chief strategy officer at Tvarit AI GmbH focusing on sustainable AI driven IT solutions and a visiting professor at Flame University India and formerly Assistant Professor at Jindal Global University.

Ashish Tyagi is currently a post-doctoral fellow and lecturer at Frankfurt School of Finance & Management. He completed his PhD from Penn State University. His research interests are environmental economics, climate change policies and sustainable transformation.

Photo by Sudha G Tilak

Crowdfunding as a cooperative movement – The present and future of crowdfunding in Denmark

By Kristian Roed Nielsen.

How does crowdfunding look like in Denmark and where is it heading? Drawing on empirical data from two well-known reward-based crowdfunding platforms (Kickstarter and IndieGoGo), I try to give a quick overview of the two most famous examples of crowdfunding in Denmark. After which I will give my predictions for where the Danish crowdfunding sector will head and how the emergence of lending-based platforms like Coop Crowdfunding could help take crowdfunding into mainstream in Denmark. Doing so by tapping into our cooperative movement roots by allowing customers to decide, through their loans, what we will eat in the future.

The bank, they don’t understand shit now, especially not in my business.

An entrepreneur’s view on banks (Junge & Bech, 2019)

Trust in banks is for many good reasons at an all-time low as consequence of a series of damning money-laundering scandals, the facilitations of offshore tax havens for the super-rich (i.e. Panama Papers), and not least the lingering resentments from the 2007 financial crisis. Despite these and other indictments, the sector as whole has seemed remarkably unaffected, perhaps because despite our moral reservations they hold a near monopoly on the purse strings not least when seeking a loan for an entrepreneurial endeavor. Or at least they used to.

The emergence of crowdfunding as an alternative source of finance for entrepreneurs is increasingly challenging the banks near monopoly as entrepreneurs now are increasingly engaging consumers and citizens directly for financial support. Citizens have thus become increasingly common enablers of product and service innovation in their own right (Belleflamme et al. 2014) and the global value of funds raised through crowdfunding have already hit US$ 32 billion in 2017 with continued strong growth expected (Statista 2018).

In Danish context, where loans for SMEs remains restrictive (Nielsen 2019), crowdfunding nonetheless remains a uncommon practice and is generally outside the awareness of many entrepreneurs and consumers (Junge & Bech 2019). This is arguably somewhat surprising given the historic strength of cooperatives in Denmark that were driven forth in part due to strong consumer engagement in businesses. The question then is what is the current state of crowdfunding in Denmark? Drawing on empirical data from respectively Kickstarter and IndieGoGo – the two arguably best known examples of crowdfunding – I have sought to provide you with a quick overview of reward-based crowdfunding in Denmark. After which I will give my predictions for where the Danish crowdfunding sector will head.

Crowdfunding in Denmark: A Quick Overview

Reward-based crowdfunding emerged as means to finance creative endeavors, which is also apparent when we look into which campaign categories that are most popular amongst Danish founders (i.e. Film, Fashion and Music).

Figure 1: Number of Projects by Category (2015-2018).

Among these projects, about 22 pct. succeed in meeting their funding goal, while 78 pct. fail to hit their target[1]. However as is illustrated in the Figure 2 these rates vary significantly depending on for example the project category. For example, the project category ‘Art’ is nearly a 50/50 proposition, but campaign categories like ‘Animals’ have a 100-pct. failure rate.

Figure 2: Average success rates by project category (2015-2018).

Finally, as illustrated in Figure 3 and 4 respectively success rates are strongly affected by geographic location and the regional distribution of crowdfunding resources thus remains strongly tied to the major cities. For example, Copenhagen alone accounts for 50 percent of resources garnered via reward-based crowdfunding. To see why please read my other recent blog post on this topic. So, while certain municipalities outside the major cities have high success rates one should not assume that they have many successful campaigns. In fact, the two municipalities (Vallekilde and Morud) with a 100-pct. success rate have only one campaign per respective municipality.

Figure 3: Success rates by municipality.
Figure 4: Distribution of crowdfunding resources by city.

Future of crowdfunding in Denmark

Crowdfunding in Denmark remains a rare source of income for entrepreneurs and is generally challenged by a lack of awareness from both entrepreneurs and citizens. This lack of awareness furthermore results in a lack of trust in this new form of financing. However, while reward-based crowdfunding remains niche and tailored to specific entrepreneurial endeavors that can offer tangible perks for their supporters, the emergence of other crowdfunding models provides an arguable basis for a strong competitor to the banks. For example, lending-based models, exemplified by Lendino and Coop Crowdfunding, provide entrepreneurs with an access to loans from their customers (and others) that are often cheaper then what banks are willing to offer (Junge & Bech 2019). The lenders on the other hand, who face little incentive to keep their saving in a fixed interest account at a negligible interest level, are increasingly incentivized to look for alternatives like these lending-based models especially as many loans are guaranteed.

I therefore believe that especially Coop Crowdfunding’s focus on driving new and more sustainable business models within the food sector represents, as they say themselves, a return to a type of cooperative movement 2.0 that is well-placed in Danish context. Coop Crowdfunding provides a platform for entrepreneurs to find engaged citizens who want to drive new and more sustainable food practices and are willing to put their money where their mouth is by offering cheaper loans as compared to the banks. In a country with high levels of trust and in context of an engaging story were consumers themselves can decide what we will eat in the future, I believe Coop Crowdfunding model could signal an opportunity for crowdfunding and not least green growth in Denmark.

Footnote

[1] It is important to bear in mind that there are some significant differences between the two platforms analyzed. While Kickstarter is an “all-or-nothing” platform, which means that the creator of the campaign only keeps the money if (s)he hits their funding goal IndieGoGo is primarily a “keep-it-all” platform, where the creator of the campaign can choose to keep the money if (s)he thinks that they can provide the promised service or product for the money raised. This translates into significantly different “success rates” for respectively IndieGoGo and Kickstarter if hitting the creators funding mark is definition of this. Whereas on Kickstarter 46,4 pct. of Danish campaigns hit their funding goals only 5 pct. do so on IndieGoGo.

References

Belleflamme, P., Lambert, T. & Schwienbacher, A., 2014. Crowdfunding: Tapping the right crowd. Journal of Business Venturing, 29(5), pp.585–609. Available at: http://www.sciencedirect.com/science/article/pii/S0883902613000694.

Junge, I.C. & Bech, L.L., 2019. Choosing Crowdfunding: A study of why entrepreneurs choose to engage in crowdfunding and how the choice of crowdfunding model and purpose change throughout the startup life cycle. Copenhagen Business School.

Nielsen, B., 2019. 10 år efter finanskrisen: Mange små virksomheder får stadig et nej i banken. Jyllands-Posten. Available at: https://finans.dk/erhverv/ECE11308747/10-aar-efter-finanskrisen-mange-smaa-virksomheder-faar-stadig-et-nej-i-banken/?ctxref=ext.

Statista, 2018. Crowdfunding – Statistics & Facts. Statista. Available at: https://www.statista.com/topics/1283/crowdfunding/ [Accessed April 24, 2018].

About the author

Kristian is Assistant Professor at the Department of Management, Society and Communication and Visiting Researcher at Mistra Center for Sustainable Markets – Stockholm School of Economics. His research explores the potential role that “the crowd” could play in enabling sustainable entrepreneurship and innovation. Follow him on Twitter @RoedNielsen.

By the same author

The Winners and Losers of Reward-based Crowdfunding
Reward-based Crowdfunding for Sustainable Entrepreneurs: A Practitioner’s Guide

Photo

Photo by Rob Curran on Unsplash.

The Winners and Losers of Reward-based Crowdfunding

By Kristian Roed Nielsen.

Proponents of reward-based crowdfunding have touted its emergence as an alternative source of innovation finance as an exciting and democratizing event. This democratization is enabled via the unique blend of crowdsourcing (Poetz and Schreier 2012) and micro-financing (Morduch 1999). Fundraising is enabled by a widely dispersed community of users, whose interactions are facilitated by one or more platforms (e.g., IndieGoGo, Kickstarter, Kiva), trading “a small group of sophisticated investors” for “large audiences (the ‘crowd’)” (Belleflamme, Lambert, and Schwienbacher 2014:2). But how does the change in investors really change who is rewarded – basically who are the winners and losers of reward-based crowdfunding? It was with this question in mind that Caleb Gallemore, Kristjan Jespersen and I set out to follow the money and identify exactly where and who benefits from this new source of finance by analyzing data from the large US-based reward-based platform IndieGoGo.

Where does the (crowd) money go and why?
Firstly, and perhaps not surprisingly, it appears that it is the already affluent regions that benefit the most from crowdfunding activities, while less well-off areas still receive the short end of the stick. Clearly while crowdfunding may offer an extra opportunity for achieving financing, this does not offset other factors that play an important role in entrepreneurial success e.g. background, education and social network that favour areas already affluent.

More surprisingly we also found that increased competition – i.e. more campaigns – actually increase the likelihood of funding success. For each percentage increase in the number of campaigns in the same neighborhood, we estimate a decrease of about 11% in the odds that each of those campaigns will receive no funding pledges. Indicating the increased competition actually results in a net positive outcome where campaigns rather than leeching of one another, generate momentum for further success. This may be because of increased levels of visibility of crowdfunding activities as a whole at the local level. In other words, people living in areas with more crowdfunding activities might be more aware of the practice, increasing the pool of potential investors. Another possibility is that areas with high levels of crowdfunding activities might generate local communities that can share knowledge and advice about the process, improving the quality of local ventures.

Finally, and still undergoing analysis, we increasingly find that certain people are – naturally – more successful then others at achieving crowdfunding success. Witnessing that for each successful campaign launched by an individual or group the likelihood for future success increases dramatically – hence after five successful campaigns launched by a given person or group they have a near 100 pct. chance of future success. We are perhaps witnessing the birth of the professional crowdfunder.

Crowdfunding as the democratizing agent of innovation?
As money seems to coalesce around certain regions and individuals we have to wonder whether this trend will continue. Will we increasingly see certain regions and individuals benefitting while other less well-off or professional lose out? And what does this mean for crowdfunding as the democratizing agent of innovation? It offers opportunity for you and I to drive innovation, but that innovation process itself perhaps unsurprisingly still seems to cluster around certain regions and persons. While this is by no means the final word – this is still early day research of only one sample – these observations nevertheless complicate the idea of relying on crowdfunding as a new mechanism for economic development, poverty reduction, or social action. While crowdfunding certainly provides a new way to access capital, it may not provide such access equitably.

Kristian is Assistant Professor at the Department of Management, Society and Communication and Visiting Researcher at Mistra Center for Sustainable Markets – Stockholm School of Economics. His research explores the potential role that “the crowd” could play in enabling sustainable entrepreneurship and innovation. Follow him on Twitter @RoedNielsen.

Pic by olgavisavi, via Fotolia.

Banking on the Future – Driving Responsibility and Sustainability in the Financial Sector

By Lavinia Iosif-Lazar.

While the world seems to have moved on from the last financial crisis, one can only wonder if banks and financial institutions have learnt something from it that could steer them away from repeating the experience. From the educational side, we also have to consider whether business schools are able to instill in their graduates the values and norms to navigate financial institutions into clearer waters.

100 Years CBS – Time to Rethink Finance
During a CBS conference in the late months of 2017, academics and practitioners within the finance and banking industries alike had come together to think and “rethink the financial sector”. The purpose of the event was to bring to light the issues and opportunities of responsibility and sustainability within the financial sector, and create an agenda for future research and teaching in business schools, like CBS.

Over the course of the event, the ambition was to develop a dialogue with stakeholders from the banking and finance industry and to challenge the current attitude towards banking and its future with “responsibility” being the word of the day. The hope was that this dialogue would ignite new ideas and develop an agenda for future research and teaching in business schools towards 2117.

During the three tracks focusing on society, business models and the individual, with responsible banking being the overarching theme, participants heard speakers address issues spanning from the role Fintech and disruptive technologies like blockchain and cryptocurrencies play in industry innovation to different religious perspectives on banking and finance.

To Rethink Finance, we need to Rethink Education
When it comes to financial education, the focus was set on bringing it in sync with the new developments and real life challenges, while at the same time stressing the need for a business model based on valuation and normative principles. In crisis situations, the clear-cut modelling learnt in school no longer represents the norm. Education plays a major role in securing that the new generations of graduates have the capabilities needed to identify and understand people and their needs, rethink and modernize local banking and be attuned to the technological developments that can pave the way to a more responsible banking sector  – centered on people instead of money.

Lavinia is project coordinator at CBS PRME. You can visit the PRME Office at Dalgas Have 15, Room 2C.007  & follow CBS PRME on Twitter, Instagram and Facebook.

Pic by Markus Leo (Unsplash), edited by BOS.

Dirty Oil or Green Energy in the Faroe Islands?

By Árni Johan Petersen.

These are the stories from the two divided camps in the Faroe Islands – please give your take on this dilemma. Should the Faroese explore and produce oil in the Faroe Islands that will contribute to global energy safety and stability to an ever growing global energy demand? Or should the Faroese stop this process now, and rethink the current state of the world where the Faroe Islands could become the front-runner for green solutions to statuette an example, and stop the greenhouse gasses deriving from fossil fuel energy by saying no to oil?

Background
The 4th license round for rights to oil exploration in the Faroe Islands was May 17th 2017, and the search for oil in the offshore subsoil in the Faroe Islands might continue if there is an interest from international oil companies to invest in the exploration. Since the first license round in 2000 there have been conducted nine drillings in the Faroese offshore subsoil without any commercial fund but results have concluded the subsoil to have a hydro-carbon active system in place.

Today, the Faroese economy is strong, unemployment rate is close to 2 per cent, young Faroese are moving back home, population has surpassed 50.000 inhabitants for the first time, salmon industry is booming (has done so for seven years), tourism is booming (four years), and the fishery is booming. A society in prosperity where the incentives to create new jobs might be vanishing because there are no Faroese to fill in the positions and foreign workforce might become a necessary solution to keep the (capitalistic) wheels going.

Pro-oil exploration Camp
The Faroese Ben Arabo, CEO at Atlantic Petroleum, argues that the Faroe Islands should explore for oil in the Faroese subsoil. The world, he argues, demands oil and gas in large quantities because the world consumes 100 million barrels of oil every day, and the demand is increasing. Oil, as a percentage of the total world energy consumption, is decreasing but the growth of energy demand is so great that the demand for oil in quantity increases every year. Currently, he continues, approximately one third of the global energy demand derives from oil, one third from coal, and one fourth from gas. The rest derives from nuclear energy, water and other renewable energy currently supplying one-digit percentage of the global energy production.

We, who live in the privileged part of the world, Ben argues, take energy stability and security for granted while other parts of the world, e.g. India, China, Indonesia etc., do not have this luxury. Ben recommends people who think they could survive without oil should examine how long time passes before they use the first object that demands oil in its production process (e.g. tooth brush). Hydrocarbon is present in a large numbers of product ranging from mountain helmet, solar panels, aspirin, and tooth paste. The wishful thinking of “no-oil-tomorrow” is based on ideology rather than technology, Ben concludes.

Resistance Camp
For the first time since the Faroese started to dream about finding oil we are observing resistance in the Faroese community. These are mainly environmentalists who have joined forces in an attempt to stop the oil exploration in the Faroe Islands. One local NGO, Ringrás, is represented by Ingmar Valdemarsson á Løgmansbø who argues:

“The context of the opening of the fourth Faroese hydrocarbon licensing round is marked by increasing ecological turmoil and biosphere degradation stemming from anthropogenic climate change and widespread habitat destruction. Fundamentally, our global society is built upon a measure of success (unrelenting growth) which, when achieved, clashes with the integrity of the interconnected ecosystems that make life on earth viable, and thus, enable civilisation as we know it.

The challenges we face, as a country and a global community, are much greater and more fundamental than the question of energy supply alone. But nevertheless, it is evident that the energy systems of the future must, by necessity, be renewable, if they – and we – are to last. Reality is catching up with our complacency and the thwarted efforts to ditch fossil fuels and racing ahead of our expectations, but luckily on two fronts:

  1. The forecast dangers of rapid climate change are showing themselves at an accelerated, unexpected and ominous pace.
  2. Key renewable technologies have matured to take on and render fossil fuels largely obsolete.

Focusing on the latter in relation to the former, it is entirely untimely, unnecessary and unethical for the Faroe Islands to venture into a dirty industry that would threaten the mainstays of the Faroese economy, namely the fishing industry and tourism, whilst contributing to an uncertain future in favor of very dubious short-term financial gain, prone to suffer from stranded assets as disruptive technologies coupled with global weirding and climate policy expedite the transition to a low-carbon society. This is underlined by the recent developments in India, where 14 Gt of planned coal power stations have been cancelled in May alone on account of Solar PV directly outcompeting coal.

In this environment of change, we must embrace the shift away from fossil fuels and take on the potential leading role that our national goal of 100% renewable electricity generation by 2030 promises to imbue us with. This path is what we as a country need and what the world needs and, best of all, it won’t cost the world.”

According to Ingmar the Faroe Islands, the Faroese Government, has signed the Paris Agreement (COP21) which includes lowering the carbon emission to decrease the global warming.  The Faroese Minister of Industry and Foreign Affairs, Poul Michelsen, has also publically stated his support to the agreement and the Faroe Islands should be the frontrunner in the battle against fossil fuel emission adding to the fire of global warming. The long term perspective, according to Ingmar, is that this will be the sustainable solution regarding environment, society, and economics because the Faroe Islands are heavily dependent on their fisheries, salmon farming, and tourism. Oil industry will add to the carbon quantity in the natural environment and changes in the ecology will alter the livelihood of the resources in the sea. This, in turn, will negatively affect the natural resources in the Faroe Islands harming the economy and society in the long run. Exploring for oil has to stop now!

The Broader Picture
The International Energy Agency (IEA) recommends exploring for more oil in the Scandinavian area because this will provide global energy stability and security. This argument is based on the fact that the political system is transparent, and the regulation for oil activities is progressive in terms of natural environment, work processes, and overall safety. The Middle East is, according to IEA, not the most reliable nor stable area, while Scandinavian countries are triple-A-democracies, market economies and predictable partners.

Producing more oil will lower the price of oil and this automatically decreases the incentives to invest in research and development of renewable energy solutions because the energy consumer demand will, in general, follow the least expensive solution. In contrast, if the oil production is stopped the oil price will go up and the demand for alternative solutions becomes pressing and the investors will predict return on investment. This will speed up the process to develop renewable energy solutions but we will probably experience political power changes on the global arena, e.g. a stronger Middle East. The question is, for how long? The sooner the world moves to alternative energy solution the global arena will change, again, and this might be the only sustainable solution because the emission and global warming is already at a critical stage.

So, should the Faroese provide for energy stability and security, or should they be the front-runners to say “no” to oil? Could the Faroe Islands become a role model for other societies in the Arctic and beyond? And if the Faroe Islands can do this, could other countries learn from this small country? Is the Faroese political (Governmental) agenda hypocritical because of its duplicity? Or is this hypocrisy a necessary aspiration to prosper as a small society in the Arctic that might spread to other small societies in the Arctic?

Árni Petersen is PhD-Fellow at the Department of Management, Society and Communication at Copenhagen Business School. His PhD project pursues the research question: “How does future expectation of wealth deriving from the oil affect the Faroese society and the potential outcomes in the future in the Faroe Islands?” His research features an in-depth case study of the Faroese Oil Industry, including interviews, observations, and local newspaper articles about the oil industry.

You can find Árni on LinkedIn.

Pics by BSEE & Christian Reimer, edited by BOS.

Reward-based Crowdfunding for Sustainable Entrepreneurs: A Practitioner’s Guide

By Kristian Roed Nielsen.

 In my last blog post, I offered some initial insights and ideas into how crowdfunding could be employed to support sustainable innovation. This time, having just finished my Ph.D. dissertation, I provide some hands-on advice for (sustainable) entrepreneurs wishing to succeed with reward-based crowdfunding based on mine and others’ latest research.

 Reward-based crowdfunding represents a rapidly growing source of innovation funding for a diversity of entrepreneurs, start-ups and even established firms. Crowdfunding success depends on the ability to mobilize strangers to support other strangers for causes, products or services that have not yet been realized and of which they have little direct oversight or control. This trust between and in strangers is fascinating for a host of reasons – how do individuals project trust so that others believe it, why do people trust and not least how is trust maintained? Also, what happens when innovation financiers are no longer professional investors, but rather ‘normal’ citizens like you and me? This is what my dissertation tried to uncover and below are a series of Q&As with regard to the question of how entrepreneurs can successfully achieve funding.

Q&As for Sustainable Entrepreneurs Planning to Pursue Reward-based Crowdfunding

1. What is your target?
The amounts typically raised by successful crowdfunding campaigns vary greatly. However, the average funding level of fully funded campaigns is approximately $8,000. Campaigns seeking significantly greater sums should also consider alternatives

2. Have you budgeted for failure (and success)?
A large majority of campaigns fail to meet their funding goals, but the costs relating to preparation are rarely accounted for (Gerber & Hui 2013; Mollick 2014). Even when successful, campaign founders often fail to account accurately for costs associated with implementing their project plan. These include higher than expected development costs or even mailing and return costs (Blaseg & Skiera 2016). Blaseg & Skiera (2016) note that one-in-ten fully funded campaigns fail to deliver on the promised product or service.

3. Have you succeeded or failed in the past?
Past success and failure are strongly associated with the likelihood of funding success. A prior successful campaign is associated with a 173% increase in expected funding receipts, while past failure is associated with a 17,7% reduction in expected funding receipts. Therefore, at the very least consider asking successful campaigns’ founders for advice.

4. Have you prepared a dissemination strategy?
The scale, connectedness, and “quality” of your team are significant predictors of crowdfunding success (Zheng et al. 2014; Nielsen et al. 2017). A large majority of campaigns receive only small amounts of support, while a small minority of campaigns receives the bulk of funds raised. For example, in the case of IndieGoGo “the top 10% of campaigns receive nearly 80 % of funds pledged to campaigns in our sample” (Nielsen et al. 2017: 16). Most campaigns fail early and significantly below their target. In addition, the ability to mobilize female support appears to lead to higher pledging levels (Nielsen 2017).

5. Where are you located?
A campaign located in an urban setting with high median income and social capital is significantly more likely to receive funding as compared to ones located in poorer rural areas.

6. What type of product are you pursuing?
Consumer goods that are out of sight or not directly related to personal style appear to attract significant higher levels of pledges, based on altruistic and/or environmental values. Conversely, visible consumer-goods related to personal style (e.g. new headphones or fashion items) appear to attract investments based on egocentric (or hedonistic) characteristics. The product you are pursuing affects what message works and which doesn’t.

7. Finally, how easy is your product to copy?
Be aware that there are copy-cats that use platforms like IndieGoGo and Kickstarter to trawl for easy to copy ideas and products (Smith 2013). Hence before announcing your campaign try to have your supply chain as ready as possible.

Reward-based Crowdfunding: Multifaceted Challenges and Untapped Potentials for Sustainable Entrepreneurs
Aside from these areas that sustainable entrepreneurs (and others) should be aware of when pursuing reward-based crowdfunding: is reward-based crowdfunding is a good match for sustainable entrepreneurs at all? As academic as it sounds, it depends. It depends on the purpose of the endeavor that sustainable entrepreneurs pursue, the sum of money they seek, where they are located, their social capital and network, their prior experience, and to a not insignificant extend on the product they are pursuing.

Furthermore, for all these attributes outlined, numerous of others are unaccounted for. As with any other human activity, there is a complexity that cannot simply be unspun in the span of a single dissertation. Nor can we detangle consumption in crowdfunding from the larger driving forces of consumer behavior. The fact that innovation finance can now be driven by consumers rather than professional investors does not in itself change consumer demands – demands which more often than not fail to correlate well with sustainable consumption behavior (Jackson & Michaelis 2003).

However, this does not imply a lack of significant potential within reward-based crowdfunding; especially because of the increasing recognition that individual behavior is strongly affected by, for example, the choice architecture inhabited by the individual (Thaler & Sunstein 2008; Sunstein & Reisch 2014). There is thus an evident potential for utilizing these insights in online crowdfunding platforms as well. Individual behavior is neither linear nor is it written in stone. It is rather shaped by a multitude of factors as illustrated in the dissertation; hence it is a matter of constructing a context that encourages the better angels of our nature.

The message, which the dissertation then seeks to instill in the reader, is that reward-based crowdfunding is not a silver-bullet to solving the funding concerns of sustainable entrepreneurship. Yet,  at the heart of what we call “the crowd” there lies a potential that remains – at least at the moment – largely untapped.

Kristian is a PhD-Fellow studying the potential of crowdfunding in driving sustainable innovation. He is home to the Department of Management, Society and Communication (MSC) at Copenhagen Business School. Follow him on Twitter.

Pic by Torsten Maue, edited by BOS.

The Task At Hand: Facing a Trump America

The following post by American CBS MBA student Wynne Lewis is an accompanying piece she wrote recently for the Financial Times’ MBA Blog.

Titled “Case for responsible business post Trump and Brexit shocks“, Wynne spoke to the shocks of the recent inauguration of Mr. Trump in the U.S. and the vote for Brexit in the UK. She argues that these events are creating many setbacks to the strides we have taken recently in favour of human rights and combating climate change. But they are also catalysts for positive change for the individuals who are fired up and ready to go stand up for what matters most – for example by contributing to a more sustainable economy by founding your own venture.

Read the full post on the FT MBA Blog.

In her latest piece on the CBS MBA blog, she now offers a little bit of inspiration to get you started with making a change.

By Wynne Lewis.

As Eleanor Roosevelt once said,

“You gain strength, courage, and confidence by every experience in which you really stop to look fear in the face. You must do the thing you think you cannot do.”

We fear regression, but there is much we can do.

I spoke with my classmates (representative of countries from all around the world), my professors, and visiting speakers and here is a little bit of inspiration to get you started.

For Employers / Employees:

  • Recognise the power of business. Do not be ignorant to your own influence. There is no such thing as an a-political corporation in the polarised climate under which we are operating today. Every decision must be intentional.
  • Create meaningful working class jobs. If your consumers are voting pro-nationalism, are they willing to pay a higher price for locally sourced products? Can you source your products or raw materials locally? Can you conduct market research to prove your case to investors? There may even be a risk management case to make for keeping the supply chain close for better transparency.
  • Treat your employees with respect and invest in their development. Look at the most recently hired/promoted people at your company. Are they a diverse group? Are you promoting from within? If not, chances are good that some of your talent is falling through the cracks or not being developed. It may not be intentional, but you can become aware of it and take strides to be sure you are capitalizing on your best resource – your employees.
  • If you have employees who may feel marginalised or unsafe in the current social climate sparked by the election, reach out and check-in with them. Do they feel safe in their commute to work? (This has been very relevant for many of my friends living in New York, so it is worth asking.) Is there anything you can do to help? Has the office climate changed at all for them? It is important that they are able to focus on doing a good job without feeling marginalised or harassed at work. Keep tabs on this. If handled with care, you will foster the establishment of a strong working environment and retain your talented minority (women included) workers.
  • Look for business opportunities. What was the change you were hoping for? Is there a gap in products/services today and the products/services we need to achieve that change? Your next great venture may just be hidden in the void.

You will know best how these things must ultimately align with a clear business case appropriate for your company, but it is important to point out those business practices that shape our countries, our politics, and ultimately our societies.

For Investors:

  • Divest from energy companies who are not investing in the future. Oil is booming right now with the recent elections, but the future will hold a diverse portfolio of energy sources. Companies who are only focused on fossil fuels are resisting innovation.
  • Be an active voter in the companies you invest in. If you hold stocks in companies that are doing things that you do not support – underpaying workers, polluting, vocalising racist sentiment – use your voice as a shareholder to change things. Be active and let them know that as an owner you do not support the way they are operating the business. Chances are high, you are not alone. Get other investors involved.
  • Invest in companies that are good for people, planet, and profit. There are many resources for those interested in impact investing. Read up and put your money where your values are.

On the personal side: invest in values you care about. Whatever they are, donate your time or money to the things that matter most. Create the world you want to live in and that you want your children to live in. Consider it a long-term investment.

The most important thing ultimately is to do something. So get out there, and be active.

Have some great ideas? Please add a comment below.

Based in New York, Wynne is currently enrolled as an MBA student at Copenhagen Business School. She was attracted to the Copenhagen MBA for its strong focus on Responsible Management and the promise of a global classroom. Post-MBA, she is toying with the idea of starting her own venture. She is a blogger for the Financial Times MBA blog, where she hopes to tell the story of what really powers her passion for Responsible Management on the far-reaching global business platform that is the Financial Times.

Pic by Pexels

Crowdfunding for Sustainability: Creating a platform for sustainable ideas

By Kristian Roed Nielsen.

Crowdfunding as phenomenon is strange as it fundamentally boils down to strangers supporting strangers for causes, products or services that have not yet been realized and of which they have little direct oversight or control. Despite this oddity, crowdfunding is growing rapidly.  Just between 2013 – 2014, approx. €2.3 billion were raised, enabling a vast number of enterprises to grow and ideas to become reality. As engaged scholars, the question thus becomes: how to utilize this phenomenon as a means to drive sustainable ideas and projects?

Early testbeds for sustainable crowdfunding

The examples of EcoCrowd, GreenCrowd, and Kiva all point to the potential of crowdfunding in driving both environmental, but also social development and innovation. The case of the German crowdfunding platform EcoCrowd is especially interesting as it illustrates how public finances can be used to create platforms dedicated to tackling environmental challenges by co-supporting their development.

The added benefit of these types of platforms is that they, if successful, become self-sustaining resource centers for further sustainable ideas and ventures. More precise, these platform allow citizens to engage directly in driving sustainable change by supporting, for example, community projects. One example of this includes the The Peckham Coal Line urban park that sought to convert the old raised Peckham coal line in London into a raised urban park via an online campaign on the civic crowdfunding website SpaceHive.

The Peckham Coal Line further illustrates how policymakers can draw-upon the strengths of crowdfunding by co-financing community projects if they hit a certain level of financing. The Peckham Coal Line ultimately successfully raising £75,757a of which government funds represented £10,000 in backing. In this way, community projects could be driven via the entrepreneurial ideas of members of the community.

Future platforms

The future of these platforms of course very much depends on many factors, such as the quality of the campaigns hosted. Prior successful campaigns show that people are indeed willing to engage and raise significant amounts of money. But this requires that people see value in the campaigns hosted. If to many campaigns fail or there simply aren’t enough to inspiring further action, then the platforms will slowly decline.

Therefore, I propose that a collaboration between sustainability-oriented organizations – like Sustainia – represent a great opportunity to find these inspiring campaigns. Sustainia with their Sustainia Awards have a huge database of sustainable ideas and projects just waiting to be supported and scaled. One could even imagine a “Peoples Choice” award where individual vote with their valets for the solution, technology or project they found most inspiring and worthwhile. Sustainia could thus create a platform rich with innovative ideas and projects and “the crowd” can offer the support needed to truly bring these ideas to life.

Kristian is PhD-Fellow studying the potential of crowdfunding in driving sustainable innovation. He is home to the Department of Intercultural Communication and Management at Copenhagen Business School. Follow him on Twitter.

Original Pic by Tommy L, Flickr, changes made by BOS