From the Cluster: Crossing the Great Sustainability Divide

mehedi New It is high time emerging nations push for a sustainable route to economic development.

By Mehedi Zakir

Visit any of the major developing cities in Asia—Dhaka, Mumbai, Shanghai, Jakarta—and you will be amazed by their rapid transformation. Even when you step out of the cities, you cannot miss the signs of overall amplification in material quality of life, the distribution of electricity and water, and increased industrialization. The hasty advance in the emerging economies is not without its downsides. Rapid urbanization is diminishing natural resources at an ever-increasing rate. Focusing on quantity of development rather than the quality is harming human lives and unbalancing nature. Sustainability in the emerging markets is an immense challenge, as businesses find it almost impossible to bond social good with financial objectives.

In the past five years, I gained keen insights on these challenges while serving in the financial industry of Bangladesh. As I worked with local manufacturers, it dawned on me that the field of finance can offer solutions.

In practice, sustainability may mean higher initial investment, lower financial returns and longer payback periods. This situation is exacerbated by the fact that emerging economies are mostly driven by small and medium enterprises that lack the deep investment and borrowing capabilities of larger cousins. It also doesn’t help that traditional profitability calculations do not take environmental and human costs into account. In most cases, owners/shareholders are happy as long as their financial targets are met and turn a blind eye toward the true economic cost.

Although most developing nations now have regulations to contain the damage, lack of enforceability means that the rules come to little or no avail. These days, a lot of countries have also implemented taxation to punish the noncompliant. But errant business owners almost always find a way to get out of trouble by being resourceful and cozy with regulators.

At the individual level, the issue is more about the tragedy of commons. Individuals fear that if they do not exploit the common resources, then someone else will. The cost of sustainable behavior is also remarkably high in the short term for most emerging-economy households, except the very rich.

The good news is: Not everything is gloom and doom for sustainability in the emerging markets. Economic development organizations like the World Bank and the International Finance Corporation (IFC) promote sustainability by offering easy financing to businesses with environmentally responsible operations. IFC recently opened a $400 million soft loan facility in Bangladesh to support sustainable brick production, which has traditionally been one of the biggest polluters. The World Bank is investing in the development of renewable energy sources in conjunction with local partners in Bangladesh. These efforts and their effectiveness have impressed me so much that I aspire in the long term to join the World Bank or IFC and foster sustainable development in critical areas such as renewable energy.

Economic development organizations may be catalysts for change in the emerging world, but to make sustainability viable from a commercial perspective, we should focus on several areas.

We must translate sustainability into financial terms through proper environmental accounting. Governments and economic development organizations have to push forth regulatory regimes that incentivize compliant behavior and swiftly dispense with any breach. Effective enforcement by the judiciary and legal system is the key. In addition to credit and financial outlook ratings, an independent sustainability rating should be provided for compliant companies that investors weigh in buying and selling shares. In a capitalistic society, when return on capital is affected, sustainability will become a part of the calculus.

Financial organizations also must play an important role, promoting sustainable businesses by offering easier terms and conditions for the project and working capital. This financing can be in the forms of higher lending amounts, lower interest costs or longer payback periods. Governments should also fuel this initiative by creating gap funds with budgetary support in case commercial initiatives fall short.

Innovative financial instruments should be used to allow compliant individuals and businesses to transfer the cost of sustainability to the noncompliant. One example is carbon emission trading, though this is still a novelty in the emerging markets. For example, only one city in India is trying to implement particulate emission trading, and only one company in Bangladesh is working on carbon trading. For emissions trading to succeed, emerging-nation governments have to impose carbon cap-and- trade systems and support their growth and ease of access for small and medium enterprises.

Finally, developed nations should set up intergovernmental financial entities to facilitate the transfer of technology and infrastructure to emerging markets. These organizations can follow the principles of the Export Credit Agencies, which already support long-term technology transfer projects by providing financial arrangements to developing countries. This arrangement will not only ensure the transfer of sustainable technology, but will also provide higher revenue to developed countries through additional tax income.

China, the largest carbon emitter in the world, is a prime example of a country burdened with unsustainable development. Although heralded as the next superpower, its industrialization has led to environmental pollution and human health hazards, including one of the highest cancer rates in the world.

Mopping up its pollution and providing health care to the ill are not only very costly in the near term, they may ultimately impede the speed of development itself.

It is high time emerging nations push for a route to economic development that incorporates human and environmental well-being.

Mehedi Zakir is a first-year Wharton MBA student who spent the past five years in the financial industry of Bangladesh, delivering innovative financing and risk management solutions to transform his local market.

 

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