4 ways to make sustainable businesses work in developing countries
September 2010
In 2012 the Rio+20 Summit will take place in Rio de Janeiro. Besides commemorating the UNCED conference 20 years ago, a new sustainability agenda for the next 20 years will be drawn up. I was asked to provide 4 recommendations to the Netherlands Committee going to Rio.
The bottom-line is that most businesses can become sustainable given the right financial incentives. As a note of clarification, I’m defining a ‘sustainable business’ as a business that improves the quality of life of this and future generations. Sustainable businesses should ideally be very profitable so that they grow.
My policy recommendations are:
1. Implement “Value Extracted Tax”.
Scrap income tax and charge higher taxes on the use of energy and the production of finite resources (e.g. oil, minerals, virgin tropical hardwoods, drinking water from depleted water reserves) This provides developing countries with a triple-dividend. Environmental polluters and resource users pay more taxes, increasing the cost of energy use, resource use and pollution. Yet businesses with many employees will pay less taxes. This combined creates jobs and a cleaner environment. Thirdly, many developing country governments face problems collecting taxes from their citizens. Taxing a small group of extractative and polluting industries is far simpler to enforce than the taxing of millions of employees. The net effect of this change in taxation is that the total taxes collected will increase.
2. Pension funds in all countries should invest between 1-5% of their funds in sustainable businesses. Legally enforce this.
Pension funds are the sleeping giants that can cause massive economy wide changes. They can especially cause changes in large companies, like the ones listed on stock exchanges. If a pension fund for example switches its investments towards a bank that lends to sustainable businesses – rest assured that all the conventional banks will start thinking about how they can start lending sustainably.
3. Support markets in environmental commodities.
After decennia of experience with markets in SOx, NOx, CDM, CERs en ETS (Carbon) we have learned how markets and exchanges can be created for other environmental commodities. This can have a large impact on the environment and businesses in these economies. It will also encourage investments into these environmental commodities and will cause international exchange of technology and know-how. Examples of these environmental markets can be in . Water reserves and water pollution . Fish stocks . Biodiversity . Reforestation . Recycling . Nature conservation . Protected species and many more.
4. Set up Matching Funds for sustainable investments
Entrepreneurs needing start-up or expansion finance for their Green-tech or sustainable businesses can get 50% equity finance from the fund. The other 50% will have to come from the entrepreneur, investors, banks or other sources. This matching structure will act as a magnet of sustainable businesses, but it will also act as a promotor of local risk capital investments. This kind of risk finance mentality is very badly needed to get sustainable businesses off the ground in developing countries. This kind of Matching Fund structure will be the ideal vehicle to promote the first 3 recommendations above. These four steps: taxation, pensions, markets and investing – though daunting – are what’s needed to create economies that improve the quality of life for its citizens. Simply do it!