Q & A

Alumni Forum

Yale SOM alumni from around the globe weigh in on the question "Can we afford sustainability?"


Yale SOM alumni from around the globe weigh in on the question "Can we afford sustainability?"

Tom Halsey '81
I served for more than a decade on the board of an independent pre-K through sixth grade school and community center which principally serves a disadvantaged minority population in south Dallas, Texas. The school has always struggled to raise enough money each year to keep the lights on and the faculty and staff paid. While this institution is successful beyond imagination in terms of its mission, the excellent work it does, and the lives it impacts, it always will operate on the financial edge solely because of the importance of its mission. One of our aspirations is to raise a bit more money each year than we need to break even, in order to create a reserve equal to one year's fundraising requirement. By doing so, instead of raising the dollars essentially at the same time we are spending them, the "current year" would enjoy a balanced operating budget with little risk and little pressure. However, this will never happen. Instead, the operating budget will increase at least in lock-step with our ability to raise more annual dollars because a larger budget will enable us to better fulfill our mission. We have a social disincentive to save.

Tom Halsey's complete essay "When is financial sustainability the wrong goal?" appears separately on the Q7 website.


Audrey Davenport '09
I graduated from SOM (and Yale's Forestry School) last May and now work for the Environmental Defense Fund. I manage our partnership with KKR, helping them to improve business and environmental performance across their portfolio. As of right now we are working with about 20 of their companies, in the U.S., Europe, and Asia. Frequently, we field questions at KKR and at the portfolio companies about the expected costs of adopting environmental management strategies or initiatives. The truth is environmental management is just good management — we've yet to work with a company where low- or no-investment opportunities didn't exist to save money and reduce environmental impact in the near-term. 

Taking a longer-term view of sustainability strategy (i.e. strategies that may require capital or time investments from a company), I think we also have a story to tell around why sustainability is not only affordable but necessary. Take GE and Ford as examples on the opposite sides of the spectrum. GE launched Ecomagination to redesign core products and offerings to customers that use energy more efficiency. Ford built a green manufacturing facility, but did little to improve the energy efficiency of its products. One built sustainability strategy into its core business strategy and one applied it as window-dressing.

I recently fielded this exact question in an interview and my overall response is that sustainability strategies reap more dividends than virtually any other corporate strategy. Successful environmental strategies can positively impact a business in a number of varied ways — reduction of costs through decreased resource use intensity, top-line growth through the development of higher quality products and new customers, reduction of risk (both regulatory, financial and reputational), improved recruiting and retaining of talent, the development of an innovative, problem-solving culture, and improved opportunities for communication with stakeholders (public, NGOs, customers, shareholders). 


Roberto Jimenez '10 
I would like to propose a government/international angle: Can a developing nation afford sustainability? 

Since graduating from SOM last year, I have been working in Costa Rica on climate change policy. It has been an interesting experience as the topic has attained a high level of national/international attention due to the Copenhagen climate conference this past December. I deferred my start-date with Shell Oil in The Netherlands to work on this issue, as I saw it as timely and important.

My work in Costa Rica has been conducted via a loose NGO that I founded called co2neutral2021.org. Our organization's aim is to reduce the country's greenhouse gas emissions and help deliver a low-carbon economy. We do this by generating local knowledge, persuading leaders, and energizing youth. We used the Copenhagen meeting and the ongoing national elections as conversation starters and to create a sense of urgency. Our work has been covered by Time and Reuters, amongst others.

So, can a developing nation afford sustainability? I think it can. Transforming its economy to a low-carbon one is the best strategy that Costa Rica has to becoming a developed country. Yale's framework for solving complex problem proves helpful here. Costa Rica's key opportunities can be measured via the external lenses of the competitor, customer, investor, and our global society. Our key challenges can be understood via the internal lenses, for example: aligning incentives of public and private players, sourcing and managing funds, "operationalizing" government programs, and funding local innovation.


David Schneider '85 
The notions of sustainability and global warming are so culturally cozy where I live that Whole Foods has a special checkout line for customers who drive a Prius. What is lacking in the heartache of those worried about the future is a push not only to stop human population growth, but to reduce it. Given that the arrow of technology is one-directional, it is clear that energy creation will become more efficient and less polluting over time. Despite the obvious correlation between population and pollution, few groups or individuals are pushing to leave more room on the planet for undeveloped land since to do so risks being labeled as racist. Drops in birthrate correlate with economic development, so areas with the highest birth rates tend to be found in poor nations. This leads to more poverty, destruction of the land, and the rise of radical and violent subsets of religion. Aid packages from the developed world create additional overpopulation which kicks the suffering down the road, meaning greater millions will die an agonizing death from starvation. It will do future generations little good if we were to get all of our energy requirements from solar if the world's population grows to the point where there are no parks or farmland for crops. Many food source fish are already being pushed to the brink of extinction, so do we really need more mouths to feed? Enjoy your Soylent Green. 


Kitty Boone '85 
The bigger – better – question to me is, Can we afford NOT to invest in sustainability, however communities, organizations, government institutions, or manufacturers choose to define this? Everywhere on earth we are faced with the consequences of growth, which has placed enormous burdens on ecosystems, water supplies, and populations. Designing systems, products, habits, and lifestyles that consider the broadest possible impacts of use and implementation is the only smart way to proceed – not just in the U.S., but globally. The externalities that we don't pay for today need to be embraced, understood, and addressed. And the benefit right now in this economy? There are whole new industries out there waiting to grow and be invented with the right mindset and investment. It is all very exciting, really. 


Ray Daffner ’86 
I’m curious about the converse: How can we not afford sustainability?

As someone who works in the Appalachia region, the costs of our current energy policy are immense, from impact on groundwater to the accrual of wealth outside the region, from natural resource extraction to the lack of incentives and resources for local investments in education and the proliferation of substance abuse. All this stems to a great degree from lack of a sustainable economic framework in central Appalachia. There are many people working to address these challenges, but the pull of current practices and fear of what change may bring are strong. Other regions of the country, like the Pacific Northwest, have successfully addressed these issues, but the challenges remain entrenched in Appalachia. As miners say, "Coal is our great blessing; and coal is our great curse."


Steve Murphy '88
Let's first assume that "afford" means to simply maintain or increase current measures of economic wealth. The economically well-off global citizen might then respond: "If not, so what?" Since sustainability values a more inclusive, ethical, inter-connected, and natural systems-oriented view, the economically rich "we" might actually prefer to do things we cannot afford. The sustainable path can open the door to a more spirit-filled, just, peaceful and healthy world. On many levels, it can also represent a compassionate response to our most vulnerable neighbors. As Mother Teresa once observed: "There must be a reason why some people can afford to live well. They must have worked for it. I only feel angry when I see waste. When I see people throwing away things that we could use."


Deven Patodia '06
As the owner of a small manufacturing business based out of India, I come face-to-face with the issue of sustainability on a daily basis. 

As a company, big or small, you have the option of being plugged into this concept directly by way of the kind of products you market. So for example, my company that makes cotton garments and bags focuses on producing and marketing the more eco-friendly organic cotton garments and bags instead of regular cotton. Regular cotton uses about 10% of the world's harmful pesticide while organic cotton uses no pesticide. This makes the cotton fields fertile for a longer period of time, more sustainable…

Even if you're not in the business of selling products that fit the bill of sustainability, as an organization there are some daily habits that can be inculcated into the work culture. For example, we use a few simple ideas that prove to be cost-effective as well as sustainable at the same time: a) using the other side of the paper for printing and for rough sheets, b) reusing envelopes we get for sending documents via inter-department transfer or even within a specific department; c) being diligent about reusing rubber bands, clips, etc.

Sustainability is not a new concept. It has been around for ages. Somewhere along the way science and productivity ruled the roost and we ended up overdoing things in our zeal to be industrialized. However , getting back into the sustainability mode is quite feasible and need not be an expensive option.


Cher Jacques '08
The more relevant question might be "Can we afford to continue to live, work, and manage institutions unsustainably?" I recently returned from the Democratic Republic of Congo where I managed a branch opening of a microfinance bank. I was there during the financial crisis and saw several organizations loose funding and have to shut down immediately. A valid argument could be made that the constituencies they served were even worse off after these organizations left than if they had never been there. In the economic development arena, sustainability must mean that we first do no harm. 


Anamaria Aristizabal '07
This question has multiple levels. The first is economic, as the word "afford" implies. The second is political, as this topic has become public relations and image imperative, and the third is moral. With respect to the first level, one can argue in many different directions. For a starting enterprise, such as an organic processed quinoa product that just hit the market and is struggling to make ends meet, the question whether to use sustainable packaging or not in its products might effectively boil down to a question of affordability. And the most probable answer, even though the niche of this product is the green consumer, is no, not yet, this small company cannot afford the sustainable option. For a large corporation, the answer is often different. This entity is able to step beyond immediate concerns, into the realm of investment and risk, which leads to innovation and competitive advantage. That is why the leading corporations who have extra cash, such as HP, DuPont, and Walmart, have come up with compelling sustainability strategies which have impacted positively their bottom line and their image.

The second level comes up as companies gain a greater level of maturity and scale. A company that is increasingly interrelated with its surrounding systems, that is, the social system, the environmental system, the policy system, the technological system, will start to be the target of a variety of pressures. This is due to its greater visibility and its increasing impact (positive or negative) on these systems. These pressures might take the form of legal lawsuits, public relations fiascos, environmental breakdowns, or technological uncertainties. This is the case of companies such as Citibank, which faced an aggressive campaign by the Rainforest Alliance accusing it of irresponsible lending practices towards environmentally destructive projects. Citibank suddenly became able to afford sustainability, by joining with other banks and creating the Equator Principles, a set of guidelines and filters to select only projects with a minimum of environmental risk.

The third level, the moral dimension, is more complex and is omnipresent for every company and individual. The question of whether one can afford sustainability becomes the same question as, "Can I afford caring for others?" The utilitarian paradigm that characterizes much of our culture today and which we are ashamed to take ownership of, calls us to hurriedly say no, we cannot afford caring for others or our environment. It's not necessarily our fault, it is a systemic problem. As Riane Eisler suggests in her book The Real Wealth of Nations: Towards a Caring Economics, today's society considers caring and care-giving to be impediments to productivity, or at best irrelevant to economics. She notes that "our challenge is to develop a caring economics where human needs and capacities are nurtured, our natural habitat is conserved, and our great potential for caring and creativity is supported." Since we cannot change an economic system overnight, every person and company can reflect on what values and legacy it is committed to, and how one can become an increasingly faithful embodiment of one's values. This might or might not lead to immediate economic returns, but for sure it will bring individual bliss and collective wellbeing.


Ying Tang '06 
Sustainability is becoming an expensive fashion. Committees are formed, grand speeches are made, and models are built, striving to address the evil of industrialization. Yet in the zeal of popular movements, substance was often replaced by symbolism – divorced from the origins of such movements.

In my humble opinion, sustainability is simply a holistic way of living and working, and it applies to all. No matter whether you are in government or in business, sustainable conduct merely means: understanding the law of natural orders, and acting accordingly. Social systems are like living organisms, whose sustainability has to come from within, not from any segregated external forces. In fact, a narrowly focused approach can often destroy the internal balance, and ultimately destroy the system.

Forty years ago in Red China, Chairman Mao initiated a steel movement – maximizing the output of steel at any cost. As a result, passionate community leaders seized all iron woks from households, and burned them in an attempt to produce steel. How ironic that billions of Chinese were deprived of a cooking necessity for a so-called bigger cause.

Forty years later in liberal America, there was a green energy movement – to control climate change. As a result, ethanol, made of corn, was promoted as renewable bio fuel. The missing truth is: it takes 0.8 gallons of gas to make one gallon of ethanol. A basic understanding of the cost mechanism would have shown that ethanol is in fact economically unsustainable.

It is wisdom that we must seek. To understand is the beginning of wisdom. As Sun Tzu argued in The Art of War, if you understand yourself and your enemy, then you can be the winner, all the time. Understanding leads to the right way. Without understanding and respecting natural laws, human will often lead to chaos and disasters. History shows it. Taking away the progress of human minds, there is little enlightenment left other than dead facts and petty details – details that lead to nothing are what baggage is to an army.

In the pension/endowment investment industry that I'm in, sustainability is either ignored by industry practitioners or reduced to green energy investing by a few advocates. Rarely has it been applied to the governance and the way of investing: Can we segregate truth from disguise and noise? Are we keeping things in perspective? Have we lost vision as if blind men touching the giant elephant? Are we making decisions with supreme care and diligence? 

A decade ago the industry hastily followed the successful Yale endowment model, without assessing whether the needed characters and processes are imitable. Many universities hired expensive CIOs with prior Wall Street experience to "invest" endowments. Asset allocation model and expensive CIO, somewhat resembling modular design in manufacturing, became the crown of the crowd, until recession hits. All of a sudden the industry screams out loud, "Is the endowment model dead?"

Without wisdom, the public will be short-sighted, and manipulated by temporary forces. No wonder David Swensen favors Keynes's saying, "Worldly wisdom teaches that it's better to fail conventionally than to succeed unconventionally." It's never easy to be the hero, for society either blindly idolizes or destroys him. 

The peculiar thing in investment is that euphoria can overwhelm one's thinking in success, yet a bear market quickly destroys one's faith. Behavioral economists have warned us about such peculiarity. Even professional investors, not short of technical qualifications, have difficulty restraining their emotions of fear or greed. 

Yet a wise man or woman stands still as the crowd screams, "Action! Change!" "Investment is a ‘loser's game,'" Charley Ellis said. As observed in amateur tennis games, steady defensive acts will lead to better investment outcomes, as abrupt offensive acts often do more harm.

Unfortunately in the practice of human resources, characters are often replaced by resumes. In learning and education, philosophy is often replaced by techniques.

The great philosopher Voltaire once said, "We must look at things in the large, for the very reason that the human mind is so small and sinks under the weight of minutiae." There is no shortage of minutiae in modern life: gadgets, pills, 24/7 news, debates, statistics, trends, forecasts, pitch books, cocktails, pop stars, rumors, politics… Without noticing, one can easily burden one's mind with immediate details, and the horizon recedes into unrecognizable lines and shadows, as if riding in a high speed train.

"Reflection without studying is dangerous. Studying without reflection is waste of time," said by Confucius (and Francis Bacon as well). In the pursuit of eternal success, we have to acquire a balanced way of doing things. Only then will sustainability have substance, and ultimately, a future.


Paul Tweddle '04 
Never has the question of sustainability been more relevant. Unfortunately for most, the current landscape will prove to be anything but sustainable and we must all prepare for a very cathartic process through which the global economy rebalances. Government policies around the world are doing their utmost to slow this process down for obvious reasons, but it is still highly uncertain if they will be successful in doing so (there is no data set to study as we are in uncharted economic territory).

Nothing exemplifies the global imbalances more than the trade dynamic between China and the U.S. It is my belief that the trade imbalance between these two economies has reached a zenith and that China's export-led model is as bankrupt as America's debt-fueled consumption model. Whereas the United States' problem is that it can't make as much as it consumes, China's problem is much worse because it cannot consume as much as it makes, as by definition the very same wage arbitrage that yields Americans cheap goods makes them unaffordable for Chinese workers.

Interestingly, back in 1990 China's economy was the size of Belgium's, while now it is set to become the second largest economy in the world. That mighty leap in growth was almost entirely due to its trade surplus with the U.S., which grew from $10 billion in 1990 to $268 billion in 2008, or 6% of Chinese GDP. If you strip out said growth from their entire GDP, the magnitude of the U.S.'s importance becomes quite clear. This however underestimates the importance of the U.S. trade surplus to China primarily due to the pro-cyclicality of consumption and investment. By this I mean that said trade surplus has generated massive employment in China, which has boosted consumption, with investment spending also boosted as factories and production centers required building in order to feed America with goods. Foreign direct investment by companies setting up shop in China in order to take advantage of wage arbitrage has also boosted investment. Finally, the other factor that understates the effect of the U.S. trade surplus is the money made from said enterprise, which is deposited in Chinese banks (profits by local firms, I mean), and provides fuel for future loan growth which further amplifies domestic growth. So it would seem very clear that although every analyst plays down this relationship, in my view de-coupling is and has always been a flawed theory, with my preference being the theory of lagged effects. 

This movie has played out many times over history with the same results every single time, most recently in the collapse of Japan in 1990 and the Asian tigers in the late 1990s. It is a fact that, with very few exceptions, any country that has exhibited loan growth of 10% or more annually for 10 years has suffered a severe banking crisis when loan growth eventually slowed down. Well, even before we hit the wall in the west with our own banking crisis, China had already grown loans on average by 18% annually for the last 20 years! Then, after the crisis hit, China increased loans by 27% over the nine month period between September 2008 and June 2009 ($1.2 trillion, which is the largest stimulus provided by any nation in nominal terms, but massive relative to its size... this has also had the effect of stimulating every commodity-producing country, especially those in the industrial material exporting space. See evidence in Brazil, Australia, Peru, etc). Loan growth has since continued its frenetic pace and is increasing the risk of a systemic banking crisis. Anyone paying any attention to China will have also noticed the recent pronouncement by the government that banks raise $75-80 billion in equity in 2010. This is a clear sign that policy makers used the banking system as a policy tool, and expect substantial losses due to nonperforming loans. 

So the United States and China share the same economic paradigm, that being debt-funded government spending rather than capitalism, something which is inherently "unsustainable" as history has time and time confirmed. What China has on its side is that its government debt to GDP ratio is quite low, at 20%, and it has ample reserves. This is even lower than Japan post-collapse in 1990 at 69% debt to GDP. Since then, Japan has been able to stave off its version of the great depression through government spending, ramping up its debt to 200% now, all at very low cost. The low cost is a product of all those profits made before the collapse, which now do not seek risk (because of scarcity of healthy risk adjusted rates of return), but rather safety, which only government debt can provide. By the way, the U.S. has publicly held debt as a percentage of GDP just shy of where Japan was in 1990, so those calling for impending doom in the bond market might be waiting a while longer (however, the CBO does say in their outlook that the ratio will reach 300% by 2082 due to entitlement spending, etc.).

Returning to the state of the U.S.-China trade relationship and its future, one cannot assume that the big "bet" the Chinese have made on the depth and length of the recession will pay off unless Americans can renew their profligate spending once again. Here is where I see another set of troublesome issues. During the period between 2002 and 2007, Americans increased their borrowing by $1 trillion per year (from the Federal Reserve flow of funds data). This borrowing elevated the personal consumption expenditure to $10 trillion and is a key reason for GDP having risen to $14 trillion. In order to give you an idea of magnitude, in 2008 Americans only increased their borrowing by $54 billion (so we borrowed near $1.2 trillion in 2006, around $825 billion in 2007, which preceded the massive fall to only $54 billion). As I saw in the 2009 Federal Reserve flow of funds data, we are now contracting, meaning Americans are no longer not borrowing but they are actually starting to de-lever in 2009. These are mind boggling statistics in light of their effect of consumption, and hence U.S. imports of Chinese goods. 

The problem for the U.S. now is that households are no longer credit worthy, they do not have enough collateral to borrow against (household net worth is down 21%), and home equity, that all important ATM Americans had become used to withdrawing from, is now at an all-time low of 43% (it was 62% as recently as 2001, and 82% in 1945). The relatively new area of economics called liquidity economics deals with this essential grease needed to keep economic growth chugging along. Yale SOM's own Gary Gorton is pounding the table on getting securitization up and running again in order to drive growth through increased liquidity. But, alas, given the balance sheets and income statements of Americans vis-à-vis the price of real estate and goods (as well as unemployment rates, capacity utilization, and what the Australian model tells us about wages in the future), I fear the finance industry's originate-securitize-sell-to-sucker scam is dead for quite a while, as well as facing substantial political backlash.

In conclusion, it is my belief that we face greater uncertainty than at any point in the last 100 years and hence talk of sustainability is not only futile but actually irresponsible. Instead, we must understand the signals being sent by the globalized economy and trade dynamics, which in our case implies that America must restructure its economy to one driven by long lead technologies, education, energy innovation, etc. We must embrace change and creative destruction, making sure to minimize the drag to capital as it seeks the best allocation for future growth. What we certainly cannot afford is the current economic policy of bailing out anyone and everyone, with specific focus on industries that provide no value-added to society (a great part of finance), or are doomed by inevitable Ricardian forces (i.e., autos). One place our policy makers should look very closely, too, is the economic revival of Chile post-Allende, and the policies at its genesis. Indeed, the policies exacted a very high short-term social cost, but the country's amazing success over the last 30 years sits as a good example of positive policy. Make no mistake, the cost always gets paid, it is just a question of high short-term or lower annual costs over a protracted period of time, with the long-term benefits on the margin being greater with the tough medicine solution.