Seven Reasons why Russia Should Invest in Sustainability — Three of Them Unconvincing

by Alan AtKisson

CEO, AtKisson Inc. & Author, The Sustainability Transformation

On Wednesday, 10 February, I made the second keynote presentation (after Ashok Khosla’s opening) to a conference in Moscow called “Innovative Russia: Responding to Global Challenges.” The other participants on the 11-person panel were a small who’s who of combined Russian and Silicon Valley leadership. You can view the program here:  http://gvacapital.com/ir.  Moderator Yermolai Solzhenitsyn’s affiliation is not listed there, but he’s the managing partner for McKinsey in Moscow. The photograph was taken from the stage, with my iPhone, during Ashok Khosla’s speech.

Response to the speech was positive enough that I turned it into an article text, published below, which will also be translated and published by the Russian on-line magazine gazeta.ru. Since my books were recently published in Russian translation, I also managed to slip in — during a final comment, about how venture capitalists could at least try to put some sustainability content into their investment decisions, instead of making money on anything at all and then giving some of their wealth to charity — a note of gratitude to Natalia Tarasova, a professor at Mendeleev University and good friend. She had overseen the translation.

Why “Seven Reasons”? Because Muscovites love the number seven. And why are “Three of them Unconvincing”? Read, and you’ll see …

These are exciting times in sustainability. In practice, sustainability involves reinventing business and governance processes so that they stop destroying key ecosystems, depleting irreplaceable resources, and increasing the gap between rich and poor. “Practice” is exactly what has been missing from sustainability work for most of the concept’s lifetime. But recently, sustainability has moved out of the category “something that academics, bureaucrats, and activists talk about” to the category “something that mainstream business leaders and investors do something about.” This is a monumental shift that has been gestating for some time, if you knew where to look. But it really began showing evidence of its exponential growth rates only in the past three to five years. Now, the evidence is overwhelming:

• Countries like South Korea and China have embraced the concept of “Green Economy” or “Cyclic Economy” with serious policy initiatives and billions of dollars of investment

• Global companies like Unilever or Siemens (and dozens of others) have set goals that combine ambitious revenue growth with strong reductions in environmental impact, impressive increases in corporate responsibility practice, and serious commitments to “sustainability innovation”

• Global consulting and auditing giants such as Ernst & Young have been hiring hundreds of people to support new, growing divisions with titles like “Climate Change and Sustainability Services”

• Investment in renewable energy grabs headlines every week, such as the recent deal between United Arab Emirates and Spain to invest USD 5 billion in Spanish solar technology

• Oil and gas economic powerhouses such as Norway are redirecting more and more of their windfall fossil-fuel-generated capital into cleaner and more sustainable solutions (Norway recently pledged to increase its domestic renewable energy use to 67.5% of total by 2020, which translates to an increase of 9% every year in wind, hydro, solar and other sources)

These items are already commercial facts, but more visionary innovations and mega-projects are also taking shape in the world’s think-tanks and testing grounds. From South Korea’s large-scale tidal energy installations, to the bio-mimicry technologies erupting from the minds of biologists working in collaboration with engineers, to the giant-but-increasingly-realistic proposals such as “DESERTEC” (generating solar electricity in the Sahara) or mega-grids (e.g. linking up East Asia with a vast complex of underground, highly efficient mag-lev trains and supercables) … it is no wonder that anyone just waking up to this transformative revolution in humanity’s planetary management strategy might find it all a bit dizzying.

Of course, up to now, humanity had no “planetary management strategy” — and this was precisely the problem. Our activities, super-amplified through the power of cheap energy and technology, had become planetary in scale, but disruptive (and largely destructive) of the planet’s billion-year-old natural processes. And indeed, for decades, it was largely academics and citizen activists (plus a relative handful of visionary leaders in business, the United Nations, local government, and other arenas) who worried the most about what was happening, and tried to do something about it.

That “something” that these early leaders were trying to “do” was to change government policies, business practices, consumer attitudes, educational curricula, and other elements of our increasingly inter-connected global system. The request was actually simple:  Add sustainability to these things. Add systems thinking. Add a longer-term, more holistic perspective to the definition of “success.”

For many years, these efforts to change thinking (and practice, and policy, and investment) did not seem to be working, or at least not working fast enough, and certainly not working at anything like the right scale. But such is the magic of exponential growth:  what appear first as insignificantly small, incremental changes are in fact replication and multiplication processes. They grow by doubling. Things appear to go faster and faster, and at a certain point, things take off. Think cell phones, Internet, Total Quality Management. Few people remember that seeking to perfect quality, as a manufacturing practice, was still a new idea a few decades ago. The idea’s original proponents could barely get noticed by business leaders. But then the Total Quality Management movement started (in Japan), it grew exponentially, it took off … and by one decade ago, “Quality Management” was such a normal, mainstream concept that everyone stopped thinking about it.

That’s what’s happening in sustainability:  take-off. Sure, there are ups and downs even in the midst of take-off, which is exactly what you would expect in a maturing market of any kind. But the overall pattern in unmistakable. Wherever you look on the map of the world, from the renewable energy fields of Brazil, to the environmental accounting practices of shoe-maker Puma, to the spread of clean cooking stove technology to the smoked-out kitchens of the developing world, you can see transformative change accelerating before your very eyes.

But not in Russia.

Why is Russia missing from the emerging map of transformation to a greener and more sustainable economy? With its enormous amounts of money, resources, and brainpower, it could be leading the way, as several other oil and gas-based economies are doing. But analysts far more well-informed than myself — including Russia’s own leadership — have long noted with worry that Russia’s surging economy is almost entirely based on the export of raw resources. The country’s rising prosperity floats on that sea of oil and gas, as a few Google clicks (engineered partly by Sergey Brin’s Russian brainpower) will easily tell you. Easy wealth breeds indifference, and Russian innovators tend to take their inventiveness elsewhere, to places like Silicon Valley, resulting in a drain of capital, both financial and intellectual, from the country.

This situation could easily be reversed. I use the word “easily” in an entirely theoretical sense:  in practice, nothing is easy in Russia, as any Russian is quick to tell you. The entire nation seems to take pride in its enormous capacity for problems and difficulties — and by extension, its capacity for overcoming them. Nonetheless, in theory, Russia could change relatively quickly from being a sustainability laggard to a serious leader, especially in areas related to technology and large-scale industrial implementation.

What follows are seven reasons why Russian leaders in government and business — including that class of wealthy and powerful people known universally as the “Oligarchs,” together with the people who advise them — should take the opportunity for investing in sustainability far more seriously than they currently do. While all seven reasons are convincing to me, I am quite certain that the first three will not be convincing to anyone in a position of power in Russia. For that reason, I have clearly labeled these first three as “Unconvincing Reasons.”

But that leaves four reasons that seem to have the potential for unlocking a torrent of creativity, investment, and change in the way Russia pursues its economic destiny. Because many Russian economic leaders started their professional lives as physicists and scientists, I will use — starting from Reason #4 — the concept of Potential Energy as a metaphor for what I, as an outsider, see as possible in Russia. A small shift in thinking could result in large shifts in the real world, resulting in multiple benefits, not just for Russians, but for the world as a whole.

UNCONVINCING REASON #1:  THREATS TO NATIONAL SECURITY

Many sustainability issues have a national security dimension. If you are sitting on resources that others desperately need but don’t have — like oil, or water — you may find soldiers at your doorstep. UN diplomats quietly pointed to climate change and precipitation declines as underlying causes for the forced migrations and slaughters of Darfur. Australia has concerns about what happens on its Northern shorelines if refugees flee swamped coastlines or other disruptions. The US Department of Defense runs scenario exercises based on climate change, conflicts over resources, and other sustainability worries, and is moving aggressively into biofuels and solar energy to insulate defense operations from the vagaries of a global energy market. One would think that arguments like these would be compelling to anyone in the leadership of a nation with a permanent seat on the UN Security Council.

But Russia is vast. It has resources that it perceives, rightly or wrongly, to be virtually endless. It has an extremely strong defense (which, according to recent news reports, is slated to get even more budget support in coming years). No one in Russia worries seriously about hungry Finns or Latvians storming across the border, or even Chinese troops for that matter. No one worries about where the fuel to run tanks and warships and fighter jets will come from. Despite the echoes of Cold War saber-rattling in recent Russia-NATO exchanges, nobody worries about missiles falling on Moscow anymore. National security is truly not an issue for Russia. Arguing for sustainability “for the sake of national security” would generate nothing more than an ironic chuckle, so let’s cross that off the list.

UNCONVINCING REASON #2:  BREACHING THE PLANETARY BOUNDARIES

In a landmark article published in September 2009 in the journal Nature, an eminent international group of scientists concluded that humanity’s activities had already pushed several global ecosystems (climate, biodiversity, the nutrient cycle) over the limit of what those systems could tolerate. Other systems were heading quickly over the same precipice. The long-term consequences would be “detrimental or even catastrophic for large parts of the world” — strong language that reflects the seriousness with which they viewed the available data. They called for concerted action to bring humanities use of resources and emissions of waste back into the “safe zone” of what the planet can sustain. Their arguments were so compelling that political leaders have been sitting up and taking notice, including the United Nations High-Level Panel on Global Sustainability, which is chaired by two presidents.

But once again:  Russia is vast.  Even if the worst-case scenarios associated with these trends come to pass, the typical Russian leader is likely to think, “So what?” If water dries up in one place, we’ll shift agriculture to another. Too hot and dry in the south? Too much nitrogen in the water table? Too much climate change? We’ll just grow wheat in balmy Siberia. The rest of the world may have serious troubles, but Russia feels insulated by its size, geographic diversity, and resource wealth. Cross Reason #2 of the list as well.

UNCONVINCING REASON #3:  THE NEED TO “SAVE THE WORLD” FROM CATASTROPHE

A generation of sustainability champions (including myself) were inspired to act by the analyses contained first in a little book called The Limits to Growth, published in 1972 and updated twice, the last time in 2004. The original worries presented in Limits — that the exponential growth of population, resources, and pollution would eventually bump up against the boundaries of the planet (see Reason #2) — have been supplemented in recent years by the notion that there could be “tipping points” in the global system. Resource depletion, ecosystem disturbance, and other activities may seem “sustainable” for a while, but when they can cross an invisible line in the sand, they suddenly collapse like a house of cards, taking innumerable species (and humans) with them. An example might be the Amazon:  at what point does the number of trees lose critical mass and trigger a sudden shift from Rainforest to dry savannah? Unfortunately, such nightmare scenarios are the stuff of current serious scientific analysis.

When people use the phrase “save the world” in the context of sustainability, usually with a kind self-mocking (or just plain mocking) undertone, what they often mean is the effort to stop destructive processes before it is simply too late to prevent some sort of resulting catastrophe. People are emboldened in this work by remembering that, on several occasions, humans actually have saved the world, or at least important parts of it. The most famous example is the threat to the ozone layer caused by the production of CFCs:  production of this insidiously dangerous chemical was dramatically reduced, essentially just in time to prevent the loss of the planet’s one and only atmospheric shield against dangerous ultraviolet radiation. Even the phrase “Save the Whales!” from the 1970s can be celebrated now as a kind of world-saving triumph, at least for several whale species, which have bounced back from the brink of near-certain extinction.

But is “saving the world” a compelling reason for Russia to invest more seriously in the sustainability transformation? Hardly. Russia will be fine. See above: even in a truly worst-case scenario, Russia would adapt and survive, as it always has. (Remember that Russian affinity for surviving serious and complicated problems.) And as for saving the world for its own sake, well … what has the world done for Russia lately? Scratch Reason #3.

If you question my characterizations above, consider the data. While reading through the excellent English-language summaries provided by the organizers of the recent Russia 2012 Forum — an event that happens right after Davos, and manages to entice many of the global Davos stars to stop in Moscow on their way home — I came upon this wonderful tidbit at the end of a slide presentation on Russian attitudes to risk management in the financial markets. As the last item in an otherwise dull review of what Russian investors think about hedge funds, participants were asked, “Do you believe the world will end any time soon?”  “Yes,” said 4.3% of respondents. “No,” said 45.6%. But the majority response, 50.1%, was this:  “I don’t care, I’m hedged.”

Having dispensed with the unconvincing reasons for why Russia should invest in sustainability, let’s turn to the potentially convincing ones, and to that wonderful and relevant concept from basic physics:  Potential Energy.

REASON #4:  CAPTURING AN EXTRAORDINARY ONE-TIME FINANCIAL OPPORTUNITY

According to published analyses, there is a lot of money in Russia currently trapped in its antiquated buildings, equipment, and infrastructure. It is trapped there partly by energy price subsidies, but it is also trapped by a simple lack of attention and focus. There may be more exciting things to do on a Friday night in Moscow than improving the energy efficiency of buildings and machines; however, there are few things that are potentially more profitable in the long term.

The key word here is “potential.” An apple hanging by its stem has what physicists call “potential energy.” Break the stem — or better yet, if the stem is gripped between your two fingers, simply open your hand — and the potential energy is converted to kinetic energy, the energy of motion. The apple falls.

According to a report by McKinsey & Co. published in 2009 (“Pathways to an energy and carbon efficient Russia”), there are many such apples in the Russian economy. Relatively simple incentives and decisions, the equivalent of simply letting the apples fall, could create a very respectable flow of money, even in a country used to the torrential flows of petro-rubles. Consider the following:

• An initial investment of €70 billion to upgrade buildings and construction would result in savings of €190 billion over a twenty-year period. This is equivalent to a 120% return on investment.

• When it comes to producing heat and energy, a €20 billion investment produces €60 billion in savings over the same period, a whopping 200% ROI.

In fact, says McKinsey, “Russia has the largest relative potential among all the BRIC countries to reduce [CO2] emissions through implementing only measures that are economically attractive” [emphasis added]. While the savings in CO2 may not be a compelling motivator for Russia’s economic leadership, the potential for solid returns on investment should be — not to mention the jobs that could be created in order to do the work, and the pleasure of owning shiny new (or renovated) buildings and machines.

The benefits include health and safety: Russia’s own Geographical society reported last year (March 2011) that “we have fundamentally obsolete production facilities and communal infrastructures, which is [a recipe for] a major disaster.” Fully 60-80% of Russia’s energy infrastructure is estimated to be in need of maintenance and repair, and those repairs could be combined with efficiency upgrades. Around 90% of industrial waste is not recycled back into production: waste is going to waste, when it could be generating more economic value. These figures represent a great deal of financial potential energy that could be released by the right combination of incentives, policies, and forward-looking investors.

What is that combination, exactly? These are the kinds of big, complicated problems that Russians ought to love, because solving them could make some people quite wealthy. The potential exists not only in renovating the existing infrastructure, but in the new things that must be built just to meet projected demand. Over 60% of the infrastructure to provide Russia’s expected energy needs in 2030 has yet to be built. What choices will Russia make about how to build it? Wasteful ones? Or long-term profitable and sustainable ones?

In fact, it is entirely possible that the estimates of McKinsey and others may be conservative. For example, the rise of “passive house” technologies in Europe in recent years has produced many examples of extraordinary cost savings (which is another way of saying, extraordinary profit). A typical Soviet-era apartment complex in, say, the Czech Republic can now be rebuilt to save 90% of its previous energy consumption, while creating brighter and more attractive living environments. No one really knows what would happen if innovations such as these were serious deployed throughout the Russian economy, because no one has tried.

The apple is still clenched firmly in the hand.

REASON #5: THE COMPETITION FOR ECONOMIC AND GEO-POLITICAL POSITION

Like it or not, Russia is in competition for power and influence on the world stage. At the moment, the nation’s vast fossil fuel and other resource reserves are the primary platform on which it stands. But this powerful platform will not last forever, and its lifespan may be shorter than many believe.

The global energy market is changing with extreme rapidity. Many countries are embracing new (and environmentally controversial) methods of extracting oil and gas explicitly to reduce their dependence on the global market … and by implication, their dependence on Russia. Other nations, such as China and South Korea, are taking what might be called “hard positions” in sustainability and green economic innovation, partly as a way of increasing their “soft power”:  South Korea has been rewarded for the billions it invests in “Green Growth” with an enhanced profile as a forward-thinking technology leader envied by many. Meanwhile, the financial crisis continues to depress demand, and if high unemployment persists or deepens, the word “depression” may creep back into the global economic lexicon. Experts speculate openly about what will happen if these trends combine to create a “perfect storm” — from the Russian economic perspective — of dramatic drops in the price of oil and gas. The picture they paint is not rosy.

The reality of today’s energy market, as well as the future of how that market will develop, are both devilishly complicated. Some say “peak oil” will drive prices sky-high; others say depressed demand and diversification will send prices plummeting. Predicting the future is impossible. But that simply underscores the very real possibility that Russia may not have more than a decade left to enjoy its extraordinary fossil fuel capital windfall. If the petro-ruble river starts to run dry, what will Russia have to show for all its years of easy money? As more nations “frack” their own gas, install windmills and solar cells, super-insulate their houses, and start driving their cars on electricity generated off their own roof-tops, what will they buy from Russia? What will Russians buy from each other?

Investments in sustainability of the kinds described above — not just in the low-hanging fruit in Reason #4, but also in the more visionary directions described earlier, including the emerging fields of biomimicry, green chemistry, and sustainability-oriented nano-, bio-, and info-technology — would accelerate the kind of economic transition that everyone says Russia needs. Russia has the chance to transform itself from pipeline-and-oil-barrel hulk to a focus of technical and economic admiration, while renewing its economy on back of a much more diverse and robust industrial portfolio. Granted, the world’s hunger for oil and gas is not going to disappear any time soon; but the world’s hunger for sustainability-oriented innovation, and its respect for those who seriously invest in it, is growing exponentially. This has created a serious global race in which Russia is not currently competing.

And you have to be in it, to win it.

REASON #6: IMPROVED QUALITY OF LIFE FOR THE RUSSIAN PEOPLE

In a recent issue of Science journal, an international team of 24 researchers documented the benefits in every country, worldwide, of reducing tropospheric ozone and black soot. In brief, by taking action to improve a menu of 14 wasteful and pollution-generating industrial activities — of which all but one apply strongly to Russia — health will improve, food production will increase, and millions of premature deaths would be avoided (an estimated 40,000 of them in Russia). The cost? Negative. The whole exercise would generate net positive income by reducing healthcare expenditures and increasing agricultural output. The fact that these actions would also help reduce the impact of climate change is just a bonus (“Simultaneously Mitigating Near-Term Climate Change and Improving Human Health and Food Security,” 13 January 2012).

This is just the most recent in a long line of research papers, case studies, and living-proof models showing that “going green” is good for people as well as the planet. In buildings renovated to be sustainable and efficient, fewer people get sick and employee retention rates improve. If you make city streets or even parking lots more beautiful and pedestrian-friendly, people will walk more instead of driving their cars round and round looking for a parking spot that is 50 meters closer to the door.

Sustainability innovations of these kinds do not just save lives, make money, and stimulate economic development: they make people happy. They create optimism. They can help point whole societies squarely toward the future, and generate a feeling of hope.

What Russian leader, in government or in business, would not want this for the Russian people?

Which brings us to the seventh, and most compelling reason for why Russia should invest seriously in sustainability.

REASON #7:  BECAUSE YOU CAN

Russia, compared to most other countries on Earth, is in a privileged starting position when it comes to investing in sustainability. It has ample financial and intellectual capital to invest — much of which is leaving the country, at the moment, but that is a flow that could be reversed. It has surplus resources to such an extent that the word SURPLUS should be written in large letters. It has a relatively unchallenged position of national security, and no need to project power globally (because, among other reasons, it has all the resources it needs). It has a deep heritage of leadership in science and technology on which to draw. And it has plenty of low-hanging, money-making fruits to pick from its economic tree.

More importantly, Russia’s strengths give it the resilience needed to take some risks and absorb some losses — for as any entrepreneur will tell you, one has to be ready to take a loss once in a while, in order to accomplish a big win. Changing national economic habits, technologies, and infrastructures is going to require a lot of focused thought, domestic reform, strong incentives (e.g. to reverse human and financial capital outflows), and occasionally nerves of steel. Russia needs to find its niche on the global sustainability stage and, for its own sake, to do it quickly. As noted earlier, the theory is easy and straightforward. The practice will be challenging.

But Russians are a tough people. They like challenges, and they don’t like to lose. There is a great deal to be won by investing seriously in sustainability and economic transformation. Russia certainly should do this, if only because — in ways that truly are unique to this country — Russia can.