Google is diversifying into offshore wind energy, but to whose benefit?

Google recently announced that it invested in the development of a “backbone” transmission project off the mid-Atlantic coast which will hopefully accelerate the development of offshore wind energy. Despite the stated good intentions of Google, are they really doing this to boost their image? If not, then the question instead becomes “Why is shareholder money being used for diversification and altruism?” After all, Google is a rational, public company.

Diversifying into new areas only makes sense for corporations if they can bring expertise and have a synergistic effect with their existing operations. The goal there is to improve shareholder returns over what they could normally get in the market. In this case, that would be a company that specializes in energy transmission.

While Google has invested in another wind project, this investment is not like the majority of its operations. Nor is it like its foray into phones, price indexes or content providing where their existing market share, technology and talent can uniquely provide value to shareholders. Remember: Google is an information company, not a venture capital fund or utility.

Now, before anyone accuses me of being reactionary to a positive development in the renewable energy world, let me say that I am pleased that this money is being invested. I see a bright future for offshore wind as a reliable, cost-competitive, and clean source of electricity. Nevertheless, I am trying to understand the motives of Google to see if we can expect more developments of this kind in the future.

My belief is that Google is in fact trying to boost its ‘Green’ and ‘Socially Conscious’ credibility after its spat with China earlier this year and the revelations its relationship with the government concerning its vast supply of user data. In an audio interview you can find here, Rick Needham, Google’s director of green business operations, dismisses that idea simply saying that this will provide a “solid return.”

Neither the interviewer nor Needham talk about how investors could ultimately choose where to invest their money if Google’s profits were distributed to them. Instead, we are led to believe they are looking to ‘do good’ and be profitable at the same time, even if this sort of direct investment isn’t the best value for the company’s owners.

Google and many other public companies participate in many socially conscious initiatives. These have a tendency to make them look altruistic and compassionate and put them in a positive light in the public view. Still, they are looking to benefit in the long-run by being able to sell more, attract better talent, and avoid scrutiny. If managers weren’t truly acting in the best interest of their shareholders, they would be replaced. This is what people should understand about the actions of a public corporation: they should and will only act when it makes financial sense.

With that in mind, the increased tendency to ‘greenwash’ products or entire companies has been well-noticed. We’ll see more of these types of investments and projects, as long as the public is still attuned to these issues.

Still, there is one more explanation for Google’s expansion aside from establishing ‘green’ credibility or corporate altruism: empire building. Empire building is a huge agency problem in that the interests of the managers and shareholders are at odds. The heads of Google may prefer to have a far-reaching company that is ‘changing the world’ and are looking for a new way to have a huge impact while destroying some value.

People have often accused Google of trying to take over the world. However, this project is most likely an example of greenwashing. For anyone thinking Google may be different in some way, remember: they have much to gain from those exact thoughts.


USA Today is now on the marketing payroll of NASCAR

USA Today ran a story this weekend by Nate Ryan entitled “Nascar going green, moving to ethanol blend fuel in 2011.” On this blog, we have spent a fair amount of time talking about both the use of buzzwords such as “green” and the pitfalls of biofuels. One post from a couple of years ago debunked the debunking of several ethanol myths while we have also looked into the prospect of biofuels dragging 30 million people into poverty and increasing carbon emissions by 30-fold. Needless to say, this story feels a lot like it is out of early 2008 rather than October 2010.

NASCAR is moving towards a 15% ethanol blend fuel beginning with the 2011 Daytona 500. While this isn’t the only green initiative, it is the one NASCAR would like to be the focus of its PR campaign according to NASCAR CEO and Chairman Brian France:

“When we said we had to accelerate our green efforts, this was a centerpiece,” France says. “It’s certainly the most visible thing we can do.It’s also one of the more difficult things that we do.”

If something as environmentally and socially destructive as corn-based ethanol is the centerpiece of your green efforts, then it’s not a stretch to say you have problems with your plan. The article does make a brief mention of other initiatives such as recycling and LEED certification for new buildings, but the bulk of the text is dedicated to the marketing advantage gained by the change in image.

But the switch to ethanol might be the most important step in achieving an ancillary benefit — attracting new sponsors in the green economy to cash-strapped teams hurting for funding since the onset of the recession.

“If you make a presentation to sponsor your car or race, it’s, ‘Well, tell us what you’re doing about green concerns.’ If you don’t have an answer, that may shut the door for you. They might not have an interest. There are some companies that are going to have budgets set aside exclusively for people that are actively green. There is a smart economical benefit to this.”

For me, the rationale behind having ethanol be the forefront of ‘green’ efforts is pretty clear. Thanks to some clever marketing and lack of real criticism of ethanol in the media, the public generally views it as a good solution. Also, it is a fairly easy and inexpensive switch for NASCAR and requires no huge switchover costs that other process changes may. Altogether this is a pretty inexpensive greenwashing campaign that allows NASCAR to get some free advertising from news sources such as Nate Ryan of USA Today.

One could make the argument that this is a relatively moot point as the prospects for NASCAR becoming a sustainable sport are bleak. I wouldn’t mind seeing some high powered electric cars race around the track, but we would also lose those roaring engines that make it so exciting at times. Like most every other sustainability effort, NASCAR is still in the ‘doing things less badly’ stage. It should get praise for the positive steps taken, but heavily scrutinized for this move.

In the end, my issue is not with NASCAR, but with Ryan. The title “Nascar going green…” is effectively advertising for NASCAR while the message of the article deals with the desired impact of the switch to ethanol on sponsorship. In fact, the author does not seem too concerned about the environmental consequences of a switch to ethanol, leaving that question unresolved:

NASCAR couldn’t provide many specifics about ethanol. France said the move would reduce the carbon footprint of a race (“we’re not exactly certain, but there is a benefit”).

If Ryan truly wanted the focus to be on NASCAR ‘going green’ then he would have investigated this aspect a little bit more to inform readers. If not, then the title should have instead been something along the lines of “NASCAR seeks to attract environmentally-conscious fans and sponsors through ethanol fuel blend.” Of course, that would be expecting a lot out of Nate Ryan and the mainstream media.

Could we see a microfinance bubble?

Vikas Bajaj’s recent article in the New York Times entitled Sun Co-Founder Uses Capitalism to Help Poor details the story of Sun Microsystems co-founder Vinod Khosla and his venture into microfinance. His recent investment in SKS Microfinance netted him $117 million after the company issued an initial public offering (IPO). The narrative of the article is that there is insufficient capital available to truly combat poverty and that Khosla is trying to channel his profits into productive outlets that will reduce poverty in a significant way. The dissent within the article is limited to the basic “you can’t put profits over people” mindset while Khosla sees N.G.O.’s as ultimately ineffective, presumably because of the lack of funding.

Aside from addressing the potential marginalization of microfinance’s noble social goals, there is a completely separate issue of the ramifications of such a flood of fund into social ventures. Money can only be a valuable resource if it can be put to good use through strong institutions and managers. Growing the budget of an organization does not necessarily result in an increase in it’s effectiveness. Even so, Kosla should be commended for his efforts to fund a wide range of social ventures such as milk collection and chilling plants which will direct cash to more than one place.

Without sufficiently strong institutions, the potential for a microfinance bubble is very real since the effectiveness microfinance depends on fiscal sustainability. The article almost gets to the point here:

Moreover, as the fallout from the global financial crisis has made clear, the profit-maximizing tendencies of businesses can hurt society, said Phil Buchanan, president for the Center for Effective Philanthropy, a research organization based in Cambridge, Mass.

A common conception about the financial crisis is that it was caused by unbridled self-interest. That is a partial answer, but the real driving force behind the crisis was that self-interest combined with an inexhaustible supply of credit in an unregulated market. Microfinance is a poverty-fighting tool which utilizes credit itself. With that in mind, could we see a Minsky bubble in microfinance as large sums of money flow into these ventures? A lack of skilled managers doing their due diligence would be another ingredient in the recipe for such an outcome. Combined with the recent IPO clouding the incentive structure of the organization, there is a risk for creating financial instability through a mechanism that was meant to bring stability to the developing world.

The fact that micro-loans are not collateralized will keep any crisis from spreading to the wider economy in the way that the housing boom of the mid-2000’s did. Nevertheless, a boom and bust of any proportion within the microfinance system would put it’s long-term sustainability in question. The real way to provide stability would be to strengthen the organizations and foster a long-term growth plan. However, the article makes clear that Khosla values the desires of wealthy donors over experienced N.G.O.’s. It will be interesting to see the ultimate impact of SKS Microfinance on the greater system and if we see some of the problems associated with for-profit lending start to creep into this form of financial services. In the meantime, the raised capital should be invested in the organization rather than used to extend credit beyond it’s scope and capability.