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.

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.

CBO Blasts Ethanol

An article published last Thrusday by the Washington Times suggests that federal support for corn ethanol has large negative consequences and a dubious impact on the environment. It seems that the Congressional Budget Office is catching up to the many critics of ethanol (for some of our own criticism of ethanol, feel free to check here). This should be the final nail in the coffin for aggressive corn-based ethanol policies. Continue reading

Green-tech investment falls 50%, but it’s no time to worry

The first quarter of 2009 saw a sharp decline in all forms of investment in clean-tech and energy both compared with a year ago, as well as the fourth quarter of 2008. Overall, the $13.3 billion invested was down 53% from the previous year and 44% from the last quarter. Investments in new renewable-energy projects led the decline, with venture capital investments also dropping 22% and a near evaporation of all investment in pure-play clean energy companies. However, this raw figure does not tell the entire story for the industry, nor is it necessarily indicative of a trend.


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Crunching Sustainability Pt. 1: Iceland

Smash the Mirror tries to bring solid economic and rational thinking to sustainability, geopolitics, and current events. To that end, this is a pilot post for a new series on how the Credit Crunch of 08-09 will impact the environmental sustainability of human life. Posts in this series will appear under the tag “Crunching Sustainability“.

By now, the collapse of Iceland’s governing coalition has been circulating through the media for a while. To sum it up in a single phrase, the cause of the fall was the economic crisis and monetary policy. That is why, according to the Washington Post article, there is a new push by some citizens and the country’s Democratic Socialist Party to join the European Union.

Fishing Boats

Fishing boats tied up along a pier.

The Euro has rapidly cemented its reputation as a stable currency, and that appeals to the Icelanders who feel they have been betrayed by inadequate policy-making. Unfortunately, the EU also has its failures, and the fishery management policies are foremost among them. Continue reading

Transatlantic Carbon Trade

New York Times

Out of Brussels comes word that the European Union wants to work with the United States to lead a cap-and-trade emissions system for wealthy nations. A well-implemented cap-and-trade system has the perks of providing an absolute maximum for the traded emissions, and of taking advantage of the efficiency of the competitive market equilibrium (the CME is always in the Core, to put it technically). In short, an ideal cap-and-trade system allows for fully effective environmental regulation within the market system, rather than throwing the baby out with the bath water.

Unfortunately, the EU plan previously has been the model of how not to implement a cap-and-trade system. Individual countries would routinely demand vastly overinflated quotas so that they would not have to make an effort to actually restrict emissions. The New York Times says however, that word out of Europe is that they are well on their way to improving the system: Continue reading

Intimacy Instead of Consumption

“Have More Sex to Save The Planet” reads the headline on this Times Online Green Central Blog Post. Certainly, it’s quite an attention grabber. Unfortunately the post itself is quite simplistic and does little to create a positive image of sustainability and environmentalism. Humans will have to grapple with shrinking the environmental footprint of our activities, and soon. As the Times Online post highlights, drawing happiness from non-market goods such as family time, or intimate relationships might provide greater fulfillment and less waste.

One wonders though, what kind of imagery that language conjures. The modern environmentalist community has been careful to avoid associations with so-called “hippies” of the 1960s. Talking about sex saving the planet evokes images of utopian communes. Still more alarming is Flintoff’s unsubstantiated, doom-and-gloom assertion that emission cutbacks will cause wholesale economic collapse Continue reading