Energy Transition

The business case for safer factories

Oliver Niedermaier likes to tell a story to illustrate the not-so-modest aim of his private equity venture, Tau Management. “One of our operators was talking to the owner of a factory, who was saying: ‘You can’t possibly do solar here, we’re in in the middle of Bangladesh: it’s just not efficient; can’t happen.’ So the operator walked the owner up to the roof of his own factory, and there, two doors over, was a roof covered in photovoltaics – a Pepsi factory. Why? To stop production interruptions, get off an unreliable grid and reduce costs. It was a revelation to the factory owner: that here was a significant way to save significant cost in his operation – and those cost savings to have a net effect on greenhouse emissions.”

It’s that mix of business and ethical opportunity that underpins Tau, a company dedicated to transforming global supply chains. Their first target: shoddy practices in the garment industry. By helping big Western retail brands identify and invest in upgrading, modernizing and generally building “factories of the future” in south Asia, they hope they can make not just economic but social, humanitarian and environmental sense – proving in effect that there are, as they say, “capitalist solutions to capitalism’s failures”.

“We want to turn around the common logic of responsible investing, where people assume they need lower financial returns,” he says.

Tau’s goal is to set up a $1 billion fund within three years, starting with investments in six to eight factories and scaling rapidly to 20-25, all specifically designed to reduce energy costs and gradually move to renewables. They hope those plans could reduce greenhouse gas emissions by 24 million metric tons per year, saving 2.5 billion kilowatt years of energy. “That would be staggering in places where the idea of renewables is so imperative but there hasn’t been the connection between know-how, resources and need,” Niedermaier says. “We bridge that gap, like good private equity does.”

The garment industry was already consolidating, he says. “Buyers were moving to fewer, bigger, better, faster, cleaner suppliers. But the shift wasn’t happening fast enough for them. It’s a competitive field and they wanted an advantage over their competitors. All that we’re doing is accelerating the inevitable in an industry at an inflection point. We’re a traditional private equity firm – what makes us different is the extraordinary network we’re pulling together to make it happen.”

That network came together in 2010 at the World Economic Forum’s gathering of Young Global Leaders, where Neidermaier met Ben Skinner, an investigative journalist who worked with Richard Holbrooke and spent time in wartime Sudan. “I saw mass atrocities, saw some of the worst things that man does to man in the modern era,” Skinner says. “What I was left with was a sense that humanitarian issues touch all our lives by virtue of the products we buy – and more to the point, that business can make a change in these massive problems. In 48 hours, a corporation the size of Walmart can change the way they source on a particular product line, with a direct effect on millions of lives – while government can take 10 years to pass a law and then never really enforce it.”

The 2013 tragedy at Rana Plaza, where 1,129 Bangladeshis died in a factory collapse, is a perfect example of what Tau hope they can prevent. “Weeks before its collapse, Raza Plaza was audited for safety,” Skinner says. “You hear people respond to disasters by saying: ‘Let’s just do more audits, let’s pile them on.’ But we talked to some factory groups that have 89 different audits every year. Every third or fourth day they’ve got a new auditor, with a new strategy of how to game the system.

“You need to have skin in the game, get your hands dirty and begin transforming these places – by which I mean going in with capital to take equity stakes and drive the change that needs to happen. Without the money, the know-how, and the structured bundled demand from retailers and brands, you’re going to get a lot of goodwill and, frankly, a lot of hot air. You’re going to get more factory fires, more protests – and you may, god forbid, get another Rana Plaza.”

NGOs are key partners in the eradication of the worst crimes, Skinner and Niedermaier agree. “But they’re most effective when powered with a positive business vehicle with a mandate to have the social and environmental benefits not only as an altruistic add-on but as the core that drives profit and value,” Skinner says. “It has to be driven by business.”

The role played by the YGL forum in bringing together that unique combination of know-how, resources and understanding of need was invaluable. As well as Niedermaier and Skinner, there’s co-founder Sanjay Gupta, who ran a Forbes 50 family office with $7 billion under management and has vast experience of – and access to – very large ultra-high net worth investors. The advisory board includes other YGLs: Brett House, a former global strategist with a macroeconomic hedge fund who has also been a policy adviser at UNDP; James Gifford, a former executive director with the UN-backed Principles for Responsible Investment Initiative; and Brian Behlendorf, who has done pioneering work in the open-source software movement.

If Skinner is “all heart”, Niedermaier says he’s “a little bit of heart and a little bit of brain. It’s hard for a German-born New Yorker to be all heart, but they’re working on me.” Together, however, it’s clear that these YGLs are frustrated with short-term shareholder capitalism. “It is value destructive in a lot of industries,” Neidermaier says. “We’re looking for ways to continue to be capitalists, hopefully incredibly successful ones, who build big solutions for big problems – which is what capitalism is all about.”

Author: Chris Michael is a freelance writer working for the World Economic Forum.

Image: Employees work inside a textile mill of Orient Craft Ltd. at Gurgaon in the northern Indian city of Haryana April 16, 2014. REUTERS/Anindito Mukherjee

This is part of a series of posts marking the 10-year jubilee of the World Economic Forum’s community of Young Global Leaders.

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