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By James Bonner, independent sustainability consultant

A central theme in this series of blog posts is the acknowledgement that business, and the wider economy, is inextricably connected to, and dependent on, the natural environment – something that organisations, and their wider stakeholders, are increasingly recognising.

From the impacts and dependencies businesses have on ‘natural capital’, to drivers encouraging reporting and consideration of environmental issues by business, there is a realisation that the economic system (nationally and globally) relies upon the natural environment. Moreover, our economy, and the activities of business that drive it, negatively impact vital environmental resources and systems with likely adverse consequences for  long term economic growth, social development and environmental sustainability. This highlights a difficult, and fundamental, dilemma:

-          Our economic system is reliant on the natural environment.

-          The natural environment is being depleted and degraded, to a point of destruction, by our economic system.

Taking this paradox into account, it is clear that there is a pressing need to fundamentally change our economic approach, and as the WBCSD (World Business Council for Sustainable Development) state in their Vision 2050 project, a requirement that ‘economic growth is decoupled from environmental and material consumption and re-coupled to meeting needs.’ As such, the concept of a ‘green economy’ has been promoted as an alternative economic model, an approach based on the principles of sustainable development theory and ecological economics. The UK Government defines the concept in its 2011 paper ‘Enabling the Transition to a Green Economy: Government and business working together’ through stating: ‘A green economy is not a sub-set of the economy at large – our whole economy needs to be green. A green economy will maximise value and growth across the whole economy, while managing natural assets sustainably.’

Such a theoretical definition of the concept might seem somewhat notional but it does serve to capture the essence of what should be aspired to when determining such a new economic approach. Furthermore, it highlights that our current economic structure, in many senses, does the opposite to this – generating economic growth and development that is not inclusive across society, while exhausting and degrading natural assets. In any case some more applied definitions of a green economy have been offered including UNEP’s (United Nations Environmental Programme) perspective stating that ‘practically speaking, a green economy is one whose growth in income and employment is driven by public and private investments that reduce carbon emissions and pollution, enhance energy and resource efficiency, and prevent the loss of biodiversity and ecosystem services’.

Additionally the World Bank, in its substantial report from earlier this year ‘Inclusive Green Growth: The Pathway to Sustainable Development, describes the green economy in terms of ‘growth that is efficient in its use of natural resources, clean in that it minimizes pollution and environmental impacts, and resilient in that it accounts for natural hazards and the role of environmental management and natural capital in preventing physical disasters.’

As these more practical definitions infer, the green economy is/will be based on economic development and business activity which is low in carbon emissions and pollution (e.g. renewable energy and sustainable transport), that increases resource efficiency (e.g.  green buildings and eco-design), can help mitigate environmental impacts (e.g. flood management and urban planning), and will conserve key environmental services (e.g. sustainable agriculture and habitat conservation).

Find out more about the green economy at ACCA’s Accounting for the future online conference.

Active ownership by investors

aksaroya —  12 October 2012 — 1 Comment

By James Bonner, independent sustainability consultant

In addition to the wider approaches to advance the consideration of sustainability issues through investment frameworks such as the Equator Principles and the UN’s Principles for Responsible Investment, there are also opportunities for individuals and groups to more directly influence the environmental, social and governance (ESG) related activities and impacts of specific organisations in which they hold investments. In particular, the process of active ownership - where investors become much more aware of, and participatory in shaping, the direction and strategy of the companies in which they are involved – is a process which fosters such influence.    

Active ownership (which is, furthermore, central to the second principle of the UN PRI) generally involves the implementation of a range of actions and programs to enhance interaction between investors and management, from policy forming and strategy planning, to stimulating the monitoring and reporting of corporate performance in relation to sustainability impacts. Furthermore, investors can use their position as shareholders in companies to exercise their voting rights at general meetings and additionally raise shareholder resolutions to be voted on including proposals on company policies or procedures, normally pertaining to corporate governance and wider corporate responsibility issues. Ceres, a U.S. based advocacy group for investor and business leadership in sustainability, tracks shareholder resolutions filed by their investor network on sustainability issues pointing out that ‘resolutions are part of broader investor efforts encouraging companies to address the full range of environmental, social and governance issues’.

Significantly, Ceres have reported that resolutions addressing environmental and social matters are consistently gaining more than 30 or 40% of shareholder backing – an increasing trend which supports the notion that such issues are gaining wider, and more mainstream, support and attention. Furthermore, the paper ‘Shareholders press boards on social and environmental risks’, produced by Ernst & Young in 2011, backs up such trends, reporting an almost 40% growth in the number of environmental and social sustainability resolutions filed since 2000, a significant increase in average voting support for such filings and a prediction that half of all resolutions in its forthcoming ‘proxy season’ (the period in the year when many companies hold their shareholder meetings at which resolutions are consequently raised) would be related to such issues. The following table extracted from the report highlights these trends:

Source: http://www.greenbiz.com/sites/default/files/ernst-young-shareholder-resolutions.pdf  

As the E&Y report concludes ‘shareholders are paying closer attention to environmental and social matters, believing them to bear closely upon the risk to which investee companies are exposed and, ultimately, upon the financial performance of those companies’and, as such, active ownership procedures of greater investor and management engagement, and compelling shareholder resolutions, are likely to increasingly put pressure on businesses to report and manage their wider sustainability impacts.

Watch the Accounting for the future workshop on Active Ownership.

By James Bonner, independent sustainability consultant

Traditionally, expectations around improving the sustainability and corporate responsibility reporting of businesses has fallen on, and been driven by, governments and external regulators, and furthermore via the influence of other external stakeholders – NGOs, pressure groups and the wider public.

However, more recently, a number of investor groups have become increasingly involved and active in the area and through their role, as a powerful and influential stakeholder group, can have significant impacts on both corporate and investor behaviour with regards to non-financial risks (including wider sustainability issues).  The concept of Socially Responsible Investment (SRI) has become increasingly popular with the ‘USSIF, The Forum for Sustainable and Responsible Investment’ reporting in 2010 that sustainable and responsible investment in the U.S. had been growing at a significantly greater rate than all investments in general – 13% growth compared to 1%.

In addition, there have been a range of efforts to devise international frameworks and principles that aim to further incorporate environmental, social and governance (ESG) issues into the strategies/decisions of investors. By gaining the commitment of investors as signatories to their principles, such frameworks aim to progressively develop the inclusion of sustainability criteria throughout the wider investment landscape. Two of the most widely recognised frameworks that promote ESG considerations by investors are the Equator Principles and the UN Principles for Responsible Investment while the recently launched Natural Capital Declaration (NCD) is evident of investor groups considering their commitment to more specific ESG issues – in this case around the environmental issue of natural capital and biodiversity. To highlight what these principles cover, the following are an overview of their structures:

While such frameworks can be useful in developing the wider investment landscape to encourage organisations to be more accountable for their ESG impacts, there has been some criticism labelled at their effectiveness in practice. Such perspectives argue that they are ‘too weak to work’ and ‘encourage only minor alterations to investment decisions, within commercial constraints, rather than altering the underlying basis of decision-making’. This viewpoint, articulated here via an article by a representative of the International Institute for Environment and Development (IIED), nonetheless advocates strengthening such investment principles to improve their usefulness and effectiveness stating: ‘this should not be used as justification to stop using them [investment principles frameworks] – rather improved transparency, monitoring and measurement of the impact of investment principles is urgently needed.’

To take part in the debate join ACCA’s Accounting for the future conference.

By James Bonner, independent sustainability consultant

With an increasing awareness and understanding of sustainability issues growing over the past number of years, the concept of socially responsible investing (SRI) has developed in order to meet a growing demand from investors who have an interest in the area. SRI strategies, in general, consider the wider social and environmental impacts of the bodies invested in – both by the nature of products/services they are involved and their individual organisational practices.  

A number of major Stock Exchanges from around the world have reacted to, or potentially stimulated, SRI practices and have developed specific indices for organisations which are deemed to meet set sustainability or corporate social responsibility criteria. Indeed, some Exchanges have established minimum sustainability reporting standards for all listed companies on their Exchanges and in doing so can be credited for advancing and progressing the uptake of sustainability and corporate responsibility reporting by businesses.

The World Bank’s International Finance Corporation highlights the role of Stock Exchanges in the financial sector’s approach to managing financial and other risks associated with the social and environmental impacts of businesses. From South Africa’s Johannesburg Securities Exchange as the first market in the world, in 2003, to require compliance with set corporate governance and sustainability reporting standards, to specific indices aligned with some of the major international markets (such as the FTSE4Good and the Dow Jones Sustainability Indexes) there have a been a range of efforts by Stock Exchanges to influence the sustainability disclosure of businesses.

As an introduction to some of the historical, and on-going, developments in such requirements by global Exchanges, the ‘Initiative for Responsible Investment’ at Harvard University has recently compiled a review of the corporate responsibility requirements and programs by Stock Exchanges from around the world (as well as national governments). You can view a table which extracts some pertinent examples from the study, highlighting disclosure efforts by specific national Exchanges, and the year such developments were introduced.

This post supports the debates and workshops taking place at ACCA’s Accounting for the future conference taking place this week.

ACCA’s Accounting for the future conference kicked off this morning with a panel debate on how boards and companies need to consider the needs of their stakeholders. Chairing the session was Professor Andrew Chambers and he was joined by Paul Moxey, ACCA, Tony Hewitt, Imperial College Business School and Catherine Howarth, Fair Pensions. This was an interesting debate watched by over 650 individuals. Key themes included defining and prioritising various stakeholders, identifying where the responsibility lies within organisations when it comes to engaging with stakeholders and how regulation such as corporate governance can have an impact. Detailed below are some of the questions that came in from attendees and the responses from ACCA expert Paul Moxey:

I agree with the enlightened approach. Does the panel think that an approach would be to have a representative stakeholder from various groups to be present on the board in a non-exec director style capacity?

Having stakeholder representatives on boards is an interesting idea but it does not sit comfortably with the legal situation regarding directors in a number of jurisdictions including the UK. In the UK we have unitary boards and, legally, all directors should act in the interests of the company and all directors have an equal responsibility to do so. So, in law, having a director represent the interests of any particular stakeholder could be problematic. In practice, though, it is not uncommon for a director to have a particular affiliation, e.g. they are a member of a family with a large block of shares, they have been appointed by an investor. In theory such directors must put any personal or specific stakeholder interest as secondary to the company interest. The practice may well be rather different. Nevertheless the idea does seem worth exploring.

I note that neither the bank nor the government is mentioned as stakeholders yet I believe they are important?

Clearly banks potentially are important stakeholders as are societies whom governments represent. From a practical point of view, a government can be an important and influential stakeholder for many large companies e.g. as was the case with the US Government and BP after Deepwater Horizon.

How do you unify a multi diverse group of people with different values who happen to hold shares to effect involvement of shareholders in corporate governance?

The answer of course is that you cannot unify all of them. You can hope to unify some of them which is why the effort has gone into the Stewardship Code in the UK. Bodies such as the Asian Corporate Governance Association and International Corporate Governance Network also play an important role in education and encouraging investors to engage more with companies.

Should it be mandatory for Trade Unions have a representative on the board?

The answer probably depends upon your political point of view. In Germany, many boards have employee representatives who in practice are appointed by unions. I have heard very mixed views about the value of this. The danger of course with trade union representatives is that they pursue a political agenda rather than looking at the best interests of the company and its workforce.

Even footballers are fined if they do something which is shown to be contrary to accepted practice. Would directors become more accountable financially and morally if they were fined rather than the shareholders picking up the bill?

I think it is very likely that the propensity for the US authorities to go after high profile corporate wrong doers will have had a salutary effect on senior executives and board members generally. So I think the answer is yes – they would be more accountable. The danger though would be that good people may not want to become directors, this would be OK if other good people came forward. My concern though is that powerful people in a large organisation might choose not to become a director but still manage to have a lot of practical control over what a company does. It would be unwise for anyone to become a director in such a case but in practice many directors would not know what is going on until it was too late.

What about requiring PLCs to hold an Interim General Meeting within one month of release of half-yearly results? Shareholders can ask the Board “any surprises so far or expected”? A good chance to align the thoughts of boards and shareholders.

A nice idea but large shareholders will have access to boards anyway. They prefer one to one meetings to the General Meeting. This is why AGMs are usually very sterile affairs. The situation might be different if small shareholders could get more involved.

There seems to be not enough inter-face and monitoring of the Board with the day to day management. What steps can be taken to affect this?

This problem has been with us for a very long time and successive changes to company law or governance codes does not seem to help. Something is needed to make directors more accountable. Better engagement with shareholders will help but is not a complete solution. Some regulatory and supervisory change may be needed but unfortunately regulation usually has unintended consequences.

What possible challenges are there in achieving good corporate governance in intergovernmental organisations like OPEC?

We are still learning how to make governance work in listed companies in the private sector. The essential problem is how stakeholders can hold boards to account and how can boards hold management to account. The actors involved, and their personal agendas and incentives, are very different in intergovernmental organisations but the underlying problems are the same.

Bankers used to be regarded as safe, respectable, honest individuals. Now they are viewed as reckless, self-interest and dishonest. Is there a danger that accountants, because they didn’t highlight the high leverage of the banks, could be besmirched?

There is a danger but it has not happened except to a very limited extent. I think that what went wrong with banks and the financial system was so complex that very few people understand what happened and why. The media and governments focussed on easy blame targets such as so called greedy bankers, ignorant or supine non-executive directors and absentee shareholders. The role of accountants and auditors is so complicated that few people understand how they helped or hindered.