Assignment Three Research Report (Individual) On Theory, Policy and Implementation of Corporate Governance and/or Sustainability to a Business Sector
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Sustainability.pptxSESSION TEN
CORPORATE
SUSTAINABILITY
New Realities in Directors Duties
This Chapter concerns the widening scope of company directors’ duties under the increasing impact of the pressures for corporate social and environmental responsibility.
Narrow interpretations of directors’ duties that focus simply on the commercial success of the business and relegate other considerations to externalities are not tenable in the present context.
The dawning realization of the global consequences of imminent climate change provides a series of inescapable challenges for business enterprises.
Responding to these climate challenges involves the exploration and development of new paradigms of directors’ duties.
A series of international institutional initiatives are inspiring, facilitating, and guiding the progress of companies towards new conceptualizations of directors’ duties and responsibilities, climaxing in the historic 2015 Paris United Nations Agreement to adopt an ambitious, determined and comprehensive international Framework Convention on Climate Change (UNFCC 2015).
New Realities in Directors Duties
These policy initiatives are increasingly reinforced by market indices which recognize and measure the performance of companies according to social and environmental criteria.
This effort is endorsed by a wide array of business and civil society bodies that are researching and disseminating knowledge and practical analytical skills regarding sustainability.
This amounts to a changing landscape for the definition and practice of fiduciary duty where risk, strategy, and investment are closely calibrated with social and environmental responsibility.
First, the Chapter will consider the imminent global consequences of climate change and the implications for businesses, economies, and societies.
In this context of clear and present global risk, the transformation to new paradigms of directors’ duties is examined.
This includes an examination of the consequences for directors’ roles in combating climate change by mitigation and adaptation and the building of sustainable enterprises.
The Global Consequences of Climate Change
The phenomenon of climate change is gradually becoming part of the discourse of daily life.
This is anthropogenic climate change—that is, what we did to the earth’s climate (and what consequences this will have).
According to the United Nations Framework Convention on Climate Change (UNFCCC), climate change is: “A change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods” (UNFCCC 1992: 1; IPCC 2013; IPCC 2007).
Climate change is caused by the increased emission of carbon dioxide and other greenhouse gases, which accumulate in the atmosphere and prevent heat from radiating into space (Figure 10.1).
The consequences of climate change range from gradual to a catastrophic impact on the environment, ecology, economy and society (IPCC 2013; Stern Review 2006).
Figure 10.1 The economics of climate change: the link between greenhouse gases and climate change Source: Adapted from Stern Review (2006), The Economics of Climate Change, Stern Review, 8,
The Global Consequences of Climate Change
In 1988, the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP) established the Inter-governmental Panel on Climate Change (IPCC) to provide the world community with the most up-to-date and comprehensive scientific, technical, and socioeconomic information about climate change.
The IPCC assessments have played a major role in motivating governments to adopt and implement policies in responding to climate change, including the United Nations Framework Convention on Climate Change and the Kyoto Protocol (IPCC 2014a).
The IPCC issued a risk assessment report on March 31, 2014, stating that the effects of climate change are already occurring on all continents and across the oceans. A very large international team of scientists prepared this assessment; the team included 179 lead authors, 66 review editors, 436 contributing authors, and 1,729 individual expert reviewers from 84 countries (2014b).
The world is unprepared for the imminent risks of a changing climate, and while there are opportunities to respond to such risks, they will be very difficult to manage with high levels of warming (IPCC 2014a).
The Global Consequences of Climate Change
The report suggests that, though the nature of the risks are becoming increasingly clear, climate change will continue to produce unpleasant surprises.
Vulnerable people, industries, and ecosystems around the world are identified in the report.
The report finds that risk from a changing climate is due to vulnerability (lack of preparedness) and exposure (people and assets in harm’s way), overlapping with increasing hazards (the sudden triggering of climate events or trends). Intelligent intervention to decrease risk in each of these three dilemmas is possible. Vicente Barros, the co-chair of the group of scientists who produced the report commented:
“We live in an era of man-made climate change. In many cases we are not prepared for the climate-related risks that we already face. Investments in better preparations can pay dividends both for the present and for the future. . . . Part of the reason adaptation is so important is that the world faces a host of risks from climate change already baked into the climate system, due to past emissions and existing infrastructure”(IPCC 2014b).
The Global Consequences of Climate Change
There is a growing consensus that what we have witnessed since the 1950s with respect to climate change is without precedent in recent millennia.
One example is the Northern Hemisphere, where the last thirty years have been the warmest since Anglo-Saxon times, and eight of the ten warmest years on record in the United Kingdom have been since 2002 (Met Office 2015) .
Other examples include the atmospheric concentration of greenhouse gases, which are now at levels not seen in 800,000 years, and the rate of sea level rise, which is now quicker than at any time over the last two millennia (IPCC 2014a) .
And, though natural fluctuations may mask the impact temporarily, the underlying human-induced warming trend of two-tenths of a degree per decade has continued since the 1970s (Otto 2015).
The Global Consequences of Climate Change
There is significant evidence of serious impacts on natural and human systems on all continents and across all oceans. However, the impact is strongest and most comprehensive for natural systems.
Global warming influences changing precipitation levels affect which impacts upon water resources, and increases the thawing of permafrost,. and many terrestrial, freshwater, and marine species shift their geographic range and migration patterns in response to climate change (IPCC 2014a) (Figure 10.2).
People who are economically or socially marginalized are especially vulnerable to the impact of climate change.
The widespread impact of recent climate related extremes such as heat waves, droughts, floods, cyclones, and wildfires reveals vulnerability and exposure of both ecosystems and human systems to current climate variability (IPCC 2014a:6).
Governments throughout the world are already extensively engaged in developing adaptation policies, for example, in coastal and water management, environmental protection, land planning, protecting infrastructure, disaster management, and reforestation.
Figure 10.2 A Global Perspective on Climate Related Risks Source: UNFCC (2010) The Cancun Agreements, United Nations Framework Convention on Climate Change
Stern Review
In his earlier review on The Economics of Climate Change, Sir Nicholas Stern called climate change “the greatest market failure the world has ever seen” (Stern 2006: viii).
He insisted that the choice we faced was taking mitigation action now or very expensive adaptation in the future, and he concluded that “[t]here is still time to avoid the worst impacts of climate change, if we take strong action now” (Stern 2006: vi). Stern insisted:
“The scientific evidence that climate change is a serious and urgent issue is now compelling. It warrants strong action to reduce green-house gas emissions around the world to reduce the risk of very damaging and potentially irreversible impacts on ecosystems, societies and economies. With good policies the costs of action need not be prohibitive and would be much smaller than the damage averted” (Stern 2006: iv).
Stern highlighted how the effects of climate change are global, intertemporal, and highly inequitable. Climate change is a result of the externality associated with greenhouse gas emissions entailing costs that are not paid for by those who create the emissions.
Stern Review
Stern distinguishes a number of features of climate change that together distinguish it from other externalities:
it is global in its causes and consequences;
the impacts are long-term and persistent;
uncertainties and risks in the economic impacts are pervasive;
and there is a serious risk of major, irreversible change with nonmarginal economic effects (Stern 2006: 23).
Framework Convention on Climate Change (COP 21) Paris November 2015
A total of 196 countries reached an historic moment in global diplomacy with a universal climate agreement more rigorous and ambitious than conceived possible earlier (UNFCCC 2015).
The agreement aims to substantially “strengthen the global response to the threat of climate change” while maintaining sustainable development and efforts to eradicate poverty. Critically the agreement commits to more demanding long term mitigation efforts in Article 2 (a):
“Holding the increase in global temperatures to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change” (UNFCCC 2015:22)
Framework Convention on Climate Change (COP 21) Paris November 2015
Reinforcing this commitment is the agreement to a robust transparency framework for emissions reductions with common accounting standards, national reporting, and independent expert review.
The agreement establishes binding commitments of all parties to make “nationally determined contributions” (NDCs) and to pursue the necessary domestic emissions reductions measure to achieve these (C2ES 2015).
In addition to annual reporting, every five years countries are expected to develop new NDCs that represent a significant progression on previous targets.
While it is possible that some countries may breach the caps on emissions, over time there is the possibility of negotiating to renew and increase emissions reductions.
Framework Convention on Climate Change (COP 21) Paris November 2015
The IPCC, Stern Review, and countless other international agencies, market intermediaries, business and civil society bodies, and national and legal authorities have helped the business world recognize the dramatic environmental consequences of unrestrained industrial activity and how little time there is to put this right.
What this scenario suggests is not business as usual. The traditional conception of corporations maximizing profit and leaving others to worry about the externalities they create simply does not work in a context of the impending consequences of climate change.
In this context, government, business, and the wider community have to engage in the immediate and urgent stewardship and recovery of the environment.
Business corporations will respond—or shareholders, stakeholders, and governments will make them respond—to the demand that they act with greater responsibility in their use of resources and impact on the community and environment.
New Paradigms of Directors’ Duties
The Final Report of the 2015 American Bar Association (ABA) Task Force on Sustainable Development described the scale of the challenge in achieving sustainability:
“Sustainability is a framework for decision-making based on promotion of environmental protection, social justice, and economic/financial responsibility at the same time, with the overall objective of promoting human well-being for present and future generations. . . .
Sustainability is intended to address two significant and related problems—widespread environmental degradation, including climate disruption, and large-scale extreme poverty. The root causes of these problems, in turn, are understood to be unsustainable patterns of production and consumption as well as a very large and still growing population” (2015:1).
New Paradigms of Directors’ Duties
In a remarkable speech to Lloyd’s of London, Mark Carney, the Governor of the Bank of England and Chairman of the Financial Stability Board, highlighted that a classical problem of environmental economics is the “tragedy of the commons”—the despoliation of common property through over-use.
He noted, however, that because the catastrophic impact of climate change is beyond the traditional horizon of most actors, it is also a “tragedy of the horizon”—it is imposed as a cost on future generations because the current generation has little direct incentive to fix it (Carney 2015).
That is, the intervention to repair climate change is beyond the usual business cycle, political cycle, or horizon of regulators and other authorities (Risky Business 2014).
The tragic paradox is that by the time climate change is considered a defining issue within the normal business and political cycle, it will be too late to repair, except at enormous cost.
New Paradigms of Directors’ Duties
Attempting to calculate the potential future costs involved, the G20 Finance Ministers asked the Financial Stability Board to consider how the financial sector could take account of the risks climate change posed for the financial system. Carney identifies three channels through which climate change has an impact on financial stability:
• Physical risks: This includes today’s impact on insurance liabilities and the value of financial assets arising from cli-mate related events such as floods and storms that damage property and disrupt trade.
• Liability risks: This includes impacts that could arise if parties suffering loss or damage from the effects of climate change seek compensation from those they hold responsi-ble. These claims could come decades into the future and could potentially hit carbon resources companies and emit-ters hard. If the companies have liability coverage, the claims would hit their insurers the hardest.
• Transition risks: This includes the financial risks resulting from adjustments towards a low carbon economy as changes in policy, technology, and physical risks prompt a reassessment of large-range asset values when costs and opportunities become apparent (Carney 2015:6).
New Paradigms of Directors’ Duties
Corporations have a central role to play in the two main strategies for combating climate change by mitigation and adaptation. Diminishing the potentially catastrophic consequences of the increasing impact of climate change will require urgent efforts to reduce carbon emissions.
Corporations are required to make a major contribution to emissions mitigation, and if they refuse to do so they will face reputational damage, higher energy costs, legal costs, and fines from increasingly rigorous emissions regulations.
More critically, they may find it increasingly difficult to transfer the risk they encounter through insurance, and also discover they are being deserted by investors and credit providers concerned at the exposure to emissions intensive sectors, stranded assets, and declining industries (Barker 2013:9).
Equally, corporations will be fully engaged in the efforts at adaptation to climate change involving actions to moderate the harm of climate change, or to pursue opportunities to ameliorate the harmful effects of climate change.
How Climate Change Impacts on Directors’ Duties
How climate change impacts the interpretation of directors’ duties is now being examined. As Barker elucidates, international lawmakers have thus far concentrated upon taxing emissions, protecting the environment with emissions standards and disclosures, and planning.
Barker concludes that, at this stage, the question of liability for climate change has revolved around mitigation and its cost, while the issue of damage caused by climate change impacts remains at an embryonic stage: “Plaintiffs have found duty and causation (or, in a climate change context, ‘attribution’) to be near ‘insurmountable’ evidentiary hurdles. This is primarily due to the disconnect between the global nature of emissions and their collective, cumulative effect, versus the localised nature of their impacts” (Barker 2013:12).
While international agencies remain silent on the question of the implications for directors’ duties regarding climate change, this reserve is unlikely to continue. The gathering scale of the international, market, national, and business and civil society campaign for corporate social and environmental responsibility presents an irresistible challenge to corporations and directors to rethink their mission in the direction of sustainability (Figure 10.3).
Figure 10.3 The Widening Scope of Director’s Duties: The Increasing Impact of Social and Environmental Responsibility
The Circular Economy
New business models forming in the circular and sharing economies are enabling transitions to sustainable business practices, addressing resource depletion, waste management, and resource stewardship models that go beyond the traditional life-cycle requiring collaborative governance structures, new partnership arrangements, and networks between and across sectors.
New technologies may transform the management of the traditional linear economy towards a circular economy, in which waste is effectively eliminated, and the economy is restorative rather than depletive of ecosystems (Circle Economy 2016; European Commission, 2015a; World Economic Forum 21014).
The European Commission has been developing a Circular Economy Strategy for some time: “The circular economy requires action at all stages of the life cycle of products: from the extraction of raw materials, through material and product design, production, distribution and consumption of goods, repair, remanufacturing and re-use schemes, to waste management and recycling” (European Commission 2015b)
Table 10. 1 A Natural Resource-Based View of the Firm Strategic Environmental Key Business Capability Driver Resource Advantage
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International Agencies: The Global Compact
Of the hundreds of international institutional and policy initiatives around corporate social and environmental responsibility and sustainability, the United Nations Global Compact (Global Compact) is the most prominent. The Global Compact was commenced in 1999 by United Nations then-Secretary-General Kofi Annan, to “initiate a global compact of shared values and principles, which will give a human face to the global market” (Annan 1999).
The United Nations Global Compact accepts that “corporate sustainability starts with a company’s value system and a principled approach to doing business” (2014:11; Rasche and 2010). With affiliations from 8,375 large corporations in 162 countries, the Global Compact has a remarkable foothold in the boardrooms of the world’s leading corporations.
The ten principles of doing business proposed in the Global Compact involve fundamental responsibilities in the areas of human rights, labour, environment, and anticorruption. The principles are derived from the Universal Declaration on Human Rights, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development, and the United Nations Convention Against Corruption.
https://www.unglobalcompact.org/
International Agencies: The Global Compact
It is the expansive philosophy of the United Nations Sustainable Development Goals that now informs the Global Compact vision of a sustainable world. Though a voluntary commitment, the United Nations Global Compact expects participating companies to report on their progress towards effecting change through producing strategic reports showing measurable gains and losses.
However, the Global Compact has been criticized as a voluntary exercise with less traction than might at first appear. Sethi and Schepers question the effectiveness of the Global Compact in changing social and environmental performance in its signatory companies, commenting on the low level of accountability and transparency demanded by the United Nations (2014).
The United Nations Principles of Responsible Investment (PRI) is an investor initiative in partnership with the UNEP Finance Initiative and the Global Compact (PRI 2015a; 2015b). Early in 2005 the UN convened a group of 20 of the world’s largest institutional investors to negotiate a set of Principles for Responsible Investment, which were published in a Working Capital Report in early 2006 as a guide to the investment community on how to incorporate environmental, social and governance issues into their investment decision-making and ownership processes.
https://www.unpri.org/
International Agencies: Principles of Responsible Investment
Founded in 2006, the Principles of Responsible Investment has recruited 936 signatories to its principles, 245 asset owners, and 691 investment managers.
This represented 19% of asset owners with assets of $12.4 trillion of a total market of $64.6 trillion, and 63% of investment managers with assets of $46.3 trillion of a total market of $74 trillion.
The PRI principles focus upon incorporating environmental, social, and governance (ESG) issues into investment analysis and decision-making processes.
Signatories are obliged to provide publicly available transparency reports regarding their commitments to ESG issues, confidential assessment reports, and the details of organizational characteristics, asset mixes, responsible investment policies, and governance.
This provides the largest data set on investment responsibility in the world; of the 936 PRI reporters in 2015, a total of 725 reported on whether their submissions were assured by third party providers, and 95 (13%) responded they had been assured by independent parties (though in some cases this assurance was partial) (Hebb et al 2015; Louche and Hebb 2014).
The PRI has developed and extended the debate on responsible investing internationally; however, the question remains whether the PRI has given too much credibility to investment corporations that have not committed to responsible investing except at the margins.
https://www.globalreporting.org/Pages/default.aspx
International Agencies: Global Reporting Initiative
The Global Reporting Initiative (GRI) was founded in 1997 by CERES and the Tellus Institute in conjunction with the United Nations Environment Program (UNEP).
The GRI became a Sustainability Reporting Framework with reporting guidelines at its center, covering environmental, social, economic, and governance issues.
In 2002, the GRI relocated from Boston to Amsterdam and was inaugurated as a UNEP collaborating organization. A sequence of four sets of reporting guidelines, G1 to G4, have been published in 2000, 2002, 2006, and 2013 (GRI 2015a).
Over 3,000 experts from business and civil society participated in the development of the G3 reporting guidelines in 2006 in a multi-stakeholder approach. In 2010, the GRI published guidelines on how to use the GRI in combination with the ISO 26000, a Social Responsibility standard of the ISO (GRI 2010; ISO 2015).
In 2013, the GRI released Reporting Principles, Standard Disclosures, and an implementation manual, along with the online publication of G4 as a free web-based tool (GRI 2015b).
International Agencies: Integrated Reporting
A large consortium of agencies combined together in the effort to progress a proposal for integrated reporting (IIRC 2011). Integrated reporting provides a comprehensive framework for companies: The consortium includes:
The Prince’s Accounting for Sustainability Project,
the Global Reporting Initiative,
the World Business Council for Sustainable Development,
the World Resources Institute,
the World Intellectual Capital Initiative, the Carbon Disclosure Project,
the Climate Disclosure Standards Board,
the European Federation of Financial Analysts,
the United Nations Conference on Trade and Development,
the United Nations Global Compact,
the International Corporate Governance Network,
the Collaborative Venture on Valuing Non-Financial Performance, and many others.
http://integratedreporting.org/wp-content/uploads/2017/07/IIRC_IR2016_IntegratedReport.pdf
International Agencies: Integrated Reporting
Integrated reporting provides a comprehensive framework for companies:
“Integrated Reporting brings together the material information about an organization’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates.
It provides a clear and concise representation of how an organization demonstrates stewardship and how it creates value, now and in the future. Integrated Reporting combines the most material elements of information currently reported in separate reporting strands (financial, management commentary, governance and remuneration, and sustainability) in a coherent whole, and importantly:
• shows the connectivity between them; and
• explains how they affect the ability of an organization to create and sustain value in the short, medium and long term”(IIRC 2011:6).
Competing Reporting Frameworks
Regional Reporting
Sectoral Reporting
Sustainability Market Indices
There are many market indices that assist investors in making informed investment decisions, and among them are a group of increasingly influential sustainability indices that focus upon corporate, social, and environmental performance (IBE 2013). The existence of these indices will attract more investors, fund managers and institutions to concentrate their minds on the potential benefits of socially and environmentally responsible investing. In turn this will lead more companies to both develop and to disclose their social and environmental policies and performance.
There are a group of increasingly influential responsibility and sustainability indices led by the FTSE4Good and S&P Dow Jones Sustainability Indices (DJSI). These indices include the Calvert Responsible Index Series (committed to environmental sustainability and resource efficiency; human rights and equitable socieites; and accountable governance and transparency) (Calvert 2016). MSCI has acquired a number of other indices including RiskMetrics and KLD Research and Analytics, and GMI Ratings to become a large international agency “committed to future sustainability and transparency of the financial markets (MSCI 2016).
Sustainability Market Indices
The FTSE4Good Index Series is designed to measure the performance of companies demonstrating strong Environmental, Social, and Governance (ESG) practices. The FTSE4Good Index Series criteria are based on publicly available data in assessing ESG practices, and do not accept privately provided data from companies, which is intended to enhance transparency. The ratings process for the FTSE4Good has an independent committee of experts from the in-vestment community, companies, NGOs, unions, and academia to oversee the reviews and methodology development (FTSE (2015; FTSE 2011).
The criteria consist of governance (corporate governance, risk management, tax transparency, and anticorruption), social (health and safety, labour standards, human rights and community, and customer responsibility), and environment (climate change, water use, biodiversity, pollution, and resources). Companies are rated against these criteria, and can be removed from the index if they fall below a minimum standard for a twelve-month period.
Companies that manufacture tobacco, weapons systems, and components for controversial weapons, including cluster bombs and chemical/biological weapons, are excluded from the series
Sustainability Market Indices
The rival S&P Dow Jones Sustainability Indices (DJSI) were launched in 1999 as the first global indices tracking the financial performance of leading sustainability-driven companies with an integrated assessment of their economic, environmental, and social performance with a focus on long-term shareholder value. A rules-based methodology focuses on best-in-class companies with a total of 3,470 companies invited and 1,845 analyzed distributed among a DJSI World, Europe, North American, Asia Pacific, Emerging Markets, Korea, and Australia indices.
In September 2015, the S&P DJSI launched three new climate change index series in association with Trucost: the S&P Global 1200 Carbon Efficient Index Series, S&P Global 1200 Carbon Efficient Select Index Series, and S&P Global 1200 Fossil Fuel Free Index Series. All three index series are derived from the constituents of the S&P Global 1200, and will focus attention keenly on the carbon footprint of listed companies.
However, again the rigor of the DJSI assessment criteria—“the gold standard for corporate sustainability” —experienced something of a shock when on September 21, 2015, Volkswagen AG (VW) was listed as the industry group leader for Automobiles and Components (S & P Dow-Jones 2015a), and on September 29, 2015, the S&P Dow Jones Indices announced that VW was to be removed from the Dow Jones Sustainability Indices as a result of revelations that it had manipulated emissions tests to conceal the level of toxic pollutants issuing from its diesel engines in popular saloon cars in the United States (S&P Dow Jones 2015b).
The Limitations of CSR/ESG Analysis
Bendall observes the inspiring aspirations but serious limitations of ESG analyses which:
• Rely predominantly on information published or provided by the companies
being assessed;
• Focus analysis on management policies and processes not on the actual ESG impacts and outcomes of the companies;
• Assess companies within a downside risk framework focus-ing on the management of negative externalities that can lead to damage to reputation or litigation (rather than focusing on whether the company is creating greater social or environmental value for society);
• Use limited frameworks for understanding complex and evolving fields of corporate responsibility, and reductionist methods to assess companies;
• Are not completely independent from the companies they are assessing;
• Are not completely transparent about their methods of re-search, analysis, and ranking, or about their general opera-tions to allow stakeholders and regulators to assess their credibility (Bendell 2010).
http://www.sseinitiative.org/
Sustainable Stock Exchanges Initiative (SSEI)
The goals of the Sustainable Stock Exchanges Initiative (SSEI), commenced by a Sustainability Working Group with representatives of twenty-three global stock exchanges formed with the backing of the World Federation of Exchanges (The WFE is the trade association for all regulated stock, futures, and options exchanges that list more than 44,000 companies representing a total market capitalization of $60 trillion), must be informed by the ideals, yet aware of the limitations, of the existing sustainability indices (SSEI (2015).
The value proposition for stock exchanges adopting environmental, social, and governance principles recognized by the SSEI include:
• Developing well-functioning markets, which are more re-silient and less volatile;
• Contributing to stronger, more transparent listed companies that are better able to identify and manage risks and opportunities;
• Creating more attractive markets where investors can better evaluate fundamental drivers of value creation, and as more investors recognize the value of ESG information, they will direct more of their activity to exchanges that foster it;
http://www.cinfo.ch/en/world-business-council-sustainable-development
Business and Civil Society Initiatives: WBCSD
The World Business Council for Sustainable Development (WBCSD) is one of the most prominent of the international business agencies campaigning for corporate environmental, social, and governance responsibility.
The WBCSD is committed to eco-efficiency, which is “to embrace practices that start to decouple economic growth, human development, and well-being from negative environmental and social impacts” (WBCSD 2010:2).
Stephan Schmidheiny, the industrialist founder of the WBCSD, acknowledges that eco-efficiency “is also about redefining the rules of the economic game in order to move from a situation of wasteful consumption and pollution to one of conservation, and from one of privilege and protectionism to one of fair and equitable chances open to all” (Schmidheiny 1992:13)
Business and Civil Society Initiatives: WBCSD
WBCSD has developed policies on climate change and carbon emissions with We Mean Business (2015), a consortium of other agencies including Business for Social Responsibility (BSR 2015), the Carbon Disclosure Project (CDP 2015), and the Climate Group (2015).
These polices include campaigning for science-based emissions reductions, putting a price on carbon, procuring 100% of electricity from renewable sources, and reporting climate change information in mainstream reports as a fiduciary duty. Supporting this campaign are organizations such as the Portfolio Decarbonization Coalition (2015) and the Low Carbon Technology Partnership Initiative (LCTPI 2015).
The fact that these initiatives are having traction with companies internationally is illustrated by the companies that report their greenhouse gas emissions, water management, and climate change strategies to the Carbon Disclosure Project, which has increased from 253 unique company reports in 2003, to 5003 companies disclosing in 2014 (CDP 2015).
CDP and the Climate Group have compiled a list of companies with 100% greenhouse gas emissions reductions targets achieved by 2014 (Table 10.2),
Table 10.2 Companies With 100% GHG Emissions Reduction Targets Source: CDP/The Climate Group, Unlocking Ambition 2015, p3
| Organization | Country | Per Cent Reduction | Target Year |
| Aimia Bank of Montreal** Biogen Google Insurance Australia Intuit Kohl's** Marks and Spencer ** Microsoft** TD Bank Group** Royal KPN Infosys Goldman Sachs Interface Kingspan Group Mars GlaxoSmithKline* Tesco** Verbund | Canada Canada US US Australia US US UK US Canada Netherlands India US US Ireland US UK UK Austria | 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 | 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2015 2018 2020 2020 2020 2040 2050 2050 2050 |
https://www.trucost.com/
Business and Civil Society Initiatives: Trucost
Trucost, which highlight to investors the real cost of carbon, and how this must be incorporated into estimates of the market valuation of corporations. Trucost is a dedicated consultancy established by a number of large financial institutions in London to examine natural capital dependency across companies, products, supply chains, and investments, with a view to managing risks from volatile commodity prices and increasing environmental costs, and ultimately building more sustainable business models.
“It isn’t ‘all about carbon’; it’s about water; land use; waste and pollutants. It’s about which raw materials are used and where they are sourced, from energy and water to metals, minerals and agricultural products. And it’s about how those materials are extracted, processed and distributed” (Trucost 2013)
Natural capital is defined by Trucost as: “The finite stock of natural assets (air, water and land) from which goods and services flow to benefit society and the economy. It is made up of ecosystems (providing renewable resources and services), and non-renewable deposits of fossil fuels and minerals”(Trucost 2013:3)
Trucost suggests that the world’s largest natural capital risks—faced by business, investors, and governments—are costing the global economy in the order of $4.7 trillion dollars per year (2013:6).
Business and Civil Society Initiatives: Trucost
Resource intensive industries and supply chains around the planet are incurring these natural capital costs, and internalization of the costs by companies and industries has only occurred at the margins.
However, confronted by the prospect of another 3 billion middle-class consumers by 2030, demand for natural resources will grow rapidly as supply continues to shrink.
“The consequences in the form of health impacts and water scarcity will create tipping points for action by governments and societies. The cost to companies and investors will be significant” (2013:6).
Trucost is engaged in informing companies and investors how to measure and manage natural capital impacts, to focus on high-risk areas, and to develop mitigation (Trucost 2013; Makower 2015; Green Biz/Trucost (2015).
Together with examining the impact and costs of climate change, the cost of ongoing depletion of ecosystems and biodiversity must also be estimated. Trucost is a member of The Economics of Ecosystems and Biodiversity in Business and Enterprise (TEEB), which is supported by the G8 and UN Environment Programme and the European Commission
http://www.teebweb.org/publication/the-economics-of-ecosystems-and-biodiversity-teeb-in-business-and-enterprise/
Business and Civil Society Initiatives: TEEB
The Economics of Ecosystems and Biodiversity in Business and Enterprise (TEEB) has many key messages on business, biodiversity and the ecosystem including:
• The world is changing in ways that affect the value of bio-diversity and ecosystem services (BES) to business. The value of biodiversity and ecosystem services is a function of population growth, urbanization, economic growth, and ecosystem decline.
• Biodiversity loss and ecosystem decline cannot be consid-ered in isolation from other trends, which are growing and shifting markets, resource exploitation, and climate change.
• Business risks and opportunities associated with biodiversi-ty and ecosystem services are growing, and with the inter-action between biodiversity loss, decline in ecosystem ser-vices, and other major trends, business can expect increased risks and opportunities over time.
• There will be increasing pressure on, and more restricted access to, natural resources with growing market demand for natural resources and increasing public concerns about the environment.
• Consumers increasingly consider biodiversity and ecosys-tems in their purchasing decisions, which companies and their suppliers will need to re-examine.
https://eiti.org/
Business and Civil Society Initiatives: EITI
The Extractive Industries Transparency Initiative (EITI), which in 2003 established firm principles of responsibility for the resources sector. This sector is central to the economic development of many emerging economies.
However, too often in the past the operation of resources companies in poor countries has been associated with political corruption, which has enriched national politicians and impoverished local communities.
Putting this into perspective in key emerging economies, extractive industry revenues as a percentage of government revenue range from 96% in Nigeria to 22% in Liberia (EITI 2015a). As Clare Short, the Chair of the EITI Board, stated:
“The wealth from a country’s natural resources should benefit all its citizens and . . . this will require high standards of transparency and accountability. After the principles were agreed, rules were drawn up to ensure that all EITI member countries committed to minimum levels of transparency in company reporting of revenues paid and government reporting of receipts” (EITI 2015b:6).
The Changing Landscape of Fiduciary Duty in the 21st Century
Given the enormity of the environmental and social threat that humanity has encountered in recent decades, and given the range and extent of the civil, professional, business, and governmental response to the impending crisis of climate change, it is curious that there has been comparatively little change in corporate law or in directors’ duties.
This is especially so, since internationally, there have been substantial reforms in environmental and other related law. One explanation for this paradox is that directors, in pursuing the success of the company, are already able and willing to take into account the impact of environmental and social changes and to develop strategies to mitigate or adapt to these threats.
Directors will incorporate environmental and social responsibility into their decision-making as part of a balanced assessment of the risks and opportunities facing the company.
The re-evaluation of fiduciary duty is presently taking place and will prove to be profound.
The Changing Landscape of Fiduciary Duty in the 21st Century
As Paul Watchman one of the author’s of the original UNEP FI report commissioned from Freshfileds Bruckhaus Deringer that argued the integration of environmental, social and governance consideration into investment decisions is “clearly permissible and is arguably required” (UNEP 2015:9) states,
“The concept of fiduciary duty is organic, not static. It will continue to evolve as society changes, not least in response to the urgent need for us to move towards an environmentally, economically and socially sustainable financial system” UNEP 2015:13).
What is occurring is the widespread and insistent development of soft law to deal with the wicked complexities the overwhelming emergency of climate change has exposed. While soft law has its limitations, it may also be applied intelligently and promptly to deal with changing circumstances, and it can be translated into hard law when required and possible.
The Changing Landscape of Fiduciary Duty in the 21st Century
Addressing the insurance industry, Mark Carney the Governor of the Bank of England, and Chair of the international Financial Stability Board stated:
“Participants in the Lloyd’s market know all too well that what appear to be low probability risks can evolve into large and unforeseen costs over a longer timescale. Claims on third-party liability insurance—in classes like public liability, directors’ and officers’ and professional indemnity—could be brought if those who have suffered losses show that insured parties have failed to mitigate risks to the climate; failed to account for the damage they cause to the environment; or failed to comply with regulations.
Cases like Arch Coal and Peabody Energy (Roe v Arch Coal Inc et al 2015) —where it is alleged that the directors of corporate pension schemes failed in their fiduciary duties by not considering financial risks driven at least in part by climate change—illustrate the potential for long-tail risks to be significant, uncertain and non-linear” (Carney (2015:9).
There are a number of recent cases of directors of major corporations who have encountered the environmental risks that can evolve into immense unforeseen costs. On February 5, 2015, BP agreed to a $20.8 billion civil claims settlement with U.S. federal and state authorities over the 2010 Deepwater Horizon oil rig disaster, with $8.1 billion of the funds designated for coastal wetlands and marine mammals as part of a fifteen year Gulf of Mexico restoration program (Financial Times 6 October 2010).
The Changing Landscape of Fiduciary Duty in the 21st Century
In another contemporary illustration of a hitherto highly respected international company confronting disaster because of its neglect and defiance towards essential environmental standards, in September 2015, VW admitted to installing software in 11 million car engines over several years that allowed the cars to pass regulators laboratory emissions tests, but belched out toxic nitrogen oxides when travelling normally on the road. As VW faced a litany of fines, lawsuits and recall costs, its reputation for engineering excellence and environmental responsibility was the subject of ridicule.
After seeing the company lose over a third of its market capitalization in a matter of days, the company announced it would set aside $7.3 billion dollars, the equivalent of six months profits, to cover the costs of making its cars comply with pollution standards. The carmaker had become the most successful in Europe as the result of its “clean diesel” advertising, and the diesel engines that were affected by the fraud accounted for half of its sales. The outgoing CEO Martin Winterkorn announced too late that the company would introduce twenty new hybrid or all-electric vehicles by the year 2020 (Ewing 2015).
Stranded Assets
Mark Carney, from a Bank of England and Financial Stability Board perspective, starkly set out the implications for the resources industries of the IPCC’s estimate of a carbon budget necessary to limit global temperature rises to two degrees above preindustrial levels: a carbon budget that amounts to between one-fifth and one-third of the world’s proven reserves of oil, gas and coal (IPCC 2014a; note 4)). Carney states:
“If that estimate is even approximately correct it would render the vast majority of reserves “stranded”—oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics. …
The exposure of UK investors, including insurance companies, to these shifts is potentially huge… 19% of FTSE 100 companies are in natural resource and extraction sectors; and a further 11% by value are in power utilities, chemicals, construction and industrial goods sectors. Globally, these two tiers of companies between them account for around one third of equity and fixed income assets” (Carney 2015:11).
De-Carbonisation
Yet, there is the other side of the ledger if corporations are astute enough to realize it. “On the other hand, financing the de-carbonisation of our economy is a major opportunity for insurers as long-term investors. It implies a sweeping reallocation of resources and a technological revolution, with investment in long-term infrastructure assets at roughly quadruple the present rate” (Carney 2015:11).
The danger is that if all business does not face up to the enveloping threats and opportunities of climate change, carbon intensity will continue to increase towards the IPCC projected worst case scenario at 4% of global warming (Figure 1).
Undoubtedly, that will precipitate the nonlinear compounding of climactic catastrophes that will endanger civilization, let alone business survival.
As Figure 10.3 indicates, a rate of decarbonization is required to keep global warming below 2% that will demand virtually zero-carbon emissions by the end of the century—a goal that will require comprehensive commitment from corporations and directors.
Figure 10.3 Reducing Carbon to Zero Emissions by 2099
Conclusions
Henry M. Paulson, who as the U.S. Secretary of the Treasury had to negotiate the risk of the global financial crisis, is now co-chair with Michael R. Bloomberg of the Risky Business Project, an environmental consultancy. He is also helping others to get the climate change message across: “I know a lot about financial risks—in fact, I spent nearly my whole career managing risks and dealing with financial crisis. Today I see another type of crisis looming: A climate crisis. And while not financial in nature, it threatens our economy just the same” (Risky Business 2014:9).
There are alternatives to waiting for disaster to happen, and building a circular economy now is one of them. Presently we have a linear economy in which we extract resources at an ever-increasing pace, and having made them into products then dispose of them wastefully. A circular economy is designed to be waste-free at every stage and resilient by design; innovative, and restorative of ecosystems.
CHAOTIC GOVERNMENT POLICY ON ENERGY POLICY AND CLIMATE CHANGE
The Re-discovery of Bicycles in China
http://knowledge.wharton.upenn.edu/article/bike-sharing-maturing-china/
http://knowledge.wharton.upenn.edu/article/why-bikecycles-are-making-a-huge-comeback-in-china /
Bees give up searching for food when we degrade their land
A new study into honey bees has revealed
the significant effect human impact has
on a bee’s metabolism, and ultimately, Its survival.
In an ARC-funded Linkage Project,
researchers from The University of Western
Australia, in collaboration with Kings Park
and Botanic Garden, Curtin University
and CSIRO, have completed a world-first study on
insect metabolism In free flying insects—focusing
on the honey bee.
The study has revealed the significant effect
human impact on the environment had on bees,
which are crucial for the planet, pollinating one third
of everything we eat.
Landscapes that have been degraded mean a
reduction in the availability of resources,
which affects the metabolic rate of the honey bee
and puts more strain on its body’s ability to function.
Pollution Minimise emissions, Continuous Lower
Prevention effluents and waste improvement costs
(1900s-1980s)
Product Minimise life-cycle Stakeholder Pre-empt
Stewardship cost of products integration competitors
(1980s-2000s)
Sustainable Minimise and eliminate Shared vision, Future
Position
Development environmental burden of Circular economy
(2000s-2060s) firm growth
