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Australian Law Reform Commission - Reform Journal |
Reform Issue 87 Summer 2005/06
This article appeared on pages 32 – 36 of the original journal.
CSR — saving the environment?
By Jeff Angel *
Increasingly, demands are being made on the business sector by those who are working for a greener economy.
The focus is being drawn to the core economic paradigms and production cycles that generate our material wealth. While the economy, the environment and human wellbeing are inextricably linked, there is a mismatch between the short timescales that drive profit making and aligned political and economic policy, with the longer timescales that reveal environmental damage.
Dr Steve Hatfield-Dodds from the CSIRO reports that the Australian economy is increasing its use of materials in production rather than becoming more efficient and ‘dematerialising’.1 This leads directly to more environmental degradation, which he and many others argue is unsustainable. There does appear to be some evidence, however, that technology in conjunction with ‘a stronger sustainability signal’ can prevent ongoing environmental pressure. Can the human energy, values and enormous financial resources in the private sector be marshalled to save the environment? Over the past 10 years, a number of concepts of green capitalism have been developed and practitioners in Australia and overseas in the corporate, economic and environmental fields have grappled with their implementation.
Amery Lovins et al, who authored Natural Capitalism, describe the need for business strategies to be built around the radically more productive use of natural resources and suggest that these ‘can solve many environmental problems at a profit’. They highlight four major shifts in business practice, all of them ‘vitally interlinked’:
• dramatically increasing the productivity of natural resources, achieved largely through reduced wasteful use;
• shifting to biologically inspired production models, through closed loop production systems;
• moving to a solutions-based business model focused on flow of services, rather than goods; and
• reinvesting in natural capital, to restore the planet’s ecosystems.2
Long-time Australian environmentalist and researcher Philip Sutton reflects that Environmental Management Systems (EMS) were first developed to help firms who had ‘large, direct and negative environmental impacts with a significant risk of public exposure, were subject to tough legal controls, or were sensitive to materials costs’.3 The mining industry is a good example as it was one of the first environmental battlegrounds and in response sought to improve its performance at extraction sites. He calls EMS the ‘default’ approach, which he regards as less relevant to a significant majority of businesses whose indirect impacts are greater than their direct impacts. For instance, the chain of supply to a service company where the combined impacts of suppliers have far greater impact than the purchasing company’s daily office operations.
These ideas pose a radical challenge for corporations and policy makers. Nevertheless, strategies are being explored and implemented to reconfigure the economy.
Capturing externalities
In simple terms the market economy operates by sending price signals to consumers who then choose products to purchase. Of course it is not that simple and governments have had to intervene to moderate or remove perversities that cause significant community and individual harm.
One of the key reforms is the treatment of externalities. These are environmental costs that are absorbed by the ecosystem outside of the operation of the market. They are not recognised by the market and traditional policy makers. Yet they impose large financial and human costs on the community.
Externalities have a significant impact in limiting the opportunity for new eco-efficient industries to emerge. For example, renewable energy is seen as too expensive by many, but this is only the case while fossil fuel-generated electricity avoids responsibility for its carbon costs and damage to the earth’s climate. Consider the recycling of bottles, cans, and cardboard boxes. All consume significant natural resources, and all have significant opportunities to source a high proportion of materials through recycling. Instead the one-way container is the preferred model. Virgin materials and their extraction costs as well as extra pollution from manufacture avoid funding for the disposal of waste packaging by ‘free riding’ on the back of ratepayer-funded kerb side recovery. This allows virgin materials to remain ‘cheap’ alternatives to recovered materials in the marketplace.
In 2005, the Productivity Commission reported on a range of inefficiencies arising from lack of consideration of externalities:
‘...it is important to recognise that any inherent ‘over-reliance’ on electricity generation with high CO2 emissions is a reflection of the failure to price for externalities, rather than from the introduction of greater competition... Similarly, pricing inefficiencies also underlie concerns about the environmental impacts of greater road use...Rail is more efficient, has lower associated costs and is characterised by lower externalities than road. However, rail pricing is unable to reflect these advantages over road because of current distortions. The contention that road transport is subsidised relative to rail freight has been the subject of some debate. But this does not undermine the basic proposition that further reforms to the pricing of services such as transport and energy, to include all costs, could have significant environmental benefits.’4
Environment Business Australia, a coalition of leading companies has outlined its concerns:
‘A lack of data on the real cost of externalities prejudices against new era technologies and this means that the price of some traditional goods and services continues to be artificially deflated where there is an unrecognised negative externality. In effect, we are rewarding degradation rather than real wealth creation and protection of our basic capital.
‘Yet, logically it is less expensive to avoid damage now than to repair compounded damage in the future! In other words, we pay higher prices to clean up as taxpayers than we would for the goods and services we buy as consumers. We need to be able to use our buying and investment power to make sure that the current market is able to value the things that we value.’5
While the problem is being increasingly recognised, particular roles and responsibilities in the solution are still debated. There is an initial tendency by business to blame the consumer, for instance litter was the fault of the consumer, not the producer who invested heavily in the one-way container system and along the way demolished returnable deposit systems that had worked well (and still do when reintroduced). Business also argues that better information, rather than regulation, will suffice. However, new business-market-consumer-environment linkages are needed.
Heather Ridout, CEO of the Australian Industry Group, has supported the push to cleaner production, which produces short term cost savings by reducing waste and energy and water costs during manufacture, but says ‘it is clear moving companies from cleaner production to sustainability requires reform of our major institutions, particularly financial institutions’.6 She has called for a range of changes including new economic instruments to reward investment in waste and pollution saving technologies; a risk assessment index to enable insurers to tailor premiums to environmental performance; and environmental cost accounting to sit alongside mainstream corporate accounts. All these measures seek to incorporate the externalities of environmental harm into business decision making.
CSR in action
The investment sector has a critical influence on economic activity. It can give life to or kill off a project and exert ongoing pressure on the project’s management and outcomes. The Australian Ethical Charter developed by ethical investment company, Australian Ethical Investments (AEI), is designed to be an integral part of the company’s investment selection process.7 It provides an ethical screen of companies. The Charter sets out both positive factors guiding investment, and negative activities to be avoided. As in the case of other ESD based principles, the Ethical Charter includes social as well as environmental considerations.
The concept of ethical investment derives from personal values. Thus screens are set up to filter out inappropriate business activities. Rather than just focusing on the best rate of return for the individual investor, which fund managers call fiduciary responsibility, other matters are brought to bear. Of course, managers cannot be allowed to squander people’s hard won money but at the same time their behaviour reinforces the short-term profit motive that causes so much environmental damage. A more complex mix of information and values should determine investment decisions about financial risk.
For example, climate change has the potential to adversely affect about 20% of global gross domestic product, and ‘is more important than interest rate risk or the foreign exchange risk’, according to insurer Axa.8 The ‘Enhanced Analytics Initiative’, established by a range of European funds managers worth many hundreds of billions of dollars, seeks to commission research and educate investment analysts about ‘extra-financial issues’.9 Such issues include corporate governance, carbon constraints, extended producer responsibility and human rights. The initiative has identified those brokers that have the best non-financial information, some of whom are active in Australia. Analysts are a critical part of the investment decision process.
It is notable that after some years of refusing to invest in unethical companies involved in activities such as uranium mining, alcohol or old growth logging, that companies are still undertaking such abhorrent activities. There may be personal satisfaction in the investment decision to avoid the firm, but it is not necessarily an agent of change. A more direct form of influence can be provision of funds (venture capital) to companies that are in the establishment phase of commercialising new green products.
Investors—both individual shareholders and large firms—are also beginning to adopt ‘shareholder activism’. Boral, a large company that is involved in extensive native forest logging, has been bedeviled by the Boral Shareholders Action Group, which has presented resolutions to annual general meetings and called directors to account. Similarly, The Wilderness Society has sought assistance from institutional investors to pressure the Tasmanian timber company Gunns to stop logging and woodchipping old growth forest.
These strategies argue there is merit in decisions to invest in environmentally damaging companies, by those who are ethically concerned. They allow shareholders, in particular large institutional ones, to leverage their ownership by insisting on changes to business practices. The withdrawal of significant funds and public attacks by large investors can have serious implications for a company. It is another way of shining the light of accountability and adversely impacting on the reputation of a company.
Extensive efforts are also being made to improve the content and credibility of environmental reporting by business. The US-based Coalition for Environmentally Responsible Economies aims to ‘establish an environmental ethic with criteria by which investors and others can assess the environmental performance of companies’.10
These criteria and their development have led to the Global Reporting Initiative (GRI). The GRI describes itself as ‘a long-term, multi-stakeholder, international undertaking whose mission is to develop and disseminate globally applicable Sustainability Reporting Guidelines for voluntary use by organisations reporting on the economic, environmental and social dimensions of their activities, products and services’.11 It identifies core environmental areas for reporting—air, water, land, biodiversity and human health. It also stresses the importance of integration between the economic, environmental and social elements of an organisation’s operations. The GRI, which is gaining traction with a growing number of large companies, highlights the engagement of stakeholders and the independent verification of reports, coupled with internal auditing, independent commentary and clear senior management commitment through public statements.
There have been regulatory moves by the Australian Parliament to require environmental reporting. Amendments to corporations legislation, which came into effect from the 1998–99 tax year, require that Directors’ Reports detail performance in relation to any ‘particular and significant environmental regulation’ applicable to the company.12 While this amendment remains open to variable interpretation, there is little doubt that it has increased the awareness of reporting on environmental performance. The Financial Services Reform Act came into operation in March 2002 and requires disclosure by the financial services industry (for example, insurance and superannuation funds) to reveal ‘the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment’.13
Broadscale reporting of environmental sustainability that will one day match conventional sharemarket reporting is a key aspiration of green capital reformers. The Dow Jones Sustainability Group Indexes (DJSGI) have been designed to track the sustainability performance of the top 10% of companies in the Dow Jones Global Index.14 Separate indexes are designed to assess companies on a regional, sectoral or other specialised basis.
With indicators in the economic, environmental and social dimensions of each corporation’s operations, the DJSGI examine innovation, governance, shareholder expectations, leadership and social responsibility. Illegal commercial practices, human rights abuses, extensive layoffs or workforce conflicts, and large disasters or accidents are used to exclude a company from the index ‘regardless of how well the company performed in the Corporate Sustainability Assessment’. By publishing the indexes regularly the DJSGI aim to encourage companies to pursue and manage sustainability opportunities and to reduce or avoid sustainability risk, as well as encouraging longterm shareholder investment in sustainability-focused companies.
Signposts of a sustainability culture
Corporations operate in the economy, the wider community and as places of human interaction.
They are steeped in the conventional short-term approach reinforced by public and media accolades for their annual profit making and supportive, powerful government bureaucracies.
What are the types of behaviour that would show evolution towards and achievement of the integration of environmental sustainability values by a company?
Regulatory Compliance: A wide range of government regulations to protect the environment and workers has been enacted over previous decades. They contain various permissions to operate, for example, in relation to air and water pollution, contamination of land, waste management and protection of threatened species and prevention of land clearing.
At a minimum, companies need to follow the law, but no regulation can embrace the full range of environmental sustainability requirements and ensure the complex implementation process. This requires a range of other significant internal changes.
Awareness of environmental sustainability: A company needs to know what its impact on the environment and the community is and to be able to use that information to change its behaviour. Information collection systems should comprise relevant indicators, standards and benchmarks, monitoring processes and knowledge of stakeholder perceptions. A business that obtains accurate and independent information has taken a significant first step.
Reporting on environmental sustainability: As discussed above, a range of indicators has been developed upon which public reports can be issued. The most important aspects beyond accuracy are the transparency of reporting, objectivity of the methodology used and acceptance of external audit. Other key factors in a maturing approach to sustainability are the willingness to admit non-compliance with standards, effective mechanisms to address problems and commitment to challenging targets.
Community engagement relevant to environmental sustainability: How well does a company relate to the community? Is it a process of managing community concerns by public relations campaigns or genuine engagement and consultation with the local and wider public? Processes in which the community and key stakeholders have confidence can be developed to allow specific impact and target identification and to open the business to community-based auditing. Community views, if taken seriously, can help drive change.
Corporate commitment to continuous improvement in environmental sustainability: Changing corporate culture is not a short term task and the level of sustainability seeking depends on persistent organisational commitment at senior management and board levels. There also needs to be training of staff and integration of environmental concerns and sustainability into all levels of decision making, in particular development of business plans and interaction with suppliers and others in the purchasing chain.
The extent to which an organisation has moved beyond compliance with respect to environmental sustainability: The signals from the current economy and conventional business practices need to be reassessed and reformed. To some extent a company can do this by itself with concerted planning for adoption of current best practice and continuous improvement to achieve clean production, undertake restorative activities and adopt closed loop, no-waste operations. Most often there are consequent financial savings in reduced resource and pollution costs, yet adoption is limited because these costs are given little value by current economic policy and market design.
Some may believe the feel good approach is sufficient to motivate CSR. But none of the above operates in isolation of the broader society’s expectations, tax and other economic settings and decision making by investors and consumers (large and small). CSR will require a wide array of persistent and comprehensive pressures and changes.
Paul Gilding, former Australian Executive Director of Greenpeace International, and founding partner of Ecos Corporation, does not believe the warm and cuddly approach to CSR is enough:
‘I don’t want companies behaving responsibly out of moral guilt. This won’t get companies to embrace sustainability with sincerity, let alone urgency or speed. I want companies to embrace sustainability because it will help them whip their competition. I want sustainability to be Darwinian...
‘If sustainability is going to take hold in the corporate sector in a big way—and we need it to—it will be when it produces big profits and faster growth. It won’t happen because of an optional executive commitment to an abstract concept. It will happen because sustainability is a great business strategy. And it is...
‘Sure, plenty of today’s companies don’t get it. Many never will. We’ll enjoy watching them decline into the rubbish bin of history and tomorrow’s business-school case studies. I don’t want to feel holier than them. I just want to see them go broke. Bring on the market and bye-bye losers.’15
There’s a long road to travel before achieving a pervasive shift to CSR.
* Jeff Angel is the Director of the Total Environment Centre in Sydney.
Endnotes
1. S Hatfield-Dodds, Economic Growth, Employment and Environmental Pressure: Insights from the Australian experience 1951-2001 (2004) working paper to ANU Environmental Economics Network, 18 November 2004.
2. A Lovins, L Hunter Lovins & P Hawken ‘A road map for natural capitalism’ (1999) 77 (3) Harvard Business Review 145, 146-148.
3. P Sutton, Targeting Sustainability, The Positive Application of ISO 14001 (Document 165) (1997).
4. Productivity Commission, Report On National Competition Policy Reforms (2005), 122.
5. Environment Business Australia, ‘Externalities: harming environment, health, and economy’, cited in D West and M Hogarth, Extended Producer Responsibility (2005).
6. H Ridout, ‘Lending financial weight to the push for sustainability’, Waste, Management and Energy Magazine August 2004, 5.
7. Australian Ethical Investment Prospectus, 24 October 1999.
8. A Day, ‘The rising cost of global warming’, The Australian Financial Review, 8 June 2004.
9. R Thamontheram and D Russell, ‘Enhanced Analytics—the inclusion of extra financial issues in the investment process’, Australasian UNEP FI Newsletter, March 2005.
10. See <www.ceres.org> at 26 April 2005.
11. See < www.globalreporting.org/about/brief.asp> at 14 November 2005.
12. See now Corporations Act 2001 (Cth) s 299(1)(f).
13. Financial Services Reform Act 2001 (Cth) s1013D (2A).
14. Dow Jones Sustainability Group, Guide to the Dow Jones Sustainability Group Indexes, September 2000 at <www. sustainability-index.com> at 14 November 2005.
15. P Gilding, ‘The profit motive is pure enough’ The Australian, 8 March 2005.
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