SUSTAINABILITY

CHAPTER 9

Outline

Sustainable Development ?

1987: World Commission on Environment and Development (The “Brundtland Commission”)

“Our Common Future”: Coined the term Sustainable Development:

”Development that meets the needs of the present without compromising the ability of future generations to meet their own needs”

Social and Environmental Sustainability

Source: Dunphy, Griffiths & Benn (2007)

A Planet Under Threat means:

the population explosion

the natural limits to non-renewable resources

over-exploitation of renewable resources

growing ecotoxicity, threats from nuclear, biological and chemical technologies & catastrophes

reduced species diversity

incentive systems encouraging waste and pollution

environmental warming

extreme differences in income

lack of a systemic global view

Predicted Social Impacts Associated with increases in average Global Temperature

Stern Report (2006) The Economics of Climate Change

Source: Stern Review: The Economics of Climate Change :Fig. 1.4 (2006:8)

Rising AtmosphericGreenhouses

GASCONCENTRATION

( Measured in CO2 equivalent)

• Rising Global Mean Surface Temperatures

(GMT)

Rising Sea Levels

Changes in rainfall variabilityand seasonality

Changing Patterns of NaturalClimate variability

Melting of Ice Sheets, Sea-Iceand Land Glaciers

PHYSICAL CHANGES IN CLIMATE

RADIACTIVE FORCING

(Change in energy balance)

Land use change

Emissions

Feedbacks including a possible reduction in The efficiency of the land and oceans to absorb Carbon dioxide emissions and increased natural

Releases of methane

Local and global feedbacks i.e.:Changes in the clouds, the water contentOf the atmosphere and the amount ofSunlight reflected by sea ice (albedo)

RisingAtmosphericTemperatures

Rising OceanTemperatures

(Lagged)

Impacts onPhysical,

Biological and

Human systems

The Cost of Inaction?

From Finsia Industry Opinion Poll

– Q: The UK's Stern Report in 2006 found that "doing nothing to stop global warming will prove far more costly to the global economy than taking measures in the next 10 to 15 years to fight it". To what extent do you agree or disagree with these findings?

– A: 89% Finsia members surveyed agreed with the finding from the UK’s Stern Report.

Trends Cause Discontinuities and Changes

TRENDS

Economical Ecological Socio-cultural

• Interconnectivity• Deregulation• Accountability• Innovation speed• Global Trade• Access (information, capital)• Ageing structure

• Instability of ecological systems• Climate Change• Biodiversity• Scarcity of natural resources (water, energy, soil)

• Transparency• Healthy living• Ageing population• Demographic changes• Social tensions• Urbanization

Discontinuities / Challenges

Sector / Issue / Markets

Sector ChallengesSource: SAM Research AG “Presentation for Ethos Conference 210609

What Can Be Done?

‘The Norwegian Pension Fund invests its nation's oil revenue for the wellbeing of future generations. With about $460 billion under management, it is one of the world's biggest investors. It also has a strong ethical charter, and that's what has led to its decision to withdraw its $1 billion investment from Rio Tinto’.

‘Australian Institute of Superannuation Trustees released a ground-breaking report on super funds and climate change. Carbon Counts 2008: The Carbon Footprints of Australian Superannuation Investment Managers ‘

‘By "carbon optimising" the ASX 200 (overweighting companies that are carbon efficient in each sector and underweighting carbon-intensive companies), carbon efficiency could be improved by 42 per cent without sacrificing returns’.

http://business.smh.com.au/business/climate-change-the-new-challenge-for-super-fund-returns-20080912-4fgz.html

Automotive Manufacturers & Climate ChangeImpact of increased CO2 measures on profits (EBIT)

Ford

GM

BMW

VW

Daimler C.Honda Nissan

Renault

Toyota

-12

-8

-4

0

4

8

12

Source: SAM Research, Changing Drivers Study, October 2003

Share price development of Toyota and GMOctober 2003 – October 2005 (indexed)

2003 2004 2005

Different transport systems/different vehicles/different engines/different energy

There are currently around 32 million cars in China. However the rate of car ownership is low at only 25 per 1000 population. If ownership grew to the world average of 120 cars per 1000 then there would be 156 million cars, an increase of 124 million.

If the rate of ownership grew to the American level of 700 per 1000 then China would have 910 million cars, an increase of 878 million cars which is 128 million more cars then currently exist on the whole planet.

The Future of Urban Transport ?

MODEL ELEMENT POTENTIAL DRIVERS

Operating Costs

Emissions Trading & Reporting

•Purchase costs of any additional carbon allowances required, over and above allocation.•Exposure to electricity costs.•Other costs associated with trading, reporting and compliance.

Emissions Reduction • Additional (or reduced) operating costs as a result of carbon mitigation.• N.B. in many cases, investing energy efficiency achieves a net reduction in operating costs.

Other •Buildings compliance costs.•Transport costs (longer term).•Potential additional costs associated with supply chain risk due to weather exposure (some reported problems already for instance in

Framework for Assessing Company Climate Change

Understanding the Risk

Investment Decisions:

•Considerations of liability in investment decision•Purchasing Policies•Hedging positions•Scenario Analysis

Managing the Risk

Company Exposure

•Development of Greenhouse gas emissions inventory, both direct and indirect (electricity) emissions for key business units.

•Greenhouse gas Key Performance Indicators: - Product intensity († CO2-2/unit of product) - Op cost sensitivity († CO2-e/$ operating costs) - Equity exposure, through investments - Past exposure - Future exposure

Value Chain Exposure

•missions' associated with supply & product chain, e.g. transport, energy intensive outputs;

•Differential exposure from Annex-1 & non-Annex-1suppliers

Abatement Opportunities:

•Identification of abatement opportunities•Development of marginal cost curve for abatement•Supply chain potential

Competitor Exposure

•Competitor exposure•Substitute exposure•Opportunities

GREENHOUSE GAS

CHEMICAL FORMULA

PRE-INDUSTRIAL CONCENTRATION

(ppbv)

CONCENTRATION IN 1984 (ppbv)

MAJOR ANTHROPOGENIC

SOURCES

Carbon dioxide CO2 278,000 358,000 Fossil fuel combustion land-use conversion

Cement manufacture

Methane CH4 700 1721 Fossil fuels

Rice paddles

Waste dumps

Livestock

Nitrous oxide N2O 275 311 Fertilizer use

Industrial processes

Combustion

CFC-12 CCI2F2 0 0.503 Liquid coolants/ refrigerants

Foams

HCFC-22 CHCLF2 0 0.105 Production of aluminium

Sulfur hexafluoride

SF6 0 0.032 Dielectric fluid

SECTOR WEATHER RELATER RISK REGULATORY RELATED RISK

POTENTIAL OPPORTUNITIES

Short – term Long – term

Property & construction

Higher insurance costs Higher insurance costs or inability to get insurance

Decrease in asset value due to changes in flood levels or poor energy performance

Increased construction costs due to changes to building codes

Minimum energy performance standards

Inclusion of energy intensive construction materials into ETS

Growth market for energy efficiency/management products and services

Growth market for energy efficient construction materials

Property energy performance used as differentiation to attract key clients

Transport & infrastructure

Increased maintenance & insurance costs due to increased storms & flooding

Increased construction costs due to changes in civil engineering standards

Minimum energy transport performance standards

Inclusion of aviation in fuel and airline industry in ETS

New water infrastructure

Alternative fuels

Tourism & tourism related

Destruction of major tourism attractions

Destruction of major tourism attractions

Increased in tropical diseases impacting attractiveness as destination

Retail & consumer discretionary

Increased volatility in earnings of weather exposed or season dependent products due to increased weather variability

As for short term Compulsory energy performance standards for consumer

Growth in demand for energy efficient consumer goods

General Increased business interruption due to extreme weather events

As for short term Need to include ETS related assets and liabilities in financial accounts

Increased electricity price

Business Drivers

Employee values & beliefs

Corporate governance

Ethics

“Extended producer responsibility”

Management & reporting standards

Codes

Market sensitivity to environmental & social issues

Global transparency due to electronic media

Reputation

Linkage of sustainability performance to shareholder value

Opportunities for growth of new products & services

Materiality

Barriers to Sustainability

Sustainability is seen as “fuzzy” and not relevant to the company’s primary business mission

The business case for adopting sustainability cannot easily be reduced to monetary terms

Commitment to sustainability, transparency, and disclosure may exceed “comfort zone”

Adoption

Sustainability is viewed as a traditional compliance issue, rather than an innovation opportunity

Lack of accepted standards complicates the measurement of progress toward sustainability

Trade-off decisions are more difficult under the broad scope of the “triple bottom line”

Practice

Corporate Hall of Shame 2007

The Nominees

Coca-Cola, for draining local water supplies in drought prone areas in India, allowing harassment of workers fighting for labor rights in Colombia, undermining public confidence in local water utilities, and falsely promoting itself as a socially

responsible corporation.

ExxonMobil, for refusing to pay $4.5 billion in damages from the 1989 Exxon Valdez oil spill and spending millions to delay action on global warming, including funding “junk science” to confuse the issue.

Ford, for awful fuel efficiency and pollution ratings, blocking government efforts to improve auto emissions, thwarting efforts by workers to unionize, and paying its CEO $28 million (for only four months of work) as they plan to cut 30,000 jobs.

Halliburton, the nation’s leading war profiteer, for grossly under-delivering—and shortchanging our troops—on more than $20 billion in lucrative government contracts and for planning to move its headquarters to Dubai, enabling them to shirk paying their full share of U.S. taxes.

Corporate Hall of Shame 2007

Kimberly-Clark, for using the same tree fiber suppliers — after years of denial — for its tissues that have contributed to the destruction of the world’s remaining ancient forests in North America.

Merck, for keeping Vioxx on the shelves for four years after learning that the pain medication was causing heart attacks, heavy-handed political tactics, and fighting government efforts in Thailand to allow generic versions of AIDS medications.

Nestlé, for numerous abuses — including use of child labor on cocoa farms, skirting responsibility for its role in the obesity epidemic, and draining community water supplies for its bottled water products.

Wal-Mart, for failing to support its workers, who live close to the poverty line and often are not covered by the corporation’s health plan, for displacing local businesses and for massive claims of sexual discrimination.

Emerging Business Values

‘The broader role of corporations in society lies in understanding theinterdependence between economic growth, social development andenvironmental protection’

Gail Kelly, CEO Westpac, 20 February, 2008.

‘CSR is rational, enlightened and self-interested business behaviour’Westpac, 2006:15.

‘Sustainability is here to stay or we may not be’.Niall Fitzgerald, CEO Unilever

‘Climate change has focused our attention on sustainability issuesgenerally and, as an industry, we need to better reconcile theincentives that drive short-term profits with the risks to our economyover the long-term’.

Stephen Harrison AO, Interim CEO, Finsia:‘Tip of the Iceberg Report’ 2006.

Kofi Annan Launches UNEP FI Principles at NYSE 2006

UNEP Finance Initiative

UNEP Finance Initiative: Principles of Responsible InvestmentAustralian Financial Institution Signatories

Asset Owners Investment ManagersARIA (Australian Reward Investment Alliance) AMP Capital Investors AustralianSuper Australian Ethical Investment Ltd. CARE Super BT Financial GroupCatholic Superannuation Fund Colonial First State CBUS Superannuation Scheme DrapacChristian Super Five Oceans Asset ManagementESSSuper Foresters ANA MutualHesta Super Indian Ocean RimLocal Government Superannuation Scheme Portfolio PartnersLocal Super Statewide Superannuation Trust UniSuper VicSuperVision Super

Fiduciary Duties

DUTY TO ACT FORA PROPER CAUSE

DUTY TO ACTPRUDENTLY

Carry out the items Of the trust

Act in the best interestsof the beneficiaries as

a whole

KEY FIDUCIARY DUTIES

Act reasonablyApply special

Knowledge and skill

Act with care, skill andDiligence regarding

Someone else’s investment

Consider the suitability Of investments

Consider relevantconsiderations

Australia (FiduciaryDuties set out in case

Law and statute)

DiversityTake proper advice

Canada and UK(fiduciary duties setOut in case law andStatute)

US (fiduciary duties case law and federalAnd state statute)

SOLE PURPOSE TEST

MODERN PRUDENT

INVESTOR RULE

Source: Freshfields , Bruckhaus and Deringer . A legal framework for theIntegration of environmental, social and governance issues into institutional nvestment October 2005. UNEP Finance Initiative Innovative financing for sustainability .

Institutional Investor Voting 2000-2003

0 10 20 30 40 50

2000 2001 2002 2003

Public health –AIDS, workplace coverage

Banking/ insurance

Treatment of animals

Public health – product safety

Nuclear power

CSR/ CERES reporting

Humanitarian – debt relief to poor countries

Human rights

Artic drilling

Social community impact

Charitable giving

Public health – tobacco cigarettes

Militarism and violence

Genetically modified organisms

Climate change/ renewable energy

Public health- affordablemedicines

Pollution/ Recycling

Political influence

Equal employment

Global labour standards

Public health –AIDS, workplace coverage

Banking/ insurance

Treatment of animals

Public health – product safety

Nuclear power

CSR/ CERES reporting

Humanitarian – debt relief to poor countries

Human rights

Artic drilling

Social community impact

Charitable giving

Public health – tobacco cigarettes

Militarism and violence

Genetically modified organisms

Climate change/ renewable energy

Public health- affordablemedicines

Pollution/ Recycling

Political influence

Equal employment

Global labour standards

Evolving CSR Standards ArchitectureFigure 8 The Evolving Global CSR Standards Architecture

Globally Recognizedprinciples

Generallyaccepted accounting principles

Specialized CSR standards

Overall CSR managementsystems

Emergingissues

NORMATIVE

UN Global compact OECD Guidelines

GRI Guidelines

AA 1000 Assurance Standard

SA 8000 EMAS ISO 14000 WWF CE

SIGMAGuidelines(UK)

VMSPrinciples(Germany)

Q-RESGuidelines(Italy)

AA 1000Framework (UK)

SDS21000 ( France )

ISO..?

REGULATIVE

Others…

Source: Allouche J. (2006). Corporate Social Responsibility: Concept, Accountability and Reporting.

Source: Adapted from: Allouche J. (2006). Corporate Social Responsibility: Concept, Accountability and Reporting

Source: Allouche (2006). Corporate Social Responsibility; Concept, Accountability and Reporting.

Corporate Strategies to Deliver Value to Society

Comply

Obey the law

Control

Communityinvestment

Create newvalue

Collaborate

Costs, risks,liabilities,Negative impacts

StrategicPhilanthropy,Social venturecapital,Employee volunteering

New :Products & services,Processes,Alliances,Markets, andBusinessModels that Meet societal needs

To solveComplex

social&

environmentalissues

Shareholder added value

So

ciet

al

ad

ded

va

lue

Sustai

nable

added

val

ue

Long term

gro

wth

Source: Nelson, 2004.

Rejection

Non-responsiveness

Compliance

Efficiency

Strategic proactivity

The sustaining corporation

The Phase ModelThe Phase Model

From Dunphy, D. , Griffiths, A. and Benn, S., Organisational Change for Corporate Sustainability, Routledge, London and New York, 2003; revised edition 2007)

Model of Sustainable Value

Adapted from Hart and Milstein 2003

Growth of SRI Investment Assets in Australia 2000- 2006

325

18182175 2355

4500

7670

11 985

0

2000

4000

6000

8000

10000

12000

2000 2001 2002 2003 2004 2005 2006

A$

m

Source: EIA (2006) Sustainable Responsible Investment in Australia, Sydney: Ethical Investment AssociationSource: Ethical Investment Association (EIA) 2006 SRI Benchmarking Survey

Source: Jed Emerson (2006)(See www.blendedvalue.org)

Blending Economic and Social Value