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CHAPTER 9 SUSTAINABILITY 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 reduced species diversity the natural limits to nonrenewable resources incentive systems encouraging waste and pollution over-exploitation of renewable resources environmental warming extreme differences in income growing ecotoxicity, threats from nuclear, biological and chemical technologies & catastrophes lack of a systemic global view Predicted Social Impacts Associated with increases in average Global Temperature Stern Report (2006) The Economics of Climate Change Local and global feedbacks i.e.: Changes in the clouds, the water content Of the atmosphere and the amount of Sunlight reflected by sea ice (albedo) Land use change PHYSICAL CHANGES IN CLIMATE Rising Atmospheric Greenhouses GAS CONCENTRATION Emissions ( Measured in CO2 equivalent) RADIACTIVE FORCING (Change in energy balance) Rising Atmospheric Temperatures •Rising Global Mean Surface Temperatures (GMT) Rising Sea Levels Rising Ocean Temperatures (Lagged) Changes in rainfall variability and seasonality Changing Patterns of Natural Climate variability Melting of Ice Sheets, Sea -Ice and Land Glaciers Feedbacks including a possible reduction in The efficiency of the land and oceans to absorb Carbon dioxide emissions and increased natural Releases of methane Source: Stern Review: The Economics of Climate Change :Fig. 1.4 (2006:8) Impacts on Physical, 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 Ecological Economical • 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) Socio-cultural • Transparency • Healthy living • Ageing population • Demographic changes • Social tensions • Urbanization Discontinuities / Challenges Sector / Issue / Markets Sector Challenges Source: 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-forsuper-fund-returns-20080912-4fgz.html Automotive Manufacturers & Climate Change Impact of increased CO2 measures on profits (EBIT) 12 Toyota 8 Renault 4 Honda Daimler C. 0 VW -4 BMW -8 GM Ford -12 Source: SAM Research, Changing Drivers Study, October 2003 Nissan Share price development of Toyota and GM October 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 Operating Costs POTENTIAL DRIVERS 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 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 Investment Decisions: •Considerations of liability in investment decision •Purchasing Policies •Hedging positions •Scenario Analysis •missions' associated with supply & product chain, e.g. transport, energy intensive outputs; •Differential exposure from Annex-1 & non-Annex-1 suppliers Competitor Exposure •Competitor exposure •Substitute exposure •Opportunities Abatement Opportunities: Managing the Risk •Identification of abatement opportunities •Development of marginal cost curve for abatement •Supply chain potential 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 Short – term REGULATORY RELATED RISK POTENTIAL OPPORTUNITIES 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 Ethics Employee values & beliefs Corporate governance Codes “Extended producer responsibility” Management & reporting standards Reputation Market sensitivity to environmental & social issues Global transparency due to electronic media Materiality Linkage of sustainability performance to shareholder value Opportunities for growth of new products & services Barriers to Sustainability Adoption 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” Practice 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” 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 the interdependence between economic growth, social development and environmental 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 issues generally and, as an industry, we need to better reconcile the incentives that drive short-term profits with the risks to our economy over 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 Investment Australian Financial Institution Signatories Asset Owners Investment Managers ARIA (Australian Reward Investment Alliance) AustralianSuper CARE Super Catholic Superannuation Fund CBUS Superannuation Scheme Christian Super ESSSuper Hesta Super Local Government Superannuation Scheme Local Super Statewide Superannuation Trust UniSuper VicSuper Vision Super AMP Capital Investors Australian Ethical Investment Ltd. BT Financial Group Colonial First State Drapac Five Oceans Asset Management Foresters ANA Mutual Indian Ocean Rim Portfolio Partners Fiduciary Duties KEY FIDUCIARY DUTIES DUTY TO ACT PRUDENTLY DUTY TO ACT FOR A PROPER CAUSE Carry out the items Of the trust Act in the best interests of the beneficiaries as a whole Act with care, skill and Diligence regarding Someone else’s investment Act reasonably SOLE PURPOSE TEST Apply special Knowledge and skill Australia (Fiduciary Duties set out in case Law and statute) Take proper advice Diversity Consider the suitability Of investments Canada and UK (fiduciary duties set Out in case law and Statute) Consider relevant considerations US (fiduciary duties case law and federal And state statute) 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 Global labour standards Equal employment Political influence Pollution/ Recycling Public health- affordable medicines Climate change/ renewable energy Genetically modified organisms Militarism and violence Public health – tobacco cigarettes Charitable giving Social community impact Artic drilling Human rights CSR/ CERES reporting Public health – product safety Nuclear power Treatment of animals Public health –AIDS, workplace coverage Banking/ insurance Humanitarian – debt relief to poor countries 0 10 20 2000 30 2001 2002 2003 40 50 Evolving CSR Standards Figure 8 The Evolving Global CSR Architecture Standards Architecture Globally Recognized principles NORMATIVE OECD Guidelines UN Global compact Generally accepted accounting principles Specialized CSR standards Overall CSR management systems Emerging issues GRI Guidelines AA 1000 Assurance Standard SA 8000 SIGMA Guidelines (UK) EMAS ISO 14000 WWF CE Others… VMS Principles (Germany) Q-RES Guidelines (Italy) AA 1000 Framework (UK) SDS21000 ( France ) ISO..? REGULATIVE Source: Adapted from: Allouche J. (2006). Corporate Social Responsibility: Concept, Accountability and Reporting Source: Allouche J. (2006). Corporate Social Responsibility: Concept, Accountability and Reporting. Source: Allouche (2006). Corporate Social Responsibility; Concept, Accountability and Reporting. Societal added value Corporate Strategies to Deliver Value to Society e lu a v d th e d w ad gro e bl rm a in g te a st on u S L Collaborate Create new value Community investment Control Costs, Comply risks, liabilities, Negative Obey the law impacts New : Products & services, Processes, Strategic Alliances, Philanthropy, Markets, and Social venture Business capital, Models that Employee Meet societal volunteering needs To solve Complex social & environmental issues Shareholder added value Source: Nelson, 2004. The Phase Model Rejection Non-responsiveness Compliance Efficiency Strategic proactivity The sustaining corporation 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 11 985 12000 10000 7670 A$ m 8000 6000 4500 4000 1818 2000 2175 2355 325 0 2000 2001 2002 2003 2004 2005 2006 Source: EIA (2006) Sustainable Responsible in Australia, EthicalSurvey Investment Association Source: Ethical Investment Investment Association (EIA) 2006Sydney: SRI Benchmarking Blending Economic and Social Value Source: Jed Emerson (2006)(See www.blendedvalue.org)