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Tinkering at the edges

The launch of a socially responsible investment index in China is welcome news, says John Elkington, but it is naïve to believe it will power real change without stronger political action.

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Speaking at the World Economic Forum's “Summer Davos” in Tianjin in September, premier Wen Jiabao reaffirmed China’s commitment to balancing growth with sustainability. The country, he pledged, “will continue to conserve resources and protect the environment and raise the efficiency of resource utilisation and the capacity to tackle climate change.”

The message is great, but there remains a real question mark over the country’s ability to deliver on this promise, even as it starts to promote socially responsible investment. Recent efforts to get fund managers to engage with the sustainability agenda are pleasing, but it is worth asking whether the country is about to apply weak market solutions to its severe environmental challenges.

It is, of course, welcome news that China is launching an environmental, social and governance (ESG) investment index. The CSI ECPI China ESG 40 Equity Index, made up of 40 domestic companies, is a joint venture between the China Securities Index Company, backed by the Shanghai and Shenzhen stock exchanges, and ECPI, a European ESG research company.

To declare an interest, I have been on the advisory boards of half a dozen socially responsible investment (SRI) funds since 1990, from small pioneers through to larger financial institutions like Norway’s Storebrand. So I believe that SRI is a worthwhile experiment, particularly if the approach moves beyond the screening of company sectors and performance to actively engaging the management of mainstream companies. But it’s truly worrying when you hear senior people from major global companies like Rio Tinto or Unilever expressing concern about the lack of mainstream investor interest in what they are doing in such areas as the ESG agenda and wider sustainability.

At a recent conference on biodiversity for business, Unilever’s senior vice president of sustainability, Gavin Neath, reported that “Mainstream investors have [shown] very little interest and give us very little credit for what we do – and there’s little sign that is going to change any time soon.” He noted that only SRI analysts are interested in Unilever’s investments in such areas as drip irrigation in Brazil, solar-powered ice cream freezers and water-conservation projects.

Rio Tinto chief executive Tom Albanese agreed with this assessment, noting that his company organises regular corporate social responsibility briefings for shareholders – but is finding that mainstream investors, as the Financial Times puts it, “are not interested in Rio’s [ESG] initiatives because they do not think they are core to the business.”

Both executives think the analysts are wrong. And the huge financial liabilities incurred by BP in the wake of the devastating oil spill in the Gulf of Mexico may fuel greater interest in ESG factors. But it is significant that the market-leading Dow Jones Sustainability Indexes only delisted BP after the spill. (To declare another interest, I was on their advisory board for many years, too.) Their latest rankings of companies is also notable for the fact that car manufacturer Toyota – long a darling of the SRI and ESG investment communities – has been dropped because of the quality problems experienced as its rapid growth outran its quality controls.

If such companies are dropped only after the event, critics wonder, are they really providing their investors with value added? Are they any better than their mainstream competitors at detecting emerging risks, most of which have also been taken by surprise by such corporate reverses? I believe that the answer to both questions is yes, but it is clear that SRI funds do have a case to answer.

SRI pioneers remain convinced that major, long-term investors like the pension funds will have to take ESG factors into account. We have already seen major reinsurance companies like Swiss Re begin to integrate such considerations into their own massive shareholdings. But at a time when most financial analysts are still rewarded on a quarterly basis, the chances of opening out investor horizons are small.

Another big SRI ambition is to persuade the huge sovereign wealth funds operated by countries like China, Norway, Russia, Singapore and Saudi Arabia to build ESG metrics and performance targets into their investment activities. Russia seems a long shot, but over time other countries may move within range.

Norway is the poster child in this area, with its Government Pension Fund – valued at US$449 billion (3 trillion yuan) at the end of June – applying active and long-term screening to all investments, based on the ESG-related values of Norwegian citizens.

It is true that Norwegians, and Scandinavians more generally, are unusual, with a history of social and environmental awareness unmatched in most other parts of the world. But in Europe more widely there was positive news this year when the 2010 wealth report from the European Sustainable Investment Forum found the proportion of high-net worth Europeans insisting their investment portfolios are managed against sustainability metrics rose from 8% in 2007 to 11% in 2009. That represents 729 billion euros (US$936 billion), more than a third more than in 2007. Eurosif executive director Matt Christensen is excited, arguing that most of the wealthier investors start by “dipping their toes in the water” with just 1% of their assets – but may well increase the proportion if the experiments work out.

Let’s hope so, but I am not persuaded that the current level of SRI activity will exert sufficient leverage on the global capitalist system to achieve anything like the sustainability that premier Wen Jiabao aspires (or should aspire) to. So, yes, a warm welcome to the CSI ECPI China ESG 40 Equity Index – but I wonder if there is a Chinese language equivalent of the English proverb “One swallow doesn’t make a summer”? The uncomfortable fact remains that, for real progress, we need political heavy-lifting on a scale that most of our leaders still find unimaginable.


John Elkington is executive chairman of Volans and non-executive director at SustainAbility.

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Making money, and lots of it, is the greatest social responsibility of Chinese industry

Everything I wish to say, and everything that needs to be said, has been explained in the title.

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Earning money comes first

Earning money is the top priority for China and the west alike. When can we earn more money than American companies? Only on that day can we take a breath for energy saving and environmental protection.

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一个公司忽视自身对社会和环境的责任是非常危险的。行业依靠输出和输入 - 两者都是有限资源。比如一个木材公司,如果没有补种树木来保持原有数量,是不能砍树的。否则,这公司迟早会倒闭。同样,一个公司也可以仅凭其良好的信誉生存,拥有顾客。采矿公司在其运作的当地社区野蛮施工则产生不好的公共关系。


The danger of short-sighted thinking

That is a very short-term point of view and very dangerous. The idea that industry's first consideration should be profit disregards long-term sustainability of that industry. Making money and being socially responsible are NOT exclusive, and many companies have shown this with great success. To continue to pursue money without thinking about the future is irresponsible both in a business sense and a moral sense.

It is very dangerous for a business to ignore its responsibilities to society and the environment. Industry depends on inputs and outputs - both of which are finite resources. A timber company, for example, cannot cut down trees without replanting at a rate that maintains a continuous stock - otherwise, the company will eventually go out of business. Likewise, a company exists solely on its good reputation with its customers. It is just bad PR for a mining company, for example, to run roughshod over the local communities it operates in.

The market exists within the environment, and it is a back-and-forth relationship. One cannot survive without the other and if the market grows to the detriment of the environment, eventually, there will not be enough environment in good enough condition to support the market. That is basic ecological economics.

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That is to say, the MARKET cannot survive without the environment. The environment can get along just fine (and probably better) without us.

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Major principle and minor principle

In regards to energy saving and emissions reduction, and the major principle of social responsibility in businesses, we are all well aware and there is no need to repeat it here. Imagine, how would a business that does not know how to earn a lot of money, achieve their goals of social responsibility? How would an entrepreneur who is concerned about his country and people all day long, have the time and energy to think about staff and commitments? Even his own business is in jeopardy and the staff is in the middle of an unemployment crisis, does he have time to think about social responsibility? Definitely not. Near-sightedness is of course not good, but Far-sightedness is not necessarily good either. We advocate that we can neither be near-sighted nor far-sighted, we advocate appropriateness. We should not have unrealistic expectations in what we do. Everyone has nice thoughts but we can't all hope to be like Bill Gates, being generous in this and that. Do you have that kind of strength? Before you do, honestly and sincerely do your business, while remembering what you are capable of doing. Perhaps it is not what you initiated or wanted, but with the mainstream of society and direction of development, there is some sense of entrepreneurship.

There are a few businesses that take into account main business and subsidiary businesses but that is rare. The key is that this model seems to be unable to replicate. Our job is to make this model so that it is easy to understand and win the hearts of people, allowing companies to find their own space to put to good use. That will be difficult.

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The government must make a difference

For China's political system, it is necessary to use the government's powerful ability to control the economy in a truly useful place. It is not necessary to go back to the original planned economy. As long as the government uses certain economic and financial means (rather than administrative means), it can establish and attempt to use the standard SRI system, such as further the "green securities" motion (although listed companies now have to disclose environmental information, it is still not enough.)

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junzi knows what ought to do and what not

Junzi -- Confucius's ideal person, who any one of us, rich or poor, has the potential to become -- knows what ought to do and what not. However, the petty individuals act on their own wills.

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The government's omission: China's five year carbon emissions trading pilot

People's Daily: "Yesterday, in a side event, "China takes action to fight climate change" during the UN Climate Change Conference in Tianjin, NDRC deputy director Sun Cuihua revealed that within five years, China will pilot carbon emissions trading in some industries and provinces.

Sun Cuihua explained that there currently are two major forms of carbon trading. One is based on project emissions of the "Kyoto Protocol," namely CDM emission reductions, and the other one is emissions trading. She said that China is in the industrial development stage and therefore it is not possible to set limits to carbon dioxide emissions."

What is the difference between the two methods mentioned by the leaders? In order to resolve the acid rain problem, the US pushed forward carbon dioxide and sulfur emissions trading in the late eighties, early nineties, which was very successful.The prerequisite of trading is to set a price for carbon. If the price is too high "it will affect economic development" and if the price is too low, there will be no initiative. We are still strangers to energy efficiency, but we are already talking about carbon trading, it's a joke. Sometimes, it would be better to not do anything.

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All that glisters is not gold

Although Norway's Government Pension Fund might be regarded as the poster child in this area, that fund a includes several companies which have poor environmental credentials.

For example, Norway was recently obliged to delist one such company, Samling Global, two of whose forestry businesses had previously been certified as legal and sustainably managed. However, those certificates (in Sarawak and Guyana) have been withdrawn and not re-instated.

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I don't understand

I don't understand. What about this Norwegian fund? What happened to this Sanlin company? What has this got to do with the subject, social responsibility? I'm totally confused.

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I actually find that heartening

The fact that a company can be de-listed from a sustainable business index means there is ongoing oversight happening. To me, that gives the list more reliability and credence, rather than less.



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Strong political action

If everything needed political action and intervention, it would be disastrous. Do we need political intervention? What results would come from intervention? Are we all so unintelligent that we need an elitist to comment on national affairs? Not necessarily.