Pressures for change

There is ever increasing interest and concern on the part of the international community, governments, corporations, regional and local organizations, and not least individuals and shareholders, in the social, environmental and ethical aspects of the market economy. Our broad aim is sustainable development. But what does it mean? Perhaps the best known definition is that of the Brundtland Commission of 1987:

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

But that begs as many questions as it answers. I have a suggestion of my own:

"Durable change for the better while protecting the earth we inherit and the earth we bequeath".

Or a sound bite from Rob Gray:

"Treating the world as if we intended to stay".

The phrase 'market economy' has always been something of a misnomer. All markets have to operate within a framework of the public interest. There is a surprising degree of hypocrisy on this issue. The Americans make free trade a principle, yet their economy is riddled with subsidies, protection and the rest. Pork barrels are part of the American way of life.

The Chinese are closer to the truth when they speak - don't be dismayed - of a "socialist market economy". We all tax and regulate in different ways. Use of fiscal instruments to encourage the good and punish the bad is familiar. In truth without some measure of public intervention, there would be widening divisions between rich and poor; and environmental factors would make economies unworkable in the long term. Some of the factors are:

• increasing pressure of human population
• degradation of land and accumulation of wastes
• water issues: fresh water and salt: supply and quality
• climate change: the Joint Science Academies statement of 7 June 2005: some of the hazards are short as well as long term
• loss of biodiversity: see the Millennium Ecosystem Assessment of 30 March 2005
• the hazards as well as opportunities of modern technology: see the Martin Rees assessment.

There is increasing corporate recognition of the issues expressed in both public statements and adoption of principles, guidance and networking. There is also increasing pressure from shareholders, and CEOs are subject to new tests of corporate responsibility. For example:

• the letter from the 24 corporate leaders (including F&C) on climate change to the Prime Minister of 27 May 2005, and meeting with him on 9 June
• the recent speeches by the President of GE
• advice to shareholders through such bodies as the International Corporate Governance Network, the Investor Network on Climate Risk, and not least the F & C paper on Responsible Ownership (or Policy and Principles for Corporate Governance and Corporate Responsibility;
• such benchmarking mechanisms as the FTSE 4 Good and the FTSE/ISS (International Shareholders Services) indices.

Few now maintain that the only responsibility for companies is to make money for their shareholders. All are concerned about reputational as well as the other risks involved in not taking these issues seriously. As two very good recent examples, see the recent Esso series of advertisements, and the efforts of the aviation industry to improve its public image.

The problem is how the public interest should be recognized, and what should be done whether by international treaty, legislation, regulations, guidance, or voluntary codes of conduct. Most corporate leaders believe that the less intervention, the better for all concerned. They are worried about perverse planning, excessive regulation and government interference. I like the remark on government attributed to Ronald Reagan:

"If you are making a profit, tax it: if you are still making a profit, regulate it; if you fail to make a profit, subsidize it."

From the international point of view good examples of action are:

• the Kyoto Protocol
• schemes for sulphur and carbon reduction emissions
• the Equator Principles for financial institutions (with the help of the International Finance Corporation within the World Bank) to govern social, economic and environmental risk in project financing: I believe that banks adopting theses principles represented as much as 75 percent of the project finance market in 2003
• the London Principles adopted by the Corporation of London and the British government to promote best practice in financing sustainable development projects and initiatives.

As a long standing advisor on environmental issues to the Government of China, and also to the EBRD, I have seen for myself how social, economic and environmental considerations can be brought into the operations of the market economy. Let me emphasize: they are not an impediment to market success.

• China: here the government has been most unfairly demonized . Somebody has to be blamed if trousers are too cheap. Of course the Chinese economy has been growing rapidly and in some respects messily. It has major problems, particularly over water. But better than most, the Chinese government has understood that the environment has to be seen as a kind of endowment of natural capital. They echo the view of a well-known economist that "the economy is a wholly owned subsidiary of the environment". In short without a healthy environment, there can be no healthy economy. They also echo the view of another economist that "markets are superb at setting prices, but incapable of recognizing costs". Prices are indicators. But they must tell the truth about costs. Recently the General Party Secretary Hu Jintao and the Premier Wen Jiabao both spoke of the need to adopt "a new development mode", or an "economic growth mode", within the overriding objective of achieving an all round harmonious society or xiaokang. Already the idea of "green clean growth" has been applied in the province of Shanxi. It means bringing in all the externalities, and giving the priority to human well-being and welfare rather than to mere productivity. The Chinese are recovering their self confidence after their century of troubles, and the balance of power in the world is changing as a result. I am going to Beijing next week to look into the possibilities of alignment of British and Chinese environmental standards.
• EBRD: this bank has an environmental advisory committee which applies strict environmental and ethical criteria to its investment policies. It has been interesting to see the effects on many major projects, including the new oil and gas pipelines in the Caucasus and Sakhalin Island.

I have described a whole dimension of thinking affecting the corporate sector. It cannot be described as new. But its importance really is new. F&C is well equipped to cope.