Changing Money

In 2005 more people working in the corporate citizenship field began to express a belief that in order to change the way business does business, we have to change the way money makes money. Greater focus is now on the role of the financial markets as the origin of, and therefore potential solution to, social and environmental problems. In the UK a variety of campaigning organisations including Amnesty International, Greenpeace, People & Planet, WWF joined together to launch FairShare, a campaign to mobilise UK pension fund owners to put pressure on their trustees, fund managers and ultimately the companies they invest in behave in a responsible and sustainable manner.108 2005 witnessed a greater level of activity in the financial services sector, including a range of collaborative initiatives. In April the group Just Pensions published a ‘trustee toolkit’ to help UK pension scheme trustees  to understand more about responsible investment and how they might integrate it into their scheme’s long term investment strategy.109 Denmark's National Pension Fund announced that it would work with EIRIS to help it invest responsible.110 Meanwhile investors started to report more clearly on their screening, indexing, engagement, voting and government lobbying activities. For example, the asset manager of Halifax Bank of Scotland, Insight Investment, reported on its engagement with 62 companies on governance and corporate responsibility issues, representing 11% of its clients' holdings.111

Some institutional investors are recognizing that major problems like AIDS, climate change, and poverty actually pose threats to long-term business success, and to combat them will require all companies to respond, not just a few companies that seek an ethical profile. Many investing institutions like pension funds are so large that they own a broad cross section of an economy, and so many of the costs externalized by some companies in their portfolio are picked up by other companies in the same portfolio, thereby impacting negatively on the value of the fund as a whole. For example, a steal company’s likely success at securing an import tariff to protect its domestic market would be assessed favourably by many fund managers, and so that form of political lobbying activity would be incentivized by the stock market. However, the result of this may be to increase the price of steal thereby reducing the profitability of steal-using companies in the same portfolio, and so reducing wealth overall. A systems-view of the situation would look at what individual corporate behaviours are likely to support longer term value creation in the economy as a whole, without negatively impacting on that company in the short term, and then incentivize those, not for an immediate return to that company, but a longer term return to a wider set of stocks. Currently most fund management still involves an assessment of individual companies that is based on an atomistic not systemic mindset: a company is assessed purely in terms of its own prospects (mostly in the near term).

As ‘universal owners’ Professor James Hawley of Saint Mary's College argues that institutional investors should be taking a lead to change the way their assets are managed, and redefine what it means to exercise fiduciary duty to include a broader range of factors.112 A whole-systems theory of value and valuation would take into account a company’s influence and reliance on the wellbeing of the whole world economy.  A number of initiatives signpost what may emerge in the future as this theory of value develops. Frank Dixon of Innovest Social Investors has developed a new approach to assessing the social and environmental performance of companies which focuses on the political activities of companies and thereby “encourages firms to proactively work with others to achieve system changes that hold them fully accountable.”113 Another signpost is the launch of the Enhanced Analytics Initiative (EAI), where asset managers and asset owners with over €380 billion Assets Under Management (AUM) are actively supporting better sell-side research on extra-financial issues concerning society, the environment and corporate governance. They have committed to allocate individually a minimum of 5% of their respective brokerage commission to sell-side researchers who are effective at analyzing material extra-financial issues and intangibles.114

One of the most significant initiatives is the development of the UN Responsible Investment Principles, covering the central importance of more active ownership and assessment of extra-financial issues in enhanced conduct of their fiduciary duty.115 Farsighted fiduciaries looking after trillions of dollars of assets are engaged in this initiative, and many have also backed the Carbon Disclosure Project and the Extractive Industries Transparency Initiative, both of which encourage more corporate reporting on extra-financial issues.

Committed individuals in these investment institutions are beginning to lead beyond the borders of individual companies, and beyond their own short-term interests. There is, however, some way to go. More engaged ownership can help address the social and environmental challenges of our time when the owners are pension funds with farsighted fiduciaries. However, the average US mutual fund turns over its portfolio once every 10 months, and consequently the more influence these myopic money flows exert on corporate boards the more difficult it may become for CEOs to lead their companies towards sustainability. The challenge such CEOs must meet is to reach across borders, to their competitors, to civil society, to farsighted investors, and to governments, to build a critical mass of support for a fundamental transformation of the basic principles of our economy – property rights and their related obligations.

There is a deep simplicity to the surface complexity of malaise we see around the world today. This is because there is an initial system condition or trigger that creates a cascading fractal of social fracturing, by putting anti-social pressures on financial firms, to put anti-social pressure on CEOs, to put anti-social pressures on suppliers, communities, governments, and ultimately, ‘all that lives’. That initial condition is this: the ability for people to demand an increase in their personal repository of power (i.e. financial capital), without being accountable to those who are affected by that demand.

Financial capital is one expression of property rights. Property rights are one form of human rights. The premise of most human rights thinking is that we enjoy rights so long as our exercise of a right does not infringe on the ability of others to enjoy theirs. By assuming that the numbers in our accounts will rise, without having any concern for how this is achieved, we are abrogating ourselves of the basic obligations that come with human rights. By demanding that our financial property increases we are creating situations that lead to the infringement of others human rights (and even our own). If we believe in democracy then it can not be left up to the powerful to decide if they are responsible or not, or if they are carrying out their obligations or not. Instead, we must focus on the governance of capital by those who are affected by it - a concept I dubbed ‘capital accountability’ by this author in a report for the UN Research Institute for Social Development (UNRISD).116 An economy based on this concept of property would be one where owners of capital could only invest in activities that are accountable to those affected by them. Nick Robins, head of SRI at Henderson Global Investors, and author of the forthcoming Imperial Corporation, told the JCC that demands for capital accountability will become greater as people realize that “ultimately you can not hold corporations to account unless you hold capital to account”. Drawing on Adam Smith’s incisive critique of the irresponsibility of that iconic corporation of the 18th century, the East India Company, Robins argues the corporation’s capacity for genuine wealth creation continues to be marred by design flaws. To remedy these, Robins proposes that the corporate privilege of limited liability needs to be matched by a legal duty of care to do no harm to people or the environment in the pursuit of profits for shareholders.

contents © Greenleaf Publishing, apart from the Introduction © jem bendell, 2006. site by waywardmedia.com