SUSTAINABLE MANAGEMENT Why Unsustainable Is High-Risk Management

To some, ‘sustainable business’ means applying the principles of triple bottom line reporting – the interdependency between environmental, social and economic sustainability. Others find Phoenix Organics’ managing director Chris Morrison’s definition of ‘future-proofing business’, little easier to grasp.
Organisations’ awareness of sustainable management issues is “often initially raised via risk management channels” according to consultant and author of Winning the Knowledge Game: Smarter Strategy for Better Business in Australia and New Zealand Alastair Rylatt. Key risks still include increasing regulatory constraints. Public policy is moving from, as UK chancellor Gordon Brown puts it, “the taxation of goods to the taxation of bads”. In other words costs will be allocated according to the ‘pollute and pay’ principle.
In both first world and developing nations companies and individual executives are increasingly being held to account for damaging the environment.
Two Israeli companies, Carmel Olefins and Haifa Oil Refineries, and 12 of their senior executives have been charged with two separate incidents of releasing toxic chemicals into the air in the Haifa bay area in 2003. And Indonesian police have charged six senior managers from Denver-based gold miner Newmont with pollution fatalities involving mercury and other heavy materials alleged to have originated from the company’s mining operation in north Sulawesi.According to London-based information provider Ethical Corporation, veteran American corporate governance activist Bob Monks now includes environmental impact as one of his four company value indicators, along with chief executive pay, accounting practices and investment by non-executive directors. “Investors are increasingly aware that poor environmental stewardship can pose significant threat to shareholder value and investment returns,” says Monks.
Monks recently took 25 percent stake in environmental research firm Trucost, which reports that progress in adopting sustainable management indicators is still slow. recent study of the FTSE All Share index companies conducted by Trucost for the US Environment Agency shows few companies take their environmental impacts particularly seriously. Only 12 percent regarded the environment as material business risk. Trucost CEO Simon Thomas agrees that disclosure levels of environmental impacts are still low and wants all companies to incorporate their environmental risks in their accounts. Experts disagree on the extent of the threat, but there is growing recognition of the risks of future climate change.
Sean Lucy, practice leader for climate change at Phillips Fox, Melbourne, told Auckland’s climate change conference late last year that whereas in Australia the impetus for measures to deal with climate change was coming from private enterprise, in New Zealand it was coming from the Government.
Even the big budget Hollywood disaster movie, The Day After Tomorrow, is evidence that climate change is “firmly in the public consciousness”. Lucy thinks directors and managers must factor it into their decision-making. “There is strong consensus that climate change is real. The global business community is increasingly understanding and acting on this message.”
Companies still make significant investment decisions based on the assumption that “the climate system will behave pretty much as it has done since records have been kept”. “But,” says Lucy, “this assumption is no longer valid.”
Public companies fail to appreciate how quickly the market reacts once risk is recognised. The Swiss-based mining company Xstrata lost eight percent of its market capitalisation in month on news that Japan was considering imposing carbon tax. “Xstrata’s experience shows that public companies need to start managing their exposures to climate change and other sustainability issues now, or run the risk of suffering from change in market sentiment,” says Lucy.
Phillips Fox suggests businesses “establish process to ensure that both risks and opportunities are identified and acted on early”. The process they label ‘Climate Control’ need not be any more difficult than mainstream business issues according. They offer five-step process:
• Build corporate knowledge – ensure there is broad understanding of climate change within the business, especially at senior management level.
• Identify business impacts.
• Develop strategic response.
• Implement.
• Review and report.
Sustainability risk should be managed like any other significant risk management issue.

The ‘greening’ of business
There is increasing scientific evidence that pollution (much of it industrial) is killing the world’s environment and, even more directly killing people. Research by doctors at the University of California and the Boston Medical Centre links pollution to about 200 different diseases ranging from cerebral palsy to testicular atrophy and more than 37 forms of cancer.
Pro-environmental activism is also entering the mainstream, with business leaders taking up causes alongside hardened greenies. Whether their motives are altruistic or self-interest the effect is the same: an accelerating trend toward more sustainable management practices.
The management emphasis in every sector is switching from growth to sustainability. The goal of the Greater Wellington Regional Council’s 10-year plan is “working towards sustainable region”. Confirmed and supported by stakeholders the council plans to ensure the region’s “environment is protected while meeting the economic, cultural and social needs of the community”.
Popular culture now also reflects changing attitudes to business. documentary film The Corporation, for instance, takes damning look at the history of companies and their impact on society (see Management, July 2004, p6). Its audience appeal is now so great that it is showing in mainstream cinemas throughout the English-speaking world. Commercial entities can no longer assume they have mandate to continue trading without broader societal support.
The 2005 edition of the State of the World report by the Washington-based research organisation Worldwatch Institute calls poverty, disease and environmental degradation the real “axis of evil”. Former Soviet Union president and now Green Cross International chairman, Mikhail Gorbachev suggests, in the report’s foreword that the world must concern itself with poverty, “gross misallocation of limited resources to consumerism and war” and the dangers of climate change. He is “delighted” that last year’s Nobel Peace Prize was given to Kenyan environmental activist, Wangari Maathai.

Business opportunities – SRI
Sustainable and responsible investing (SRI) is also becoming mainstream. David Blood, former chief executive of Goldman Sachs Asset Management, and former US vice president Al Gore, last year launched Generation Investment Management to bridge the worlds of traditional investment and sustainability. The firm invests in companies that effectively manage their sustainability risks.Also last year the Johannesburg Securities Exchange (JSE) launched its first SRI index to help investors make informed decisions about the changing market and encourage investment in responsible companies operating in South Africa. According to consulting firm McKinsey & Co market investors will pay 23-28 percent premium for shares in firms with good (read sustainable) corporate governance standards.
The flagship Global Fund of Storebrand Investments, rated by Global Investor Magazine as the top European asset manager, outperformed the MSCI World Index by over one percent (Fund 11.8 percent, Index 10.7 percent) in 2003. The fund only invests in companies which rank in the top third of their global peer group according to Storebrand’s environmental and social performance criteria.
Some of the world market’s best known brands have recognised the value of adding ‘eco-friendly’ to their brand attributes. UK bank

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