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Ethical way less risky

BUSINESSES around the world are either being dragged into, or have become willing participants in, a drive to improve their social and environmental performance.

The drive is also being promoted at the government level, as with the requirement in the recently introduced Financial Reforms Act that makes it mandatory for fund managers to state whether social and environmental considerations have been considered when an investment decision is made.

However, others such as the Chamber of Commerce and Industry have been highly sceptical of the ability of businesses to be able to work effectively in determining a triple bottom line outcome, which may be at odds with a pure profit motive.

However, a report by AMP Henderson Global argues that there is growing global anecdotal evidence of a growing link between investor returns and long-term sustainability issues.

“Many in the investment world still downplay the sustainability agenda, seeing it as a soft issue, largely concerned with matters of corporate brand and reputation,” Henderson Global Investors SRI Research head Nick Robins says in a report tellingly called Paying the Price.

“The evidence of the past few months has demonstrated that there is a real financial price to pay for companies that impose high health and environmental costs on society,” he says.

Mr Robins points to the slide in the value of British Energy earlier this year as an example.

British Energy invested around £50 million into Britain’s nuclear power program. However, the market is now questioning the future of nuclear energy in the UK.

Mr Robins argues that, as a result, the company is worth just 1 per cent of its original value and was only saved from administration by £650 million in government emergency loans.

Likewise, the Swiss-Swedish engineering giant ABB saw its share price halve in a single day in October amid fears that an asbestos liability facing its US subsidiary Combustion Engineering could overwhelm the group. Tobacco companies are also facing heavy liabilities around the world.

“One by one, these cases demonstrate a belief long-held by socially responsible investors – the need to get serious about the hard-edged investment implications of the sustainability agenda,” Mr Robins says.

“Traditionally, business and investors have looked at returns on financial capital as the sole criterion for success.

“Sustainability means extending the focus to include the management of other critical ‘capital stocks’. Notably human wellbeing and the state of the environment.”

The St James Ethics Centre has been grappling with what businesses need to do in order to reconnect the world of industry and commerce to the broader society in which it operates.

“The myth of a radical separation between the two sectors has been allowed to stand for too long,” St James Ethics Centre executive director Simon Longstaff writes in a recent report.

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