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Environmental and social issues can be just as vital to company success

The nosedive in Lonmin’s share value over the last week is proof that the environmental, social and human rights activities of companies are linked to their financial value.

Lonmin's Marikana platinum mine.
Lonmin's Marikana platinum mine. Photograph: Getty Images

Companies have traditionally been less willing or able to make a business case for their social obligations – to people, communities and wider society – than they have for their responsibility to the environment.

Moral commitments to the environment can often have tangible cost benefits; urging customers to switch off lights and appliances reduces gas and electricity bills for customers, while asking people to switch off taps or use the same towels for an entire hotel stay conserves water and lowers costs.

By contrast, exercising due diligence, conducting human rights impact assessments, consulting with and adjusting large scale projects to meet the needs of local communities and paying the living wage are all more difficult to sell to a board because the short-term advantages and profit-making potential are less obvious. What is obvious is that such measures can engender a significant cost in the short-term.

The solution - long-term cost benefit analysis - is discouraged by the nature of our financial markets but increasingly companies are beginning to discover that the benefits of long-term responsibility are no less tangible and significant when they arise: costs such as delays and disruptions of operations; problematic relations in local labour markets; insurance and security; reduced output; diverted staff time and, perhaps most significantly in this case, reputational damage.

This week’s events at Lonmin demonstrate that the markets understand this too.  There is an increasing recognition that environmental and social factors can have a material impact on returns and should be a greater priority for companies.  In the aftermath of the financial crisis, few would dispute the need for more forward-thinking and long-term planning from multinationals and for greater cognisance of the wider impact of business. The Gulf of Mexico oil spill, which forced BP to cancel its dividend for the first time since the Second World War and to report its first annual loss in nineteen years, demonstrated that environmental and social issues can be vital to company success.

Yet there remains doubt in the private sector, and particularly among investors, that Government is willing to offer the expertise, support and clarity to business about their social obligations and how to meet them. Companies who are leaders in social responsibility complain that the playing field is tilted against them, and want to see greater rewards from Government for good behaviour, and greater sanctions for rule breakers. Successive governments have failed to do this.

In May this year I tabled an amendment to the Financial Services Bill, which would have sent a clear signal to companies like Lonmin that such behaviour would not be accepted by the London Stock Exchange. In October, colleagues in the Lords will put forward similar amendments that will clarify the purpose of the stock exchange, allowing the new regulator, the Financial Conduct Authority, to take into account an applicant’s respect for human rights and sustainable development in protecting the integrity and respectability of the exchange.

Richard Lambert, former Director-General of the CBI, wrote in an opinion piece for the Financial Times in June 2011: ‘It never occurred to those of us who helped launch the FTSE 100 index 27 years ago that one day it would be providing a cloak of respectability and lots of passive investors for companies that challenge the canons of corporate governance, such as Vedanta, ENRC, Kazakhmys, Fresnillo. Perhaps it is time for those responsible for the index to rethink its purpose.’

The government has been handed an opportunity to correct the market failure that led to the death of 34 miners last week. It is widely accepted that a more sophisticated understanding of investment risk – one which takes longer-term sustainability issues into account – is urgently required.  If this Government is serious about its commitment to responsible capitalism and sustainable development, both companies and their investors must be engaged in the debate and the stock exchange is uniquely positioned to facilitate this process.