Letter from the London School of Economics
Environmental Initiatives Network in association with the Environmental
Investment Organisation to the Clerk of the Committee
Turning Words into Deeds- The potential enabling
role of the UK Financial Sector for the future of Sustainable
Development, both within the UK and internationally
We thank you for the opportunity to make this
submission, written on behalf of the Environmental Investment
Organisation(EIO) in association with the London School of Economics
Environmental Initiatives Network. Both organisations are of an
independent non profit nature, manned by unpaid staff, founded
in 1994 and 1995 respectively and made up of recognised experts
and practioners in their fields.
Because our only resources are our ideas, we
particularly welcome the commitment to open and genuine consultation
that the Government has made in the run up to the Earth Summit.
We believe it is important to create some degree of level playing
field between participants that allows proposals to be judged
on their merits rather than the resources of the organisation
putting them forward.
We would firstly like to bring to the EAC's
attention our experiences in contributing to the Governments Earth
Summit preparations and secondly to ask the members to consider
the relevance of our proposals for the financial sector, which
have become known as the ET Financial Scheme, to the Governments
broader Sustainability Agenda.
The LSE Network hosted a conference on 20 March
1999, in collaboration with Schumacher Society, to debate a document
put forward by the EIO entitled "Environmental Tracking-
An Investment Transformation for the 21st Century?". This
proposal, borne out of the ideas researched for a book written
by a network member with an investment background, proposed a
new model of fund management combining the cost and investment
advantages of the widely utilised "index fund" concept
with the environmental and ethical objectives of the increasingly
popular "SRI" approach to fund management.
Benefiting from the input of a range of distinguished
figures, including Bernard Asher, former HSBC Investment Bank
Chairman, Tony Juniper, Director designate FoE, and Penny Shepherd
MBE, former UKSIF Executive Director and a host of other practioners
in related fields, and after a period of consideration and consultation,
the EIO presented revised proposals to the Network in January
2001, entitled "EIO Response V2". The document is still
subject to revision by a joint EIO/Network working party and therefore
not yet available in its final public form, however, the mechanism
it advocates offers an exciting opportunity to harness the influence
of the financial system for constructive purposes and members
are encouraged to obtain a copy. The report is available from
Nat Holtham at the LSE Development Office, ([email protected])
or from Michael Gill ([email protected]). In due course we
will be happy to attach the document (6 pages) for the committee's
The new proposals have considerably broader
application than the original Environmental Tracking mechanism
and can be described as a macro financial market strategy with
the dual capacity to solve large scale environmental problems
and sectoral bottlenecks. The LSEEIN committee formally agreed
last July to submit the key principles of this new work into the
Government sponsored UNED-UK Earth Summit Preparations, with a
contribution to the "Changing Patterns of Production and
Consumption" workshop consultations in September last year,
hosted by Imperial College, London, and the proposal was included
in the Workshop reports presented to the Stakeholder Forum sponsored
"Its Your Choice" preparatory conference held 20 February
2002 at Imperial College.
Our experience of this process may provide some
insight into the reality of how a small organisation with something
relevant and innovative to say can participate in this government
sponsored consultation process and inform the committees remit
to evaluate the progress of Earth Summit Preparations.
The UNED consultation process has been based
on stakeholder engagement in six predetermined sectors; Energy,
Tourism, Food, Transport, Water and Other Domestic Goods. These
sectoral boundaries were decided at an earlier, invitation only
consultation, headed by the Government Commissioner for Sustainable
Development and confirmed at a Conference held at the LSE 20 March
2001. Because the Network was neither invited to this event nor
aware of its remit until after it had taken place the opportunity
to input on how these sectoral boundaries were arrived at was
missed. As a consequence, our subsequent efforts to have a financial
sector analysis and programme for practical actions for the "city"
included in this Government/UNED-UK sponsored consultation have
A macro financial strategy does not easily fit
into a sectoral analysis by industrial category, because it applies
equally to all of them. Although the Imperial College staff running
the consultation have done their best to fit us into the "Other
Domestic Goods" category, its appearance in the post workshop
consultation document hidden under the heading of "Switching
Taxation from Labour to Natural Resources" rather emphasises
the limitation of these predetermined sectoral boundaries. (See
www.unedforum.org/conf/consconf/domestic goods report
dec 2001 consultation document for the full text. Annex 1
contains the relevant section for this submission.)
Mike Barry, Environmental Manager for Marks
& Spencer and leader of the other domestic goods group, has
taken a very supportive position and has assured us of his best
endeavours to have the matter raised within UNED Stakeholder Forum.
Nevertheless the fact remains that the opportunity
to address proposals that have been designed to impact on the
financial sector has been missed in the consultation process.
Yet, because of its ultimate shareholder authority over the corporate
sector and its capacity to direct new investment resources at
will, the financial sector clearly has more influence over the
workings of the economy than any other. The question has to be
asked as to how in a genuine consultation process on how to change
the production and consumption patterns of the economy, the financial
sector can be left out? And how is a relatively small stakeholder
organisation specialising in how to harness the investment system
for sustainable ecological objectives, meant to communicate its
ideas into this process and ensure they are taken up?
Related to these questions is the timing of
another, parallel "consultation process" which was announced
by the Prime Minister, also in March of 2001, asking Captains
of Industry and stakeholder parties to participate in similar
but separate working groups to those already established under
the UNED process. What the logic might be here of these complimentary
processes is not especially our concern, as a duality of process
would seem on the face of things a healthy approach. John Gordon,
a special advisor to the UNED-UK committee, reported to the Minister
for the Environment at another recent UNED-UK conference (SOAS
22 January), his own questions as to what the compatibility of
these two processes was meant to be.
What has concerned us is that under this "captains
of industry" led consultation process a Financial Sector
has managed to appear. Its importance was reiterated by the Rt
Honourable Michael Meacher in his November presentation to the
UK Social Investment Forum agm, who highlighted very vigorously
the crucial role that the city of London can play in advancing
sustainable development worldwide and went on to announce the
appointment of Forum for the Futures Centre for Sustainable Investment,
as the manager of the consultation contract for this sector, in
the same way as Imperial College managed the UNED consultation
This new initiative was coined by the Mr Meacher
as the London Principles for Sustainable Finance. To what extent
this was ever meant to be a genuine and open "consultation
exercise" is not clear, but the process has clearly been
an invitation only affair with a predetermined agenda relating
to best existing practice in the UK, rather than addressing new
proposals for the sector. Interviews with approximately 40 selected
parties were followed by a one day workshop session, under "Chatham
House Rules", at Chatham House London last year, again by
invite only. It is difficult to see how this DEFRA endorsed(City
of London Corporation sponsored) financial sector consultation
can qualify as a genuine stakeholder consultation or engagement
exercise, if indeed it was ever meant to be.
The resulting report is available at www.forumforthefuture.org.
From an initial reading, it is a welcome statement of encouragement
for the many positive trends that have been emerging very slowly
over the last 10 years. It does not in itself appear to provide
for any new mechanism to guarantee the rapid uptake by the wider
financial community of the sustainable development agenda which
we can all expect to be articulated in great detail in Johannesburg
later this year.
One cannot help but draw the conclusion that
a closed shop "you scratch my back I'll scratch yours"
mentality is at work here combined with a reluctance to explore
strategies that could be perceived as "rocking the boat",
however constructive or relevant they may be.
It risks being yet another missed opportunity
to truly galvanise a pivotal sector into action. The single unanswered
question for the environmental movement and the sustainable development
debate, which is the same question that has existed since these
problems were first identified over 30 years ago, and which was
equally clear at Rio in 1992, is by what mechanism will all the
noble intentions to make changes for the better be achieved?
A mechanism means a guaranteed practical route
for effecting a change within a given time period. Given the stated
urgency of our problems, a realistic 25 year time frame to effect
a significant world wide change is required.
In our view, short of an international political
dictatorship, this mechanism can only be found via the harnessing
of the international financial markets. An effective mechanism
in that place could affect every sector in every country, within
a 25 year time period. Provided that mechanism has sufficient
appeal to be taken up on a voluntary basis by the worlds leading
investment management groups.
Our assertion to this committee is that the
mechanism referred to earlier in this submission, EIO Response
V2, is capable of fulfilling that criteria.
We invite the EAC, as members familiar with
issues of efficiency and speed of action in assessing proposals,
to consider whether the EIO's ET Financial Strategy offers the
realistic prospect of maximum effect in the shortest amount of
time. If it does, then surely it has an important role to play
in terms of environmental(and possibly wider)problem solving.
We cannot expect captains of industry, whether
they be business or financial leaders, to suddenly lead their
industries into bold new leaps. They are responsible for managing
individual companies within the confines of a competitive market,
not solving their industries problems, never mind the worlds.
They have to be provided with a framework from outside, one which
everyone is equally subjected to, and be judged on how they respond
to it. If you ask the leaders of an industry to create their own
framework for change, they will either suggest very little or
only support the change that suits their particular corporate
interests. This is not going to solve the environmental crisis.
If members are able to satisfy themselves that
the proposed ET Strategy does indeed offer a route for rapid and
global change within a foreseeable time scale, then the question
arises as to what effort the UK Government is prepared to make
to ensure its take up, given the number of proclaimed ecological
objectives the Government is committed to fulfilling.
Our suggestions would be one or preferably both
of the following.
The first is to set an example by participating
in the proposed Environmental/Ethical Stakeholders Panel that
is an essential lynchpin of the administration of the proposed
International Voluntary Financial Scheme. The panels principal
role, namely the exercise of voluntarily committed voting rights
over large companies in matters of environmental remit, is based
on the creation of a balanced business/financial/environmental/ethical
stakeholder body whose membership could include in an advisory(i.e.
non voting) role a representative of each of the main political
parties. This would be part of its "roundtable" approach.
However, as will be clear from the details of the proposals, the
key attribute of this roundtable is that its authority is derived
from a financial mechanism that has real clout, indeed the ultimate
clout, of appointing or dismissing boards of directors.
This authority, under our proposals, can and
will be accomplished by a purely voluntary financial sector initiative.
We are quite convinced now that there is enough headwind behind
the green/ethical/sri/csr investment debate for this scheme to
be taken up, once it is clearly put on the table, with clear and
transparent rules of eligibility, membership and administration.
To lead by example and indicate its willingness
to place an observer/representative on the new panel would be
the first step of assistance the Government could take.
Its second step could be to give active and
serious consideration to applying a modest fiscal support to the
scheme, under the same principle and for the same reasons that
the Government seeks to offer a fiscal stimulus to renewable energies,
organic farming etc . . .
If the committee recognises the ET Financial
Scheme as a viable route for achieving widespread progress on
the sustainable development front, then it ought to be perfectly
compatible to ask for some incentive, however modest, to encourage
eligible funds to join the scheme. It cannot be logical to espouse
the virtues of green taxation polices(echoed for many years now
in the environmental debate) and not apply the same principle
to the financial sector, the ultimate starting point for most
of these problems.
In regard to this second point, it is noteworthy
that the aforementioned Forum for the Future Interim London Financial
Principles Report appears to specifically disavow the use of any
taxation incentives for green/SRI finance initiatives, with the
suggestion that this would indicate to consumers/investors they
were somehow being sold an inferior product.
There is no evidence of this happening with
organic food or renewable energy, on the contrary it is perceived
as perfect good simple sense to fiscally encourage what is needed.
What is the logic of applying a different logic to finance?
The point perhaps is a reminder of the limitations
that conflicting obligations on leaders of particular companies
can cause when asked by the Government to develop proactive strategies
for their industries. Business leaders are first and foremost
responsible for running large organisations against their competition.
Can we really expect them to put the needs of the whole industry,
never mind the wider world, first? Surely, the Government ought
not to be surprised if the result is change that has at least
one eye on the interests of the particular businesses those company
heads are responsible for.
THE SRI INDUSTRY
In the case of the current London Principles
Report, the ambiguity over a fiscal incentive for SRI is more
likely explained by a reluctance to have an honest debate within
the industry as to what kind of funds genuinely deserve a "green
incentive". In understanding the SRI field and the views
that its participants may offer, one has to face the uncomfortable
fact that there is a bias in favour of the kind of financial products
that have already been developed and marketed.
No body wishes to admit that the screening/exclusionary
ethos of ethical SRI investment over the last 25 years might actually
be incompatible with the positive engagement minded strategies
of ownership. Yet, in our analysis, we can see no structural benefit
to the wider workings of a sustainable economy coming out of the
traditional Ethical/SRI fund. This is principally because they,
like their conventionally managed non ethical/SRI counterparts,
being based on the principle of screening, selection and exclusion,
forfeit any routes for shareholder influence over the vast majority
of companies. Given the retail investment market is almost exclusively
made up of such funds, difficult matters such as this would have
to be fairly squared up to before such funds could claim to be
eligible for some kind of competitive tax advantage.
On the other hand, a pure index fund committed
to the proactive use of voting rights for environmental purposes
under a transparent and independently administered scheme, would
have a very strong case for benefiting from a minor tax incentive,
relative to the competition. At the moment, the very considerable
fiscal subsidies made available to the investing public for existing
investment products make no effort whatsoever to encourage constructive
green investment strategies. A clear example of unjoined up Government
strategy with the right hand saying one thing and the left doing
Such is the highly contentious nature of the
UK SRI scene, yet these are the kinds of issues the committee
would have to familiarise itself with in order to make informed
recommendations on how the Government might encourage and harness
the influence of the financial system in pursuit of its sustainable
Thinking "outside of the box" is a
pre-requisite for making a quantum leap from where we are now
to where we need to get to. There has to come a moment of truth
in a debate where words do have to be turned into deeds and sacrificing
sacred cows may be required in order to get there.
We include for the committees information an
Annex 2 detailing the history of our efforts since 1994, including
two previous submissions to Government departments, listing whom
we have approached and when.
The committee may wish to note that our latest
proposals recently attracted the support of a senior UN Director,
Dr Arthur Dahl, head of Coral Reef Unit, who in a robust lecture
at the LSE last October, entitled "Beyond Economics-Paths
Towards Sustainable Development", expressed the view that
"Ethics may even have a part to play in something so basic
as the market mechanism and we should look to ideas such as the
international voluntary financial eco label. We need to
find ways to help those in business who want to make it more ethically
responsible environmentally and socially."
In a similar vein, Professor Anthony Giddens,
Director of the LSE, opening his submission to the 20 March 1999
conference noted that, "The LSE has never been frightened
of new ideas and it is highly appropriate that the potential
of Environmental Tracking should first be considered here
in the Hong Kong Theatre".
Professor Herbert Girardet, a leading ecological
campaigner and contributor to the Earth Summit Preparations, wrote
in his foreword to the book from which this idea has originated,
"I believe that here is a tool could be as sharp as a Samurai's
sword, even if it is kept in its sheath much of the time . . .Environmental
Tracking does have real potential for getting the stock market
and therefore the economy to change its behaviour patterns".
Support is growing for this approach, as the
urgency of the problems it is designed to tackle become more manifest,
and the need for a direct route to solve them more obvious. The
rapid rise in investor interest(institutional and retail) in the
sustainability agenda offers a unique opportunity and we urge
the committee to take a similarly robust view of how to break
the log jam of talk and debate without action.
Encouragement is required if these proposals
are to be capitalised on rather than lost in the pollution of
information overload. It is certainly not within the EIO's or
LSEEIN's resources to put such a scheme into practice, or to be
able to indefinitely bring it to the attention of those who could.
The ET Voluntary International Financial Eco
Label Scheme (The ET Scheme) is an enabling mechanism designed
to capitalise on the financial sectors macro influence over the
economy. It does not prevent anyone else's agenda from being promoted.
On the contrary, it merely seeks to ensure that whatever environmental
or sectoral objectives are espoused by interested stakeholder
groups are actually supported by a delivery mechanism. Beyond
calling for a balanced stakeholder input into such a mechanism,
neither the EIO or LSEEIN has any other agenda in relation to
particular environmental or social priorities which might be advanced
by implementing the scheme
We hope the EAC will give due consideration
(a) whether The ET scheme could
provide an effective frame work for advancing the Sustainable
(b) what the advantages of operating
both in tandem but independently of Government might be
(c) how it might be replicated
on an international scale, albeit with plenty of capacity for
flexibility and learning; and
(d) whether the Government might
be asked to obtain some endorsement at Earth Summit 2002 for its
Disclaimer: Readers should note that the views
expressed in this document do not necessarily represent those
of all LSEEIN committee members, the LSEEIN's wider membership
or the London School of Economics and Political Science