SUSTAINABILITY CHAPTER 9

Outline

Sustainable Development ? 1987: World Commission on Environment and Development (The Brundtland Commission) Our Common Future: Coined the term Sustainable Development: Development that meets the needs of the present without compromising the ability of future generations to meet their own needs

Social and Environmental Sustainability Source: Dunphy, Griffiths & Benn (2007)

A Planet Under Threat means: the population explosion the natural limits to non- renewable resources over-exploitation of renewable resources growing ecotoxicity, threats from nuclear, biological and chemical technologies & catastrophes reduced species diversity incentive systems encouraging waste and pollution environmental warming extreme differences in income lack of a systemic global view

Predicted Social Impacts Associated with increases in average Global Temperature

Stern Report (2006) The Economics of Climate Change Source: Stern Review: The Economics of Climate Change :Fig. 1.4 (2006:8) Rising Atmospheric Greenhouses GAS CONCENTRATION ( Measured in CO2 equivalent) Rising Global Mean Surface Temperatures (GMT) Rising Sea Levels Changes in rainfall variability and seasonality Changing Patterns of Natural Climate variability Melting of Ice Sheets, Sea-Ice and Land Glaciers PHYSICAL CHANGES IN CLIMATE RADIACTIVE FORCING (Change in energy balance) Land use change Emissions Feedbacks including a possible reduction in The efficiency of the land and oceans to absorb Carbon dioxide emissions and increased natural Releases of methane Local and global feedbacks i.e.: Changes in the clouds, the water content Of the atmosphere and the amount of Sunlight reflected by sea ice (albedo) Rising Atmospheric Temperatures Rising Ocean Temperatures (Lagged) Impacts on Physical, Biological and Human systems

The Cost of Inaction? From Finsia Industry Opinion Poll –Q: The UK's Stern Report in 2006 found that "doing nothing to stop global warming will prove far more costly to the global economy than taking measures in the next 10 to 15 years to fight it". To what extent do you agree or disagree with these findings? –A: 89% Finsia members surveyed agreed with the finding from the UKs Stern Report.

Trends Cause Discontinuities and Changes TRENDS EconomicalEcologicalSocio-cultural Interconnectivity Deregulation Accountability Innovation speed Global Trade Access (information, capital) Ageing structure Instability of ecological systems Climate Change Biodiversity Scarcity of natural resources (water, energy, soil) Transparency Healthy living Ageing population Demographic changes Social tensions Urbanization Discontinuities / Challenges Sector / Issue / Markets Sector Challenges Source: SAM Research AG Presentation for Ethos Conference

What Can Be Done? The Norwegian Pension Fund invests its nation's oil revenue for the wellbeing of future generations. With about $460 billion under management, it is one of the world's biggest investors. It also has a strong ethical charter, and that's what has led to its decision to withdraw its $1 billion investment from Rio Tinto. Australian Institute of Superannuation Trustees released a ground-breaking report on super funds and climate change. Carbon Counts 2008: The Carbon Footprints of Australian Superannuation Investment Managers By "carbon optimising" the ASX 200 (overweighting companies that are carbon efficient in each sector and underweighting carbon-intensive companies), carbon efficiency could be improved by 42 per cent without sacrificing returns. super-fund-returns fgz.html super-fund-returns fgz.html

Automotive Manufacturers & Climate Change Impact of increased CO2 measures on profits (EBIT) Source: SAM Research, Changing Drivers Study, October 2003

Share price development of Toyota and GM October 2003 – October 2005 (indexed)

Different transport systems/different vehicles/different engines/different energy There are currently around 32 million cars in China. However the rate of car ownership is low at only 25 per 1000 population. If ownership grew to the world average of 120 cars per 1000 then there would be 156 million cars, an increase of 124 million. If the rate of ownership grew to the American level of 700 per 1000 then China would have 910 million cars, an increase of 878 million cars which is 128 million more cars then currently exist on the whole planet.

The Future of Urban Transport ?

MODEL ELEMENTPOTENTIAL DRIVERS Operating Costs Emissions Trading & Reporting Purchase costs of any additional carbon allowances required, over and above allocation. Exposure to electricity costs. Other costs associated with trading, reporting and compliance. Emissions Reduction Additional (or reduced) operating costs as a result of carbon mitigation. N.B. in many cases, investing energy efficiency achieves a net reduction in operating costs. OtherBuildings compliance costs. Transport costs (longer term). Potential additional costs associated with supply chain risk due to weather exposure (some reported problems already for instance in

Framework for Assessing Company Climate Change Understanding the Risk Investment Decisions: Considerations of liability in investment decision Purchasing Policies Hedging positions Scenario Analysis Managing the Risk Company Exposure Development of Greenhouse gas emissions inventory, both direct and indirect (electricity) emissions for key business units. Greenhouse gas Key Performance Indicators: - Product intensity ( CO2-2/unit of product) - Op cost sensitivity ( CO2-e/$ operating costs) - Equity exposure, through investments - Past exposure - Future exposure Value Chain Exposure missions' associated with supply & product chain, e.g. transport, energy intensive outputs; Differential exposure from Annex-1 & non-Annex-1 suppliers Abatement Opportunities: Identification of abatement opportunities Development of marginal cost curve for abatement Supply chain potential Competitor Exposure Competitor exposure Substitute exposure Opportunities

GREENHOUSE GAS CHEMICAL FORMULA PRE-INDUSTRIAL CONCENTRATION (ppbv) CONCENTRATION IN 1984 (ppbv) MAJOR ANTHROPOGENIC SOURCES Carbon dioxideCO2278,000358,000Fossil fuel combustion land-use conversion Cement manufacture MethaneCH Fossil fuels Rice paddles Waste dumps Livestock Nitrous oxideN2O275311Fertilizer use Industrial processes Combustion CFC-12CCI2F Liquid coolants/ refrigerants Foams HCFC-22CHCLF Production of aluminium Sulfur hexafluorideSF Dielectric fluid

SECTORWEATHER RELATER RISKREGULATORY RELATED RISK POTENTIAL OPPORTUNITIES Short – termLong – term Property & construction Higher insurance costsHigher insurance costs or inability to get insurance Decrease in asset value due to changes in flood levels or poor energy performance Increased construction costs due to changes to building codes Minimum energy performance standards Inclusion of energy intensive construction materials into ETS Growth market for energy efficiency/management products and services Growth market for energy efficient construction materials Property energy performance used as differentiation to attract key clients Transport & infrastructure Increased maintenance & insurance costs due to increased storms & flooding Increased construction costs due to changes in civil engineering standards Minimum energy transport performance standards Inclusion of aviation in fuel and airline industry in ETS New water infrastructure Alternative fuels Tourism & tourism related Destruction of major tourism attractions Increased in tropical diseases impacting attractiveness as destination Retail & consumer discretionary Increased volatility in earnings of weather exposed or season dependent products due to increased weather variability As for short termCompulsory energy performance standards for consumer Growth in demand for energy efficient consumer goods GeneralIncreased business interruption due to extreme weather events As for short termNeed to include ETS related assets and liabilities in financial accounts Increased electricity price

Business Drivers Employee values & beliefs Corporate governance Ethics Extended producer responsibility Management & reporting standards Codes Market sensitivity to environmental & social issues Global transparency due to electronic media Reputation Linkage of sustainability performance to shareholder value Opportunities for growth of new products & services Materiality

Barriers to Sustainability Sustainability is seen as fuzzy and not relevant to the companys primary business mission The business case for adopting sustainability cannot easily be reduced to monetary terms Commitment to sustainability, transparency, and disclosure may exceed comfort zone Adoption Sustainability is viewed as a traditional compliance issue, rather than an innovation opportunity Lack of accepted standards complicates the measurement of progress toward sustainability Trade-off decisions are more difficult under the broad scope of the triple bottom line Practice

Corporate Hall of Shame 2007

Emerging Business Values The broader role of corporations in society lies in understanding the interdependence between economic growth, social development and environmental protection Gail Kelly, CEO Westpac, 20 February, CSR is rational, enlightened and self-interested business behaviour Westpac, 2006:15. Sustainability is here to stay or we may not be. Niall Fitzgerald, CEO Unilever Climate change has focused our attention on sustainability issues generally and, as an industry, we need to better reconcile the incentives that drive short-term profits with the risks to our economy over the long-term. Stephen Harrison AO, Interim CEO, Finsia:Tip of the Iceberg Report 2006.

Kofi Annan Launches UNEP FI Principles at NYSE 2006

UNEP Finance Initiative

UNEP Finance Initiative: Principles of Responsible Investment Australian Financial Institution Signatories Asset Owners Investment Managers ARIA (Australian Reward Investment Alliance) AMP Capital Investors AustralianSuper Australian Ethical Investment Ltd. CARE Super BT Financial Group Catholic Superannuation FundColonial First State CBUS Superannuation SchemeDrapac Christian Super Five Oceans Asset Management ESSSuper Foresters ANA Mutual Hesta Super Indian Ocean Rim Local Government Superannuation Scheme Portfolio Partners Local Super Statewide Superannuation Trust UniSuper VicSuper Vision Super

Fiduciary Duties DUTY TO ACT FOR A PROPER CAUSE DUTY TO ACT PRUDENTLY Carry out the items Of the trust Act in the best interests of the beneficiaries as awhole KEY FIDUCIARY DUTIES Act reasonably Apply special Knowledge and skill Act with care, skill and Diligence regarding Someone elses investment Consider the suitability Of investments Consider relevant considerations Australia (Fiduciary Duties set out in case Law and statute) Diversity Take proper advice Canada and UK (fiduciary duties set Out in case law and Statute) US (fiduciary duties case law and federal And state statute) SOLE PURPOSE TEST MODERN PRUDENT INVESTOR RULE Source:Freshfields,BruckhausandDeringer. A legal framework fortheIntegrationof environmental, social and governance issues into institutionalnvestmentOctober 2005.UNEP Finance Initiative Innovative financing for sustainability.

Institutional Investor Voting

Evolving CSR Standards Architecture Source: Allouche (2006). Corporate Social Responsibility; Concept, Accountability and Reporting.

Corporate Strategies to Deliver Value to Society

Rejection Non-responsiveness Compliance Efficiency Strategic proactivity The sustaining corporation The Phase Model From Dunphy, D., Griffiths, A. and Benn, S., Organisational Change for Corporate Sustainability, Routledge, London and New York, 2003; revised edition 2007)

Model of Sustainable Value Adapted from Hart and Milstein 2003

Growth of SRI Investment Assets in Australia Source: Ethical Investment Association (EIA) 2006 SRI Benchmarking Survey

Source: Jed Emerson (2006)(See Blending Economic and Social Value