Dieselgate: what governments did, didn’t and should now do

Even the most cynical of corporate critics are being surprised at the revelations from Volkswagen. What does it also tell us about the role of governments?

The Volkswagen crisis has been escalating since September, when the company admitted that it had installed so-called ‘defeat device’ software in 11 million diesel vehicles so they appear to meet air-quality standards for nitrogen oxide, a gas which poses a threat to human health. The latest twist came this week when it admitted to understating CO2 emissions for about 800,000 vehicles sold in Europe and overstating their fuel economy.

What started in one market (the USA) just with diesel engines has multiplied: more markets, more fuel types, and more brands, with Audi and Porsche now implicated. So far no other manufacturing groups have been found at fault. However the regulators are circling, while the weakness of their testing is under scrutiny too.

VW’s share price has dropped 40% since September, destroying some €35 billion of shareholder value. Direct costs continue to mount – now estimated at €8.5 billion in fines, compensation and rectification, with unquantifiable long term damage to the brand. In academic circles, proof of the so-called ‘business case’ for corporate social responsibility is much debated; what is surely no longer in doubt is the cost of irresponsible actions.

Aside from annoyed regulators and outraged drivers, others are not letting a good crisis go to waste. For example, Greenpeace is cannily using the affair to drive take-up of electric vehicles – with a specific demand to VW to develop a “mass-market electric car that families can afford”. That’s both smart campaign tactics and astute advice to VW who certainly will need a game-changing story beyond “we’re sorry” if they are to recover their reputation.

And what of governments themselves?

What they did right was pursuing testing and issuing violation notices, at least in America, where the EPA (the US agency to protect human health and the environment) has led the way. It was this action that uncovered the wrongdoing: not VW’s ethics rules or a whistleblower, nor its own sustainability reporting and assurance, nor external scrutiny from the legion of rating and ranking agencies like DJSI.

What governments did not do, at least in Europe, was act swiftly on the available evidence. We’ve known for a decade that the real-life impact of diesel was below theoretical improvements in emissions. In my previous work as a London Assembly member, I was critical of the European Commission which was slow to enforce its environmental directives. I was questioning the London transport authorities as long ago as 2006 on action needed to improve air quality, where diesel was the principal villain. (So external rating and ranking agencies should have known of the problem, if they had gone looking.)

What should governments do now? One thing is to be a lot more inquisitive when their citizens’ health is at risk. Another is to be a lot less trusting about corporate culture that lets bad behaviour go unchallenged, even if one accepts (which I don’t) that it’s all down to a handful of rogue engineers.

Like Watergate before it, Dieselgate can teach us much beyond the specific cause célèbre about underlying corporate systems and a damaging lack of accountability.

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Double-whammy: young women and the potential for progress

With attention focused on the launch of the Global Goals in New York, let’s put the spotlight on gender inequality and how companies can profit from parity.

Among the 17 new sustainable development goals, it’s no coincidence that women are the only demographic group to have a single goal dedicated to them. Goal #5 pledges gender equality, and calls out the role of young women in particular.  That’s because empowerment here will unlock progress on many of the other goals.

Despite some recent improvement on legal rights, the economic disparities between men and women remain stark. To cite just one piece of evidence – from the Food and Agriculture Organization of the United Nations – if women had the same access to productive resources as men (and they comprise 43% of labour force on developing country farms) food yields would rise by 20–30 percent. That’s a lot more mouths fed and families lifted out of poverty.

It’s no surprise then that some companies have made empowering women one of the main pillars of their approach – such as Coca-Cola, under the tagline #5by20. Coke says the role of women is one of the three issues “that will more shape or define the 21st century” than any others. It has committed to enable “the economic empowerment of 5 million women entrepreneurs across the Company’s global value chain by the year 2020”.

Walmart – the world’s largest company by revenue and biggest private employer – has gone further and committed to source $20 billion of products from women-owned businesses in America. Go online in the US and you can select your shopping basket from women-owned suppliers.

Unilever has long recognised that young women – schoolgirls in particular – are a key agent for delivering its health and hygiene programmes such as Lifebuoy handwashing and for meeting its one billion goal. And last year it added a new pillar focused on women’s livelihoods to its legendary Sustainable Living Plan.

Just last month the McKinsey Global Institute took a look at the subject – and put a price tag on the opportunities being missed. Its report, The Power of Parity,  estimates that advancing women’s equality could add $12 trillion to global growth. Actually, that number isn’t even at the top end of its number-crunching estimates. India and Latin America stand most to gain.

And here at Corporate Citizenship, we’ve just published our own advice on what the global goals mean for business, From My World to Our World, the culmination of a 17 week odyssey of analysis in the run-up to the New York launch. If companies want a double-whammy of benefit, focusing on goal number 5 is a great place to start.

This article also appeared at Responsible Business blog

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From my world to our world

The forthcoming SDGs offer opportunities for companies to reframe the debate about the role of business in development.

Itinerant diplomats have long had the last weekend in September pencilled into their diaries for New York, before moving on to Paris in December. Their business? An international deal on climate change before year end, and agreement on a new set of development goals by the end of this month.

The build up to New York started at Rio+20, the UN Conference on Sustainable Development, back in 2012. More than a year ago CC Briefing was commenting on the potential (Global goals, fewer squabbles) I was optimistic that the role of the private sector would be hard-wired into the final formulation. More recently it’s clear that some companies are already seeing opportunities, with Clare Griffin from GSK noting that partnership and innovation will be key, when attention turns from the ‘what’ of the goals to the ‘how’ of delivering them.

For the last three months, my colleagues and I have been examining each of the proposed 17 new sustainable development goals in turn, looking at the implications for business. All the preparation since 2012 has fostered a large degree of consensus among the 193 members of the United Nations, so that the Transforming Our World agenda is now largely settled.

And what are the implications for companies, once those diplomats have signed up their governments? My belief is the framework is clear enough, broad enough and robust enough to create a new standard against which the commitment and performance of business can and will be judged.

For some, that will prove painful, especially if they hold to old notions that the business of business is business and no more.

Others will seize the opportunity to move from focusing on their own preoccupations and priorities towards understanding how their contribution fits the bigger picture – in short, a shift from ‘my world’ to ‘our world’. They’ll still need to work out what they themselves are contributing and what more they can do by working in partnership.

But now they can legitimately say what others must do and what changes are needed, notably governments, if we are to close the gap over 15 years between today’s reality and the promise of the SDGs – a world free from the tyranny of poverty, with life on this planet protected and with peace and justice secured.

That’s not a bad outcome from a long weekend’s deliberation in New York.

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Human rights: help or hinderance?

Many people misunderstand what human rights really mean in the modern economy, and the language we use doesn’t help.

Mention abuse of human rights and most ordinary people will think of Amnesty International, dictatorial governments and appalling torture. So they might wonder why a company would produce a report dedicated to its human rights impacts, as Unilever has just done – the first to be fully aligned with the UN Guiding Principles Reporting Framework launched last year. The more clued up might then think about extended supply chains and wonder about prison and slave labour, and see a connection with governments like China.

Other people might see beyond government abuse and conceive of human rights as all about the individual and their rights. Fed by tabloid scare stories, they might even see human rights as about protecting individuals, like suspected terrorists, over the common good – and think companies like Unilever are in league with the European Court and other “dangerously” foreign tendencies.

Actually, think about human rights in the context of companies and the global economy, and you rapidly come down to money. In fact Professor John Ruggie – who has played a seminal role in the UN Global Compact, in the Millennium Development Goals and latterly as the UN Secretary General’s special representative for human rights – says the need for corporate action on human rights stems directly from the “massive gap” between the power of companies in a global economy and the ability of societies to deal with the impacts that creates.

He argues that markets need a framework of rules in which to operate and for participants to thrive, and that current governance frameworks – public law, civil governance and corporate governance – are inadequate. It’s an important argument, which he sets out on Business Fights Poverty here.

If you doubt that human rights comes down to economics, consider two aspects of recent economic history that created massive abuse. The first is the abolition of slavery, highlighted in a recent BBC programme, Britain’s Forgotten Slave Owners, when the government compensated British slave owners for loss of their ‘property’, to the tune of £17bn in today’s money, whilst the slaves themselves received nothing. The second is colonialisation; comments in May by Indian MP, Shashi Tharoor, during a debate about Britain’s debt to her former colonies, went viral with millions of YouTube views. His economic case for reparations is set out here.

Returning to Unilever’s groundbreaking report on its implementation of the UN Guiding Principles on Business and Human Right, look at the eight issues it identifies as most salient and you’ll soon see the economic drivers – including fair wages, forced labour, land rights and working hours. The report itself covers strategy and policy, moving from compliance to promotion, and charting the path ahead. Well worth a close read by anyone trying to comprehend what this all means to a global corporation.

From slavery to modern international capitalism, human rights comes down to who gets the money and how they go about acquiring it. Don’t let the language stand in your way.

This articles was also published by IMPA ACT

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Green Bank goes private

Mike Tuffrey reflects on the continuing tussle between public and private ownership

Britain’s new Conservative government made one decision last week that wasn’t promised in its manifesto – moving the Green Investment Bank into the private sector. Instantly dubbed a money-raising privatisation, the Bank itself prefers to talk about bringing in private capital and seeking new investors.

A bit of background first. The UK Green Investment Bank (GIB) was the world’s first investment bank dedicated to greening the economy. Established in 2012 by the coalition government, it had public funding of £3.8 billion to invest in innovative, environmentally-friendly areas “for which there is a lack of support from private markets.”

The Bank’s current management strongly supports the move out of government control. They like the idea of not being limited by public sector borrowing limits. They say they’ll be able to invest in a broader range of projects as previous EU state aid rules won’t apply if it’s at least 70% privately owned. They also say that, whoever the owner(s), its corporate purpose remains defined in law around five green objectives including GHG reductions, resource efficiency and biodiversity.

Critics say that raising additional finance doesn’t require full privatisation. The original logic for public intervention still holds good, as the mainstream financial services industry doesn’t yet have the risk appetite for what’s needed. And anyway, selling up this soon fails to realise the full value of the original investment. In other words, it’s more about politics and deficit reduction, and less about securing long term change towards a greener economy.

Regular readers will know I’m not an automatic private good / public bad person, and instead favour a judicious mix of both. On this one, I tend to agree with the critics. It was good, therefore, to hear M&S CEO, Mark Bolland, speaking thoughtfully about partnership with government at this week’s Plan A 2020 progress update event. Companies need governments and want to work with them, he said. But electoral cycles delay things and business can’t hang around waiting – often they have to push ahead.

He didn’t mention Heathrow, the other big story this week, where business wants action to get the economic benefits, and needs government to prioritise that over the social and environmental disbenefits. Think jobs versus noise and pollution. That one will run and run.

Meanwhile a final thought on the GIB sell-off. Logically, if the City does indeed now ‘get’ the green investment case, this should yield a healthy premium over normal banking valuations. Green investing is the future of making money, surely, in a resource constrained world? Conversely, if the price falls short, that confirms why GIB should have stayed in the public sector a while longer.  We’ll know by the end of the year.

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Poverty: big, bold and very challenging

SDG #1: End poverty in all its forms everywhere

Wow! Let’s say that again: The SDG number 1: End poverty in all its forms everywhere. And in just 15 years; by 2030 like the other proposed Sustainable Development Goals being debated, and hopefully agreed by the United Nations in New York this coming September.

Dig into the details of this first goal and it becomes more doable. Eradicate extreme poverty (less than $1.25 a day), halve other forms of poverty according to national definitions, build resilience and so forth.  And actually, this builds on huge progress already made. One of the triumphs of the outgoing Millennium Development Goals was cutting extreme poverty in half between 1990 and 2010, which benefited 700 million people. But that still leaves 1.2 billion people living in extreme poverty today.

Full marks for ambition, then.

Goal-1

What’s needed now is real recognition of how that MDG success happened, and what will drive the next leap forward. That means economic growth led by business through open global trading, supported by governments. It’s true that two of the later draft goals (#8 and #9) do directly address growth, employment, infrastructure and innovation. And it’s also true that the whole framework of the SDGs is intended to be ‘holistic’, more easily allowing business to contribute. Good to see individual companies actively participating in discussions, therefore, along with representative organisations like WBCSD and ICC working together in the Global Business Alliance (GBA) for Post-2015.

My message to business, however, is don’t just focus on growth, on arguing for a bigger cake. What matters, as well is who gets a slice, and how big that is; in other words how growth is shared.

Companies aren’t comfortable talking about questions of equity. Frankly, they’re very shy about facing facts on pay differentials between the top and the bottom. Or who is getting the money up and down their extended value chains in precarious ‘flexible’ employment. Or how much goes to governments in tax versus shareholders in dividends. Or indeed whether developing countries get a fair deal compared to the rich North.

SDG number 1 is big and bold – but also very challenging to complacent business-as-usual companies.

This article also appeared at Business Fights Poverty is part of a series on the SDGs at Corporate Citizenship

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Less supplicant, more partner

Governments are an essential partner for successful business, even if predicting elections is a tricky business

Last month I commented on the UK general election. The outcome looked too close to call, I thought, and concluded… “one thing is clear, though. All the parties have ambitions for change, and none have the resources to pay for it through conventional tax and spend. Whatever the hue of the next government, it will surely come knocking at the door of companies for help, willing or unwilling.” (For our analysis of the Conservative manifesto, see here, where we noted a resurrection of the Big Society concept and some interesting detail about corporate responsibility.)

This month I want to take the argument a stage further and say that companies should see governments as an essential partner, rather than a demanding supplicant to be held at bay. That’s not to say I accept the full Mariana Mazzucato thesis (The Entrepreneurial State) that it’s governments who are the real innovators and risk-takers. But I do think the much-quoted concept of ‘shared value’ focuses too much on companies and their own social impacts, and not enough on the essential role played by government. To plot a reliable path towards an economically prosperous, social just and environmentally sustainable future, we need a tripartite approach involving business, government and civil society. If you doubted governments are an essential part of the equation, just look at the topics addressed in our guest articles this month – urban sanitation by Neil Jeffrey from WSUP and food security by Anna Simpson from Forum for the Future.

That becomes harder if government is not a stable partner. The UK political outlook may now be more certain, but the picture internationally is less so. The US presidential election kicks off in just eight months with the Iowa caucus in February 2016, and the final vote in November. In Europe, 2017 is bookended with French presidential elections in the spring and German federal elections in the autumn. Meanwhile this year sees major intergovernmental agreements due on sustainable development in September and climate change in December.

For global companies, the sustainable development goals (SDGs) offer a framework which – if agreed as new ‘world goals’ at the United Nations – will transcend the shifting priorities of national governments. Here at Corporate Citizenship we’re embarking on a 17 week effort in the run up to September to analyse each of the 17 proposed goals in turn, asking what they mean for business. You can track our progress here and follow us on Twitter for a weekly prompt.

The case for more joined-up thinking was driven home for me by a recent study by the IMF on the sheer scale of government subsidies for energy, estimated at a $333 billion this year. That’s money governments spend to reduce the purchase price of energy. Where the study broke new ground was in quantifying the cost of the damage done by burning that energy, in air pollution, road congestion and global warming. Calling that a post-tax subsidy, the IMF puts the price tag at a stonking $5.3 trillion – 16 times more. Much of that is paid by companies and citizens, in lost productivity, and by the governments themselves in remedial spending. The IMF modestly concludes “the fiscal, environmental and welfare gains from removing energy subsidies are substantial” – worth 3.6% of global GDP.

Now that’s a prize worth winning from getting government policy-making right.

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Big choices, or mundane concerns?

What the UK general election campaign says about the future for responsible and sustainable business

Here at Corporate Citizenship we’ve been analysing the manifestos of nine of the political parties contesting the UK general election. At time of writing it’s impossible to say which will end up with a role in the future government, save that the pundits predict it’ll be more than one.

But let’s stand back from the sound and fury of the election contest itself, and ask: have the issues that preoccupy professionals working on corporate responsibility and sustainability cut through to the general public?

Most obviously, on concerns about how employees are treated – from zero hour contracts to minimum wages and pay differentials – the parties have traded blows nightly on our TV screens. More surprisingly, in the manifestos at least, detailed proposals on corporate governance, such as gender balance and employee representation on boards, reflect continuing concerns about accountability in big business.

On the other hand, newer issues – such as the circular economy, resource minimisation and sustainable consumption – have barely featured. The LibDem manifesto did include some references to building a green economy, and one if its ‘five green laws’ was on zero waste, but these weren’t central to its pitch. Similarly, the Green Party manifesto sets out an alternative economic vision, but they focused their actual campaign on austerity.

Likewise, no one has put the central issue of climate change before the people, nor sought a democratic mandate for the tough actions needed to counter the threat and adjust to its consequences. Still, if Sherlock Holmes was reading the runes of the campaign, he might observe that on this issue the dog hasn’t barked; only one party (UKIP) has promised to repeal the Climate Change Act, the others preferring to put off the implications to another time.

Ostensibly, the election has been about the big choices facing the future of country, but the campaign has focused on the more mundane concerns of today.  The Greens came closest to offering a radical alternative, but then undermined their credibility by publishing detailed costings of their proposals. The price tag is £250 billion in extra public spending compared to today’s annual total for central government of £560 billion. Few in the world of corporate sustainability think the answer is to leave it to governments and grow the public sector by 50%.

One thing is clear, though. All the parties have ambitions for change, and none have the resources to pay for it through conventional tax and spend. Whatever the hue of the next government, it will surely come knocking at the door of companies for help, willing or unwilling. Those companies committed to a sustainable future need to do a better job in spelling out what’s needed. And then next time perhaps one of the parties will at least find a way to convey that to the voting public.

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Mixed messages, and other election news

Now is the time to tackle carbon pricing, when the oil price collapse will sugar the pill

Britain’s last financial budget before polling day, announced on March 18, included the inevitable pre-election boondoggles. It also sent mixed messages on the environment.

A £1.3 billion cut in taxes to boost North Sea fossil fuel production after the halving in global oil prices predictably had climate change campaigners up in arms. Also included was funding (through complex contracts-for-difference in the electricity market) for a big new renewable energy project, the Swansea Bay tidal lagoon, along with a slew of smaller measures such as another increase in the landfill tax and a boost for ultra low emission vehicles.

Green window-dressing from a business-as-usual Chancellor, perhaps? Or, less cynically, just another example of the messy reality of transitioning from the old economy to a new and by no means yet certain green economy.

One week later came news of another knock-on from the oil price drop: the possible immediate collapse of Closed Loop Recycling, the UK’s principal food grade recycled plastic manufacturer. I visited the plant in Dagenham some years ago while a London Assembly member and am still in awe of the hi-tech machines that take a jumble of mixed plastic waste in at one end and produce pristine PET and HDPE at the other end, clean enough to eat off, literally.

However, with virgin plastic prices currently falling 20% or more a year, according to WRAP, the financial model is clearly under severe threat. In this instance at least, the circular economy risks rapidly switching to a straight line, downwards.

What can be done?

One option for public policy makers is to seize the opportunity of lower oil prices to make a start on introducing a carbon tax. The lesson from landfill is that taxes can make a big difference. That started out at £8 per tonne, climbing steadily to today’s £80, without the economic roof falling in. The ultimate impact has been transformative.

Earlier this year, The Economist newspaper highlighted a recent OECD study on the economic cost of environmental regulations. Straying from the publication’s usual party line, that surprisingly concluded “an increase in stringency of environmental policies does not harm productivity growth.”

What better time to bring in counter-cyclical measures against planet-threatening fossil fuels? Indeed, if not now, then when?

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The state we’re still in – can anything be done?

Thoughtful business leaders will not get much airtime in the coming UK general election.

The countdown is underway. With fewer than 60 days to go until voting, the next few weeks in Britain will be dominated by an increasingly febrile debate from which the voice of business risks being largely absent. That contrasts with the closing stages of the Scottish referendum last year, when companies made a telling and arguably decisive intervention, spelling out the damaging consequences of independence.

At the start of March, one thoughtful business leader – Nigel Wilson, chief executive of Legal & General – gave it a go in a woefully unreported speech to a City audience. His themes were simple: the need to think long term, for business to consider its social usefulness, and for “constructive collaboration across central and local government, regulators and the investment industry to deliver long-term investment, growth and jobs in the new economy”.

With ultra-low interest rates, the time to invest is now, he said. Contrasting “very grandiose schemes”, like the HS2 railway, ‘Boris Island’ airport and the Hinkley nuclear power station, he highlighted ‘slow money’ investments with immediate practical benefit that Legal & General is making, in the likes of private rented housing, student accommodation and retirement villages – very much against the grain of conventional City and government thinking.

References to the social usefulness of business resonate with remarks by Adair Turner back in 2009 about the big banks, and by ex-FT editor Richard Lambert more recently. And those with longer memories will recall what Will Hutton was saying in the run up to the 1997 general election, in his book, The State We’re In. Picked up by Tony Blair in a speech in Singapore, the notion of a ‘stakeholder economy’ briefly offered the prospect of a socially useful model of reformed capitalism.

But New Labour was not about fundamental change, and on getting into government the idea was kicked into the long grass of the company law review. By 2005, in a deregulatory gesture to a business audience, Gordon Brown killed off even the limited idea of an operating and financial review (although in fairness some elements have crept back in subsequently).

Now Will Hutton is back with a new book, How Good We Can Be, reviewed here by Vince Cable’s former special adviser, who brings a world-weary reality check to the diagnosis of the problem as well as the prescribed cure.

Still, Hutton sets out a vision which I for one find compelling, certainly when compared to the thin gruel we’ll be offered in the major parties’ manifestos over the next couple of weeks.  “With technological possibilities multiplying, a wholesale makeover of the state, business and the financial system is needed to seize the opportunities by being both fairer and more innovative”, he argues. “The aim must be to create an economy, society and democracy in which the mass of citizens flourish.”

The question is – will any other CEOs follow Nigel Wilson’s lead with a vision of what could be? Or will they simply line up with the politicians in the yah-boo disputatiousness that passes today for political discourse?

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