Select Committee on Environmental Audit Appendices to the Minutes of Evidence


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, ( or from Michael Gill ( In due course we will be happy to attach the document (6 pages) for the committee's public record.


  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 been frustrated.

  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—conf/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 contract.

  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 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.


  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 another.

  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 development targets.

  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 to:

    —  (a)  whether The ET scheme could provide an effective frame work for advancing the Sustainable Development Agenda;

    —  (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 introduction.

Michael Gill


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

March 2002

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