This article titled “Cleaning up the Global Compact: dealing with corporate free riders” was written by Jo Confino for the Guardian Professional Network, for guardian.co.uk on Monday 26th March 2012 16.47 UTC
If you want to know whether greenwash is alive and well, look no further than the thousands of companies being thrown out of the world’s largest voluntary corporate sustainability initiative, the UN Global Compact. More than 750 businesses, including major corporations in Europe and America are likely to be kicked out in the next six months alone, with hundreds more to follow. These are on top of the 3,100 businesses already delisted in the past few years.
Executive director Georg Kell is on a mission to clean up the organisation and ensure that members are building sustainability into their core activities and not using the Global Compact for PR purposes. While some companies have been removed because of bankruptcies and mergers, Kell says he is dealing with “free riders who joined but had no intention to stay engaged.”
Non-governmental organisations have long criticised the Global Compact, which promotes 10 principles in the areas of human rights, labour, the environment and anti-corruption, because it has no effective monitoring and enforcement provisions.
They also accuse businesses of using it to oppose any binding international regulation on corporate accountability and for benefitting from the Global Compact’s logo, a blue globe and a laurel wreath, which is very similar to the UN logo, while continuing to perpetrate human rights and environmental abuses.
Part of the problem, Kell acknowledges, was of the Global Compact’s own making. Expectations about engagement a few years ago meant a chief executive statement and “some kind of commitment to implement sustainable principles.” Kell says this has been tightened up with the development of several engagement tools and that companies are being clearly marked out if they are at an early or advanced stage of reporting.
In support of Kell’s outing of companies which are not meeting minimum reporting requirements, a coalition of global investors from 12 countries managing over $3tn (£1.9tn) of assets, recently wrote to 29 large-scale Global Compact members, with a combined market capitalisation of $136.9bn, to put pressure on them to start producing progress reports.
Kell is anxious to act because he recognises that the corporate sector is moving far too slowly to deal with the enormity of the social and environmental challenges heading this way.
He puts the lack of progress down to company CEOs not liking to change and the fact that many thrive on perverse incentives.
“If the business model is doing fairly well you do not want to rock the boat,” says Kell. “In other areas it is true to say the business case has not penetrated down through organisations’ subsidiaries yet. It is understood at CEO level and headquarter level but to drive the sustainability agenda through the value chain is a tall order.
“The other barrier is the operating environment. The fact is that in many parts of the world the enabling environment for business is not well developed. It has to do with corruption and violence and the way that power is managed for the benefit of the few.”
Kell is also openly critical of conservative business organisations that are seeking to prevent progress by trying to stamp on modest proposals at Rio+20 such as mandatory reporting for companies. He recognises there is a battle between progressive and conservative businesses and says what a different world we would live in if “all chambers of commerce had been called chambers of corporate responsibility.”
Despite the delisting exercise, which Kell had to force through against reactionary forces within the Global Compact, it still has more than 5,300 participating businesses from over 135 countries and is signing up new businesses at the rate of around 100 companies every month. One reason Kell gives for this renewed interest is that the financial crash has forced companies to recognise they need to be more resilient.
“It has pushed business into a reflective mode and a recognition they need to move beyond philanthropy and looking good,” says Kell. “Now it’s going to the core of how I make my company resilient and fit for the future. How can I prepare for the next shock and how do I move to a long term value creation space rather than riding the high risk speculative fashion trend. The financial crisis was a huge boost for the Global Compact and continues to be so.
“On the investment side, before the financial crisis, analysts had no time for us. I can tell you of board meetings when institutions on Wall Street said it was nice what we were doing but they did not have time as they had to go back to the office and make big money right now. That was the kind of mindset. Now there is a realisation that environmental, social and governance issues affect long-term performance. Investors are still lagging behind the real economy, but that gap is closing and that is great thing.”
Despite the rise in companies joining the Global Compact, Kell himself points out that only 40% of the 500 largest global companies are members and just 10% of multinationals. On top of this, most have just started the journey with very few in a clear leadership position. In the last year, of the near 4000 companies that submitted progress reports, only 5% were considered to be at an advanced level.
“Many in our movement do create change and some of the work is spectacular such as the national efforts on anti-corruption by our Indian and Brazilian networks,” says Kell.
“But even in our strongest markets, the Global Compact is not yet at scale. Only when we have critical mass at country level will corporate sustainability lead to the big transformation. From our angle, we would need at least 20,000 active participants to make global transition inevitable.”
Over the last eight months, Kell has been concentrating on preparations for the Rio+20 conference, which has involved working with networks in more than 80 countries.
He recognises that economic incentive structures must be realigned so that sustainability is valued and profitable and that it is imperative that the corporate sector needs to value externalities, such as ecosystems and biodiversity.
However, with the chance of radical change at Rio being highly unlikely, the Global Compact is setting its sights a lot lower, concentrating much of its resources in seeking support for a global policy framework for business to annually disclose sustainability information in their annual financial reports or other reports – or explain why they do not.
Kell admits that reporting is no silver bullet, but says “that if Rio comes to an understanding on the future of disclosure and there is genuine consensus behind this and it is supported by governments, it can go a long way to drive corporate sustainability and get the 90% who currently do not report into the fold.”
What gives Kell nightmares is that Rio+20 will end up sending the wrong signal to companies if governments do not start to act together.
“I know that multilateral decision making is in a deep freeze these days and we are facing difficult times,” he says. “We have the fallout from the financial crisis, the sovereign debt crisis, many countries are preoccupied with their own affairs, we have the rapid shift of economic growth and power from the traditional centres towards the east and the south while global institutions are still catching up with that, so there are many challenges on the political front.”
He also points to the fact that the two largest powers, the United States and China, are facing leadership elections which will weaken their ability to act decisively.
But Kell is staying optimistic and hopeful: “If governments were to agree some fundamental principles on green growth, the need for natural capital evaluation, agree to adopt incentive structures to shift towards a more sustainability orientated reward and punishment system, and if governments agree to a couple of collaborative platforms then I would say this is a great beginning.”
Even without government support, Kell believes that collaboration and innovation within the private sector can help create solutions to many of the world’s problems.
He says it is already possible to run zero carbon transport systems, produce decentralised clean energy, build sustainable livelihoods at village level, and conserve 80% of the water usage in agriculture.
Despite this potential for change, Kell, like many others who are engaged in the field of sustainability, worries that it may take an environmental disaster of epic proportions before governments and business really face up to the challenges of climate change.
“Mother nature will impose on us a change of course and will force us to accelerate our adoptive flexibility towards a new environment,” he says. “The sooner we start the journey the lower the cost and the bigger the benefits.”
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