As a member of the Trade and Industry Select Committee since 1998, I have come into contact with a number of anti-globalisation campaigners and have used my position to promote a fairer trade regime with the developing world. It is apparent to me that – in international terms in particular – there is a lack of accountability for the activities of major companies with regard to their impacts on communities and the environment.
The system is currently heavily weighted towards the interests of the shareholder and fails to recognise employees, consumers and local communities as valid stakeholders in the interests of a company. I am a member of the CORE Coalition, a group of organisations pushing for greater company disclosure and accountability. CORE is not trying to make the UK a difficult place in which to do business, but to encourage a longer-term view of what constitutes corporate success. If a company does well financially in the short term at the expense of local communities, its employees and its reputation, then its long-term prospects may be less healthy.
Drivers for change
There is a driver for corporate responsibility within the socially responsible investment (SRI) industry. The principle holders of SRI funds are pensions schemes and due to the fact that individual people’s lives are dependent on those funds, they have to do everything possible to reduce risk.
Traditionally, risk and company value has been perceived in financial terms by looking at a company’s balance sheet. But in today’s markets this is no longer adequate. It is estimated by the New Economics Foundation that up to 70% of a large company’s value now lies in intangibles such as consumer goodwill, brand value, employee morale, and health and safety performance. This means that to accurately assess a company’s value and associated risks, it is necessary to have full disclosure of that company’s exposure to social and environmental liability.
This kind of risk is of great interest to investors and potential investors and it would seem sensible to have the same standards of disclosure for environmental and social liability as the FSA demands for financial risks. As we move towards a more holistic view of company performance, developments in SRI are promoting a longer-term view of risk. Transparency in the reporting of social and environmental risks will help companies perform better in the long-term and reduce risk across the whole economy.
Legal requirements
What legislation is driving it? The first is the Pensions Disclosure Regulation 2000, an amendment to the 1995 Pensions Act that requires occupational pension funds to disclose the degree to which they take into account ethical, social and environmental considerations.
This regulation has certainly fuelled the debate on CSR – and sparked massive growth in the number of CSR consultants – but the degree to which environmental and social performance has been improved is debatable.
The future could see legislation that will further reduce risk for investors. The Higgs Review of the Role and Effectiveness of Non-Executive Directors recommends a codification of the role of non-executives, encouraging boards to take a broader view of their experience – in other words, looking outside the traditional financial emphasis on experience. The government is expected to encourage boards to appoint non-executives with social or environmental expertise in future, although this is unlikely to be framed in legislation.
However, the next Queens’ Speech is likely to contain the long-awaited Companies Bill, the published draft clauses of which refer to an Operating and Financial Review (OFR) (see p28), that will make reporting of environmental and social risks mandatory for some companies. Although there are a number of loopholes, the OFR does represent a change for which the government should be congratulated.
My bills are not designed to become law, but to catalyse interest and support for a better regime to be implemented as part of the Companies Bill. If we are successful in our negotiations with government, companies over an agreed size will be required to report on their environmental and social impacts in an annual report. Companies will also be obliged to report payments to developing world governments and consult on proposals with major implications for communities or the environment.