Natural Capital - be careful what you wish for

In the run up to the 2012 Earth Summit (Rio+20) the United Nations Environment Programme Finance Initiative (UNEP FI) published a bold statement of its position. It said its members share a common vision on sustainable development that can only be achieved with "a stable and sustainable financial sector as its backbone." It called on financial institutions to integrate sustainability issues into risk management policies and decision-making. While some may take issue with the suggestion that bankers hold the key to a sustainable future, the idea that the financial sector should pay closer attention to sustainability is surely to be welcomed.

One way in which it could do so is described in the Natural Capital Declaration (NCD). Presented to the world communty at Rio+20, it invites private and public sector actors to work together "to create the conditions necessary to maintain and enhance Natural Capital as a critical economic, ecological, and social asset." It suggests that, at present, financial institutions do not sufficiently "understand, account for and therefore value, the risks and opportunities related to Natural Capital." Members of the financial sector, it says, are key stakeholders in future discussions about valuing and protecting Natural Capital.

The Natural Capital Declaration is well meaning. There is a much to be said in its favour. Business and finance should certainly integrate, value and account for their impacts on nature in order to be truly accountable to stakeholders and the wider society in which they participate. Finance and business interests need to do more to understand their direct and indirect impacts on the natural environment, incorporate these into decision-making, and work together to develop integrated reporting of their sustainability performance, on which they should be judged.

A new language for a new agenda?

The NCD marks a new phase in the dialogue taking place at the interface of environmental concern and practical economics. The 2005 Millennium Ecosystem Assessment (MA) offered a useful vehicle to convey the world of business and finance into the environmental debate. By adopting the new vocabulary of ecosystem services and natural capital environmentalists hope to engage policy makers and practitioners on their terms, in language they understand, as they search for common ground upon which their cause can find some much-needed grip.

So the concept of natural capital, beloved by environmental economists, is finding its way into the practice of finance and investment. Is this a good thing? I would argue not. The language of ecosystem services and natural capital seeks to establish a new business-led agenda for protecting the natural world. But it risks alienating at the same time those who prefer to speak in their native tongue. Although the NCD doesn't assume valuation must mean monetary valuation and market solutions, it certainly point us in that direction. Do we really want to go there?

The NCD supports the work of The Economics of Ecosystems and Biodiversity (TEEB) project. The latter originally set out its stall to develop monetary or economic valuation (EV) as a practical tool for decision-makers at all levels. It acknowledges the limitations and difficulties EV faces in capturing all of the values society places on nature. Interestingly, the TEEB for Business report has surprisingly little to say about EV and much to say about other tools for managing risks and opportunities related to biodiversity and ecosystem services (BES). Improving environmental management and performance does not require us to place a price on environmental effects. Biophysical measurements and indicators still have an important role to play in environmental accounting. A sustainable business is not inevitably one that measures everything in dollars and cents. In fact, doing so may deceive us into thinking trade-offs exist where really they do not.

To be fair to the authors of the NCD, they are not suggesting that placing a monetary figure on the environmental impacts of business decisions is the only way to insure they are taken into account. But by couching the environmental aspects of business and finance in terms familiar to the accountant and economist, it does restrict the meaning of "value" to something commensurate with other balance sheet items. In so doing it fosters a commercial attitude towards nature commodified as a business risk or opportunity. 

An ecosystem services and natural capital view of the natural world perceives nature as a flow of benefits and ignores other sources of value. It regards nature as a resource and a means to a human end. It acknowledges the values human beings may bestow or confer on the less tangible cultural or spiritual "services" provided. But it refuses to locate objective value in nature itself. It both risks displacing civic virtue and denies the environmental ethic that motivates many to care for the natural world.

It is vital that environmentalists successfully engage with the world of business, finance and economic policy. We must be prepared to work upstream and tackle the ultimate causes of environmental degradation. But at its root, the ecological crisis is a moral or spiritual crisis. A BES or natural capital approach denies us the richer ethical framework necessary to make proper judgements over competing values and priorities. Pragmatic it may be but should environmentalists really be jumping so enthusiastically on the natural capital bandwagon?

An incomplete theory of value

By referring only to the stock and flow of benefits provided to society by nature we commit ourselves to a particular notion of value. This purely economistic approach views value in instrumental and strictly anthropocentric terms and denies or downgrades other dimensions of nature's value such as its intrinsic or inherent worth; or its existence or preservation value. While a total economic value (TEV) approach to economic valuation recognises non-use values (including existence, option or bequeath values), it can only accomodate these in welfare maximising utilitarian terms which aggregate individual preferences revealed by a willingness-to-pay (WTP).

Many economists are well aware that people don't attach meaning and value to nature in the same way they do to a second hand car. For some this is a technical problem to be solved by better survey techniques and more sophisticated econometrics. For others it reflects a fundamental flaw. Secondly, in reality nature embodies a plurality of possibly incommensurable values which cannot be collapsed on to a single measuring rod - money.

Back in the real world, people express attachments, affiliations, meanings and significance to the natural world in a variety of ways. Those values cannot be quite so easily revealed or stated by observing real markets or creating pretend ones. Finally, by reducing nature and the environment to a commodity for which a price tag should be attached we set the stage for market-based mechanisms to arbitrate on how and where the environment is protected as cost-effectively as possible. We are clearing a path for the further advance of markets across the social landscape. Is this really what the environmental movement wants to see?

The authors of the TEEB Foundations recognised the ethical limitations of EV (Chapter 4) and proposed a framework in which the economic value attached to nature could be assessed separately from socio-cultural values that may require different approaches. Assuming environmental values can be separated out in this way (which they can't), TEEB is not terribly interested in the latter and has ruled them out-of-scope. 

So we are faced with the prospect of adopting Natural Capital as a banner for environmental responsibility and developing EV toolkits for implementing it, as the WBCSD has already done, by disenfranchising those that adhere to "non-economic" values. This seems to be completely at odds with mainstream Corporate Social Responsibility with its emphasis on stakeholder engagement and legitimation. Finance and business it seems is preparing to say, in effect, if society can't express the meaning and value it places on its shared natural heritage in monetary terms we're not interested in what it thinks about it. This sounds like a formula for silencing stakeholders rather than engaging with them.

 

So much for the common good

If the forgoing argument above can be summarised by asking "who's values count?", a second argument against the NCD might ask "whose risks count?". The NCD advances the principle of enlightened self-interest in purely consequentialist terms. Financial institutions, it says, do not sufficiently "understand, account for and therefore value" the risks and opportunities related to Natural Capital. It's pretty clear whose opportunities they are referring to. But are the risks those internal to the business or the risks to wider society posed by environmental considerations otherwise overlooked in business decisions?

The NCD seems to suggest that if environmental impacts of business decisions are properly identified and valued by financial institutions they will take more account of them and therefore make better decisions for society at large. It implies that valuing environmental impact has the effect of internalising the cost.

No necessarily so. A financial institution that attempts to value the social and environmental externalities associated with a proposed investment may certainly choose to modify it decisions in the light of these. But unless a decison-maker possesses a highly sophisticated sustainability appraisal model, these externalities may not have the influence on decisions that natural capital advocates hope for. Such a model would have to correctly identify, measure and monetise all the known social and environmental effects which rebound on the internal financial merits of a proposal within the appraisal horizon. In reality, many of the environmental effects of a proposal may be subject to uncertainty and therefore feature as risk factors, the materiality and significance of which will be subject to a degree of judgement in the appraisal process.

TEEB suggests that accounting for natural capital helps to identify the trade-offs present in business decisions. Perhaps, but it doesn't necessarily resolve the conflict between competing priorities. Neither does valuing the impact on nature or quantifying the associated risks necessarily guarantee success in financial terms. The report of TEEB in Business and Enterprise acknowledges the difficulties in determining the impact of Biodiversity and Ecosystem Services (BES) risk management on the value of companies that undertake it.

Would it be more realistic to look towards environmental policy or regulation to internalise these externalities, for example by assigning property rights or adjusting internal costs through a fiscal instrument that reflects the full social or environmental damage? The NCD instead sees the role of governments to demand better disclosure by companies of their dependence and impacts. It urges them to enforce fiscal measures and incentives to encourage financial institutions to integrate, value and account for natural capital. This is to be welcomed but it is no guarantee of environmentally responsible decision-making.

What about environmental virtue? 

A related problem is that the language of Natural Capital does not really lend itself to alternative appeals to environmental responsibility. It clearly wants business to "do the right thing" on behalf of nature. But it does so by appealing to the benefits it derives from nature and the associated risks to the business if it fails to do so. By restricting itself to a utilitarian, consequentialist framework it severely curtails the scope of its moral power. In describing the responsibility of business in strictly economistic terms, the natural capital approach is a retrograde step back towards business-apart-from-society. Even if businesses do account for the full costs of its business decisions, they are still business decisions. They may still be driven and guided by private, internal goals and their outcomes judged accordingly.

It seems to me that unless business genuinely views itself as a part of society with a wider remit which reflects common goals and a shared conception of the good, a truly sustainable future will remain illusive. Many of those who ply their trade as corporate social responsibility professionals do so in spite of the prevailing cultural values of the businesses they serve. I suspect most authors of sustainability reports see theirs as a higher calling to serve society at large.

These are the shared values that ought to be reflected the character and personal commitments of senior business leaders and key decision-makers. A sustainable future requires an ethic of leadership that embraces a more enlightened role for business-within-society in pursuit of the common good. It is not enough to simply reach for new tools. While an expanded toolkit will give decision-makers the opportunity to act for the common good, it doesn't ensure that they will do so. Widening the scope of reporting and disclosure will certainly help stakeholders and society hold business leaders to account. But the evidence suggests that the greatest perceived benefit to a business of its sustainability programs is its reputation, not its bottom line. That the two are linked remains an article of faith. Business leaders should do the right thing because it is the right thing. New tools help them demonstrate that they have done so.

Disengaging society

If BES and natural capital points us towards economic valuation to help society find the path to sustainability, we are placing a huge amount of faith in economic science. Viewed as social theory, that would be troubling enough. But even if we accept EV on ethical grounds, are the techniques actually up to the job? They place a high degree of confidence in our understanding of complex ecological systems. Such complexity requires sophisticated econometric models to accomodate uncertainty, interdependencies, cumulative effects, and irreversibilities - yet are highly contingent on initial conditions or assumptions. The WBCSD's Guide to Corporate Ecosystem Valuation is as premature as it is misguided.

For others, extending the reach of markets to environmental goods is the next milestone to aim for. Blinkered faith in value-neutral markets denies that there are any moral limits to markets nor any spheres of society in which they shouldn't tread. A purely economic approach to valuing nature, as advanced by TEEB and to which the NCD aligns itself, squeezes out the possibility of alternative civic institutions and, arguably, a more democratic approach to resolving environmental dilemmas. Theirs is a world in which natural values are revealed rather than formed. They are pre-existant in economic man's preferences, waiting to be discovered, rather than emerging from social processes of argument, learning and judgement.

It is true that deliberative processes or multi-criteria analysis (MCA) offer an alternative value-articulating institution to economic valuation. But accepting that natural values are multi-dimensional or socially constructed also allows them to remain "out there" where they belong in the civic square, rather than as objects to be studied in the economists' private laboratories. Such an approach engages with society to discern the value it places on nature impacted by business decisions. 

The TEEB Business report suggests that management of BES risks requires detailed analysis and broad stakeholder engagement. Its authors suggest that EV may help clarify the values at stake and raise awareness of potential risks, but notes that EV methods have not been adapted to business needs. Even if they had, it is not at all clear how business can really do both. Can business adopt an EV approach whilst also engaging with stakeholders without running into a conflict over whose values count?

Water - right, resource and relationships

More Watery than Golden

My village in Herefordshire's Golden Valley boasts its own water company - The Peterchurch Water Company - owned by the local residents who receive their water from it. The source of supply is a natural spring that flows into St Peter's Well on the side of the gentle valley through which the less-than-mighty River Dore trickles lazily before joining the Monnow, a tributary of the far mightier River Wye. Legend has it that while on his way to Rome St Peter himself consecrated the well and put in an immortal trout which remains the symbol for the village today.  

Shaping landscapes physical and cultural

Water has of course shaped both our physical and cultural landscape for millenia. It occupies a defining place in our natural and social history and connects the two in the story of human civilisation. As the source of life and the most basic of human needs it has also held a special spiritual and symbolic significance in diverse cultures and beliefs. To many, access to water is a human right and to make an exclusive claim to something that falls unbidden from the sky and finds its own course through our landscapes is an offence to moral intuition. In all societies for all of history water has usually been viewed as a form of public property, freely available to all as a gift of nature or God. 

Water is a global resource with local consequences. It does not respect political and administrative boundaries. It is not so much a renewable resource as a replenishable one. The problem is ensuring it is in the right place and the right time; in the right quantity and of the right quality.  For thousands of years societies have learnt to adapt locally to the consequences of having too much, too little, or too late. But anthropogenic climate change risks rapid and unpredictable changes to hydrological patterns faster than human beings - and other species - can adapt. The intergovernmental panel on climate change (IPCC) has warned: "water and its availability and quality will be the main pressures on, and issues for, societies and the environment under climate change." And when there is not enough to go around then there is the ever present risk of conflict over access to water as it loses its status as a public good.

Water, water everywhere but...

In the objectifying world inhabited by economists, water is viewed as a "good" or a resource - public or common pool respectively depending on the conditions of scarcity. In both cases it is either impractical or costly to exclude others from the use of a locally fixed supply of (usable) water. Pure public goods are usually provided by the state, since the "free rider problem" would ensure that they remain underprovided otherwise. State property is "owned" on behalf of the people. But once there is not enough to go around and if the state cannot exercise some form of control a tragedy nevertheless looms.

According to the economist's utilitarian instinct a problem arises when one person's use leaves less for the next person, which must be solved for the sake of overall human welfare. In this calculation, no-one can claim a natural right to water. A "property right" must be assigned or else accept the inevitable fate of any unowned resource for which there is "open access" (res nullius) - the so-called tragedy of the commons. Who should own the right to the benefits that water bring depends, in the economist's parlence, on the transaction costs assocated with each alternative. The most important of which is the cost of excluding others from it.

An alternative to state ownership is typically advanced in a set of arrangements which involve some form of private sector participation or partnership. Turning a water resource into a form of private property by assigning the rights of ownership to individuals or corporations, perhaps in the form of a concession, are the remedies favoured by some neo-liberally inclined economists. Without private property a market failure persists - or more precisely, a market is missing altogether. Some form of full or partial privatisation enables a market to be created in which a price can be established to ration a scarce resource. Access to water is, literally, no longer a free-for-all. Users pay and the rent accruing to the resource owner can be directed to investment in infrastructure, water quality and ensuring efficient univeral security of supply.

At least in theory. But it is one that is usually hotly disputed wherever it is proposed. To many, the commodification of something freely provided by nature is still a form of robbery. Exclusion is simply unjust. In the developing world tariff rises that have followed privatisation or partnership have often been met with public displays of opposition. Privatisation and reform of the water industry in Brazil in the 1990s was viewed with popular suspicion and dissent. During the next decade many multi-national companies pulled out of Latin America all together.

When Right Is Might?

A form of de-facto privatisation sometimes arises from a process of creeping encroachment, rather than a formal assignment of rights. Others are excluded from the resource not by an act of law or by contract, they are simply muscled out. We might regard this as an illegitimate appropriation of a right. Coca-Cola's bottling plants in India were blamed for drying farmers fields,  lowering and polluting the water table. In 2007, more than 400 people in Varanasi protested at the district magistrate's office demanding that Coke's Mehdiganji plant, with its veracious demand for hundreds of thousands of litres of water, be shut down. The license of another Coca-Cola plant in Kerala in 2004 had already been revoked due to local water shortages and pollution blamed on the company.

Access to safe and clean water is a justice issue. Where disparities in income persist, privatisation - de facto or de jure - raises issues of fairness and entitlement. In the Rawlsian liberal conception of justice, a fair distribution of resources under whatever institutional arrangement must be consistent with the primacy of individual liberty and inequalities tolerated only to the extent that it benefits the least advantaged. On this count experiments with various forms of quasi-private property right over water resources in the developing world have proved inconclusive. The effects of tariff rises, for example, on the poorest in society remain a matter of some academic dispute even if access to water is widened across the whole population. Entitlement theory deploys a different set of arguments. Nozick's distributive justice englobes the principles of justice in acquisition, transfer, and rectification. But can water as private property really meet the principle of just acquisition? If a property right can be established in a Lockean scheme by the mixing of one's labour, then no-one can stake a claim to untreated fresh water abstracted directly from nature.

Rights or Relationships?

Justice requires a search for an alternative that satisfies our moral intuition as well as distributional and procedural demands. Solutions inspired by neo-classical economic theory have centred on regulation or rights over public goods or common pool resources. When a large number of users have independent rights to the use of water resources, licensing and permitting are the controls through which use and access is distributed by the State. To many neo-liberals this is a second-best solution at best. At worst, it is a source of rent-seeking and government failure. Establishing private property rights in a market-based solution offer the hope of greater efficiency, safe and universal supply. In both cases, rights and duties have to be imposed and enforced by the state - a potentially difficult and costly task.

In recent decades the New Institutional Economics has examined more closely communal or customary forms of resource ownership and use. It seems the fate of a common pool resources is not necessarily the tragedy of eco-system collapse. Elinor Ostrom has shown how collective action in the right conditions can give rise to viable alternative common property regimes. Ostrom conducted her research amongst pastoralists in Africa and amongst villagers in western Nepal who jointly owned and managed irrigation systems. Here the property right is held by a collective, typically a small local community or village with a shared interest in a resource.

Collective action has been shown to be successful when a localised property right can be upheld over a relatively fixed or immobile resource with clearly defined boundaries and localised externalities. Where the transaction costs are lower than alternative institutional arrangements it makes more economic sense. It requires a small like-minded group of people who have commonly held rights over the resource but it is not possible to allocate an individual share of the benefits. Social capital, in the form of common values and trust, is a critical factor. Ostrom adds other communally determined institutional "design principles" for establishing rules: collective choice arrangements, monitoring, graduated sanctions, and a procedure for resolving conflicts. A common property regime (CPR) is therefore defined by a set of social relations, not simply by the assignment of a property right.

Corporate Water Responsbility

Since water has a commercial value to business, its growing scarcity poses a risk. Increasingly, companies are recognising both the risks and opportunities posed by water scarcity. Tighter regulatory action in response to pressure on water supplies is widely anticipated and both the droughts in China and the disruption caused by floods in Thailand have seen water move up the corporate agenda. Water issues are shifting to the boardroom: water is not only viewed as a regulatory and cost issue but increasingly of strategic importance.

On the basis that you can't manage what you can't measure, both the Carbon Disclosure Project's water initiative and the Water Footprint Network are working to improve standards of measurement and reporting. Some major corporate users of water are going further by engaging stakeholders and building relationships with local communities. For example, Tanzania Breweries Limited (TBL), a subsidiary of SABMiller, held workshops with local stakeholders in Dar es Salaam, made a detailed study of the river basin, and drew up a set of actions to improve water efficiency in the area. These included educating farmers and working with local authorities to prevent leakages from infrastructure.

Advocates of corporate responsibility acknowledge that water is a shared resource, the use of which use imposes costs on others. Some prefer the phrase "water stewardship" as an alternative to the cold instrumentalism implied by water resource management. It imples a duty of care. But, strictly speaking,  stewardship means looking after something that actually belongs to someone else. More likely, corporate use of the term is intended to reassure the rest of society - other stakeholders in the resource - that corporations recognise an obligation to share it. It is the language of precedural fairness in corporate behaviour. But evoking a principle of stewardship plucked from its ethical roots expresses a sentiment devoid of any moral  power. It does not define the normative content of the relationships between stakeholders as moral agents, whether in terms of rights, duties, or the common good.

Meeting the challenge together

We may ask: whose interests are really being pursued when companies claim to be stewards of a shared resource? And is it in the corporate instinct to treat members of the local community as a means to an end, or an end in itself? Such scepticism is reasonable. The water risks referred to by corporations are framed by their own goals. The language of stakeholder engagement appeals to principles of collaboration and participation. But there is a world of difference between participation and mere consultation; just as there is between informed consent and empowerment. If engagement is really about efficiency in decision-making and minimising the risk of damaging conflict it is unlikely to seek to empower others. And unless stakeholder participation in local resource management addresses inequalties in power relations it can hardly be called participation at all. 

If private sector corporate interests are to be welcomed in resolving the water challenges of the future, new institutional arrangements will need to be designed in which there is a genuine commitment to building the local capacity to ensure they are sustainable. Real multi-stakeholder partnerships must include public and private actors, but also local NGOs, civil society organisations, as well as local communities. It requires all parties to define a shared goal and build trust by seeing the world through the eyes of others in Kant's kingdom of ends. Corporations will need to learn to properly understand the livelihood choices faced by the poor; their risks and vulnerabilities, not just its own.  

The right to water may in a sense be assigned by the award of a license, permit, or the monopoly of a long term concession over vital infrastructure. But in any morally relevant sense, a right to a shared interest in water resources can only be secured by mutual consent and mutual obligation before it can be regarded as a legitimate right. It is through a normative ethic of discourse that the trust, shared norms and rules necessary for the stable collective or communal arrangements discerned by Ostrom can be built upon a solid bedrock of social capital. Working at a watershed scale isn't just about defining system boundaries by geography and hydrology. It is about forging relationships with the people that form part of the whole system. It is as much about the content of those relationships as the ecosystem services they share.

Murdoch and Moral Leadership

The news that James Murdoch, Executive has decided to step-down as Executive Chairman of News International is the latest development in the sordid tale of disreputable conduct in the UK newspaper industry. The Leveson inquiry into the “culture, practice and ethics of the press” represents a timely exploration of the complex relationship between organisational culture, leadership and the conduct of individual employees. Behind the question of who knew what about the practice of “phone-hacking” lies a bigger issue: should society hold business leaders responsible for the personal values and integrity of their employees?

A failure of moral leadership

It seems reasonable to suggest that senior executives have a responsibility for the internal culture of the organisations they lead. That is, not just what a company’s employees do, as defined by the structure of roles and accountability in an organisation, but how they do it, as demonstrated by their conduct and behaviour. What is it that causes staff members to believe that the ends justify the means, however unethical they are? The fact that phone-hacking appears to have been systematic at News International, a practice that had become institutionalised, has to be acknowledged as a failure of leadership. Business leaders set the goals and expectations of the organisation, and hence what is expected of its employees. But in setting targets and objectives, leaders and managers should never be indifferent to the manner in which these goals are met. It would be nice to think James Murdoch finally accepted his responsibility for the scandal at News International. 

Turning to external values 

But there is another nagging worry. Is the failure to uphold ethical standards at News Corporation symptomatic of a deeper trend amongst large corporations to neglect their internal values in favour of an appeal to values located beyond the organisational boundary – such as the perceived needs and expectations of their stakeholders?

Admittedly, there is every reason to suppose that organisational codes of ethics do little to influence personal values and integrity amongst employees (Trevino & Brown 2004), and may simply promote a compliance culture rather than foster genuine autonomy in individual moral judgement. It makes little logical sense to expect a corporation to act collectively as a moral agent if its individual members are not expected to act as such too.

Although an organisational “code of ethics”, policed by compliance officers, remains popular amongst US companies, in general the ethical narrative appears to be disappearing from business life. Issues of business ethics are being replaced by new terms which shift the focus of attention away from internal values that define the collective identity and culture of the corporation.  Ethical considerations are instead subsumed within the wider panoply of CSR philosophies and approaches.

Thus, rather than talk about corporate values and ethics, companies are increasingly adopting the language of sustainability, stakeholders, citizenship and social responsibility in which some kind of ethic is implicit but never fully apparent. One might say that this language is itself the product of an ethical discourse which has swung away from normative approaches towards a sort of ethical pragmatism.  

Dropping Es in the investment industry

A few years ago the term “ethical investing” was in popular and familiar use within the retail financial services sector. As large mainstream institutional investors began to develop their own “socially responsible investment (SRI) product offerings, investment professionals would add to their financial analyses the need to consider GSEE factors – issues of governance, social, environmental, and ethical concern. Nowadays all the talk is of “Responsible Investment” and the integration of “ESG” – environmental, social, and governance – into investment decision-making. The slippery issue of ethics has been quietly dropped in favour of a more easily reached broad consensus: a set of principles which cohere to no particular ethical framework but serve as industry good practice guidelines promulgated by the finance initiative of the United Nations Environment Program (UNEP) as the Principles for Responsible Investment (PRI). 

Don't make me blush

Has business become shy about “ethics”? Perhaps it is too soft and hazy a term to provide raw material for rigorous and rational business analysis. The triple bottom line, on the other hand, sounds comfortingly familiar. Being responsible no longer simply means not getting fined and avoiding bad press. The success of CSR in recent years lies in the fact it is increasingly viewed in strategic management terms. In the process of mainstreaming CSR approaches into management practice it is being increasingly absorbed into the wider management toolkit.

Thus, strategic CSR is now couched in value-chain terminology as “shared value creation”; self-declared sustainable businesses appeal to stakeholder theory in the development of sustainable products and services and in the development of brand identity. The harmonisation of integrated reporting frameworks, such as the Global Reporting Initiative (GRI), and the growing range of codes and management system standards has shifted the practice of CSR towards pithy issues of performance and measurement.

If what can't be measured, can't be managed where does that leave the vague notion of simply being "ethical"? It is unlikely Lord Justice Leveson will help us find our misplaced sense of personal morality in business life. 

Corporate responsibility: a broken moral compass?

The business and finance world is facing up to its responsibilities. The term "Corporate Social Responsibility" (CSR) has by now become firmly established in the business lexicon and features in the MBA syllabus of most business schools. Large US and European companies have, in the main, adopted some kind of commitment to CSR, even if they prefer a different nuance - sustainability or corporate citizenship - and they publish lengthy reports just to prove it.

It would appear then, that the question of whether one can in fact talk meaningfully of collective responsibility has been answered and the argument that corporations are moral agents has been won. Naysayers still exist but they are in a shrinking minority and their arguments have not moved far from those of Levitt (1958) and Friedman (1962) who regarded a company's sole responsibility to be to its stockholders. Bakan (2004) has argued that a corporation's legal status prevents it from acting in anything other than its own self-interest and not for moral reasons. In reply, others (Crane & Matten 2004) argue that corporations have moral agency independent of their members, pointing to their internal decision structures as well as the beliefs and values embedded in organisational culture.

Responsibility: legal obligation or social duty?

If we accept that a company is a rational moral agent, how do we define its moral obligation in relation to other agents with moral standing? And for that matter, to whom or what do we extend moral standing (what about non-humans or the non-biotic environment, for example.)?

What does "responsibility" actually mean and to whom does it extend? With what ethical theory or framework can can make sense of it? Since "duty" is a close synonym, there is something distinctly Kantian about the principle of responsibility in terms of moral philosophy. Many CSR advocates would probably be quite comfortable with a deontological approach which judges acts as inherently good or bad regardless of their consequences derived perhaps from a utilitarian calculus. But we still need to ask: to whom does a business have a responsibility? Easy, the CSR advocate may claim, "to society".

Leaving aside the huge question of what we mean by "society" (a topic for a later post, perhaps), the cynic may reply that society does so by setting the "rules of the game" through the laws and legal frameworks that govern and constrain corporate actions, restrict the autonomy of its management, establish accountability (to its owners), and thereby define the responsibilities it expects of corporations.

As such, collective bodies such as corporations can be held legally responsible for their past actions, albeit subject to tricky issues such as intention, causation, limits of control, burden of  proof, negligence and when to impose strict liability. Moreover, laws codify the moral framework within which society detemines that companies should operate. In which case the quest for more responsible businesses should focus on public policy; fans of CSR should perform a monitoring role from the outside looking in, as quasi-regulators and whistleblowers who form part of civil society.

Beyond compliance....and into a moral muddle

This is not good enough for most CSR advocates. The scope of a company's responsibility is not adequately defined with reference to the law and extends beyond mere compliance with it. A company's legal responsibilities are most pertinent after-the-fact, in apportioning blame and seeking restitution. But CSR has come to mean some form of prospective responsibility: the behaviour and conduct of corporations in relation to wider society.

These obligations are typically expressed, for example, in stakeholder approaches, the concept of extended producer responsibility, or in some version of legitimation theory expressed in terms of an implicit contract or a social licence to operate. These now well enshrined management principles seem to be firmly rooted in deontological ethics. Is duty the ethical principle is at work in assigning corporate responsibility beyond legal compliance?

A Kantian approach might regard corporate responsibility towards a society viewed as a “kingdom of ends” in which its moral imperative lies in a universal respect for human dignity. But perhaps an emphasis on rationality and universal morality would attract other objections since moral agency in a pure Kantian approach means that corporations must exercise their own moral judgements in relation to its actions, rather than simply obeying universal rules (including those codified in laws, presumably). This would fly somewhat in the face of any desire to promote common or harmonised standards of behaviour of the form we typically see in codes of practice beloved by CSR advocates and practitioners.

For some the alternative is to appeal to enlightened self-interest or, in its more sophisticated form, shared value. In this formulation it is rational for a company to act responsibly towards "society" because, in so doing, it ultimately benefits itself (or more precisely, its stockholders). In its cruder form this rationale for CSR is therefore just a form of ethical egosim masquerading as duty. The company doesn't really have a moral duty to society at all. Friedman wins afterall.

Escaping responsibility

The theoretical ethical foundations for corporate responsibility are murkier than we might suppose. It feels right that companies should have obligations – or duties – to wider society but it is not entirely clear why - or what exactly they are. Instead, in the absence of a commonly accepted moral framework, the social norms of corporate behaviour emerge from a bustling bazaar of competing expectations birthed by the postmodernist ethical gut-feel.

The corporate commitment to the vague concept of sustainability offers little as a surrogate, hinting at a common ethical dimension to corporate goals (inter-generational justice) but leaving its application open to a wide range of interpretations. In the end, the trade-offs at the triple bottom line come down to a choice, subject to the preferences of management, over the relative weight (significance) and (possibly incommensurable) values they attach to the externalities (social or environmental impacts) associated with business activity. Whatever the ethical basis is for decision-making in a "sustainable business", it appears to be broadly consequentialist in nature. In the end the search for consensus results in loose agreement to codes of practice, guidelines and reporting frameworks detached from any firm ethical mooring.

The difficulties become even more apparent in the financial world. Here responsible investors are cast as moral agents with a fiduciary duty to a collective of principals. What exactly does responsibility mean in this context? Is it to act (i.e. invest) only in a manner which is in some sense morally right in relation to wider society, or to act in a certain way in relation to other agents (i.e. invest) only if those agents are themselves acting morally (i.e. “responsibly”) in relation to other objects of moral concern (“society” or “the environment”).

It turns out then that regarding corporate responsibility as an ethical duty may not be helpful after all. In the absence of firmly established ethical foundations and an appeal to a vaguer moral impulse, we we must perhaps accept as inevitable a relativism in business ethics, and welcome a healthy debate instead. In which case, there is no one-size-fits all standard of corporate behaviour and no universally accepted truth of corporate social responsibility.

Perhaps its time to look elsewhere for a guiding moral framework for corporate conduct. Those that use alternative terms like “corporate citizenship” may have consciously done so. Would it be better to appeal to a neo-Aristotelian ideal of morally virtuous character and a commitment to community expressed in a shared conception of the human good. Should we talk of Corporate Virtuosity, instead? Or what might feminist ethics have to say about the obligations of corporations to others in society with its focus on empathy, care and harmony in social relationships? Or further, perhaps the Judeo-Christian concept of “love” in one of its forms might do a better job of defining in more precise terms the nature of the obligation corporations have to others.

There is a clear and well established case for the economic and legal responsibilities society requires of corporations. The ethical responsibilities it expects from them are not so clear cut. We can't rely on the ethics of duty to establish universal norms of good behaviour. For the good of corporate social responsibility, perhaps its time to abandon it altogether and find a new moral compass?

Reconnect?

A London (re-)connection

When it became clear last autumn that the Occupy movement were to inhabit a permanent campsite at the the steps of St Paul’s Cathedral, the Bishop of London called Ken Costa. Under the auspices of the St Paul's Institute the Bishop asked Costa, a former senior investment banker in the City of London, to explore how we could “reconnect the financial with the ethical”. Although the choice of a City insider may not have inspired the confidence of those tent-dwellers anxious for some radical out-of-the-box thinking, the subsequent engagement has been constructive and as Chair of the “London Connection” Costa has been a regular and thoughtful participant in the media debate.  What struck me, however, about Costa’s mission was not whether there is a place for ethics in financial markets (there is) but, rather, what he meant by “reconnect”?  It suggests a re-discovery of an earlier era in which financial markets operated within in a different moral framework than they do today. Certainly, to many observers it would appear financial markets don’t operate within any recognisable moral framework at all – they are amoral, if not immoral. But a cynic may claim ‘twas ever thus.

To Costa it wasn’t. He has reminded us that the godfather of free market capitalism, Adam Smith, was first a moral philosopher who wrote The Theory of Moral Sentiments before he popularised the market’s invisible hand and the pursuit of self-interest in The Wealth of Nations.  For today’s staunchest defenders of neo-liberal ideology, Smith’s philosophy remains essentially valid, even as the Occupy movement points to the self-evident failures of egoist ethics in an unsustainable world mired by recession, social unrest, injustice, and impending ecological disaster. They would argue that recent financial history alone suggests that the unbridled pursuit of self-interest is a by-word for immorality. The old tussle between liberty and justice is being fought out in a new arena.

Simple economics

It is doubtful that many high-powered traders and bankers in Wall Street and the City have actually read Adam Smith. They have however inherited a tradition of free-market thinking and a vested interest in its claims. Most will have been taught to believe in an economic creed which places unquestionable faith in markets to deliver wealth and progress if unmolested by the State. They, like many others, are given to believe in strict “laws” of economics which are as established and reliable as the laws of physics. In the words of Oliver Williamson, “in the beginning, there were markets”. It is as if markets evolve naturally according to the same laws of nature from which life itself flourishes. This is the neoliberal orthodoxy deeply embedded in the culture of the financial markets. Markets needn't fail. But governments always do.

But markets do not emerge like this at all. Neither is human society much like homo economicus portrayed in Economics 101. Most of us that have had some education in economics need to be reminded that introductory courses in the principles of economics describe a world in abstract, subject to simplifying assumptions almost to the point of absurdity (anyone know the “assume a tin-opener” joke about economists?). We are taught competitive markets work well if all the assumptions of perfect competition hold true. But they never do. A properly functioning market is a fictional benchmark against to judge the operation of real markets. 

My first economics text book described a market as “a place where buyers and sellers meet”. That’s it. It didn’t have a lot to say about what happens when they do. It had little to say about the relationships between “economic agents”; nothing of the role of trust, of shared values or of mutual obligation. Economics is a social science that really wants to be a natural science.  As a science, there is no place for value judgements, only empirically reasoned inductive method. Economics as a profession became separated at birth from its philosophical forebears in the white industrial heat of 17^thcentury enlightenment thinking that one cannot derive an “ought” from an “is”. Thus, Hume’s “naturalistic fallacy” paved the way for the separation of reason from morality and justified the value neutrality of science. Economics adopted the language and method of science, developed its own cold utilitarian calculus, and refused to be drawn into questions of right and wrong that it felt belong to the (unscientific) realm of politics. According to Betton and Hench (2002), “when this happens, business is left to ‘create value’, divorced from any real sense of values.”

But economics doesn’t have to be like that. Economics can be re-connected with the ethical. My first brush with development economics as a postgraduate student was a breath of fresh air – it was economics with a beating heart. Development economists do not flee from normative judgements. Theirs is a narrative of justice, freedom, quality of life, voice, empowerment, with a moral imperative. Their discipline goes beyond the traditional stream of neoclassical economics and its narrow concerns with allocative efficiency; it necessarily deals with the economic, social, political and institutional mechanisms of socio-economic change. Ethical or normative value premises are central features of what Gandhi called "the realisation of human potential". Similarly, the branch of new institutional economics (NIE) inhabited by Nobel Prize winners Elinor Ostrom and Oliver Williamson starts with a rejection of the simplifying assumptions of the neo-classical tradition. Here markets are seen as institutions, subject to formal and informal rules and duties upheld by the State and impossible without it. Without enforceable property rights there can be no markets. But, equally, alternative communal forms of ownership are possible and with them new opportunities for collective responsibility and action. It turns out the tragedy of the commons is not inevitable.

Virtuous markets

Free market economics is a tarnished brand. That is not to say that free markets are bad – or good for that matter. They are necessary but not sufficient for a just and stable society. We need to abandon the ideological baggage that now hinders any discussion of “free markets” and understand that markets are no more than social institutions – a place where human beings meet to exchange goods (not bads). This is a feature of human society that pre-dates the Adam Smith and the birth of the economics profession, without which human flourishing is simply not possible.

But even though markets will survive the current crisis in confidence, the legitimacy of our unreformed financial institutions may not be so easily recovered. And neither should they. Part of Ken Costa’s quest to connect the financial with the ethical must be to establish commonly-held values in businesses and institutions that engage in socially valuable commercial exchange. Arguably, a strong sense of shared values has long been chased out of our pluralist society by a version of political liberalism which prizes individual freedom and autonomy above all else. At the same time, western liberal democracies have nurtured a postmodern relativism in ethics which frees us each to follow our own moral impulse on matters of right and wrong. Little surprise then that corporate and voluntary industry codes of practice have done so little to change the culture of the financial markets or the behaviour of its individual participants.

Some say the loss of a conception of the common good that accompanied Enlightenment thinking calls for a reaffirmation of much older neo-Aristotelian-Thomist tradition of virtue (Macintyre). But then, how does one actually encourage the development of virtuous moral character? It isn’t enough to change the rules and impose regulations, as necessary as that may be. You can punish bad behaviour – with reference to clear rules – but you can’t legislate for moral virtue. You can, however, dismantle the perverse incentive structures in the financial sector that rewards a disposition towards vicious rather than virtuous behaviour, as Aristotle might say. Hence an examination of the link between bankers pay and risk-taking is a necessary first step.

But to go further than that we need to bring about a reformation in the culture of financial institutions, of the values they espouse as well as the behaviours they applaud. This is a huge challenge of leadership which is only possible if policy-makers, regulators, and those at the very top of these institutions recognise that the business and financial culture needs to change and are able and prepared to critically examine its roots. The world of business and finance does not exist in a social vacuum. There must also be a genuine market for virtue, a source of effective demand for ethical business practices, products and services in the wider society (Vogel 2006).  Government and civil society has a role to play in fostering the market for virtue and associated institutional change, including the informal "rules of the game" by which we all participate in the market economy. Norms, values, and mores are just as important in conditioning and restraining human behaviour as laws and regulations. It is both a top-down and bottom-up process.

The dialogue with capitalism’s discontents is a social learning process which will require the free exchange of ideas in an atmosphere of mutual respect.  Happily that seems to be the happening in a small but meaningful way in an extraordinary piece of deliberative democracy brokered by St Paul’s.

Welcome to ReSt

This is the first blog for Responsible Stewardship Limited - or ReSt - the consulting company I set up to provide advisory services in the area of corporate social responsibility (CSR) and responsible investment. After a career spanning twenty years as a financial analyst, researching and writing on the European corporate bond and credit markets, I have became increasingly concerned by the effects of the growing global ecological crisis on both the natural world and human society. Having trained originally as an economist, my interest in environmental and social issues led me to pursue part-time postgraduate studies in sustainable development, environmental management, and biodiversity conservation (CeDEP) before eventually deciding to quit financial markets altogether in 2011. I am however still involved as a consultant to a major global investment management company, advising on the implementation of their responsible investment policy and on the analysis of environmental, social, and governance (ESG) risks in investment portfolios. I am also a member of the management team for the UK arm of a Christian nature conservation charity, A Rocha (A Rocha International). On these Blogger pages, I hope to share my thoughts and observations on the political, moral and ethical dilemmas facing business, finance and wider society in the quest for a more just and sustainable world.