Corporations are using our money to trash the environment.

By Hank Boerner

Let’s ask ourselves, whose money is it, anyway? In a recent CSRwire Talkback blog post, I wrote that, in my opinion, the highest test of true corporate responsibility is to see how the corporate board and management respect the concept of managing other peoples’ money (OPM). That set me thinking: as the billions and tens of billions of dollars that trade every day go swirling around the capital markets…whose money is it, anyway that stock traders and investment bankers and hedge fund managers and other market mavens are using to “play the market?” Yours and mine? Let’s think about that for a second or two as we read of investment banking bonuses.

We are a long way from the glory days of early capitalism when the titans of industry, cattle barons and bond bankers ruled the roost in money matters. Usually it was their money at risk when they invested in a new oil field, built a steel mill or set out another 1,000 head of cattle to eventually feed the growing population of the USA. Think in 1880’s terms, when author Mark Twain examined the state of American affairs in his book, “The Gilded Age.” John D. Rockefeller, the founder, was building his giant enterprise, Standard Oil. The meat barons of Chicago – Swift, Armour, et al, were the end points of massive cattle flows from the American Southwest to the factories of Chicago. Andrew Carnegie was becoming the richest man in America thanks to the growing appetite for the output of his Pennsylvania steel mills, needed for railroads and bridges and skyscrapers. Oh, those were the days – if you were a robber baron!

Across the Atlantic, where it seems so many important trends related to responsible and sustainable investing are originating today, there’s increasing talk about “universal ownership” – the real wealth of the nations being bound up in the holdings of institutions that invest in the capital markets and giant business enterprises.

The United Nations-sponsored organizations Principles for Responsible Investment (PRI) and the UN Environmental Programme Finance Initiative (UPEP) examined the impact of “externalities” on fiduciary monies in late-2010. “Universal owners,” in the organizations’ view, are the institutions that hold assets for the actual owners or beneficiaries. The issues that the PRI and UNEP leadership see as real or threatened impairments of these assets are generated through business activities as global and domestic enterprises create pollution, impact biodiversity and natural resources, over-use water and degrade eco-systems worldwide. Much of the costs are “externalized,” and put on the public balance sheet and not that of the corporation causing the problem.

Consider this statement from a recent report by PRI and UNEP: 

“Large institutional investors [mutual funds, pension funds, insurance companies] are, in effect, Universal Owners, as they are often have highly-diversified and long-term portfolios that are representative of global capital markets. Their portfolios are inevitably exposed to growing and widespread costs from environmental damage caused by companies. Institutions can positively influence the way business is conducted to reduce externalities and minimize their exposure to these costs. Long-term economic well-being and the interests of beneficiaries are at stake. Institutional investors can, and should act collectively to reduce financial risk from environmental impacts.”

Now some in the US may view this opinion as interference in the ordinary business of the company and a form of socialism that doesn’t fit our national perception of free-market capitalism. But let’s now consider the estimated annual environmental costs from seven major impacts of global human activity – equal, say PRI and UNEP, to 11% of the global GDP in 2008. And the world’s largest 3,000 companies accounted for $2.15 trillion in environmental damage in 2008. (Small companies, government and other activities accounted for $4.4 trillion more.) Eventually, they say, half of large-cap companies’ [combined] earnings could be at risk from environmental costs [in an equity portfolio weighted according to the MSCI All Country World Index. (Calculations by Trucost in a hypothetical portfolio of 2439 listed companies in 2008.)

So we return to the question: given this scenario, whose money is at risk? Is it the stockholders in those companies causing the environmental damage? (That would include millions of individual investors and tens of millions of beneficiaries of fiduciary institutions that are the nominal investors.) Speaking of risk, whose money is at work in Wall Street trading and investment these days? Some of it…the US taxpayers’ money. When Uncle Sam bailed out commercial and investment banks taken the brink by the reckless behaviors of their leaders, billions’ flowed with no strings attached to the institutions to “save them” and save the US and global economies. 

So – whose money is it [that resulted] from Wall Street’s trading profits in depressed equities? (It was a great time to buy in the depths of the financial crisis – Ford Motor was $2 a share!)

Interesting questions and what if’s can be generated if we think seriously about whose money is it and the concept of Universal Ownership.

About Hank Boerner

Hank Boerner is Chairman of the Governance & Accountability Institute in New York City and is co-author with Mark W. Sickles of the book, Strategic Governance: Enabling Financial, Environmental and Social Sustainability (published 2011 by the Institute). In the volume the authors explore links between culture, risk management, strategies and corporate responsibility.

Talkback Readers: Can we and should we assert better control over corporations’ use of “our money”? Share your thoughts on Talkback!