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Many brands that say they are producing sustainable product are in reality greenwashing their textile production in China, according to the latest report from five environmental NGOs in China.

“Sustainable Apparel’s Critical Blind Spot,” which can be found here,  was a follow on from a report I wrote about here released in April that named 49 global fashion brands using polluting factories in China and suggested consumers make a “green choice” when buying clothes.

Led by Ma Jun’s  Institute for Environmental and Public Affairs, “Cleaning up the Fashion Industry”  listed 6,000 water pollution violations by manufacturers of goods ranging from sports apparel to luxury handbags.

Subsequently, 30 brands began conversations with IPE about how to improve the environmental performance of their supply chain, according to Ma Jun.

Clothing brands and retailers such as H&M, Nike, Esquel, Levi’s Adidas, Walmart, Burberry and Gap have all established regular screening mechanisms, are actively identifying pollution violations in their supply chain and have pushed more than 200 textile and leather suppliers to clean up.

Adidas, Nike, Levi’s and H&M have begun to address environmental challenges with their dyeing and finishing suppliers, the report said.

The latest investigation looked deeper into supply chains following a letter sent September 25th by the NGOs to the 49 brands requesting information about pollution management issues at materials suppliers.

Besides IPE, authors of the report were, Friends of Nature, Green Beagle, Envirofriends and Nanjing Greenstone

In all, 22 of the brands receiving the letter, including Marks & Spencer, Disney, J.C. Penney, Polo Ralph Lauren and Tommy Hilfiger gave limited or no responses to specific questions relative to emissions violation problems in their supply chain. This despite Marks & Spencer, for example, promoting its “Plan A”, which is a sustainable business benchmark for global textile companies and retailers.

Companies promoting sustainability should “not continue to let suppliers pollute the environment and hurt communities whilst using concepts such as ‘zero waste’ and ‘carbon neutral’ to greenwash their performance,” the environmental NGOs wrote in the report.

The report draws attention to the fact that textile exports from China have dropped recently, weighed by higher labor costs in China, trade barriers, the appreciation of the RMB and higher resource costs.

Big brands have moved some of their cut and sew production to South and Southeast Asia.  Nike shut down its only shoe factory in China and recently, Adidas also closed its only factory in China, leading people to believe China is steadily losing its status as the textile factory to the world.

But materials production is still concentrated in China, with exports of these products rising steadily, according to the report. This is the most polluting portion of the apparel supply chain.

In the raw materials processing sector, which includes dyeing and finishing, exports are growing steadily. According to the 2011/2012 China Textile Industry Report, for the six main printing and dyeing product categories, the total amount of exported printed and dyed cloth was 14.412 billion meters which showed a year on year growth of 13.76%.

The value of exported printed and dyed products was US$16.979 billion, which showed a year on year growth of 31.26%. However, at the same time the total value of all exported textile products only increased by 0.49%.

The cut and sew industry provides the most jobs, uses less water and energy and pollution discharge is not a big problem. However, the reverse is true for textile production. Essentially, China has kept the dirty part of the business, while allowing the relatively clean, job-creating cut and sew industry to wane.

The problem is that enforcement of pollution remains weak in China, while the cost of inputs like water and energy are still relatively low. So dyeing and finishing companies often avoid any water or energy savings initiatives and disregard pollution control, ignoring environmental laws and regulations.

Sustainable apparel in particular,  has a ”dangerous blind spot,” according to the report, which means that dyeing and finishing mills and factories lower their environmental standards to cut costs and win orders in a race to the bottom.

Essentially the problem is that most apparel and retail brands still choose not to look into the polluting part of their business – the bottom of the supply chain. Consequently, materials manufacturers are still trying to produce in the cheapest way possible in order to keep costs low for fast fashion.

We as consumers must recognize that we have a choice not to buy the cheapest item on the shelves, to acquire less and from companies that truly care about not doing harm to our planet.

I am constantly surprised that Hong Kong does not pay more attention to its water supply, that something so vital to our city is far from secured by our government.

How many of us know that 75 percent of our water comes from the Dongjiang River, while only 25 percent of the city’s drinking water is supplied by reservoirs from within the territory? That while Singapore has similar water concerns, the island nation is investing in technology to conserve, recycle and desalinate water to ensure adequate supply, yet our government simply is not.

This is wrong for many reasons but here are two of the most obvious:

1) China is experiencing a significant water crisis and is acting aggressively to ensure its own supply. As Civic Exchange’s Su Liu recently pointed out while speaking on a panel, “We in Hong Kong don’t see the big picture – 40 million compared to our 7 million also rely on the Dongjiang. If water tensions rise on the mainland – where is the priority? ” You can more read about the excellent discussion on China’s water stresses moderated by http://www.ChinaWaterRisk.org’s Debra Tan, here.

2) The Lower Dongjiang River Basin is becoming intensely  industrialized and urbanized meaning industrial pollution regionally is a real concern. At the same time, agriculture further inland has intensified and pollutants from farms, such as pesticides and fertilizers are just as dangerous in drinking water as industrial materials. So How safe is our water in reality? Clearly local testing shows that currently the water we drink meets health standards but can we be sure that will always be the case?

To my first point, China registers a 50-billion-cubic meter water shortage annually, with two-thirds of cities having trouble accessing water, according to a China Daily article last week quoting Chen Lei, the country’s minister of water resources. In all, China’s water consumption apparently has exceeded 600 billion cubic meters, accounting for 74 percent of the country’s exploitable water resources.

In January, the central government issued a document asking the entire country to limit the scale of water exploitation, improve the efficiency of water usage and curb water pollution. According to the article, China aims to reduce water consumption per 10,000 yuan ($1,597) industrial value-added output to less than 40 cubic meters by 2030, raise the effective water use coefficient of farmland irrigation water to above 0.6 and improve water quality.

Chen also has said the nation will set water consumption quotas for local governments and continue to perfect the water price formation mechanism in order to promote water resource conservation and protection.

So it sounds as though Su Liu has the right idea – the Chinese government priority won’t be to keep prices low and supply constant for the 7 million Hong Kongers drawing ever higher upstream on the Dongjiang.

And we are vulnerable. Our water agreement with Guangdong was renewed in late 2011 but only for another three years, until 2014 and for a maximum supply of 820 million cubed meters from the Dongjiang, a major tributary to the Pearl River, 83 kilometers north of Hong Kong. Our current accord commits to this supply regardless of drought.  But the river also supplies fresh water to seven other cities, including Guangzhou, Dongguan and Shenzhen. All of those cities, however, have seen allowances decreased during drought years so will Hong Kong continue to receive privileged treatment?

At the same time, we would be ill-equipped for any water rationing. As China Water risk has pointed out here, Hong Kong uses more water per capita than Paris, London, Singapore or Melbourne and over 50 percent of our water is for domestic use. This compares to just 15 percent of water usage in China being for municipal use.

Part of the problem is that our tariffs are among the lowest in the world. As CWR points out, the first 12 cubic meters of water used every four months is free for all domestic users. Countries with comparable GDP per capita such as Netherlands, Switzerland and the U.S. all have higher water tariffs.

But tariffs are also low in China and the expectation is that with a push on the mainland toward water conservation, pricing will likely at some point rise to a water tariff level of 2-3 percent of average household income. That should also translate to higher prices in Hong Kong.

Turning to pollution, I have written several blogs on the lack of enforcement of water quality standards in China. The intense industrial development throughout China, but particularly in the south, has helped fuel annual GDP growth in the double digits but it has also rendered many rivers, lakes and reservoirs, indeed much of the country’s groundwater, essentially useless for agriculture or consumption.

Of the country’s 26 key lakes and reservoirs monitored, only 23 percent fall within grade 1-111, while 19 percent of China’s seven major river basins monitored are  considered essentially useless. Finally, almost 74 percent of groundwater is considered grade IV-V standard, or excessively polluted. More information on China’s water pollution can be found here.

We should remember that a river collects the water in its basin and that means that all the pollutants within the Dongjiang Basin could potentially end up in Hong Kong’s water supply – not a pleasant thought. Will we have to wait for a major accident on the Dongjiang or its feeders before the Hong Kong government wakes up to our vulnerability?

For now, Hong Kong water quality data, although only through September last year, can be found here, on the Water Supplies Department website.

Hong Kong consumers have the ability to sustain a significant tariff hike.  That would help us move toward greater water conservation and at the same time provide  the resources for the city to invest in making options such as desalination and water recycling economically viable. What are we waiting for?

Five Chinese environmental groups have named 48 global fashion brands using polluting factories in China and suggested consumers make a “green choice” when buying clothes.

A report  led by Ma Jun and his Institute for Environmental and Public Affairs  and released this week lists 6,000 water pollution violations by manufacturers  of goods that ranged from sports apparel to luxury handbags.

Brands were linked to the factories over seven months of painstaking review of official websites, financial reports, recruitment ads and procurement bids, among other documents, according to IPE.

Over the past eight years the Institute has gathered a database of over 90,000 air and water violations from official government  sources. IPE now works with many brands to make sure they are not using polluting suppliers and to help clean up those that are illegally dumping untreated toxic waste water into rivers.

Between march 22 and March 29  the five environmental groups wrote to the CEOs of each of the 48 brands linked to factories with repeated environmental violations. They asked the brands to ensure their Chinese suppliers would not pollute the environment while manufacturing their products.

While some of the brands named immediately responded to queries from the environmental groups, acknowledged the issues and detailed how they would address the issues, about two-thirds have not yet engaged, Ma Jun said.

Notably, Spanish clothing retailer, Zara, responded by saying that it was not the company’s policy to answer questions about its business model.

Nike, Walmart, Esquel, H&M, Levi’s, Adidas and Burberry were among the companies that responded positively, saying they would work with their Chinese  contractors to improve their environmental performance. Many of these brands were  already working with NGOs to clean their supply chain, IPE said.

Another 32 brands including Marks & Spencer, Esprit, Calvin Klein, Carrefour, Armani and China-based Anta and Youngor have yet to respond, according to the report.

Besides IPE, the other authors of the report, “Cleaning up the Fashion Industry,” were, Friends of Nature, Green Beagle, Envirofriends and Nanjing Greenstone.

China is a global leader in textile manufacturing, responsible for nearly half the world’s fiber and exporting 34 percent of the garments we wear.

This production has contributed significantly to the country’s GDP but has also taken a heavy environmental  toll locally. Ma said that fashion manufacturers discharge 2.5 billion tons of waste water and chemicals into rivers and the ocean, while 80 percent of effluent is generated in fiber dying.

This has a serious impact on the country’s water supplies and is compounded by the fact that the re-use of water in the textile industry lags way behind that of many others, creating a situation where water efficiency is incredibly low, IPE said.

Among the 6,000 violations, a number of factories were given administrative penalties. Many were told to rectify problems such as illegal effluent emissions via secret discharge pipes, directly discharging waste water into waterways, improper use of waste water treatment facilities and pollutant discharges in breach of standards.

Previously, IPE targeted the IT sector, also with information gleaned from the institute’s violations database. We have written about Ma Jun’s efforts here and here.

After five reports looking at the environmental performance of IT sector contractors, most of the brands named had responded to requests for information disclosure and action.

Among the last hold-outs was Apple, which was the focus of the last two reports. The company has since agreed to disclose its connections to suppliers and provide information on contractor environmental performance.

Clearly, Ma Jun and his colleagues hope for a similar response from another industry that is widely credited with some of the worst environmental performance in China.

With IPE and others watching, retailers and brands will no longer be able to hide behind stated ignorance about how a product is manufactured. They will no longer be able to refuse to divulge lists of suppliers or deny responsibility for egregious environmental emissions locally.

Part of the problem for the apparel sector has been the quantity of suppliers used to manufacture just one item of clothing or shoe. This is a problem we have written about here. 

While many brands are getting better at understanding and working with the factories actually putting together the clothes, they tend to know less about the dyers, the spinners and the knitters who cause much of the environmental damage.

yet engaging with polluting contractors in any part of the supply chain has become a serious reputational risk and thus business risk for global brands hoping to squeeze their suppliers on cost.

It is also a wake up call for consumers hooked on cheap product made at huge environmental expense abroad. It’s about time we all made careful choices about how we consume, make sure that brands are using responsible suppliers.

For companies, the argument turns back to fiduciary duty and redefining what that means, something I have written about here.

Articles in the New York Times and elsewhere last week have criticized Apple for using Chinese suppliers whose workers are ill-paid, overworked and subject to hazardous conditions.

In a full-page spread, The New York Times compared Apple’s financial strength and reputation for innovation with a less-flattering portrait of how its products are made: “ …the workers assembling iPhones, iPads and other devices often labor in harsh conditions…  Problems are as varied as onerous work environments and serious — sometimes deadly — safety problems.”

An “outraged” Apple CEO, Tim Cook, responded swiftly in a strongly worded email to Apple employees cited widely, “we care about every worker in our worldwide supply chain” and “any suggestion that we don’t care is patently false and offensive to us.”

The truth is, nothing like the manufacturing capability found in southern China now exists in the U.S. and nowhere in the U.S. could workers be relied on to dedicate the long hours under similarly challenging  conditions.  Recent attention has focused on Apple supplier, Foxconn, where the iPhone is assembled.  The facility has close to a million employees, many working six days a week, often spending up to 12 hours a day at the plant. Many workers earn less than $17 a day.  That clearly helps improve Apple’s margins.

U.S. news show host, John Stewart, last week described Foxconn as “Fear Factory”  and detailed conditions at the factory,  its treatment of employees, large dormitories of employees, repression of employees who try to unionize and nets around the buildings to prevent suicides.  According to Stewart, the cost savings on an IPod is 23 percent to the consumer.

Understandably there is anger brewing in the U.S. toward companies such as Apple that employ tens of thousands of workers outside the United States to take advantage of lax labour laws abroad. There is a growing voice in the United States for a boycott of the ubiquitous Apple products.

In a separate article, the New York Times pointed out that Apple employs 43,000 people in the United States and 20,000 overseas and many more people work for Apple’s contractors: an additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products.

When asked by President Obama last year about overseas workers and whether or not Apple products might be produced at home, Steve Jobs was quoted as replying that those jobs were not coming back to the United States.

According to the same article, the hugely profitable Apple last year, it earned over US$400,000 in profit per employee, more than Goldman Sachs, Exxon Mobil or Google.

The stories on bad labor practices by Apple suppliers, however, follow five reports from a coalition of now 41 environmental groups in China documenting the performance and willingness of IT brands producing in China to address serious environmental violations by their suppliers.

Many of the environmental violations have led to occupational safety issues and hazardous chemical exposure for workers.

In the first of the reports, the environmental groups contacted the CEOs of 29 top IT brands, asking specific questions about suppliers’ environmental performance and provided evidence of pollution violations.  As they look to production abroad to skirt labour restrictions at home, companies look to avoid environmental regulation that should protect air, water and soil from excessive emissions.

The Chinese NGOs’ engagement process has from the start actually yielded fruit, with a number of brands such as HP and Samsung responding to requests for information and addressing issues in their supply chains. But a few, including Apple Inc., ironically were initially extremely slow in communicating, and less than willing to address the supply chain issues being raised

Hence, two of the reports, in January and August last year, focused specifically on Apple, which had failed to disclose adequate information relating to its suppliers or their environmental violations to the environmental groups, led by Ma Jun’s  Institute of Public and Environmental Affairs (IPE).

Most of the recent negative stories about Apple and the building campaign against the company fail to even mention Apple’s environmental lapses – including the New York Times full-page story, except in passing.

The Chinese environmental NGOs campaign to improve disclosure and environmental performance by brands and their suppliers is something we have written about here and here – long before the Apple news became mainstream.

In a significant success for the NGO coalition, earlier last month, for the first time Apple’s  annual supplier responsibility report  released a list identifying many of its suppliers and acknowledging some of their environmental and labour violations first publicized by IPE.

Indeed, a look at the reports showed that more than half of the suppliers audited by Apple have violated at least one aspect of the code of conduct every year since 2007, and in some instances have violated the law, according to the New York Times Story.

IPE’s website list of non-compliant factories in China reached 94,725, while the Water Pollution maps now used by many brands to filter their supply chains and make sure they are not using polluting suppliers, registered 6,220,696 page views.

IPE is now working directly with 30 such brands to screen suppliers and 550 companies have responded to being placed on the polluters list by seeking dialogue with IPE.

Since releasing its list of suppliers and acknowledging environmental breaches, Apple has also agreed to continue conversations with IPE later this month and potentially to encourage two suppliers to engage in a pilot third-party audit monitored by the Chinese NGOs.

In all, 3,122 companies have undergone a third-party audit or a document review audit process and this has led to 94 companies being removed from the polluters list.

Reprinted from the South China Morning News, January 16, opinion written by Sophie Le Clue, ADMCF’s director of environmental programs:

In one sense, 2011 was a good year for sharks. The movement in Asia against consuming shark fin gained momentum against a
backdrop of new legislation to ban the trade in California as well as several Canadian cities. In a domino effect, shark sanctuaries were declared worldwide, covering thousands of square kilometers.

In China, the business community also rallied against shark fin. To date, 142 business leaders including chairmen and chief
executives of leading companies such as Lenovo, Haier and China Merchants Bank pledged not to eat it, while hotels and clubs have committed to not serving the infamous soup.

On the government side, in 2011 45 members of the Chinese People’s Political Consultative Conference signed the “Motion on
Development of Regulations on Prohibiting Shark Fin Trade”. Some members of the National People’s Congress also signed the
motion, which will be considered by the government later this year.

Meanwhile, the Hong Kong and Shanghai Hotels Group’s surprising and insightful move to ban the product across all outlets, including its famed Peninsula hotels, was perhaps a fitting end to the year.

Despite these moves, there is a long way to go. There are enormous challenges to implementing regulatory controls and many shark populations globally remain endangered, some threatened with extinction in the near future.

As a result, eyes are now firmly on Hong Kong, the centre of the global shark fin trade and itself a driving force in declining shark
populations.Yet it seems resolute in enabling such ecologically important endangered species to be traded with little regulatory control.

Approximately 10,000 tonnes of shark fin from millions of sharks are imported into Hong Kong every year with virtually no regulation as to species. According to some estimates, this equates to around half of the global trade.

To provide context: of the 507 shark species, only 256 have been assessed by the World Conservation Union (IUCN) to determine their conservation status and of these, 56 per cent, or 143 species, have been identified as threatened with extinction, either now or in the near future. Many of these species are freely traded in Hong Kong.

Last year, questions by legislators on the topic of shark fin met with the standard response: that the government adheres strictly to Cites (the Convention on International Trade in Endangered Species of Wild Fauna and Flora) requirements.

Quite why this prevents the government from regulating trade in endangered species not under Cites remains to be seen.
The paradox, however, is startling. Cites was drafted as a result of a resolution adopted in 1963 at an IUCN meeting and came into force as an international agreement in 1975.

By placing trade restrictions on species at risk, it aims to ensure that the international trade in wild animals and plants does not
threaten their survival. Yet it only includes three species of shark, despite valiant efforts to introduce several others in 2010,
when countries with vested interests in the trade, such as Japan, reportedly bargained with fellow signatories to ensure that highly lucrative shark species – albeit critically endangered – were not included in the convention’s regulatory appendices.

Science and sustainability, the cornerstone of conservation, clearly gave way to commercial interests. For sharks at least, Cites is failing. So when an administration such as Hong Kong hides behind its Cites’ commitment in response to questions about the shark trade, despite the convention’s obvious failings, we know we are in troubled waters.

We can only hope that the next chief executive will have more foresight. Hong Kong remains a gateway to the shark fin trade in
Asia; with a little vision it could make eating shark fin history and have a major impact on an issue of global significance.

Yesterday the Shangri-La  took the courageous step of declaring that effective immediately, the group’s 72 hotels and resorts would no longer serve shark fin in any restaurants or at wedding banquets.

The announcement falls under the company’s new sustainable seafood policy, which also includes a decision to phase-out Bluefin tuna and Chilean sea bass in all hotel restaurants within the year.

In a press release, the hotel said that in December 2010 the company initiated the process of becoming shark fin free with the removal of shark fin products from its restaurant menus. “The new policy is a continuation of Shangri-La’s journey towards environmental support,” the release said

This follows the Peninsula Hotel’s decision in November last year to stop serving the soup in its restaurants and at wedding banquets as of January 1st this year.

The hotels should be applauded for their actions, which were not easy in a city that sees 50 percent of the global shark fin trade and where consumption of the soup at special events has been second-nature. Here, shark fin soup is seen as a symbol of wealth and  prestige and consumed most often at weddings and corporate banquets.

Yet as the consumption of the soup has increased in recent years with greater affluence in Asia, shark populations have dwindled.  In some species. populations have declined by as much as 90 percent. As many as 73 million sharks are caught annually, with millions of these believed caught for their fins alone.

Shark flesh is not a  high-value meat, while dried fins can be sold for as much as $300 a pound. A bowl of the soup in Hong Kong can fetch as much as $100. Thus is some cases, shark are finned at sea  with the bodies thrown back to drown in a practice that is both wasteful and cruel.

Bloom, the HK Shark Foundation, WWF and other conservation groups have been working hard in Hong Kong over the past few years to educate consumers and the trade about the ramifications of declining shark populations for our oceans.

The work has included research to understand both the cultural attitudes toward consumption of shark fin soup and the trade in shark products;  educating the hotels on biodiversity issues related to sharks and learning about the challenges of ceasing sales of shark products; encouraging consumers to consider shark fin free weddings; encouraging companies to sign a pledge not to serve shark fin soup at banquets.

Despite a swell action from local and national governments worldwide to ban consumption of shark fin products, the Hong Kong government (consistent with its course of rarely acting in public or conservation interest) has refused to consider any such action – even a ban on serving at official banquets.

In reality, the assumption is that because of the cost, little shark fin soup is actually served at official banquets in Hong Kong and indeed government officials have alluded to this.

Certainly, however, with the growing awareness around threats faced by our oceans, the sense of inevitability of action as shark populations decline, the government must now be feeling the heat.

Last week the HK Marine Products Association was certainly feeling the heat. The trade group placed half-page ads in leading Chinese publications titled (in English translation) “Is eating Shark Fin Guilty?” and arguing  that

  • Shark fin is simply a by-product of the shark fishing industry
  • CITES bans trade in only four species therefore fishing should be allowed in others
  • Any conservation of a species should be based on scientific evidence not emotion
  • States  the MPA uses resources sustainably and contributes to conservation

Clearly, shark fins, for reasons stated above are not by-products of any shark fishing industry and clearly conservation of a species should be based in scientific fact, which exists and is documented: sharks are in significant decline.We would welcome any communication from the MPA related to their sustainable practices and conservation work.

The CITES issue mentioned in the ads is an interesting one and is raised frequently by the MPA, as well as both the HK and Beijing governments, which hide behind the treaty. The main point here is that CITES is not effective in protecting shark species globally and should not be used, counter-intuitively, as a a justification to fish endangered

CITES was drafted as a result of a resolution adopted in 1963 at an IUCN (The World Conservation Union) meeting and entered into force in 1975 as an international agreement. Today, it has 175 signatories.

Its aim: to ensure that the international trade in wild animals and plants does not threaten their survival. The CITES mechanism to achieve this is by placing trade restrictions on species at risk. The Convention is, therefore, undoubtedly an important wildlife conservation agreement.

Yet CITES only includes three species of shark, despite that according to IUCN 143 species are threatened with extinction, either now or in the near future.

So why should a conservation agreement exclude threatened species? The answer lies in the fact that for a species to be bought under CITES trade restrictions, the signatories must vote.

In 2010, for example, six shark species were proposed for inclusion in CITES. Countries with vested interests in the shark trade, such as Japan, bargained with fellow signatories to ensure that highly lucrative species, albeit critically endangered, were not included in the Convention’s regulatory appendices. Science and sustainability clearly gave way to commercial interests.

In Hong Kong, CITES remains the only mechanism for regulating the shark fin trade and to make matters worse its implementation is unclear.

The Agricultural, Fishery and Conservation Department (AFCD) of the Hong Kong government is responsible for monitoring the trade in endangered plant and animal species.

Currently, visual identification is a commonly used to identify imported plants or animal species. While this may be appropriate for many species, it is extremely difficult, in practice, to determine the shark species from a fin without the carcass, and even more difficult if the fin has been bleached or processed. It is understood that AFCD do not carry out any DNA analysis.

Thus, CITES clearly is not an effective mechanism to monitor the shark fin trade in Hong Kong.

Scientific research based on DNA testing shows that in 2006 approximately 40% of the auctioned fin weight in the Hong Kong market came from 14 shark species listed on the IUCN Redlist of Threatened species.

So bravo to the Shangri-La and the Peninsula hotels for taking action, the 112 companies in Hong Kong that have signed the WWF pledge not to sell or buy shark fin as part of their corporate activities.

Going shark free is a groundswell here and abroad that we certainly hope will continue in time to save the apex predators and our oceans.

I’ve been thinking recently about Fiduciary responsibility and what that has come to mean over the past two decades of rapid growth.

I’ve been thinking about how and why the interpretation that has crept into investment culture over that period – simply to maximize rates of return  – has slowed an appreciation of investment that doesn’t cause social or environmental harm.

It goes without saying that this has also slowed investment that promotes social good as well as generating returns.

I’ve also been thinking that by itself  this narrow interpretation ignores both business risk and opportunity  – neither of which should be ignored considering the dictionary definition of fiduciary duty:  to act prudently.

Writing in a Capital Institute blog, Stephen Viederman, former president of the US-based Jessie Smith Noyes Foundation, argues that foundations should align program work with investment strategy – something that is all too rare.

“Foundation fiduciaries have an obligation to seek  ‘good’ and ‘competitive’ returns, not necessarily to maximize them,” he says.

Part of the problem has been the accompanying  “myth of financial underperformance from ‘social investing,’ a myth that still lies at the heart of the problem for finance committees who conveniently forget that two-thirds of traditional active managers underperform their benchmarks every year,” Viederman says.

“Yet the profit-maximizing argument–that you will underperform if you do sustainable investing–comes up time and time again in conversations and is never examined by the people who are making it.”

Indeed, most investors are not considering the business risk associated with investing, for example, in a power company, a textile operation or mining business in a region that is water scarce.

Most ignore the reputational risks associated with investing in factories or plants that are polluting, overly consumptive of resources, or engaged in bad labor practices.

“All investments are about the future, but most investment decisions are made on retrospective data, which as fund offerings make clear, are not predictors of future earnings,” says Viederman.

“We need to ask about …  ‘predictable surprises,’ which include climate change, the BP Gulf disaster and the financial bubble among others. …Any institutional investor who ignores them is in breach of their fiduciary duty. To be prudent, as in the prudent person, is in its original meaning, to be farseeing.”

The ADM Capital Foundation launched a web portal, China Water Risk, in October to provide investors and companies with information about water scarcity and pollution in China.

Part of the thesis behind the initiative is that better investment decisions produce better returns in the long run and these usually come with more information – and not the information investors traditionally have sought.

But, certainly, few could disagree that the regulatory environment is changing to reflect resource consumption and that water pricing in the near future will reflect scarcity.

Few could disagree that NGOs are increasingly sophisticated in exposing pollution incidents (see my blog posts on IPE’s Ma Jun and Apple, on Greenpeace’s Dirty Laundry and other reports) and that local protests in China are growing around pollution incidents.

Workers are no longer content to suffer exposure to hazardous chemicals silently, or work extraordinarily long hours without proper compensation.

All are, potentially, a drag on profits. Would it not then make sense for fiduciary duty to include analysis of  such risk?

Fully Risk-Adjusted Returns (FRR), as they might be called, should certainly not be lower as a result, indeed given the current and future challenges the world faces, they could even be enhanced by additional information.

For those who missed this, one company that is looking to consider the impact of production is PUMA, which earlier this year announced the results of an unprecedented environmental profit and loss screening.

This was a big step toward assigning economic value to resources consumed and to emissions. The value assigned was also a step toward determining the true cost of production of PUMA apparel and shoes.

Results from PUMA's Environmental Profit and Loss Analysis

The analysis showed that raw material production accounted for the highest relative impact of Greenhouse Gas Emissions and water consumption within PUMA’s operations and supply chain.

According to PUMA’s report, the direct ecological impact of company operations translated to the equivalent of 7.2 million euros of the overall impact valuation. An additional 87.2 million euros was distributed along the four-tier supply chain.

Thus, the overall environmental impact of GHG and water consumption amounted to 94.4 million euros. That compares to a third-quarter net profit of 82 million euros.

“By putting a monetary value on the environmental impacts, PUMA is preparing for potential future legislation such as disclosure requirements,” the company said.

“By identifying the most significant environmental impacts, PUMA will develop solutions to address these issues, consequently minimizing both business risks and environmental effects.”

Finally, a new and important report from IESE Business school, “In Search of Gama, an Unconventional Perspective on Impact Investing,” steps into the discussion with questions such as:

  • By focusing exclusively on the creation of financial wealth for individuals are financial markets destroying value for society?
  • Is social responsibility a component of investment that is necessarily detrimental to financial return?
  • Should changes be made in the taxation and supervision of financial transactions to account for financial markets’ responsibility to society?

Clearly, business as usual is no longer smart business and change is imminent. Considering the impact of investments and reconsidering how we make investment decisions will be the way forward.

Let’s start  by redefining fiduciary responsibility, considering Fully Risked Returns. Clearly, returns may actually be enhanced either when viewed through the lens of an appropriate risk framework/weighting or in reality as a result of a superior business environment.