Launched in 2000 by the then-UN Secretary General, Kofi Annan, the UN Global Compact is a call to entities to align their strategies and operations with its Ten Principles on human rights, labour, environment and anti-corruption, and to take action that advances societal goals, using the SDGs as their guide. The UN Global Compact is the world’s largest voluntary corporate sustainability initiative. It is a leadership platform for development, implementation, disclosure and innovation in responsible and sustainable corporate policies and practices. Entities can engage with it anywhere along the path to sustainable development: from beginners to the most advanced leaders.
Smart entities understand that principles-based business is about far more than minimum standards or compliance. Principles are ultimately the foundations for building trust
The Ten Principles of the UN Global Compact provide a common ethical and practical framework for responsible business regardless of size, complexity or location. Smart entities understand that principles-based business is about far more than minimum standards or compliance. Principles are ultimately the foundations for building trust: they provide common ground for partners, a moral code for employees and a measure of accountability. By incorporating the Ten Principles into strategies, policies and procedures, and establishing a culture of integrity, entities are not only upholding their basic responsibilities to people and planet, but also setting the stage for long-term success.
Today the UN Global Compact has close to 10,000 business and 3,500 non-business participants based in over 160 countries. The Global Compact Network Australia is business-led. It guides businesses on how uniting profit and responsibility can be at the core of their business by advancing the Ten Principles and ensuring that making a contribution to social and environmental investment drives long-term business success.
Alignment of purpose and profit
What of the link to trust? Responsible business practices demonstrate the alignment of purpose and profit and orient business strategy around social purpose. Entities can no longer survive on the notion of shareholder primacy. They must demonstrate to their employees, their customers, stakeholders and shareholders, that their purpose is one based on the collective good: that the ‘tone from the top’ is aligned to their purpose and embedded not only in their culture, but in the products and services they provide.
Entities can no longer survive on the notion of shareholder primacy. They must demonstrate… that their purpose is one based on the collective good
For example, Unilever has been a purpose-driven entity for decades. Its mantra is ‘to make sustainable living commonplace’. This simple purpose demonstrates that Unilever’s raison d’être is not to provide strong shareholder returns on an annual basis, or to make great soap. Unilever fundamentally understands that making profits does not have to come at the expense of people or planet. Rather, its business is oriented around a broad social purpose that has enabled it to drive innovation deep within the entity. This has led to the creation of more sustainable growth and has also flowed through to its products. Each of Unilever’s products is imbued with the same sense of purpose. By placing sustainability at its core, Unilever is now more connected to its consumers than most global entities. This has increased the trust placed in its brand and its products: this is what will help rebuild trust; a purpose that extends far beyond the business.
This is also why more and more entities in Australia are adopting the SDGs and aligning their climate change strategy to the Paris Agreement. Introduced in 2015, the SDGs, or ‘Global Goals’, provide a powerful agenda for sustainable development that tackles deeply entrenched economic, social and environmental challenges. The distillation of global challenges into 17 goals makes them easy for businesses to implement and provides a vital framework for investors to assess how entities are integrating inclusive economic growth into their business strategy and operations. The UN Global Compact Progress Report 2018 revealed that 80 per cent of participating entities already report taking action in support of the SDGs. Investors also look at an entity’s alignment to the SDGs as an indicator of long-term sustainability. Fundamentally, the SDGs provide a mechanism for entities to be held accountable to their values.
The Global Goals were introduced around the same time as the Paris Agreement, which charts a new course for the move to a net-zero, or decarbonised, economy. Climate change is a topic that can no longer be ignored; business is well aware of this. Business is facing increasing regulatory pressure in Australia from the Australian Prudential Regulatory Authority (APRA) and the Australian Securities and Investments Commission (ASIC) to assess and disclose the financial risks of climate change. Businesses are now heeding the advice of the former president of the Australian Bar Association, Noel Hutley SC, on the acceleration of climate-related litigation1 and are considering which mechanisms they need to put in place to reduce the trust deficit. Businesses are also engaging more closely with investors, as this important stakeholder group demands that entities disclose their long-term, climate-related risks, and ensure that their operations are resilient to the shocks of climate change.
Business is facing increasing regulatory pressure in Australia… to assess and disclose the financial risks of climate change
Entities that are incorporating the SDGs and implementing a climate strategy that, at a minimum, limits global warming to well-below two-degrees, are sending a strong, positive signal to the broader business community. These entities are, in effect, becoming advocates for how the Ten Principles of the UN Global Compact provide a common partnership standard that sets in place a principles-based approach to doing business responsibly.
What about the financial returns?
The opportunities to align purpose and profit have never been greater. Businesses that use the SDGs and the Paris Agreement as their guide will find innovative solutions to intractable problems, either through making their own investments or through multi-stakeholder collaborations, or a combination of both. While the ethical motivation for ensuring that the SDGs are embedded in business is obvious, investors, employees, future talent and consumers also recognise that doing so will create long-term value.
The Business Commission for Sustainable Development estimated that the SDGs drive US$ 12 trillion in opportunities across energy, cities, food, agriculture, health and wellbeing. However, to harness this huge opportunity and drive progress at scale, greater investment must be unlocked. To do this, multi-stakeholder partnerships that mobilise shared knowledge, expertise, technology and financial resources are required, to support the achievement of the Global Goals and to make an incredible impact.
This is where financing for SDGs is vital. While the financial sector is a crucial player, the broader corporate sector also plays a key role through the investments that it makes every day. Entities can contribute to financing the SDGs in a number of ways. First, entities can, through their own foreign direct investments (FDI), make significant capital allocations that make a positive social and environmental impact. In doing so, they are further contributing to the global flows of FDIs that, in 2018, totalled US$1.2 trillion.
Second, when raising debt, entities should consider issuing SDG bonds. Building on the emergence of a $173 billion green bond market, there has been innovation in creating other sustainability-themed bonds, including water bonds and social bonds. Issuing entities, such as ANZ and National Australia Bank, which are taking action on the SDGs, should consider tapping into this market, as institutional investors continue to expand their sustainable investing portfolios.
Last, entities (and their employees) should apply an SDG lens to their superannuation investments. Investor groups are starting to embed SDG indicators across their investment portfolios, which will enable them to make far more targetted decisions about which projects they finance and which entities they invest in. With Australia’s superannuation assets totalling $2.9 trillion, superannuation funds can play an important role in enabling employees to invest their savings in a purposeful way. As a country with a compulsory pension regime it provides Australians with a significant opportunity to direct their pension funds towards SDG related investments.
The opportunities arising from decarbonisation are similar. The pathway to a low-carbon economy provides opportunities in clean technology, green building development, electrification of transport and effective waste and water management. In its 2018 report, the Intergovernmental Panel on Climate Change (IPCC) projected that if there is global alignment on climate policies that match a 1.5 degree pathway, there will be considerable shifts in investment patterns to 2050. Overall, this means that to limit warming to 1.5 degrees there needs to be investment in low-carbon solutions that reduce greenhouse gas emissions. According to the IPCC, this will see an increase in investments in technologies that support low-carbon energy supply (that is, power generation, fuel conversion, pipelines/transmissions and energy storage) averaging US$1.6 to 3.8 trillion per year to 2050.
The business benefits are clear, and entities that commit to the 1.5 trajectory and implement scalable and replicable business models that invest in the pathway to net-zero, will be leaders in demonstrating the value of balancing profit and purpose. In fact, the consequences of failing to take advantage of these opportunities far outweigh the costs of investment. The IPCC also highlights that ambitious investment in climate action, such as investment in low-carbon technologies, will also assist in creating shared prosperity and economic stability through the creation of new jobs, increased access to energy, more sustainable and accessible transport and improvements in health. It’s the entities that recognise the value in the estimated US$26 trillion in global economic benefits of climate action through to 2030 (compared to business as usual) who will be leaders.
How do entities avoid their investments being seen as ‘greenwashing’? Over 30 entities, with a total market capitalisation of over US $1.3 trillion, have committed to emissions reduction targets that are aligned to reducing global warming to 1.5 degrees above pre-industrial levels, and to reaching net-zero emissions no later than 2050. These include property entity Dexus, the first Australian entity to set a 1.5 degree trajectory in line with the Science Based Targets initiative2. The Global Compact Network Australia, in partnership with WWF Australia, works alongside entities like Dexus, Origin, Frasers Property, Edge Environment, Westpac and Think Step, to enable them to commit to, and work towards, setting a Science Based Target. These entities are part of a global group of 624 businesses that want to mitigate the impact of climate change on their business. These entities have realised the benefits of aligning their business with the rising investment trend towards entities with strong environmental, social and governance principles. They know that leveraging low-carbon opportunities will also provide them with greater operational efficiency, a reduction in costs and the opportunity to harness the US$ 26 trillion that climate action can offer them through to 2030.
Conclusion
The SDGs offer the direction that entities need in order to rebuild trust and align purpose and profit. The Ten Principles enable entities to carry out business responsibly and the SDGs guide them in finding opportunities to provide solutions to global challenges. However, the responsibility of solving the world’s problems cannot be left to the private sector, principled businesses can, and should, work alongside government, civil society, academia and other stakeholders to achieve the Global Goals and secure trust.
Collaboration between sectors and stakeholders provides an avenue for more inclusive and transformative growth. Balancing profit and purpose and regaining trust starts by doing business responsibly: embedding principles on human rights, labour, environment and anti-corruption into strategy and operations. By having a continual focus on innovative partnerships and investments, transformational change and maintaining trust becomes possible.
Leadership is essential to this process. Businesses that embrace a principles-based approach think boldly, act swiftly and become activists for change. They tackle existing and future risks and challenges in a manner that contributes to societal goals. They align their whole business to people and planet and become more resilient as the physical and economic environment changes.
This does not have to be done alone. The Global Compact Network Australia exists to assist businesses with liaising with government, other businesses, civil society, academia, investors, consumers and unions to ensure a collaborative and sustainable path forward. It encourages business to respond to these global challenges and take action: to work with it to become a leader who truly listens to the changing global market, who is able to stay ahead of these changes and provide innovative solutions now for the problems we will face tomorrow. To become the entity that listens to its employees, many of whom are clamouring for change, and aligns with their own principles-based approach. The impetus for action is significant: we can regain trust in business and shift our planet onto a more sustainable and resilient path, but the time to act is now.