Rob Lake, Henderson Global Investors
Brian Pearce, Forum for the Future
Lord Holme of Cheltenham
1. Brian Pearce introduced the London Principles, contained in a document called "Financing the Future" commissioned by the UK Department for Food and Rural Affairs from the Corporation of London, as a contribution to the World Summit on Sustainable Development. The Principles should not be interpreted as a formal code of conduct or a substitute for a code, nor as a formal compliance framework. They were, however, intended to move the debate on the role of the financial services industry in poverty reduction away from its traditional stance of "do no harm" towards a more positive framework within which the private sector could increase both the quantity and quality of assets available for poverty reduction.
2. The key task was to provide a framework within which private investment maximised the risk-adjusted returns, not just in a market sense, but also in a social sense. This could be achieved by legislation, by an appeal to business ethics, or through market-based incentives. The latter could encourage the development of innovative financial processes, products, and markets, and operate at the level of the financial system rather than individual institutions.
3. A number of examples were provided: value-focused socially responsible investment funds, "investor engagement", carbon markets, venture capital for disadvantaged communities. For the system as a whole, it was important to ensure that equity and debt prices reflected sustainability impacts and that good corporate governance was in place. Other examples were to be found in "Financing the Future".
4. The London Principles consisted of the following:
Signatories agree, where relevant to the product and geographical scope of the business, to:
Principle 1. Provide access to finance and risk management products for investment, innovation and the most efficient use of existing assets
Principle 2. Promote transparency and high standards of corporate governance in themselves and in the activities being financed
Principle 3. Reflect the cost of environmental and social risks in the pricing of financial and risk management products
Principle 4. Exercise equity ownership to promote efficient and sustainable asset use and risk management
Principle 5. Provide access to finance for the development of environmentally beneficial technologies
Principle 6. Exercise equity ownership to promote high standards of corporate social responsibility by the activities being financed
Principle 7. Provide access to market finance and risk management products to businesses in disadvantaged communities and developing economies
5. Rob Lake emphasised that the London Principles made only a partial contribution to poverty reduction, and that they would have been unlikely to have come about had not many Socially Responsible Investment (SRI) Funds already be implementing some of the principles (particularly principles 2, 4 and 6). However, the Principles were politically important because of the involvement of the Corporation of London. They reflected a growing commitment to social and environmental responsibility, and a sense that these themes needed to be mainstreamed. It was already a requirement, for example, that pension funds should have a policy on social and environmental impact (although they were not yet required formally to report on implementation of the policy). Similarly, there were proposals under discussion for strengthening company law in this area.
6. The Principles were new and it was still too early to report in detail on implementation. However, Rob Lake's own experience as an investment fund manager was that it was possible to have useful discussions with companies, for example around corruption issues (Principle 2), or about supply chains. The Just Pensions campaign was working on similar principles. It was probably necessary to say that there was general agreement on the principles, but that implementation was so far slow. Interestingly, continental pension funds and pension fund managers appeared to show more interest in implementation than UK-based counterparts.
7. A number of points were made in discussion:
i. Questions were asked about the scope of the Principles. For example, what did it mean that business signatories were committed to "reflect the cost of environmental and social risks in the pricing of financial and risk management productions?" Would they accept lower returns without regulation? The speaker emphasised that the London Principles were not a code of conduct or a compliance framework: the intention was rather to promote good practice. There clearly were regulatory implications, however. The pressure on companies to meet social and environmental best practice criteria was increasing gradually, and consumer pressure was playing an important part. Nevertheless, there were still cases were externalities needed to be internalised through public intervention, such as through risk equity, soft loans or risk guarantees. It was interesting that in the early discussion about the Principles, the private sector had asked for UK Government involvement, but this had been resisted.
ii. There was a wider issue about whether the Principles "covered the waterfront" in terms of the contribution that the City of London might make to poverty reduction in developing countries. For example, the financial institutions played an important part in financial crises. There was also a debate about the extent to which liquidity was being drained from developing country stockmarkets into metropolitan markets in developed countries. However strong the London Principles might be on particular topics covered, there was a wider debate to be had.
iii. Questions were asked about whether or not there was a trade-off between quality and quantity. In other words, would application of the London Principles improve the quality of engagement in developing countries, but simultaneously reduce the volume of such engagement. It was entirely possible that the Principles would increase the perception of risk thresholds, and thereby reduce investment. This was agreed by the speakers to be a reasonable point. The case of pesticide residues on cut flowers was cited as an example, where the application of high standards (in itself a good thing) would make it more difficult for developing countries to export to developed countries.
iv. A further question was about whether the Principles would be adopted by all players in the market, or only by "the usual suspects". It was obviously important to encourage wide-scale adoption, but these were still early days.
v. Finally, an area for further extension was identified around the topic of conflict, which the Principles did not mention, but where improved practice by financial institutions could help to reduce its likelihood and impact. The case of the oil companies in Angola were cited as an example, along with the role of banks in recycling money siphoned off from legitimate contracts.
8. Closing the meeting, Lord Holme emphasised the importance of the London Principles. He said this should be thought of as more than a City of London initiative, rather as one which involved many financial institutions and other centres around the world, and that they were aimed at the wider 'system' of finance rather than 'financial institutions' per se. Their most important contribution was to shift the debate away from the negative agenda of "do no harm", towards a more positive agenda designed to stimulate development and support sustainable livelihoods. He thought business would be more attracted by the term livelihoods than the term poverty, which was often thought of as a social welfare function. In any case, however, it was important to emphasise the positive development agenda.
Simon Maxwell, ODI, 20 November 2002
During this event the London Principles wereintroduced, contained in a document called "Financing the Future" commissioned by the UK Department for Food and Rural Affairs from the Corporation of London, as a contribution to the World Summit on Sustainable Development.