Making Profits, Protecting Our Planet: Corporate Responsibility for Environmental Performance in Asia and the Pacific
Speech by
Nessim J. Ahmad
Director
Environment and Social Safeguards
Asian Development Bank
At the 6th Asia-Pacific Roundtable for Sustainable Consumption and Production
Melbourne, Australia
10 October 2005
Introduction
Distinguished participants, colleagues and friends,
I am delighted to join this distinguished panel to help set the scene for a very important conference. This is timely for me, since the Asian Development Bank - ADB - is just releasing its second Asian Environment Outlook. The report is aptly entitled Making Profits, Protecting Our Planet: Corporate Responsibility for Environmental Performance in Asia and the Pacific.
In ADB's first Asian Environment Outlook, published in 2001, we emphasized the need for better integration across environmental, economic and sectoral policies and plans. We urged governments to go beyond command-and-control regulations in their environmental policies. And we recommended wider application of a mix of market-based and regulatory approaches to achieve environmental objectives more effectively.
Our new report - let's call it AEO 2005 - builds on this analysis. It examines trends for improved environmental performance in Asia and the Pacific and it looks at how governments, corporations, development agencies and other stakeholders can best respond.
We believe AEO 2005 offers some timely and important messages. This morning I would like to highlight the main story line:
First, the region will need continued strong but environmentally sustainable economic growth to achieve poverty reduction targets;
Second, pressures are mounting on the private sector to improve its environmental performance;
Third, Asian companies need to be alert to these growing pressures and engage proactively with government in defining the rules of the game, and move beyond compliance.
Fourth, there is a sizeable and rapidly expanding market for "green" products and environmental infrastructure that will reward the most agile and forward looking firms;
And fifth, exciting prospects for technological change will help to shift us to a more sustainable economy, but we need to balance the risks and the rewards.
Let us examine each of these points briefly in turn.
The Imperative of Growth in Asia and the Pacific
Economic growth across the region has been impressive over the past 40 years, and has resulted not only in dramatic poverty reduction but also a swelling in the ranks of the middle class. Asia's total share of world GDP in 1960 was about 13%. By 2000 it had almost doubled to 25%. And developing Asia is expected to continue this trend, growing by 6.5% in 2005.
Even if high growth rates continue, the number of people living on less than a dollar a day will still be around 150 million in 2015. On the other hand, if growth slows and inequality grows, that number could well rise to almost three times this level. Using the $2 a day standard, the comparable figures are 1.2 billion and over 1.6 billion poor people - far short of the international target of halving poverty by 2015.
Put quite simply, Asia must therefore continue to grow rapidly, building on the progress of the last two decades. But it must abandon the "grow now, clean up later" approach. Past growth has generated unprecedented levels of pollution and resource degradation, making Asia's cities the most polluted and it natural resources the most degraded. Environmental degradation is already amounting to 4-8% of gross domestic product (GDP) in many countries. With Asia's ecological footprint being what it is - and looking at what it could be in 10 to 20 years - the issue concerns not only the region but the future of the planet itself.
The conventional approach to environmental management has been to focus almost entirely on the role of government. But what is becoming clear is that a sustainable future for the region will not be possible without the active engagement of the private sector.
Growing Pressures for Environmental Performance
Fortunately, pressure to make corporate behavior more environmentally responsible is increasing rapidly.
AEO 2005 extrapolates a growing public demand and even outcry for better environmental quality. This is being fueled by information technology, increasing levels of education, and stronger civil societies. This trend can only increase as Asia's expanding middle class gives greater attention to its quality of life.
AEO 2005 points out that governments across our region-from India, to Thailand, to the People's Republic of China (PRC)-are gradually beginning to get serious about the environment. Most governments now have cabinet-level environment ministries. Some countries are increasing their budget allocations for environment protection, beyond the regional norm of less than 1% of GDP. The People's Republic of China, for instance, is projected to increase spending on environment to 1.5% of GDP during the next five years. Enforcement of pollution control laws is tightening and judiciaries are taking tougher stances. India's so-called "green bench", for example, has become famous for closing polluting firms with unprecedented vigor. The same is happening in the PRC, where only a few months ago construction of 30 large-scale projects - including major dams - was halted for non-compliance with environmental impact assessment procedures.
In addition, AEO notes that global pressures for corporate environmental performance are mounting. More than 2,400 firms have committed to the Global Compact, and its 10 principles of good corporate governance covering human rights, labor, anti-corruption, and environment. Similarly, 30 of the world's largest banks, accounting for 75% of global project financing and $50 billion in annual investment have signed on to the Equator Principles. These require major projects to meet rigorous environmental and social safeguards. And over 700 large corporations - most of which operate in Asia or the Pacific - have decided to report on their environmental and social performance in line with the Global Reporting Initiative.
Global environmental performance standards are becoming a badge of good corporate governance and are now being passed on to SMEs through supply-chain relationships. In a world of economic integration, consumers are demanding evidence that goods were produced in a sustainable manner. Many are prepared to boycott companies suspected of ignoring environmental or labor laws. Socially responsible investment funds exclude poor environmental performers. Stockholder advocates are pushing wide-ranging resolutions at annual meetings. Green procurement is also on the rise. So far, much of this pressure has emphasized voluntary commitments, but the trend is inexorably toward more mandatory or quasi mandatory requirements.
Compliance and Beyond
The more than 50 million companies now operating in Asia and the Pacific will gradually, but surely, get caught up in what is a worldwide trend. So far most Asian firms have not been leaders in environmental performance, and many might well be oblivious to the need for change. Even those companies that wake up to this new reality and are prepared to move toward environmental compliance face a formidable and often confusing mélange of regulations, and standards at the national level. Governments will need to work towards making this regulatory jungle more hospitable. The private sector will need to engage with governments to jointly agree on more workable targets and develop measures to achieve pollution reduction and resource efficiency.
In moving forward, both large firms and even small enterprises can make more use of what AEO calls the emerging sustainability toolkit. At the minimum, environmental management systems, life-cycle analysis, recycling, increased energy efficiency, and continuous quality improvement processes can be used to reduce costs. For example, in Thailand, more than 600 firms participating in a recent eco-efficiency program achieved an average 47 percent return on their investment. On the other hand, firms that fail to adopt the sustainability toolkit may well find that their competitiveness and corporate reputation will be at stake.
Turning Threats into Opportunities
While some firms may perceive the environment pressures as a stick, others may see a carrot. AEO 2005 scopes out the growing market opportunities that exist for firms that wish to go beyond compliance and engage in new markets for environmental quality.
The current global market for environmental goods and services is already estimated to be about $600 billion per annum. This is projected to grow to over $800 billion by 2015. The corresponding market in developing Asia and the Pacific now accounts for $37 billion of this total. But its estimated yearly growth rate is between 10 and 12 percent - the fastest in the world. This means that the annual turn-over in environmental goods and services in our region could triple to more than $100 billion by 2015.
And these numbers actually underestimate the size of the regional market, because they don't capture the bulk of infrastructure investment that is needed. Meeting the region's growing demand for improved environmental quality will require a massive expansion of air pollution control, wastewater treatment, solid waste management, public transport, and clean, renewable energy systems. Annual requirements for environmental infrastructure in East Asia alone have separately been estimated to amount already to approximately $200 billion.
New financing mechanisms will be needed to meet this demand, especially those that tap into equity markets. These will include venture capital and other private funds dedicated to these purposes. Such funds are already emerging in Asia and ADB is already supporting one such effort - the People's Republic of China Green Fund - which can serve as a model for others to build on. New opportunities will also exist in the area of carbon trading and markets for ecosystem services.
Of course, only a portion of firms will be able to benefit from the boom in environmental investment. But many should at least be able to gain from greener product differentiation, if they read the market and adjust their business strategies accordingly. In India, for example, textile and handicrafts manufacturers have benefited from marketing redesigned products to environmentally conscious consumers in Europe. And such opportunities will grow as new technologies and processes come on stream.
The Role of Technological Innovation
The role of technological change may well be central to the region's future. There is some good news for the "techno-optimists" who believe that the technology will solve our problems. Indeed, AEO 2005 forecasts the prospects for 44 new technologies and predicts some impressive environmental gains from technological innovation.
Nanotechnology and other advances in manufacturing promise the dematerialization of production processes. Hybrid cars and transport improvements could drastically reduce air pollution. Progress in the mineral and life sciences could further increase agricultural and mining productivity while reducing environmental impacts. The constant march of new information technology should help to conserve energy and paper.
Such technological change will allow firms in the region to leapfrog polluting and resource intensive production processes. Most of the region's capital stock needed to drive future economic growth is still to be built. Through active choice, companies can avoid outmoded technologies in favor of cleaner and more efficient ones.
But technology is often a double-edged sword. There will certainly be new problems created. The continuing controversy over the benefits and risks associated with genetically modified organisms illustrates these challenges. Even life-extending medical breakthroughs will carry implications for future consumption patterns.
To secure the benefits from technological change, AEO 2005 lays out the incentive structures for applied research and experimentation. AEO also argues for more structured technology assessment to balance the risks and benefits.
Facilitating a Shift Towards Sustainability
AEO 2005 concludes by drawing attention to the need for an appropriate enabling policy environment, co-regulation, and voluntary initiatives to encourage firms to leapfrog over outmoded corporate strategies and production technologies. Governments should enter into productive partnerships with industry, rather than throttle the private sector with tighter regulations. Environmentally aware firms can demonstrate leadership in their sector and reach out to smaller firms in their supply chain. Industry groups, stockholders, NGOs, and other advocacy groups can join together to help reform environmental laggards, with pressure in the boardroom and in the market place. Multilateral developments banks and international organizations can help through policy dialogue, knowledge transfer and catalytic investment. And last but not least, consumers will need to act responsibly and create the market demand for greener products and services.
Global sustainability depends on what happens in Asia and the Pacific over the next 20 to 50 years. If this region cannot achieve sustainability, then the rest of the world cannot compensate for its failure.
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