Directors who run companies in an unsustainable way must be held accountable, in the same way they would if they had committed a financial misdemeanour, argue Tom Tayler, Mirza Baig and Vaidehee Sachdev.
In July 2021, Southern Water was slapped with a record £90 million fine after the UK utility admitted it had illegally discharged sewage into the rivers and coastal waters of southern England on 6,971 occasions between 2010 and 2015.1
Later that month, the company’s chairman published an open letter, claiming “deep and necessary cultural change” to both the business and its leadership team meant that, since 2017, Southern Water’s “absolute priority” had been to put the environment “front and centre in everything we do”.2
Despite the apparent contrition, Southern Water faced further criticism in the Autumn for dumping sewage in 57 areas within 24 hours. It begs the question: despite the commitments to address failings in its business, has anything changed?3
The episode was the latest example of a shortcoming in the way some companies, and the people in charge of them, operate. All too often it is cheaper for firms to flout environmental laws and regulations than it is to manage their business in a more responsible and sustainable way.
A similar problem applies to other types of business. Clothing retailers, for example, may find it more convenient to run the risk of abetting human rights abuses, the use of child labour or modern slavery than undertake full due diligence of their supply chains and understand all the layers of the companies and suppliers they do business with.
In response to high-profile market failures and a growing public awareness of sustainability issues, rules on how companies operate are gradually being tightened. However, gaps remain in the regulatory framework that could hamper efforts to achieve their desired goal. Although it is possible punitive fines could bring about the desired change in corporate behaviour, the danger is companies will continue to view them as the cost of doing business rather than an incentive to behave in a more sustainable manner.
While fines can be an important tool, alongside that there needs to be personal jeopardy for directors as the controlling mind of the company if they are choosing or ignoring practices that are damaging natural or social capital. At the moment, directors feel pretty safe behind the corporate veil.
One of the ways investors can focus accountability for sustainability on the shoulders of directors is through voting on their re-election. Investors should also lobby regulators to ensure people who are running companies in a way that deliberately damages either human or natural capital understand they are liable to disqualification. After all, financial institutions have a responsibility to seek to influence policymakers to ensure a more sustainable system with markets operating with integrity, since that is in line with the long-term interests of their customers.
References
- UK Environment Agency Press Release, Record £90m fine for Southern Water following EA prosecution, July 9 2022.
- Source: Southern Water website
- Jacob Heath, Outrage as Southern Water dump sewage in 57 south coast places including Worthing and Hastings, SussexLive, October 21, 2021
Important information
THIS IS A MARKETING COMMUNICATION
Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.
In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 27, 101 Collins Street, Melbourne, VIC 3000 Australia., Australia.
310704 – 30/04/2023
