The Global Economic Downturn

Why the UN Global Compact and Corporate Sustainability Are Needed More Than Ever

Presented for Public Comment by the UN Global Compact Office

(This paper was first presented on 17 October 2008 for public comment. The version below incorporates additional perspectives and refinements.)

In today’s interconnected global economy, the long-term value and success of business are inextricably linked to the integration of environmental, social and governance issues into corporate management and operations. This defines the modern corporate sustainability movement.

The global crisis in financial markets and the subsequent economic downturn raise a range of important and urgent questions regarding corporate sustainability generally and the UN Global Compact specifically. Among the five most relevant:

How can trust be restored in markets generally?  Public trust and confidence in the private sector and “markets” has been seriously damaged. Amid this climate, many consumers and societal stakeholders may make little distinction between the “banking sector” and the corporate sector – that is, companies operating in non-financial industries. What will this mean for voluntary initiatives and their relationship with regulation? The bailout and rescue packages announced by governments mark a historic move by the public sector in asserting more control over financial and investment markets. Will companies still “invest” in corporate sustainability during an economic downturn? The financial crisis is clearly impacting the real economy and the prospect of a global recession is looming. Will 25 years of global economic growth and rising prosperity – driven by multilateralism and open, ruled-based economies – be replaced by barriers to trade and commerce? Growing distrust in markets is fanning populist reactions to global economic integration. Will governments re-order their priorities in ways that will place less importance on public-private partnerships? The public sector’s unprecedented bailout of financial-sector institutions will put significant strain on government budgets, possibly leading to a re-ordering of priorities that could have implications in terms of public-sector investment in key sustainability and development issues.

Amid this context, it is our belief that the overriding objective and priority of all global actors and stakeholders must be: Restoring Confidence and Trust in Markets and managing a paradigm shift from short-term profit maximization to long-term sustainable value creation, where corporate responsibility will become a cornerstone of ethically robust markets.

We believe that the UN Global Compact can play a constructive role. More specifically, we propose that: A commitment to sustainability in the spirit of the Global Compact principles can help the private sector and markets regain the confidence and trust of the public and other stakeholders.

The Role of the UN Global Compact and Corporate Sustainability

With respect to these five key questions, we believe that the UN Global Compact can make important contributions:

I. Restoring Trust

At the core of the current crisis is a collapse of trust in capital markets. While lack of proper regulatory controls, accountability and transparency are all cited as key factors in the build-up to the crisis, it is also clear that financial markets’ obsession with short-termism over long-term considerations played an important role in destabilizing markets. At the same time, there has been insufficient respect for universal “guiding” principles or values – values that encompass both commercial and ethical dimensions.

The UN Global Compact’s principles, mission (“an inclusive and sustainable global economy”) and emphasis on long-term considerations could play a pivotal role in helping to restore trust. In other words, by demonstrating a commitment to the tenets of corporate sustainability and the UN Global Compact, companies have an opportunity to help markets regain the trust of stakeholders.

With respect to financial-sector institutions specifically, the UN Principles for Responsible Investment (PRI) – co-sponsored by the UN Global Compact and UNEP – provide a platform for asset owners and fund managers to demonstrate a commitment to long-term issues and values, while reinforcing positive actions by investee companies.

II. Emphasizing Continued Relevance of Voluntary Initiatives

With governments taking a more active role in establishing both greater economic stimulation and oversight, the space for voluntary initiatives must be protected and advanced. In financial and non-financial areas, lowest-common-denominator rules and policies will still leave space for innovation and value creation that go beyond the “common bar”. The UN Global Compact has always sought to provide this space. Meaningful and inspiring corporate examples abound in areas such as climate change, human rights, water and anti-corruption, to name just a few material issues.

There will always be a need for voluntary initiatives to reinforce and complement regulatory structures and to fill voids. This is particularly true with respect to the issues and principles that the UN Global Compact advocates.

III. Advancing the Business Case in a New Era of Risk Management

Amid this climate and potential greater economic declines at the national, regional and international levels, there may be a fear that companies cannot “afford” to invest in corporate responsibility programs any longer. But as a CEO quoted in the Financial Times recently noted, “ Sustainability will remain critical to our business even during an economic downturn.”< /font>

Indeed, issues such as climate change, human rights and corruption will not vanish as a result of economic decline. In fact, climate change, if not vigorously and proactively tackled now, is bound to become the cause of the next major economic disruption. But the business case for managing these and other issues is today abundantly clear. In fact, one could argue that companies operating in a difficult economic environment have much to gain by improving their environmental and social performance through initiatives such as the UN Global Compact. This is based on the following key observations:

A commitment to corporate sustainability – as distinct from philanthropy – can mark a point of competitive and ethical differentiation vis-à-vis competitors. This can be especially relevant in economic downturns. The financial collapse demonstrates that due to economic integration a crisis in one part of the world can quickly spread to other regions. In the same way, many social and economic challenges (e.g., climate change) do not and will not respect national borders, placing a premium on an expanded view of risk management to include extra-financial issues. If the economic downturn leads to a critical evaluation of investments made in corporate responsibility, we expect to see a reinforcement of those efforts that treat environmental, social and governance issues as strategic imperatives for risk management and value creation. Conversely, end-of-the-pipe approaches to sustainability that place overall responsibility for these issues with corporate PR and marketing departments, will likely be eliminated first. Likewise, philanthropic contributions will no longer provide cover for deficiencies in critical areas. In this sense, the current developments can have a “cleansing effect” for corporate responsibility, strengthening the case for cross-cutting strategic approaches.

Therefore, the UN Global Compact and its participants and stakeholders have a unique opportunity to make the case that a commitment to corporate sustainability is as important in tough economic times as in robust times – perhaps even more important. In fact, Investments in sustainability made during this time of downturn will arguably serve to create competitive advantages when markets begin to recover.

IV. Making the Case for Open Markets

As noted above, the financial crisis has made clear that economic integration means that a contagion can quickly spread to other interdependent regions of the world. With this current unprecedented example, there will be the inevitable calls to turn back the clock on integration as countries may see protectionism as a potential safeguard.

Decades of experience demonstrate that a commitment to a level playing field in trade and investment, based on multilateral rules, offers the best hope vis-à-vis wealth creation, development and peaceful economic integration. However, markets on their own cannot deliver prosperity, let alone justice. The poor and workers do not have “golden parachutes” to break their falls. Therefore, to be legitimate and sustainable and to protect the most vulnerable, a strong political resolve will be needed to provide for the necessary safeguards.

V. Advancing Development and Public-Private Partnerships

The strain on public finances as a result of bailing out significant numbers of financial institutions will undoubtedly lead capitals to examine their priorities with respect to sustainable development. However, there is a strong case to be made that addressing critical issues, such as poverty and climate change, can simultaneously spur growth and tackle long-term challenges. Development assistance and investments in public-private partnerships are crucially important in difficult times to protect societies and economies from inherent systemic risks. In this context, commitments made to global development objectives, such as the Millennium Development Goals, must be honored.

Conclusion

The financial crisis and the subsequent economic downturn represent a significant upheaval in the evolution of markets and the private sector. Restoring trust and confidence, and shifting to a long-term paradigm of economic value creation in the spirit of universal values should therefore be viewed as the central imperatives. To restore momentum towards sustainable and inclusive global integration, it is more important than ever to build market legitimacy and political support based on sound ethical frameworks such as the UN Global Compact.

Note:  The UN Global Compact Office wishes to stimulate public commentary and observations on this paper. Please send comments to the UN Global Compact at globalcompact@un.org. Thank you.

About the UN Global Compact: Launched in 2000, the UN Global Compact is a both a policy platform and a practical framework for companies that are committed to sustainability and responsible business practices. As a multi-stakeholder leadership initiative, it seeks to align business operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption and to catalyze actions in support of broader UN goals. It is the world's largest voluntary corporate citizenship initiative, with over 5,000 signatories based in more than 130 countries. For more information, please visit www.unglobalcompact.org.