Finding the ESG Longitude

A Social Review of Paul Clements Hunt’s Lenses and Clocks, a UNEP FI paper.

With thanks to the Journal of Environmental Investing for edits and publication.

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Finding the Longitude, from Maskelyne and Harrison to Perera and Clements-Hunt:

A Social Review of UNEP FIs Financial Stability and Systemic Risk: Lenses and


Financial Stability and Systemic Risk: Lenses and Clocks

by Paul Clements-Hunt; a joint paper presented by the United

Nations Environment Programme Finance Initiative (UNEP

FI), the International Institute for Sustainable Development

(IISD), and The Blended Capital Group (TBCG); Geneva:

Switzerland, 2012, 67 pp. Available from



Reviewed by Leland Lehrman

If the reader will oblige, I’d like to take advantage of the fact that this is a book review

rather than a scholarly article to provide a “social review” of UNEP FI’s latest

contribution to the evolution of investment in civilization. Just so there is no confusion

arising from my occasional mild critiques, readers will not be surprised that I consider

UNEP FI to be the single most important division of the UN, as well as perhaps the most

progressive governance institution in the world. This conclusion derives in part from the

revision to fiduciary obligation made by UNEP FI in its Fiduciary 2 paper in 2009. Fid 2,

in the tradition of the Magna Carta, established for the legal record the opinion of many

estimable global lawyers that the fiduciary obligation extends to nonfinancial metrics and

standards such as quality of life and ecological health. With the addition of the manifold

updates to investment perspective afforded by Lenses and Clocks, UNEP FI now stands as

the leading organization affecting the evolution of investment in a world where

investment, rather than law or religion, provides the primary modus operandi for

civilization’s design or lack thereof.

I won’t pretend to agree that such a state of affairs is a good thing. The evolution of the

largely one-dimensional investment world has flattened and homogenized society in many

ways to its detriment. Many alternatives to compliance token finance (numerical taxable

currency) exist, from indigenous, self-reliant trading circles to time banks to social credit

systems. But from a tactical point of view, UNEP FI is providing a framework for

effective global intervention in a capital market rife with dysfunction and abusive


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Before we look at the details of the document, I have a few more thoughts on the implicit

communication in it, First of all, on the cover, you will find a picture of Big Ben, the

famous clock in the Tower of London. In an age of networked atomic clocks, Big Ben

seems quaint; but if you were to journey back in time to London’s heyday, you would find

that Big Ben, along with the Naval Observatory in Greenwich, provided the central timing

control function for the largest geographic empire the world has ever known. Just recently,

I stumbled upon the history of “finding the longitude,” the process by which it became

possible to keep accurate time across time zones for navigational purposes and thus reduce

casualties at sea from navigational error. A fascinating story, it boils down to a journey

from Nevil Maskelyne’s lunar navigation tables to John Harrison’s marine chronometers

capable of keeping time without a pendulum. Why do I cite these facts? Because the

paper’s subtextual communications reveal one of the central problems of environmental

finance: nature does not operate on a centrally controlled basis.

I am not arguing that the authors suggest turning the clock back to the age of empires as a

solution to the environmental, social, and financial crises we face today. But I am

suggesting that the continuing reliance on mechanical metrics and control systems

overlooks one of the fundamental attributes of cultures that experience a high quality of

life: natural integration and love for nature, rather than control over it, no matter the stated


With that said, let’s take a look at the basic arguments of the paper and contrast them with

global corporate business as usual. The central thesis of the paper explaining its title is

contained in the opening thought from Clements-Hunt:

For a more stable and resilient financial system, all public and private actors involved

in the investment and financial intermediation chains will benefit from the use of wider

and better quality “lenses” that give greater depth, breadth and granularity to our

vision and understanding of a wider range of risks. Also, those same market actors

should employ “clocks” that heighten their appreciation of the temporal nature of

risk by neither over-emphasizing those short-term and apparently more easily

quantifiable risks nor under-emphasizing the slow, creeping risks that destroy value

over the long term.

Although it bears the bureaucratic weight of noncontroversial language in its tone, this

statement is characteristic of UNEP FI’s remarks: philosophically sound and welcoming to

the ears of civil society, if politically bland. For the politically charged remarks, Clements-

Hunt relies upon his friend the Right Honourable Gordon Brown, Scottish statesman and

former British prime minister. The close relationship between the two friends was


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highlighted similarly at last year’s UNEP FI Global Roundtable in Washington, DC,

where Clements-Hunt presided, and Brown provided the politically charged keynote


Brown doesn’t disappoint in this paper, resurrecting another iconic figure of history:

History tells us that communities, companies and markets only flourish in the long

term when they are underpinned by shared values that promote stability. Through the

centuries it has become clear that values build value and morals make markets.

Seventeen years before The Wealth of Nations, the great Scottish philosopher, Adam

Smith, gave us The Theory of Moral Sentiments. The moral compass Smith provided

for the markets in the 18th century will enable us to steer a better course in the global

markets of today.

From the stage in DC last year, Brown did a remarkable job illuminating Adam Smith’s

life. A fellow Scot, Brown went to great lengths to paint a picture of Smith’s seaside

village and the importance of global trade to its success. None of this was particularly

surprising, but BrownÕs real effort was to persuade the audience that Smith’s The Theory

of Moral Sentiments was the guiding light for The Wealth of Nations, and that the “free

markets” of the world, based as they are upon Smith’s “Invisible Hand,” must not and

cannot be divorced from moral sentiment. It is this Dickensian view of the social

philosophers, from Adam Smith and John Maynard Keynes to Gordon Brown, that again

provides hope for a world drowned by the high frequency, militaristic techno-economics

of America and the G20. Indeed, the words of Clements-Hunt, Brown, and their

colleagues remind us of the great quote by Edmund Burke: “The age of chivalry is gone.

That of sophisters, economists and calculators has succeeded; and the glory of [that world]

is extinguished forever.”

Why do I spend so much time on the subliminal effect of this paper? Because the first

casualty of modern economics is moral spirit. Lenses, clocks, mechanics, technology,

economics; these tools of humankind have become masters, and before we determine how

to measure our progress, we need to determine exactly where we wish to go, and what we

desire to accomplish. Neither lens nor clock can tell us which way lies our heart’s content,

nor that of our loved ones in family, village, or nature. And so, although the paper does

not explicitly discuss these subjects, the time tunnel presence of Big Ben, Brown’s morals

and values discussion, and a few other hints and cues here and there let the readers know

that they are in the company of friends.

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I hope this review will inspire readers to take a glance at the formal, systemic

recommendations of the paper, many of which are very good. However, I will not provide

an exhaustive inventory. The report lists six primary areas of engagement, with a focus on

overcoming “short-termism” and a singular emphasis on financial performance inherent in

all of them.

Here I name the six areas explored and provide a brief citation from each section (boldface

emphasis within quotations is mine):

Dark Pools and the Shadow Side: Stability and Over-the-Counter Markets. “The

clearest link between trading activities, OTC markets and derivatives with sustainable

development is the systemic risk that instability in capital markets poses potentially for

balanced long-term economic, social and environmental development.”

Ownership That Counts: Institutional Investors and Accountability. “Since

publication of the Freshfields Report in October 2005, there has been a development of

“soft law” across various jurisdictions that highlights a clear and developing trend whereby

a consideration of broader risk issues by investors, including environmental, social and

governance (ESG) considerations, is not just permissible but in many cases is

obligated. In the case of institutional investors and the subprime collapse that led to the

financial crisis, many questions surrounding the governance of banks in which they

invested, including policies and practices regarding the fundamentals of risk management

at the institutional and systemic levels, appear to have gone unasked at worst and

raised but not pressed at best.”

Listing for Stability: Stock Exchanges and Listing Requirements. ÒIn November 2009,

the UN Secretary-General, Ban Ki-moon, addressing an event exploring sustainable stock

exchanges in New York, told the event: “Stock exchanges and other financial bodies have

a key role to play. Many of you have taken important steps to advance this agenda. I

welcome your efforts to incorporate ESG issues into new stock exchange indices,

listing rules and regulatory frameworks.” Subsequently, and in the run up to the United

Nations Rio+20 Summit to be convened in Rio de Janeiro, Brazil, in June 2012, a broad

global coalition of investor and civil society groups are backing the idea of a protocol to

promote more effective corporate sustainability reporting to enhance information and data

flowing into markets concerning ESG issues.”




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Banking Risk for the Long Term: Systemic Risk and the Basel Committee. “The

banking supervisory community might argue that there is ample scope to consider

sustainability risk issues within the existing BCBS [Basel Committee on Banking

Supervision] parameters and that such risk is actually already factored into the

Committee’s well structured deliberations. Equally, the sustainability community might

contend that rapid acceleration in public policy, legislative and regulatory efforts to

quantify sustainability risk and see them embedded in the markets normal

assessment, pricing and accounting standards means that they deserve a specific focus

within both the structural (macro prudential) and operational (micro prudential)

considerations of BCBS.”

Rating Right: The Role of Rating Agencies with the Financial System. “When

questioned on the potential conflicts of interest inherent in the “issuer pays” business

model of the CRAs [Credit Rating Agencies], the raters have traditionally contended that

the importance of their brand independence and the accuracy of their ratings act as an

efficient internal regulator. Questions raised around CRA performance in the run up

to and during the financial crisis have placed this argument under pressure.”

Insuring the Future: Stability and Solvency II. This section is more robust than the

previous five, and includes a discussion of Solvency I and II, as well as the Sustainable

Insurance Initiative. Perhaps it is best summarized with this editorial: “The insurance

industry has long been in the vanguard of understanding and managing risk and has served

as an important early warning system for society by amplifying risk signals. Through loss

prevention and mitigation, by sharing risks over many shoulders, and as major investors,

the insurance industry has protected society, catalyzed financing and investment, shaped

markets and underpinned economic development. The global risk landscape is rapidly

changing and global ESG factors require new risk management and financing approaches.

Given their multiple roles as risk managers, risk carriers and institutional investors,

insurance companies have immense capacity to understand and manage ESG


The paper’s final four recommendations are also worth listing:

Proposition 1: Build a deeper understanding of how policy-makers, market regulators

and international financing institutions can support the growth and mainstreaming of

responsible investment and inclusive finance approaches. Examine, identify, assess

and replicate how innovative approaches can be scaled and accelerated to have a

direct impact on meeting basic needs and supporting sustainability. . . .


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Proposition 2: Establish a monitoring body, which ensures that our global financial

architecture is managed on sustainable fiduciary principles. The initiative will identify

where there are flaws in the architecture, and advocate solutions. . . .

Proposition 3: Investigate why long-term pension investment has not resulted in a

financial system that more obviously serves the interests of savers and supports global

sustainability. . . .

Proposition 4: Build on the work of the Integrated Reporting Committee and others to

promote transparency in the operations of financial and commercial organizations.

This should include ensuring the principles upon which reports are based are sound

and sustainable, and that those who provide such information are independent and

that it is properly reported.
















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Nature, Culture, Policy, Finance | Will, Spirit, Heart, Body | Feeling, Thought, Balance … Action