The International Policy Framework: The evolving policy framework - the drivers, corporate strategies and leadership

Monday, March 07, 2011

18:00 - 21:15

The International Policy Framework: The evolving policy framework - the drivers, corporate strategies and leadership

If Lord Stern is right to describe climate change as the “greatest market failure the world has seen”, then policy is the natural solution to the problem. Consumers, investors, employees are all influencing the strategic agenda, but in the December 2010 Green Monday survey 66% of you said policy has a high impact on your strategy, marginally ahead of consumer pressure.

The last few years has seen a high degree of policy innovation, from emissions trading schemes, to Feed-in-Tariffs to state-funded banks, with varying success and different costs and impacts on the corporate community.  Whilst great uncertainty remains, especially around the emergence of a global trading scheme, the direction of travel is becoming clearer and corporate strategies easier to draw up.

 

Speakers

Bernice Lee Chatham House

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Lord Anthony Giddens London School of Economics

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Mark Schofield PricewaterhouseCoopers

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Russel Mills Dow Chemicals

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Round Tables

Built Environment

Name the 3 main policy developments for the next 5 years in the built environment

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This was a full roundtable with very diverse interests although all connected with the built environment. The discussion quickly moved into a brief discussion of the extraordinary range of policy developments already in the pipeline which will affect both domestic and non domestic buildings. Many of these have been documented before in previous write ups. The debate covered whether more policy resulting in regulations was needed or not and indeed whether the current Government was likely to add to this burden. The consensus was that we would probably see considerable efforts to remove red tape at both a national and local level for planning and construction. General support though existed around the table for continuing regulations that raise the bar on energy efficiency as long as enforcement on site by Enforcement Authorities was meaningful.

A number of conditions were requested by participants for policy development and indeed delivery of current mechanisms. Namely Consistency, Consistency and Consistency . Again there was a call for clarity of vision, a roadmap with milestones and political commitment that would outlast a Treasury two year budgetary cycle. Nothing new but always worth bearing in mind.

A really interesting concept of when Government policy is needed or indeed not was raised and discussed - summarised below :-

• What things happen irrespective of policy
• What will not happen without policy interventions
• Where the two overlap how can policy be designed to be clever and harness private enterprise

Some examples from Victoria State, Australia were cited where regulations were removed to the benefit of private sector companies ( turnover and reduced costs) and also reduced costs for the State Regulator but achieved positive gains to the environment and indeed GDP.

In terms of a “take home action” there is much to commend a review of those activities in your own organization that would fall under the above three categories cited above and be clear in conversations with Trade Associations, Local and National Governments where activities or actions will not happen without policy interventions. Asking for policy support for everything simply won’t wash.

Supply Chain

What international laws have the most affect on sustainable supply chain plans

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The group agreed that a question of this size and scope could not be resolved in a single session and therefore agreed to focus on the creation of some key resources for future reference which could be built on through discussion threads. The top 3 useful resources would address these aspects of the overall question:

1. Understanding: Where can companies find useful resources to track and interpret international laws affecting them and their suppliers?
2. Capability building: What are some best practices for companies building their capability to manage these regulations as they affect their supply chain?
3. Implementation in Supply Chains: Where can companies get best practical advice on taking effective action to be compliant and then harness compliance for advantage?

A discussion followed that recognized the following key issues for laws within the supply chain:
• Impacts and costs on smaller suppliers can be considerable: for example registering a new material under RoHS could carry six figure costs.
• Standards like SA8000 or WRI scope 3 can form “soft law” which can often be as influential as hard law • Variations in emission factors across countries is a challenge to overall harmonisation
• Part of the challenge is variation of laws by country but also due to the varied “implementation” of European law within individual member states
• Integrating labour laws and environmental laws into a coherent approach is a challenge, converting both intor risk indices is one approach but viewing everything as risk can limit vision on the opportunities.
• Variation in definitions of scope and boundaries for carbon footprinting
• Reconciling the multiple inputs from: law; standards and customer compliance programs.


The following references are offered as the start of a discussion to identify useful resources:
1. For understanding: (e.g. RoHS, REACH, WEEE, Packaging Directive, OECD guidelines, Business and Human Rights advice) RoHS: http://www.rohs.gov.uk/ REACH: http://ec.europa.eu/environment/chemicals/reach/reach_intro.htm WEEE: http://www.environment-agency.gov.uk/business/topics/waste/32084.aspx Packaging: http://ec.europa.eu/environment/waste/packaging_index.htm http://webarchive.nationalarchives.gov.uk/+/berr.gov.uk/whatwedo/sectors/sustainability/packaging/page29072.html OECD guidelines http://www.oecd.org/department/0,3355,en_2649_34889_1_1_1_1_1,00.html Business and Human Rights guidance http://www.business-humanrights.org/ Climate change: http://www.decc.gov.uk/en/content/cms/what_we_do/lc_uk/crc/crc.aspx
2. For building capability Trade associations and similar collective industry movements by sector for example: e.g. Global E-Sustainability Initiative (GeSI) for electronics sector. http://www.gesi.org/ e.g. The Society of Environmental Toxicology and Chemistry (SETAC) for life cycle expertise http://www.setac.org/ Product Sustainability Round Table http://www.psroundtable.com/
3. For implementation in supply chains: Sustainable purchasing guidance www.metrovancouver.org/about/.../SustainablePurchasing1.pdf Sustainable procurement standards: http://www.cips.org/en/aboutcips/news/newguidanceavailableonsustainableprocurement/ Which resources do you find most useful? Can you add to the list or share stories about how you addressed the challenge of dealing with internationa laws in your supply chain

Stakeholder Engagement

Repositioning the debate: How do you make internal stakeholders understand that sustainability policies require strategic responses and are not just reputational management issues

Carbon Strategies

Is there hope for a long term future for cap and trade?

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INTRODUCTION:
Cap and trade had been decades in development, tried at scale first of all in the USA to control sulfur emissions; emissions trading was a foundation tool of the Kyoto agreement, and one of the great hopes for it’s successor but the failure to get an international deal at Copenhagen and backtracking by the USA on a federal cap and trade scheme (where one would be senator Joe Manchin ended an election add by shooting the cap and trade bill, ‘because it’s bad for West Virginia’) has taken the wind out of the sails a little. There are concerns over security in Europe’s Emissions Trading Scheme (ETS) with a recent theft of permits leading to the shut down of spot trading. That said, the ETS is the biggest climate policy in the world, and with a recent business survey showing growing support from companies. California passed its cap and trade bill with strong public support.

DISCUSSION:
An initial show of hands showed six out of seven at the table agreeing that there was a long term future for cap and trade, with one abstention (and some qualification of how significant its role might be). A key reason is there is ‘no other big option on the table’ – its unlikely that we could have a global carbon tax system (far to complicated and unworkable). Also the more urgent cutting carbon is the more attractive the fixed cap on quantity of emissions becomes – cap and trade provides that certainty that business needs in terms of long term policy objectives. One participant felt that there was a high likelihood of an international cap and trade system being subject to large scale ‘cheating’ and manipulation. There was some skepticism that we could agree on a global system anyway and more optimism that regional schemes would evolve and link up with each other over time.

As far as corporate support, it was felt that reform of Europe’s ETS was something that companies would get behind, but perhaps limited to those with a small carbon footprint or not directly impacted much by ETS costs.

Despite the difficulties – of communicating cap and trade, getting citizens engaged to push for reform, the general bad public image of ‘emissions trading’ – it was pointed out that Europe did succeed in establishing a cap and trade system, that puts a legal limit on nearly half its carbon footprint and the tools to drive this down over time.

The discussion ended with comments on how difficult it is proving to turn the increasing climatic disaster events – floods in Pakistan, Australia, Chinese drought – into ‘teachable moments’ and that perhaps climate disaster ‘fatigue’ has set in. And yet, there is great hope that change is still possible, with the potential for strong action – ‘Things move very quickly’ someone pointed out, ‘we’ve only had the internet since 1995!’.
Finally, it was felt that the complexity of cap and trade need not be a huge hurdle to its success as a policy and support by the public, and should not be a reason to oppose it: “Something the scale of saving the earth… it’s going to be complex!”
Thanks to all participants for an interesting discussion.

CONCLUSION:
cap and trade is a key tool and it does have a long-term term role to play.

Finance & Corporate Sustainability

What are the most costly policies for big business? And what is the scale of expense?

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Businesses require adequate environmental accounting systems to understand the current environmental expenditure before they can evaluate policy impacts correctly. They also need marginal abatement cost curves to prioritise investment. Many large corporates have implemented such tools as part of their corporate responsibility programs and operational efficiency. Yet, the vast majority of SMEs within their supply chain remain unable to know the answer to this question. This means that also big business remains in the dark regarding policy impacts on large parts of their value chain.

Regulatory and corporate customer pressure is required to encourage remaining corporates and most SMEs to undertake environmental accounting and reporting, and see industry associations drive the creation of sectorial marginal abatement curves.

Based on the partial picture, there was a consensus that policies affecting energy prices would have the largest impact, closely followed by the landfill tax in the UK. The dark horse remains water, which is likely to go up significantly in water stressed areas such as London. Very few businesses seem to know whether and how sudden cost increases in water will affect their competitiveness, let alone have plans for how to deal with them. Yet there remains hope to avoid the worst of environmental cost increases. McKinsey studies have shown that 20% energy efficiency gains can be achieved without substantial investment. From experience around the table, the same holds true for waste and water.

The most urgently needed policies therefore are those focusing on standardised and in-depth environmental accounting and reporting.
• they will allow SMEs to make efficiency gains of the type big corporates have been making by setting environmental targets and measuring progress and use savings to fund growth;
• they will allow corporates to gain a fuller picture of the effects different policies have on their entire value chain.
• they will provide a necessary boost for the corporate environmental services sector- one area of the green economy where the UK should have a strong global competitive advantage - including environmental accounting, provision of capital and change management, and to keep ahead of fast developing professional service economies in emerging markets.
• they will also provide more clarity for the financial services sector to calculate risk/reward ratios of green investments.
• they will result in more opportunities for innovation in financial services, e.g. giving consumers more transparency on the environmental performance of their pension funds.

Communications

How do you market your new sustainability services?

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The discussion around the table focused on two key areas of communications:
• The challenges of telling a ‘green’ story to key stakeholders including potential customers
• Engaging employees

Most of the discussion participants represented B2B organisations. We briefly discussed the challenges of engaging consumers in understanding the environmental impacts of the products they buy in order to make informed choices. The complexity of environmental attributes and plurality of drivers to purchase create a complex environment for consumer communication. There is already a myriad of ‘eco-labels’ and like-for-like comparisons can be difficult to make.

In a B2B context, the group discussed the importance of evidence to support an organisation’s environmental credentials or service offering. Proprietary analysis or research were seen to be a critical tool to engage potential customers, providing data and a point of view which can generate a more meaningful dialogue. Intellectual property was seen to be particularly useful when trying to engage an audience that is resistant to environmental arguments. Responding to earlier comments made by the panel about plurality, several people agreed that they often rely on other arguments (eg cost savings, energy security) ahead of ‘green’ messages alone to make the case for purchase.

Engaging employees to understand an organisation’s environmental credentials and service/products offering was also identified as a challenge. It was agreed that employee engagement was a slow process, requiring continuous communication in multiple ways. One participant identified office roadshows as a successful platform for engaging staff. However, professional services organisations felt challenged where responsibility for engaging staff might fall beyond a person’s ‘day job’. Those companies that were seen to support and recognise these additional responsibilities were likely making greater progress in engaging employees.

CSR Reporting Best Practices

How does international policy inform our vision of what sustainability reporting will need to cover in 5 years’ time?

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In getting to the answer “It Doesn’t” the table, which included Paul Scott of “Corporate Register”, who collect and review the worlds CSR reports, looked at the effect of:
• The Global Reporting Initiative
• EU & Japanese Regulatory drivers and possible new world regulations
• Carbon Floor pricing
• Lack of cap / trade in USA but renewable energy drive
• Energy pricing and scarcity and security

The overall input is that current reports lack any degree of real materiality – caveated out by assurance in many cases, risk averse Boards in others.
That the GRI is overly complex, adds confusion, not clarity/ “ Confusing, bewildering, enormous “ where the best points made about the “standard” and that it drives content, not performance.
It is clear the Accounting community are developing ISA 3000 to lock out non accountancy professionals and corner this area for themselves, which will, in the table opinion, lead to even less target setting.
In conclusion, unless Sustainability reporting moves away from content, and moves to clear targets and consistent performance reviews against those targets, then there will be no impact no matter what the policy framework is. It needs to markets – Financial markets – to move to SR based valuations, before the reports become meaningful.

Technology

What are technologies that will win from UK policy in the next 5 years?

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We began discussing the benefits of FIT and RHI and how these would benefit technologies and such as solar and ground source heat pumps as end users now had the benefit to install these devices and not have the pressure of long paybacks hanging over them. We also discussed the negative impacts that these polices have with the appearance of ‘cowboy’ / ‘man in a van’ organisations that spring up off the back of these schemes and often discredit the market.

We then discussed the need to bring energy awareness in to the everyday lives of people and that in order to do this the monitoring/control that they have over their environment must be easily accessible (i.e. Google/Facebook/Home interface) where they can see what they are using and make the changes to save energy. This would mean that all aspects of energy usage and consumption would have to be bought under one platform to provide an overall one-stop-shop solution.

The problem that lies with this is that there are so many routes to market for energy services / providers is that having one complete offering would be too difficult to provide the end user giving them complete energy managements.

Energy Effeciency

What are the main variants of a typical ESCO model?

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The model is interpreted to mean different things in different regions/countries.

At the more involved end of the spectrum an ESCO is one of these three things:
1. DBOOM - Design, Build, Own, Operate, Maintain: The ESCO is responsible for designing, building, monitoring, and maintaining the system – and then leases the services provided back to the building owner. This allows customers to pay as a rent rather than through CAPEX.
2. Power Purchase Agreement (PPA): The energy assets are owned by an entity separate from the owners of the facilities. The customer commits to buy.
3. Shared Savings/Energy Performance Contract: The ESCO enters into a performance contract with the building owner and implements an energy efficiency program. The ESCO is paid for its services and equipment out of the energy savings. Ownership of equipment transfers from the ESCO or finance partner to the building owner at the end of the contract.

At the less involved end of the spectrum - people interpret ESCO’s as just providing a piece of energy efficiency equipment (e.g. voltage optimisation). This is incorrect and does not help frame the opportunity.

The first 10% is easy – lagging the loft, shutting windows etc. – ESCO’s expertise kicks in beyond this.

The table framed a number of problems with ESCO’s in the UK market:
1. Confusion over what an ESCO is.
2. Lack of empowerment in the Energy/Sustainability function to “make things happen”
3. The problem of having energy assets on the balance sheet
4. The length of commitment – all ESCO’s emphasised the cultural difficulty in getting corporates to commit to lengthy contracts – “getting someone to put their name to a 7 year commitment takes real guts in UK plc”. This is the number one problem.
5. Consultancy approach takes the savings out of the project: consultancies approach the same project, but have no ongoing interest in the success of the project.
6. Working with public sector in the UK does not work – they require a tender process and the submission of plans – these are the ESCO’s IP and they are unwilling to make them known without a commitment to business
7. Implementation – getting people to follow through on the energy efficiency measures put forward

It does not work for some businesses – we kept coming back to the chicken factory scenario. It is too risky for some businesses to commit to long term – if someone starts making chicken cheaper in another part of the world then a 7 year commitment to energy efficiency measures in a factory in the UK does not look so clever.

Steps to approaching an ESCO:
1. Frame the problem correctly
2. Pull the correct team together (Finance, Sustainability, Operations/FM/Energy etc.)
3. Understand your project demands
4. Understand your cultural blocks
5. Choose ESCO
6. Make the commitment…

Sustainable Transport

Is there a clear UK government strategy for a sustainable transport network? What does it mean for UK plc?

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The UK Government has signalled its intentions with the 2008 paper 'Delivering a sustainable transport strategy' (DASTS). This sets out aims and responsibilities for international and strategic national routes (UK government); regional routes; local routes (local councils); and cross-network routes.

Since that time the recession has hit transport spending hard and reduced the demand for business and commuter travel. Regional powers are being devolved. What evidence is there now that a clear UK government strategy for a sustainable transport network?

>> GENERAL POINTS
• Asset owners should invest more in existing infrastructure to ensure that is sustainable
• Right incentives and carbon pricing required to drive alternatives to carbon intensive transport
• Businesses need to invest in really good video conferencing and manage demand – support should be available from government to SMEs in particular
• Government should set the framework for sustainable transport to promote effectiveness at driving change and fairness for all stakeholders

>> NATIONAL GOVERNMENT
• Heathrow 3rd runway would be good for business and the environment as would have fewer aircraft in queues - but this is not government policy
• Government seems to be in favour of sustainable transport but not in favour of sustainable networks
• Support for HS2 and strategic rail upgrades is good but business is unclear on the impacts (in particular timescales)
• Tax rate should discourage flying in UK (but in this respect role of government is limited by international dimension - people will take longer flights through Europe to minimise cost)
• Aviation sustainability should cover a basket of sustainability improvements across industry including travel to/ from airport and air traffic control
• Emission trading has not had huge impact. Government gave away a lot of permits. The system could work if permits are managed properly
• More direction is needed from government in moving towards EV based transport – eg how can higher electricity demand be delivered sustainably?
• In terms of road transport government appears to be looking only at cars not heavy delivery vehicles

LOCAL GOVERNMENT
• Should address need to travel so also less relevance on carbon intensive travel - Crawley industrial estate with poor rail/ public transport links
> Local government policy instances include:
• Car free property development
• Cycle stands
• Charging points
• Freight delivery service flows
• Local implementation plans in London

Mayor's transport strategy has made a difference
• Cycle highways
• Congestion charge
• Still major problems to be fixed but underfunded
• Pricing cards out of London
• Business cooperation with local government on sustainable transport to save money too e.g. car parks
• Sustainable transport solutions in locality still need to look at wider system e.g. long distance freight and local deliveries
• Local planning conditions can be effective eg for commercial developers to have EV for delivery or better still no parking at all

Overall the view of this round table is that local government is providing a clearer direction for sustainable transport than is national government. In particular local government has been better at engaging with business over the nature of transport networks. We feel that national government needs to do more to create a fair and incentivising framework for the transition to sustainability in transport.

Corporate Strategies

Case study: Shell

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We opened with the fundamental question: what drives change in Shell’s world?

The group debated the different merits of policy instruments, suggesting a meaningful price on carbon would stimulate investment.

In fact in Shell’s Sustainability Report 2009, Peter Voser is clear about this point saying:
“Shell will continue to work with governments help develop the regulatory frameworks we believe are vital to establish the price for Co2 that allows companies to invest in the energy efficiency, new low Co2 products and services and carbon capture and storage (CCS).”

Our group then briefly discussed how long an international agreement would take to get a meaningful carbon price. The consensus was: too long!

Our current and very real backdrop is the rising oil price as a result of the Libyan crisis. Chris Huhne was quoted in the media over the past weekend using phrases such as: “getting off the oil hook”.
Mr Huhne went on to say: “we cannot afford to go on relying on such a volatile sources of energy when we have clean, green and secure energy from low carbon sources”.
Compelling words, but some in the group felt that this was political brinkmanship with no follow through.

Some other responses on how Shell could drive change included seeking technological advances for example biofuels. It was pointed out that there are still issues with scalability and of course unintended consequences, in some of the alternatives. Other drivers of changes for Shell include the issues surrounding resource scarcity.

One view put forward was that hydrocarbons will unavoidable for a long time. One should consider a long term transition from our current world which is oil, coal and gas powered; to world which is predominantly gas powered. A key related question was raised: Do Shell see a managed decline of their hydrocarbon business? Our group varied in their opinions on this issue.

A ‘ghost carbon price’ is being used by Shell to assess their ‘hydrocarbons business cases’ but given the abundance of shale gas and the cost of extraction, the economic imperative still points to this being the answer. A further argument put forward is that is it not ‘oil per se’, that is the sole contributor to climate change, but rather the abundance of ‘cheap coal’ and deforestation.

If you were CEO at Shell, what would you do?
Responses included – looking at competitors including other oil majors but also considering the role of National Oil Companies, who yield most of the power in terms of reserves. A key point was that Oil and Gas companies should not pretend to be something they are not. BP was held up as the villain. Innovation was seen as the main avenue for CEOs of Oil Majors to progress sustainably.

Strangely it was Exxon, with their dubious record regarding sustainability, which was held up as an emerging leader in the space, due to their unambiguous approach on efficiency and straight talking. Our group wrapped up with a general unease that hydrocarbons could be a dominant energy source in the medium term, but on a positive note, the tipping point to cleaner energy may be nearer than we all think.

Energy Policy & Strategy

What’s the future of the FIT scheme in the UK?

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It was felt that while the government wishes to restrain commercial use of FITs, such as solar farms in the South West, there would be far greater economies of scale from such projects than from focusing exclusively on domestic installations.

It was also clear FITs had brought forward installations that would not otherwise have occurred, shortening pay-back period to within a decade. Without this, as solar PV panels typically degrade to 85% of original efficiency within 25 years, within the payback period, the investments would most probably not have occurred on this scale.

But there was little assessment of the impact of embodied carbon through the product life-cycle. There was also consensus that FITs projects had done little so far for UK renewables manufacturing, with large-scale imports from China.

While it was unlikely projects would reach the annual limit for FITs, there was some concern that a new, restrictive policy towards larger projects could provoke the same policy confusion as with the 'stop-go' ill-fated Low Carbon Buildings Programme.

There was more confidence that the forthcoming Renewable Heat Incentive could make a difference by helping a large number of households.

Overall consensus: it is not yet clear the current small-scale FITs system would make a large inroad into delivering the UK's longer term 2050 greenhouse gas reduction target of 80%, but the RHI could yet do much more in the domestic sector.

Large-scale, Premium FITs:

There was concern that auctioning of pFITs contracts would be a disincentive to all but the larger projects such as nuclear. Participants questioned why it was necessary to change the current Renewable Obligation which had clearly been successful in delivering large-scale renewables.
The problem was not of the RO under-achieving, unless the renewables targets are set too low. In that case, where the target renewable capacity is close to being met, the RO buy-out price paid by electricity suppliers into the buy-out fund, and hence share-out among developers, is greatly reduced, even at levels below the target.
It was felt that FITs could not be looked at in isolation without further clarity on the role of the Green Deal and other policy measures under electricity market reform.

Resource Efficiency

What are the 3 key policy/non-policy developments that will drive greater resource efficiency in business?

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Participants represented the public sector, private sector and social enterprise. The discussion took the lead from both the plenary and results of the Green Business March Surveythat named compliance with regulation/legislation as being top of the list of biggest influencers changing a business’ behaviour to sustainability.

The table felt that policy and non-policy drivers were equally important in driving business resource efficiency. Among policy drivers were:
1. Landfill tax and the need to put less stuff in landfill. Whether driven by cost cutting or legislation, the end result is the same.
2. Producer responsibility, illustrated by WEEE legislation which is already showing good compliance with recycling, although moving the emphasis to reuse would perhaps provide added opportunity.
3. Carbon accounting, with a focus on the carbon balance sheet and the carbon assets of a company rather than simply emissions, again encouraging a shift to reuse.

Non policy drivers mostly centred around:
1. Cost cutting, linked to landfill but also persuasive in terms of energy, water and resource use.
2. Market positioning and gaining that competitive advantage, or simply meeting contractual requirements.
3. Material scarcity. When scarcity of primary resources starts to hit, we’re likely to see rising importance of secondary materials in the supply chain.

The table also discussed quarterly reporting in business as having an impact, not only on an ‘out of control financial services sector’ but also on the stability of the Board, the CEO and long term business strategy, whether that be towards the green economy, innovation, investment or risk.

Ultimately the size of the business will often dictate what drives it.

Venue Detail

Bank of America Merrill Lynch: King Edward Hall

King Edward Hall | 2 King Edward Street | London | EC1A 1HQ

Directions

Bank of America's offices are a very short walk from St Paul's tube station (Central Line). Exit the station at Cheapside/Newgate Street. Go past the BT centre, with it on your right-hand side and take the first available right down Edward Street. Continue down this road for 80m and the entrance to the venue is on your left-hand side.

Do not go to the main reception desk at their offices when you arrive. You are looking for an entrance that leads you directly into the King Edward Hall.