New Climate Principles for Financial Institutions

On the 4th December 2008, five leading financial institutions signed up to the Climate Principles, new guidelines developed to deal with the risks and opportunities posed by climate change.

The initial take-up was not as wide as hoped, possibly due to the financial crisis. However, Banks Crédit Agricole, HSBC, Standard Chartered, and reinsurers Swiss Re and Munich Re in signing up to what the Climate Group describes as “the first comprehensive industry framework” to address climate change.

The Climate Principles address the management of operational greenhouse gas (GHG) emissions. More importantly, they provide strategic direction on managing climate change across the full range of financial products and services, including: research activities; asset management; retail banking; insurance & re-insurance; corporate banking; investment banking & markets; project finance.

2008 FT Sustainable Banking Awards

There have been a record number of entries for the FT Sustainable Banking Awards this year, with 128 institutions in 54 countries submitting a total of 181 applications

The awards were created by the Financial Times and IFC, a member of the World Bank Group, to recognise banks and other financial institutions that have shown leadership and innovation in integrating social, environmental and corporate governance considerations into their operations.

The winners of the awards will be announced at a special dinner at the Dorchester in London on 3 June 2008.

New IFC Report – Banking on Sustainability (March 2007)

A new IFC report “Banking on Sustainability,” has been released.  It provides practical examples of 14 financial institutions in 12 countries that have taken concrete steps to integrate sustainability into their policies, practices, products, and services.

“While detailing the evidence of potential benefits for banks in integrating sustainability into their business strategy, the report reveals a dramatic shift in banks’ awareness of these benefits,” said Rachel Kyte, IFC Director of Environment and Social Development.

In a 2005 IFC survey, 86 percent of 120 financial institutions interviewed reported positive changes as a result of steps they had taken to integrate social and environmental issues in their business.The report shows evidence of the potential benefits of adopting sustainability as a business strategy. It also shows a dramatic shift in banks’ awareness of these benefits. Banks can tap vast benefits by reassessing their business practices and engaging in sustainability-oriented risk management and product development.

It is notoriously difficult to quantify the financial benefits of adopting sustainable business practices, however this report demonstrates some clear business benefits from adopting and integrating environmental and social considerations into core business strategies.

Banks consider how to include climate change in their investment decisions

London, 11 January: A group of investment banks is to investigate how best to include climate change in investment decisions.

The London Accord will seek to provide investors with more information on how best to make investments that address climate change. Sponsored by the City of London Corporation and BP, the project already has the support of investment banks including Morgan Stanley, Bank Sarasin, HSBC, Société Générale, Credit Suisse and Canaccord Adams.

“If you look at the field of climate change and investment decision-making, lots of people are aware of it and want to integrate it into their decisions. But not many people are sure of how you go about it,” said project director Jan-Peter Onstwedder, who was previously head of risk in BP’s supply and trading business.

Extract from Environmental Finance

Key discussions at the Ethical Finance Summit

There were some excellent discussions on the Equator Principles (EP) at the Ethical Corporation – Sustainable Finance Summit. The main hot topics were:

• The need to manage the success of the principles. The need to prevent their extension to areas other than Project Finance weakening the brand, due to insufficient leverage in such areas.
• The EP’s have lead to an unprecedented level of collaboration by Financial Institutions.
• There is a lack of mechanisms for demonstrating how the adoption of the EP’s have contributed to business performance and financial benefits, but despite this FI’s are see these issues as key to their core branding.
• There is a need for a pragmatic approach to their application, in certain situations when good project sponsors and FI’s have turned down projects with high potential environmental and social risks, the projects have been progressed by weaker parties and consequently developed more severe environmental and social problems.
• There is a need to manage expectations about what the EP’s will achieve – e.g. they have not been established to be a tool for equity.
• There has been a lack of developing market banks and a notable absence of leading French Banks adopting the EP’s.
• The need for sufficient lead in times to review Finance deals to avoid situations where problems are picked up too late on a project to enable compliance.
• Some banks are striving to be leaders in sustainability, while others believe the EP’s have created a level playing field.

The Do’s and Don’ts of Sustainable Banking; a BankTrack manual

BankTrack, the NGO network monitoring the private financial sector, presented their new publication, ‘The Do’s and Don’ts of Sustainable Banking; a BankTrack manual’, at the Ethical Corporations’ ‘Sustainable Finance Summit’ in London.

According to Banktrack:
The manual seeks to answer the straightforward question posed to the panel; ‘what does a really sustainable bank look like?’.

• Banks should, for example, change their bonus schemes to emphasise implementation of environmental and social policy and long-term prudence instead of short-term profits.
• BankTrack advises banks to ensure that sustainability policies are actually implemented, rather than used as a public relations tool.
• International banks are told to engage with emerging banks to improve their standards, rather than just complain that there is an uneven playing field.
• Advising investors to put their money into shares that do not meet the bank’s own minimum standards is also listed as a “don’t” by BankTrack.

It follows the outline of the Collevecchio Declaration, released in 2003, which calls upon financial institutions to embrace six commitments:

1. Sustainability;
2. Do No Harm;
3. Responsibility;
4. Accountability;
5. Transparency; and
6. Sustainable Markets and Governance.

The new manual should be seen as the updated implementation guidelines to the Collevechio Declaration, incorporating the latest thinking and expectations of civil society groups on the subject.

Workers’ rights top list of ethical investor concerns

A survey of investor has found their key concerns include workers conditions, involvement in arms trade and environmental pollution.

Extract from Environmental Finance:

London, 16 November: Ethical fund managers should favour companies that maintain high standards of working conditions in their supply chains, according to a survey of investors released this week.

UK investment management company Standard Life polled close to 1,200 of its ethical investors, asking them to rank the issues of most importance to them.

Workers’ conditions topped the rankings, which also revealed that the environment was a major concern among investors. The provision of pollution control products or services, and the development and use renewable energy, were placed second and third in terms of importance.

Standard Life Investments manages approximately £130 billion ($245 billion) of assets, £425 million of which is ethically invested. It uses the survey to adapt its investment policy in line with investors’ views on issues such as community involvement, employment policies, corporate governance, alcohol, gambling and animal testing.

The investors said fund managers should avoid investing in companies and countries with poor human rights records, companies involved in the arms trade, and those that are responsible for clearing tropical forests.

A-Z Guidelines to Successful Public Private Partnership

This seminar is being held by the European Public Private Partnership Centre in Hungary. On the 27th – 29th November 2006, at the Corinthia Aquincum Hotel, Budapest.

I am delighted to have been invited to present on ‘The need for environmental and social risk management for PPP Projects’.

The European Public-Private Partnership Center (EPPPC) was established to serve as a know-how center for public sector bodies, private entrepreneurs, investors and other industry players in the growing international marketplace of PPPs. Their state aim is to fully embrace the idea of PPP and educate the above representatives by offering them comprehensive training services as well as widespread expertise through consulting.

Link to the Training Workshop Brochure

Financial sector responsibility: The state of the art

The report discusses how greater transparency in implementing the Equator Principles can enable NGO’s to provide a fuller regulatory role, of this voluntary approach to Social and Environmental risk management.

The improved dialogue between NGOs and Financial Institutions that have been brought about through intitatives such as the Equator Principles.

The growing need to recognise that employees awareness of their personal accountability if growing, and employees are increasingly unprepared to compromise their ethics and standards in the workplace.

This special report is designed to offer the reader insights into how major institutions are responding to the sustainable development agenda. Also covered are increased expectations on business transparency and the role of regulators.

An interesting Case study discussed in the Report is the Baku-Tbilisi-Ceyhan (BTC) pipeline – which is now transporting oil from the Caspian Sea to the Mediterranean.

The $4 billion project showed how difficult it can be to address the social impacts of large infrastructure projects, such as the resettlement of local people and their compensation.
In Turkey, 300 villages were cleared during the building of the pipeline. Compensating villagers involved negotiating complex local laws – one piece of land was owned by 800 different people – and the fact that 70% of affected land owners had no legal right to compensation.
BP managed to compensate all land owners, but still there were disputes over what villagers were entitled to – for example, whether corn compensation was to be calculated at cost or market value, and over three years or just one. These disputes show how messy project finance can be on the ground.

The free PDF version of Ethical Corporation’s special 44-page report, Financial sector responsibility: The state of the art, is available to download at: www.ethicalcorp.com/fsr/

Outlining the labour components of the revised Equator Principles

Extract from ELDIS: Ergon / Ergon , 2006

This briefing paper outlines the labour components of the revised Equator principles – Equator II – to assist signatories, their clients and other stakeholders in understanding the new requirements. It introduces the new Equator Principles, which are based on a revised version of IFC Performance Standards – provisions on labour standards and provides an overview of the issues financial institutions must now address. It also suggests some steps they must take to operationalise the new requirements.Until now, the labour component of the IFC policies referenced by the Equator Principles has been limited to occupational health and safety and avoidance of harmful child labour and forced labour. The new IFC Performance Standard 2 (PS2), covers a range of new issues such as non-discrimination, freedom of association and non-employee workers, and also introduces a new set of processes that must be followed.Highlights of the PS2 include: there must be a human resources policy covering terms and conditions and other rights at work all employees must be informed of their terms and conditions and entitlements collective bargaining agreements must be respected, or if not in place, terms and conditions of work must be reasonable and, at minimum, comply with local law the rights to freedom of association and collective bargaining must be respected if rights to freedom of association are restricted in law, clients will enable alternative means for the expression of worker rights projects must not use forced labour projects must not employ children in economically exploitative or hazardous ways, and national laws must be complied with if a significant number of jobs will be lost a retrenchment plan must be drawn up based on non-discrimination and consultation there should be a confidential grievance mechanism workers must be provided with a healthy working environment sub-contracted workers are covered by most of these provisions The brief argues that the new Equator Principles have the potential to improve conditions for many workers, but the procedures required for assessing risk and the issues that must be considered will be unfamiliar to most private sector banks – as will the possibility of engaging with wider stakeholders, such as trade unions.

Arguments for both voluntary and mandatory standards for sustainability reporting

This new KPMG and UNEP report provides a balanced consideration of voluntary and mandatory approaches to sustainability reporting. A key proposition in the report is that the voluntary versus mandatory debate does not imply an “either / or” position, but rather finding a balance between regulation in certain high risk or high impact areas, and allowing industry associations or individual companies to make decisions in other areas.

Overview and analysis of current trends and approaches in mandatory and voluntary standards for sustainability reporting

UNEP; KPMG Global Sustainability Services / UNEP Division of Technology, Industry and Economics (DTIE) , 2006

This report provides an overview and analysis of current trends and approaches in mandatory and voluntary standards for sustainability reporting. It summarises arguments in favour of both voluntary and mandatory approaches, and suggests key considerations for public and private sector decision-makers in addressing different regulatory approaches and possible policy mixes. It also provides a listing of reporting and related standards in mainly OECD countries, including the European Union (EU), as well as the emerging market economies of Brazil, India and South Africa.

Arguments in favour of voluntary standards include:

• sustainability reporting is young and evolving and will therefore require time to mature. Mandatory standards will stifle innovation and not ensure moral buy-in
• public regulators are often not acquainted with company or industry issues or might avoid difficult issues for political reasons

Arguments in favour of mandatory standards include:

• not enough companies are taking up voluntary approaches, that the use of regulated guidelines and codes can add to the credibility of reports and help ensure a minimum level of disclosure
• voluntary reports tend not to disclose negative information, and that mandatory reporting will ensure the development of a central and comparable source of data for use by investors and other stakeholders

UNEP FI Sustainability Workshop in Mumbai, India

This promises to be an exciting event in consideration of the significant finance opportunities in India. Robert Tacon is an eloquent speaker on the subject of risk management and I anticipate this will be a highly insightful event.

 

UNEP FI Workshop: Mainstreaming Sustainability in Indian FIs
5 December 2006, Mumbai, India

Organised by the Outreach Group of the Asia Pacific Task Force, in close collaboration with UNEP FI Signatory YES BANK, the workshop is targeted at senior-level executives of Indian financial institutions.

The event will focus on sustainable finance and reporting. A CEO Luncheon ill be held in parallel, aiming to sensitise senior management on India’s sustainability challenge and the risks and opportunities faced by the financial sector. Speakers will include UNEP FI Head Paul Clements-Hunt, Robert Tacon, Head of Risk Reporting at Standard Chartered, Bart Jan Krouwel, Head of Sustainable Developments Department at Rabobank and Toshiro Nishizawa, Deputy Director General at Japan Bank of International Cooperation (JBIC).

This is the first such event to be organised by UNEP FI in the country.

For further information, please visit:
http://www.unepfi.org/events/2006/mumbai/index.html
Contact: ap@unepfi.org

Investment in emerging markets – opportunities for risk management and sustainability

Until the last few years, the conventional view towards investing in emerging markets was that sustainability considerations too often appeared subordinate to the quest for economic growth. Emerging markets are now seen by many in the investment community as a place where good rewards can be earned.
EIRIS had just completed a review of the opportunities for responsible investment in emerging markets, which reveals the possibilities for diversification and risk management for investors as well as wider potential gains for sustainability.

The report identifies factors hindering Socially Responsible Investment in emerging markets:

• perceived lack of consistent and widespread good corporate governance
• continuing government ownership and control such as with many large listed Asian companies that can be a critically important variable in Environmental and Social Governance performance
• the retention of large controlling interests by families in many emerging market companies that limit the rights and influences of minority shareholders.
• even where governance, environmental or labour regulations are strong in some countries, enforcement is sometimes weak.
• doubts about the honesty of some disclosed information or its credibility. For instance, in relation to ISO14001, the reputation of those providing the certification is crucial for trusting the information disclosed.
• difficulties in engaging with companies in emerging markets. Although language may be a factor in some cases, the corporate culture of many companies is not yet responsive or attuned to international investors especially relating to environmental and social issues.
• a limited number of third party organisations in these countries or regions to undertake the research required on companies. The Iinternational Finance Corporation is undertaking initiatives to facilitate and increase this research capacity.

Russian Government revokes Sakhalin II permit

Shell was surprised to find that the Russian Government has revoked the environmental permit for the Sakhelin II project, and has ordered a month long inquiry into the ecological issues.

Extract from the Guardian:

In an interview with the Guardian, Oleg Mitvol defended the government’s decision last week to revoke a 2003 environmental assessment that approved the development of huge oil and gas reserves off Sakhalin Island in the Russian far east.

Banking – ethical performance, anti-corruption and branding

PDS blogger Michael Jarvis has raised some interesting question relating to the importance of business ethic and how they need to be managed effectively to protect corporate reputations in his post ‘banking on ethical performance‘.

His proposition to use the framework approach to managing environmental and social risks that was introducted through the Equator Principles, to ensuring that the bank’s clients implement good governance and anti-corruption measures certainly merits further consideration.

In their FT column on Business Ethics, Plender and Persaud make a persuasive case for throwing out regulative approached to reputational risk management, and developing effective voluntary approaches, that are fully integrated within the cultural ethics and branding of the organisation.

2005 was a record year for investment in the renewable energy sector

Investment rose from from USD 30 billion in 2004 to USD 38 billion in 2005. A REN21 report estimates that at least 85 renewable energy companies or divisions have market valuations greater than USD 40 million, up from 60 companies or divisions in 2004. The estimated total market valuation of companies in this category is USD 50 billion, double the 2004 estimate, as several high-profile initial public offerings have recently taken place. The solar PV industry invested record amounts in new plant and equipment (about USD 6 billion), as did the biofuels industry (more than USD 1 billion).

In the last year there were many new policies adopted to support renewable energy, and several more were extended, revised, or discussed. Not only were the EU and US active, but more than 16 developing countries as well, including Brazil, China, Egypt, India, Mexico, Thailand, and Uganda.

A number of countries dramatically stepped up targets and mandates for biofuels – ethanol and biodiesel mixed with conventional fuels. The number of countries with “feed-in” policies for the purchase of power from renewable sources increased to 41, and the number of countries with future targets for the share of energy from renewables increased to at least 49.

Barclays, believes that business ethics are key ingredient to their record financial performance

John Varley, Group CEO of Barclays, explains why business ethic are so important to branding and maintaining good relationships with stakeholders – customers, employees, regulators and investors. Barclays sets out how these considerations have made an inherent contribution towards to their ongoing strong financial performance.

Imagine that you’re a big organisation, making good returns on capital. You can make choices that are irresponsible … but lucrative. But bit-by-bit, as the values that bind your organisation together are compromised through irresponsible choices, and the trust of your customers is diluted, your brand will suffer. And let’s be sure about this: brands are far more important to stock market value and sustained growth, than short term profits.

Beyond financial results

• In February of 2005, Barclays reported a record financial performance.
• A few weeks ago I was able to report another record performance – in the area of corporate responsibility.
• Many of you will have seen the recent results of the Business in the Community “Companies that count” index in the Sunday Times. This year we’re 3rd – our highest ever ranking.

Our top three ranking reveals something important: a strong performance as a responsible corporate citizen does not conflict with strong financial performance.

Business-wide responsibility

We can’t (and shouldn’t) separate our corporate responsibility activity from our daily business. Nor can we separate corporate responsibility from our brand. That’s because the people we seek to reach with our brand expect us to be responsible.

Our stakeholders – customers, employees, regulators and investors are becoming more sensitive to our changing world. They are intensely interested in ethical, environmental and social issues, and business conduct. For customers making buying decisions, corporate responsibility is a point of difference. For talented people looking to move organisations, corporate responsibility is a point of difference.

Really making a difference

Another example of where we have taken an important lead is our involvement as a founder member of the Equator Principles. The Equator Principles form a framework for a thorough independent environmental – and social – assessment of the impact of project financing, for major infrastructural programmes, such as dams and pipelines and mining.

We’re a leading provider of financing of this sort. So it’s an important area of business for us. But we have made a choice about how we are going to participate in this business. And by doing so, we are influencing other participants. More and more governments and construction companies are making the same kind of choice.

They realise that financing will be easier to obtain if the project complies with the Equator Principles.

Extracts from the text of John Varley’s speech on 31st May at the Fifth Ethical Corporation Summit in London

Rachael Bailey discusses how to manage environmental and social risk in project finance

Applying the Equator Principles can dramatically improve the environmental and social risk profile of project financings. But their application can often be improved. Extract from the Article by Rachael Bailey and colleagues:

In the three years since their introduction, the Equator Principles have driven substantial environmental and social performance improvements in project finance. These voluntary guidelines, which essentially involve private sector banks committing to apply World Bank/International Finance Corporation (IFC) social and environmental risk management procedures to projects which they finance, have been adopted by institutions accounting for more than 80% of project finance flows.

There is now widespread awareness of the benefits of using the appropriate expertise at the outset to manage potential environmental and social risks throughout the project cycle, and thereby secure better financial terms at financial close and syndication. Ensuring that environmental and social risks are fully under control now plays a key part in securing confidence in project finance deals.

The full article can be viewed on the Equator Principles Website or the Environmental Finance website.

A copy of this article is available here for downloading. ef7equator_bailey_p28-30-v2.pdf

Interesting Presentations on the Environmental Responsibility of Banks

UNEP FI have made the following presentations available on their website, following a conference on sustainable banking. The presentations contain valuable insights into the benefits of environmental risk management and green products in relation to the topics listed below:

UNEP FI and the two Greek sustainability leaders Eurobank EFG and Emporiki, hosted a one-day conference on sustainable banking. UNEP FI was delighted to welcome a representative of the European Commission as a keynote speaker at the event. The event was supported by the EBRD.

Presentations

• Opening remarks
  Paul Clements-Hunt, UNEP Finance Initiative
• The role of the financial sector in achieving a better environment – EU perspectives and initiatives
  Jorge Pinto Antunes – European Commission
• Eurobank EFG’s motivation for environmental responsibility
  Nikos Pavlidis, Eurobank EFG
• What is the motivation for a Greek Bank to take environmental responsibility? What are the business areas where environmental concern plays a role?
  Evangelos Athanasiou, Emporiki Bank
• Environmental regulations with relevance for financial institutions: the Greek and European legal framework
  Fotis Kourmousis, Union of Environmental Scientists of Greece
• The materiality of social and environmental issues to equity pricing
  Gianluca Manca, Sanpaolo IMI Asset Management
• Greening the banking products
  Dimitris Starogiannis, Eurobank EFG
• Integrating environmental criteria to credit policy
  Stella Kovlaka, Emporiki Bank
• Responsibility for Brownfields Revitalisation
  Sultana Gruber Unicredit/Bank Austria Creditanstalt
• EBRD – Your partner in eastern Europe, Caucasus and Central Asia
  Mark Rachovides, EBRD
• Environmental risk assessment – Guidance from the EBRD
  Mark King, EBRD
• Climate Change: Scientific basis and risks for the finance sector
  Dr. Hadjinicolaou, University of Athens,
• Meeting investors’ expectations
  Esther Garcia, CoreRatings – DNV

Project Finance for Renewable Energy is now a rapidly growing market

The number of project finance deals in the Remewable Energy sector is growing more rapidly than ever, Richard Stuebi explains why:

Structured energy project finance has been relatively commonplace in supporting the development of new energy facilities over the past 20 years. Central to the concept of project finance is disaggregating risk and parceling it out to specific parties who can accept that risk. As a result, project finance works great for the 30th or 40th deal of the exact same type, but it is typically very hard to use project finance approaches for funding the development of facilities using innovative technologies or commercial arrangements.

Accordingly, project finance has historically been somewhat problematic for renewable energy interests to procure. Financiers central to structuring the deal were either unfamiliar or uncomfortable with the risks posed by renewable energy technologies, most of which have not been in commercial operation for decades. This lack of project finance capacity has thus been a major barrier to the widespread deployment of otherwise viable renewable energy technologies in commercial-scale projects.

The good news is that project finance capacity is increasingly opening its doors to renewable energy opportunities. Financial professionals with deep knowledge of the true abilities of renewable energy are finally beginning to amass capital to deploy in sponsoring the development of renewable energy projects.

posted by Richard T. Stuebi click here to link to full article

Project Finance International have just published a new report Financing Renewable Energy: Funding the Clean Alternative, which (for a price) gives details on every renewable financing deal this millennium, plus analysis on future prospects.