After NGOs highlighted environmental and social problems with projects financed by the World Bank and the International Finance Corporation, its private sector arm, these organisations became more wary of investing in projects such as dams and oil pipelines. But when the World Bank refused to invest in the controversial Three Gorges Dam in China, for example, private banks, unburdened by public scrutiny, stepped into the breach.
As a result, NGOs shifted their focus to the private sector, which has had to respond to their concerns. One example of this is the Equator Principles, established in 2003 by an international group of banks, including ABN Amro, Barclays and Citigroup, to address the social and environmental impacts of the projects they finance. A year on, 27 banks have signed up, representing more than 80 per cent of global project financing funds.
The Equator Principles include safeguards in areas ranging from environmental assessment and natural habitats to indigenous peoples and child labour. If borrowers fail to comply with loan conditions, they can be declared in default.
Simon McRae, corporate campaigner at Friends of the Earth, says: “The good thing is that the signatories are saying they are responsible for how those projects are turning out. But there is still a long way to go.” Banktrack, an NGO that monitors banks’ investments, says signatories are still funding unsustainable projects, and that it is unclear to what extent banks are actually complying with the principles.
Meanwhile, the United Nations Environment Programme’s Finance Initiative has developed a set of responsible investment guidelines for institutions.
The impetus came partly from “the governance meltdown” associated with companies such as WorldCom and Enron and partly from a realisation among fund managers of the need to invest for the long term, says Monique Barbut, director of Technology, Industry and Economics at UNEP.
“Some of the scandals have sensitised funds to the fact that good sustainability within investments also makes good long-term sense in terms of protecting your assets.” In association with the Global Reporting Initiative, UNEP-FI wants to establish a de facto standard in the market. There is a vast range of information on sustainable investment but no consistency.
A forthcoming report by environmental consultancy URS carried out a study of 65 sources of information on sustainability, ranging from ratings agencies to Socially Responsible Investment (SRI) indices, such as FTSE4Good and the Dow Jones Sustainability Index, and research houses. Belinda Howell, director of corporate sustainable solutions at URS, says: “We analysed how the same companies performed across a range of ratings and there was no comparability at all. There has to be a move to better quality and better consistency of information; there are just too many operators measuring different things.”
To this end, the London Stock Exchange has set up the Corporate Responsibility Exchange. The LSE says: “UK companies are overwhelmed by the questionnaires being sent to them for corporate responsibility information.”
The CRE allows companies to fill out a single questionnaire and gives investors a single site where they can locate and analyse company data. It allow companies to disclose information against the most influential codes and rating systems, including the Global Reporting Initiative, the FTSE4Good index and Business in the Community’s Corporate Responsibility Index.
These indices are very influential, according to URS’s Dr Howell. “Companies really do respond to how they perform on these indices and whether they are in or out. That has a big impact on behaviour and companies will work very hard to improve their performance.” An earlier URS report on FTSE 100 companies suggested that those performing well in environmentally responsible indices had lower share price volatility, leading to a lower cost of capital. As a result, Dr Howell says, “one benchmark of a well-run company is how they perform in environmental indices”.
Increasingly, SRI is seen as a good business move. The Co-operative Bank says about 30 per cent of customers join as a result of its ethical policy. Now its sister company, Co-operative Insurance Society, is to canvas customers over what issues it should pursue with the companies it invests in. Mervyn Pedelty, chief executive of Co-operative Financial Services, says: “We are increasingly paying out claims for flooding and storm damage brought about by global warming. Should we be investing the same customers’ money in companies that pollute the atmosphere, which in turn leads to climate change, without seeking to improve the environmental performance of such companies?”
While insurance companies were among the first to realise they needed to take into account the effects of climate change, other key sectors that will be affected include the energy, transport, heavy manufacturing and construction industries, and oil and agricultural markets. In 2003 Dollars 70bn of damage was caused by weather-related disasters, according to the Carbon Disclosure Project (CDP).
Representing institutional investors with assets in excess of Dollars 10,000bn, the CDP asks FT500 companies what they are doing to mitigate the effects of greenhouse gas emissions.
It says it “demonstrates that the mainstream investment community is seriously engaging with the strategic and financial implications of climate change” and that taking climate risks into account is becoming part of smart financial management.