In Indonesia, Where There’s Gold, There’s Squalor December 25, 1997New York Times
Russians Fear Oil Spills (but Need Oil Money, Too)December 25, 1997New York Times
Rising Fires Renew Threat to Amazon November 2, 1997 New York Times
You can’t escape the headlines – timber companies tearing down tropical rainforest in the Amazon, coal-fired power plants belching smoke in China, gold mines leeching chemicals into the fragile soil and waters in Indonesia, all with devastating impact to people and wildlife. We can blame corporate greed, ineffective laws, or lack of government enforcement, but someone is providing the funds to these environmentally destructive projects. Who are they and what environmental guidelines, if any, are being applied?
Unfortunately, it’s difficult to know exactly what financial institutions are funding given the lack of publicly disclosed information. But, if the past is any indication, shareholders and consumers alike may soon call upon those institutions that provide the funding that propels development, and ask if social and environmental standards are being applied when lending and investing, especially as it relates to projects in developing and transitional economies.
To follow is a brief report on how private financial institutions can begin to “green” their core business areas and enable sustainable development and what we can do to encourage this process.
While the environmental performance of manufacturing and industrial firms can be evaluated using reported toxic emissions, fines levied, or other U.S. Environmental Protection Agency (EPA) and regulatory agency compliance measures, how can investors evaluate the environmental “friendliness” of a financial services company? The only public information on the environmental or social performance of private financial institutions (PFIs) consists of U.S. Community Reinvestment Act (CRA) ratings that evaluates consumer lending policies, rarely used Securities and Exchange Commission (SEC) filings on environmental liabilities, or brief paragraphs in annual reports that describe internal recycling programs.
In the past, this type of information may have been sufficient. Since financial institutions do not have smokestacks, tailings, or run-off, environmentalists, shareholders and consumers alike did not expect financiers to disclose information about their lending, underwriting and investing practices. However, the public is beginning to recognize the growing importance of the private financial sector in determining the development paths of communities, states, and even entire countries, especially those in the global South.
The National Wildlife Federation’s (NWF) Finance and Environment Program seeks to inform financiers, investors and the general public about the role that financial institutions can play in achieving sustainable development both in the U.S. and abroad. We believe that there are several components to a financial institution’s fiscally and environmentally sound global policies and programs.
First, financial institutions should articulate clear environmental standards. These standards should be available to the public. Second, the standards should encompass all core aspects of the Private Financial Institution’s (PFI) activities including lending, investing and underwriting. Third, an appropriate mechanism should be developed to monitor compliance with the standards – both internally within the PFI and externally with their clients. Finally, regular reports of the impact of the standards on environmental quality should be made available to all stakeholders. It is hoped that in the future these reports will address directly challenges and obstacles that remain to be resolved.
As a first step, NWF has developed a series of questions to outline ways that projects funded by PFIs, spanning the gamut of large scale industry from mining to manufacturing, can minimize or eliminate pollution and promote sustainability while conserving forest, wetlands, and other crucial natural resources. While most PFIs will not meet these criteria at this point in time, these questions represent a starting point for financial institutions and a “screening” process that investors and potential shareholders can use to evaluate the environmental commitment of financial institutions under consideration for their portfolio as well as institutions they utilize for services. The mention of specific institutions is provided only as an example represented by the subject area and is not intended to imply that these are the only PFIs with environmental programs or funding problematic projects.
Questions for Private Financial InstitutionsHave Comprehensive Environmental Guidelines Been Developed For Core Business Areas?
Financial institutions need to implement a set of environmental policies that are applicable to major business lines – lending, underwriting, insurance and investment. Comprehensive policies would call for an oversight monitoring mechanism to ensure that the guidelines are being followed and a periodic review process that would ideally include comments from environmental groups and other agencies. To encourage transparency, especially when financing deals in countries with lower environmental, health and safety standards and workplace requirements, environmental policies should be available to interested parties.
According to BankAmerica’s 1998 Corporate Environmental Report, their Environmental Credit Policy was revised to reference formal use of the World Bank’s guidelines in evaluating environmental performance in projects they finance. The World Bank has developed a Pollution Prevention Handbook, currently the international standard, that includes numerical targets for reducing pollution in forty industrial sectors and extensive social policies that insist on the rights of local populations to information and participation in decisions. Although the Bank has been criticized for failure to monitor and enforce its guidelines, PFIs could begin by using the bank’s guidelines as a model. However, PFI’s should first decide who will monitor the guidelines and how. For certain lines of business, Union Bank of Switzerland (UBS) applies the most stringent environmental requirements of either the World Bank, the host country or any OECD country according to Mathis Cabiallavetta, President of the Group Executive Board at UBS (Sustainable Development Agenda, 1998).
Are Environmental Policies Designed to Promote Sustainable Development?
In order to reduce claims, decrease defaults, and avoid cost-overruns, financial institutions should design environmental policies that minimize and prevent pollution, including emissions of toxic pollutants and greenhouse gases. Projects and investments should be selected only after adequate environmental due diligence has been performed. As the science of incorporating environmental criteria into financial decisions progresses, policies should incorporate the principles of habitat conservation.
Conducting strict levels of environmental due diligence, especially for projects where there is a potential of risks to health and safety, is a critical component of any environmental program. An example where adequate environmental precautions were not taken is The Kyrgyzstan Gold Mine, the site of a terrible and apparently lethal cyanide spill by the Kumtor Operating Company (KOC) in Kyrgyzstan on May 20, 1998 and again on July 22nd. Chase arranged two 8-year syndicated term loans. The spill polluted the Barskoon River with cyanide, as seventy liters of nitric acid were reported to have leaked from a truck on its way to the gold mine. A parliamentary commission has completed its investigation and will report that the spill of approximately two tons of cyanide into a local river led to four human deaths. More than 2,500 people have been poisoned and more than 800 of them had been hospitalized in the country since May 20, 1998. Financiers: Chase Manhattan Bank (lead bank), The Republic National Bank of New York, ABN-AMRO, Royal Bank of Canada, and Bank of Nova Scotia.
Are Corporate Environmental Reports Published?
It is important to provide stakeholders with information concerning a project that may affect their health, safety, and natural resources. Financial institutions should publish annual Environmental Reports that detail environmental policies, how they are implemented, and how environmental risk is minimized for those transactions with the greatest potential for environmental degradation projects.
While it is standard practice nowadays for the top multinational corporations in all sectors to publish an annual CER that summarizes achievements made to prevent pollution and demonstrate environmental stewardship, the publication of a CER is not common in the financial industry.
BankAmerica is one of the few major money center banks to publish an annual CER that discloses credit policy, the number of employees dedicated to environmental matters, and specific transactions where their Environmental Principles influenced decisions, even including an explanation of BancAmerica’s Securities controversial bond issue for the State Development Bank of China’s potential financing of Three Gorges Dam in China.
Are Environmental Issues Evaluated High in the Organization?
Determining who has overall responsibility for environmental risk assessment within the organization and to whom this person reports can provide an indication of the commitment within the institution to environmental issues. Environmental issues will only become incorporated into investment and credit decisions once an adequate number of senior level employees are hired and that these employees have immediate reporting ties to Credit Policy and Senior Management.
It is hoped that in the future environmental risk officers will be strewn throughout the organization so that environmental risk expertise will permeate the institution and not be limited to a unit specifically designed to evaluate environmental risk.
Are Employees Consistently Trained on Environmental Risks and Opportunities?
Presentations, articles, and bulletins can keep employees informed about the latest environmental regulations, technological breakthroughs and best environmental practices. By conducting training classes on how to incorporate environmental issues into credit and investment decisions, a message will be sent to employees that the environment matters, not just when it comes to internal recycling and waste management practices, but to core business areas as well.
Is Environmentally-Sound Development Encouraged?
Progressive institutions should developing innovative mechanisms to increase the stake of the private sector in environmentally-sound development like solar and wind, which may, in turn, lead to profitable new business lines and a potential competitive advantage.
An innovative wind fund was launched in the U.K. by Triodos Bank and Capital Ventures plc that allows individual and institutional investors to buy directly in wind energy projects. Triodos is also running a similar project in their home country of The Netherlands.
While a PFI would do well to use this list of Questions as a point from which to begin to fully develop an environmental program, the principles listed here are only that … principles. Any policies developed in the abstract are only given meaning when they are incorporated into the financial decision-making process.
As a way to get started, a financial institution could sign on to a voluntary environmental code of conduct to strengthen its own internal environmental policies. The main product of The United Nations Environment Programme’s (UNEP) Financial Initiative Program is the “Statement by Banks on the Environment and Sustainable Development.” The statement, signed by over 100 banks, acknowledges the financial services sector as an important contributor towards sustainable development and to preventing potential environmental degradation. Salomon, Inc., Republic National Bank of New York, EBI Capital Group and Community Capital Bank are the only U.S. signatories.
Formed out of a unique partnership between some of America’s largest institutional investors and environmental groups, The Coalition for Environmentally Responsible Economies (CERES) encourages greater corporate responsibility on environmental issues. By endorsing the CERES Principles, covering such things as an institution’s commitment to energy conservation, environmental restoration and the sustainable use of natural resources, companies formalize their dedication to environmental accountability and commit to a process of continuous improvement, dialogue and comprehensive, systematic public reporting. Financial endorsers such as BankAmerica, BankBoston, Wainwright Bank, Vancouver City Savings join corporations like Sun Company, Coca-Cola, and Baxter Healthcare and 50 other major companies in the CERES coalition.
While signing on to voluntary codes of conduct is yet another way to evaluate a company’s environmental commitment, everyone can help to advance the notion that a PFI should have explicit environmental policies that promote sustainable development by asking questions and requesting information from their banks, brokerage firms, and insurance companies. This may encourage financiers to incorporate environmental due diligence programs into credit and investment policies and decisions, which we expect will benefit the environment and a financial institutions’ bottom line.
The United States’ largest member-supported conservation group, the National Wildlife Federation unites people from all walks of life to protect nature, wildlife and the world we all share. NWF has educated and inspired families to uphold America’s conservation tradition since 1936. Its common-sense approach to environmental protection brings individuals, organizations and governments together to ensure a brighter future for people and wildlife.
Julie Tanner is the Director of the Finance and the Environment Program at the National Wildlife Federation