How the finance sector undervalues the environment and what we can do about it.
CAN FINANCIAL MARKETS PROMOTE an environmentally sustainable economy? $6.7 trillion dollars says they can.That's the amount invested or managed by 61 major investors and fund managers that have endorsed the recently launched U.N. Principles for Responsible Investment. Signatories commit to integrating environmental and social issues into their core investment analysis and share ownership policies and practices.
The Principles are just one example of an increasing recognition by financial institutions that, in the long-term, a healthy environment and society is a precondition for economic success. And even in the short term, the financial performance and risk of an investment can be strongly affected by environmental issues, such as pollution spills, contaminated land, or changes in environmental regulation or resource prices.
As a result, the past five years have been a period of experimentation, in which leading mainstream financial institutions have started to go beyond a traditional philanthropic approach to the environment to an effort to integrate sustainability into their core business activities: lending and investing money, and underwriting risk.
This is not to say that there aren't barriers, or that progress has been swift. ACF recently released a major survey of sustainability in the Australian finance sector, entitled False Profits: how Australia's finance sector undervalues the environment and what we can do about it. The study canvasses some of the business and structural factors that inhibit environmentally sound financial decision-making, as well as ten key initiatives that demonstrate a pathway towards a more sustainable finance sector.
One of the main difficulties in integrating environmental issues into financial businesses is that the traditional tools for making financial decisions, such as credit risk analysis, are too narrowly focused to capture the full impact of environmental concerns. Climate change is a classic example. Because greenhouse emissions are not significantly regulated in Australia, greenhouse pollution may not show up as a major credit risk for a particular borrower, yet the impact of climate change on a bank's whole portfolio of investments could be very significant.
An excessively short-term perspective is another important barrier. Short-term vision is especially evident in the investment markets, where analysts and funds managers are monitored and paid according to annual, quarterly or even monthly performance targets. Needless to say, a company that is driven to maximise returns over these time frames is much less likely to invest for a long-term sustainable future.
Another shortcoming of the finance sector has been its relative apathy in public policy processes related to the environment. For example, in recent federal inquiries into sustainable cities, future water supplies, salinity, and energy efficiency, out of hundreds of submissions from across Australian society and business, none whatsoever came from financial institutions.
The absence of the finance sector from public environmental policy formulation means that resource- and pollution-intensive industries tend to set the agenda and drive poor policy decisions.
Successful, sustainable finance
But all is not doom and gloom. The False Profits report found a wide range of innovative and successful financial business practices in Australia that are better aligned with sustainability. Here are a few of the highlights:
* Superannuation fund VicSuper has adopted a thoroughly integrated approach to sustainability, and not just in its 'ethical' fund options. VicSuper is one of the few pension funds world wide that reports on its sustainability performance. It has also dedicated 10% of its investments in equities and property to specifically sustainability-oriented investments, and is a regular advocate for environmental issues with the business community and its own members.
* Mainstream investment manager Portfolio Partners has signed the UN Principles for Responsible Investment and is on the way to implementing them. Specifically, Portfolio Partners has shifted to more long-term performance assessment arrangements for some of its funds, and requests environmental disclosure from companies in which it invests.
* Credit union mecu has successfully developed a series of green consumer finance products, including a green car loan and a green home loan.
* A coalition of superannuation funds is collaborating through the BT Governance Advisory Service (GAS) to improve corporate environmental performance. By cooperating in this way, the investors carry greater weight with companies that each would have individually, in addition to being able to pool resources for analysis of major environmental issues.
* As members of the Australian Business Roundtable on Climate Change, Insurance Australia Group, Swiss Re and Westpac have made a significant contribution to the public policy debate on climate change. Each of these businesses has also been a leader on environmental issues in other ways.
What you can do
The owners of unsustainable and environmentally destructive companies are, for the most part, institutional investors such as banks, superannuation funds, and insurance companies. When a company causes environmental damage, it is not only the company's management, but also these investors who should be held to account. As a consumer of banking and insurance services, and as a member of a superannuation fund, individual Australians can make a real difference.
Consumer power can be just as effective in improving sustainability in financial services as it has been in reducing plastic bag use.
Superannuation is for many Australians their largest investment. Furthermore, many superannuation funds are highly conscious of their members ability to leave the fund. In our experience, even a handful of letters about a particular issue can set in motion a process at the fund to improve performance on that issue. (Indeed, ACF was recently contacted by one fund that was very, concerned because one single member had left the fund after finding that it investments in old-growth forestry in Tasmania.)
Switching to a fund that suits your ethical ideals is a good option, but it's equally important for members of mainstream superannuation funds to ensure that those funds are improving their sustainability game as well. One way of doing this is to write to your fund, asking them quite simply whether they have endorsed the UN Principles for Responsible Investment and, if not, why not. While you at it, send a similar letter to your insurance company and your bank.
Whatever the response, email us at habitat@acfonline.org.au and let us know. Building on the success of the False Profits report, a serious push to improve the sustainability of superannuation funds will be a focus of ACF's corporate environmental responsibility campaign work in the coming months.
Are there differences in the relative contribution of Australia's major lenders to climate change?
Based on an analysis of major lending activities of banks active in Australia over a five-year period, there may well be major differences in relative contribution to greenhouse emissions. ACF analysed the relative environmental intensity of the syndicated lending activities of 24 institutions in the Australian market from 2000-2004.
For each lender's syndicated loan activities, greenhouse emissions intensity was calculated by averaging the environmental impact intensities of the industry sectors in which that institution's borrowers were active. The values are weighted according to the dollar value of each loan.
The results, for the top 10 lenders by total number of transactions, are shown in the chart above. These results indicate that the activities financed by the most greenhouse intensive lender were around 2.5 times as intense, in terms of greenhouse emissions, as the activities financed by the top performer.
LENDING INSTITUTION Emissions intensity (avg. kg CO2-e per $ final demand) Barclays 1.01 JP Morgan Chase 1.15 Westpac 1.24 ABM AMRO 1.26 Citigroup 1.29 CBA 1.56 Deutsche Bank 1.67 ANZ 1.70 NAB 2.09 BNP Paribas 2.58 Greenhouse gas emissions intensity of activities financed by top 10 lenders in ANZ syndicated loan market, 2000-04 Note: Table made from bar graph.
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| Author: | Berger, Charles |
|---|---|
| Publication: | Habitat Australia |
| Geographic Code: | 8AUST |
| Date: | Jul 1, 2006 |
| Words: | 1254 |
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