No More Hot Air
Hawser, Anita, Global Finance
Businesses are recognizing the heightened importance of minimizing both their impact on the environment and the impact that environmental legislation has on them.
Five years ago any NGO trying to take company CEOs or investment banks to task over the impact of their activities on the environment would probably have met with a closed door. Endorsing environmental principles used to be the exclusive preserve of radical left-wing groups whose members tied themselves to trees. And even those organizations that were not so left of center, such as the IFC's Environmental & Social Development Department, spent 20 years knocking on the doors of Wall Street trying to get banks to listen.
A landmark year occurred in 2003 in terms of what was once a closed door being left slightly ajar. In June that year a group of 10 banks representing seven countries were among the first signatories of the Equator Principles, a voluntary set of guidelines for assessing and managing environmental and social risks in project financing deals worth $50 million or more. An additional 34 banks have since signed up to the principles.
But 2005-2006 may go down as even more of a watershed in terms of putting environmental and social issues at the top of the corporate agenda. Last year some of the most conservative and biggest names in financial services and manufacturing signed up to "green" causes. Goldman Sachs' chairman and CEO Henry Paulson, who is also chairman of the Nature Conservancy, promised his company would invest $1 billion in renewable energy projects, establish an environmental policy thinktank and expand its role in what it does best-trading, or more specifically carbon emissions trading. Last year Ford Motor issued a climate risk report, a move that Chris Fox, director of investor programs at Ceres, which runs the Investor Network on Climate Risk, a network of 50 institutional investors with $3 trillion in assets under management, describes as a first for any company in the automotive sector.
Companies are utilizing market instruments such as qualifying GHG (greenhouse gas) emissions reductions and renewable energy certificates to achieve more cost-effective compliance with emission reduction targets outlined in the Kyoto Protocol. The volume traded in the GHG emissions market in Europe ballooned to more than 300 million tons last year thanks to the introduction of the EU Emissions Trading Scheme, which requires 12,000 installations throughout the EU25 to reduce their carbon dioxide emissions in the period from 2005 to 2012.
Investors Join the Party
The pièce de résistance, however, came in April and May of this year when 50 pension funds representing more than $4 trillion worth of assets signed up to the UN Principles for Responsible Investment, a set of six voluntary principles accompanied by 35 possible actions that investors can take to ensure that environmental, social and corporate governance (ESG) principles are considered in investment decisions and activities. "The $4 trillion now backing the principles confirms that the integration of environmental, social and corporate governance considerations is now an essential part of good business," remarked Monique Barbut, director of the UN Environment Program at the principles' launch in Paris. Perhaps for the first time a link was being clearly made between the financial performance ot a company and its environmental and social obligations.
Caisse des Depots, one of the signatories and drafters of the Principles for Responsible Investment, stressed that it applied the principles to most of its investment management policies. "We opted to take these factors into account across the board in our portfolio management, rather than limiting ourselves to a few funds invested in accordance with SRI principles," comments Francis Mayer, Caisse s CEO. Asset4, a Swiss-based firm that tracks information pertaining to the economic, environmental, social and corporate governance of 500 companies on the MSCI World Index, which it sells to pension funds, says it is not just about ethical investing any more. …