Rise of the ethical financier

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When representatives from more than 180 countries gather in Montreal on Monday for two weeks of talks on the Kyoto protocol on climate change, one of the important topics for discussion will be financing the development of projects in poorer nations that will enable them to cut their greenhouse gas emissions without having to divert scarce funds from elsewhere.

The World Bank and the International Finance Corporation will have the strongest role to play in financing and facilitating many of these projects. But private banks are also seeking ways to participate in projects such as setting up wind turbines in place of fossil fuel generators, capturing methane from animal slurry and generating energy from landfill sites – all of which can reduce emissions while raising cash for local enterprises in developing countries.

This forms part of a growing commitment to “sustainable” banking, which many financial institutions are coming to see as an increasingly important factor in their investment decisions. Such a commitment also underlies the launch of the FT Sustainable Banking Awards by the Financial Times in association with the International Finance Corporation (for more on the awards, click here).

Sustainability is a watchword of the environmental movement. The most widely accepted definition comes from the 1987 Brundtland report into global environmental problems: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Broadly, this means protecting environmental goods – water, air, soil, the diversity of plant and animal life – from over-exploitation, which swaps short-term gain for long-term damage.

A stark reminder of the danger of neglecting environmental protection came last week with the toxic spill into the Songhua river in China, leading to the shut down of water supplies and thousands of people fleeing their homes. This might seem a long way from the boardroom of the world’s top banks but the distance is closing.

Increasingly, environmental groups hoping to expose those responsible for catastrophes, and prevent them happening again, are working up the chain of financial responsibility. Not content with holding up to public scrutiny the companies directly involved, they are seeking out the organisations that provided finance for projects that end in such disasters. Rather than wait until accidents have occurred, they are directing their energies towards projects where they perceive a risk of damage.

For instance, the environmental pressure group WWF has campaigned strongly on the exploitation of oil and gas in Sakhalin. Shell, which leads the project, has taken many steps to reduce its environmental impact and argues that it has safeguarded the habitats for marine life in the area at considerable cost. WWF counters that the company has not gone far enough and has endangered rare grey whales living in the area.

WWF is now preparing to question the role of institutions helping to finance the project. “If the grey whales suffered, it would make us question any commitment banks involved made on biodiversity or other environmental goods,” warns James Leaton, policy adviser at WWF. This scrutiny extends beyond those providing finance to companies supplying advice alone.

“Do banks apply environmental screening when they have an advisory role, as well as when they invest in projects?” asks Mr Leaton.

A growing number of banks are turning to a form of self-regulation in order to ensure all project finance meets stringent sustainability benchmarks. The “Equator Principles” were drawn up in 2002 to provide standards based on some of the World Bank and IFC environmental, health and safety guidelines. More than 30 banks from around the world have signed up, including some of the biggest names in finance. “It’s about risk. Banks are worried about the risk to their reputation,” says Wayne Holden, senior environmental consultant at URS, an environmental consultancy.

Reed Huppman, partner at Environmental Resources Management, says activist shareholder groups, such as Calpers, with their own strict standards for responsible investment, have also made their views felt on these issues: “This has a lot to do with it, with the change in behaviour.”

Sustainable banking is about more than environmental awareness. Social responsibility plays a big role: helping to prevent the abuse of workers, child labour, dangerous working conditions and other problems. Banks can benefit from working with non-governmental organisations to monitor companies’ performance in these areas before they make loans.

Mr Leaton reports that many banks signed up to the Equator Principles are now going beyond them, adopting additional standards. Most important is to “demonstrate the change – to be able to show a change in procedures within the bank and show more transparency on lending decisions”, he says.

But he wants banks to do more: “We want the principle recognised that there are some areas [of the world] which are too important, from the point of view of biodiversity, to be exploited, and we believe banks should not fund projects in these no-go areas.”

Lowering reputational risk comes at a cost – in this case, the cost of investigating and assessing projects on social and environmental criteria, and adjusting those projects as necessary. But sustainable banking is not just about costs. There can be financial rewards, too.

James Cameron, co-founder of Climate Change Capital, a boutique investment bank, argues banks and investors can make large returns from areas such as renewable energy: “Whether through design, engineering or investment – clean fuels, power and technology offer entrepreneurs of the future a variety of exciting business prospects.

“There need not be conflict between the goals of making highly attractive returns on capital and pursuing opportunities that will have a positive impact on the environment in which we live.”

THE JUDGES

■John Willman, chief leader writer, Financial Times

■Lars Thunell, executive vice-president-elect, International Finance Corporation

■Nancy Birdsall, president, Center for Global Development

■David Blood, managing partner, Generation Investment Management

■Leo Johnson, co-founder, Sustainable Finance Ltd

■Clive Mather, president and CEO, Shell Canada

■Tessa Tennant, chair, Association for Sustainable and Responsible Investment in Asia

■Sivendran Vettivetpillai, managing director, Aureos Advisers Ltd

For more on the FT Sustainable Banking Awards, click here

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