the role of australia's financial sector in...

The role of Australia’s financialsector in sustainabilityA report prepared for Environment Australia

The views and opinions contained in this reportare not necessarily those of theCommonwealth Government. The Commonwealth Government does not acceptresponsibility for the accuracy or completeness of the contents of this report (and shallnot be liable for any loss or damage that may be occasioned directly or indirectlythrough the use of or reliance on the contents of the report.)

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Executive Summary

Sustainable development and the finance sector

The finance sector has the potential to promote the principles of sustainabledevelopment through its lending insurance and investment activities, as well as itsinternal policies and processes. Internationally, financial institutions have begun torespond to this opportunity by actively participating in global forums, developing and promoting socially responsible investment products and greening their internaloperations.

Purpose of the study

Recognising the growing opportunities for the finance sector to contribute to sustainabledevelopment, the Minister for the Environment and Heritage commissioned this highlevel study, which aims to:

identify international trends (in North America and Europe) in sustainabledevelopment in the finance sector

evaluate the Australian finance sector (investment, superannuation, credit and lendingand insurance) in the context of these trends; and

identify barriers and opportunities for the Australian financial sector to contribute tosustainable development.

This study was conducted over a three week period, with the support of an industryadvisory group and gives an overview of recent developments. It provides a basis forfurther discussions between government and business on enhancing the role of theAustralian financial sector in sustainable development.

For the purposes of this study we have adopted the definition of sustainabledevelopment used by the World Business Council for Sustainable Development:

"…the delivery of competitively-priced goods and services that satisfy human needs andbring quality of life, while progressively reducing ecological impacts and resourceintensity throughout the lifecycle, to a level at least in line with the Earth’s estimatedcarrying capacity."

Study findings

International developments

The findings of this study indicate that leading international finance sector organisationsare responding positively to sustainable development and, in the process, enhancingstakeholder and shareholder value. Financial institutions in North America and Europeare involved in the following activities:

commitment and awareness – participation in international sustainable developmentforums such as the UNEP Financial Initiative, the World Business Council forSustainable Development and United Nations Framework Convention on Climate Change.

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Socially Responsible Investment (SRI) – rapid growth of the SRI market in the US andUK. This has been a significant positive reaction by the finance sector to the businessopportunities associated with sustainable development

climate change – the prospect of a carbon constrained economy and subsequentadoption of market-based trading mechanisms as a result of the Kyoto Protocol (yet tobe ratified), has stimulated significant awareness and response from the financialsector which suggests that it is well positioned to play a significant role in solvingenvironmental problems.

products and services – a growing number of environmental products and serviceshave been developed in response to market demand.

greening of own operations – in keeping with other industry sectors, an increasingnumber of financial institutions are implementing company-wide environmentalmanagement systems and have also published separate public environmental reports.

Notwithstanding the above developments, a significant barrier to the further contributionof the finance sector to sustainable development is a prevailing view held by financialanalysts that environmental and social risks, whilst important, are not material tocompany financial performance.

Australian developments

Our findings indicate that in many respects the interface between the finance sector,industry, government and advocacy groups in Australia in relation to sustainabledevelopment mirrors the trends in the international arena. In some areas however theAustralian finance sector is not as advanced as its international counterparts:

commitment and awareness – until recently, at an industry level, little interest hadbeen shown in sustainable development. Unlike its European peers, only twofinancial institutions are signatories to the UNEP Financial Initiative

products and services – there is less demand for and supply of SRI products.However, products and services have been developed in response to the issues ofclimate change and community banking needs.

greening of own operations – most financial institutions appear to have implementedenvironmental risk assessment procedures and undertaken energy efficiency andrecycling programmes. However few have implemented company-wideenvironmental management systems or published public environmental and/or triplebottom line reports.

Barriers and Challenges

There are number of barriers and challenges unique to Australia which explain why thefinance sector may not be as advanced as its North American and European counterpartsin responding to sustainable development. These include:

legislation – the enforcement of environmental legislation and the disclosurerequirements for companies and superannuation trustees in relation to environmentaland social issues is less onerous than North American and European systems

market size – the supply of financial products that incorporate sustainabledevelopment principles, such as SRI, is restricted by small market size

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awareness – despite a high level of concern about environmental and social issues inthe community, this has not been translated into a significant investment in “green”products or active campaigning to promote sustainable corporate practices

public disclosure – the voluntary disclosure of environmental and social informationis less developed than in North America and Europe. The only mandatory disclosurerequirement, namely s299(1)(f) of the Corporations Law is under review and may berepealed.

Opportunities for further development and recommendations

In the context of the international trends outlined in this report and given the extent ofsome of Australia’s sustainable development challenges, there are a number of key areasthat could be addressed to further engage the finance sector. The most important of these are:

Finance sector industry commitment and awareness

In addition to the initiatives currently undertaken by individual finance sectororganisations, there is scope for the finance sector as an industry to evaluate its role insustainable development. The objectives of this would be to:

demonstrate to stakeholders that the finance sector is aware of and is examining itsrole in contributing to sustainable development

identify opportunities that could have good commercial and sustainable developmentoutcomes, which require collaboration between the finance sector, industry,government and NGOs

identify, evaluate and provide a finance sector industry response to sustainabledevelopment “hot spots” such as biodiversity, climate change, salinity, landdegradation and water resources, especially with a regional context, such as theMurray Darling Basin.

Recommendation 1 - the Commonwealth Government should encourage the financialsector to provide continued support to the Australian UNEP Financial Initiative, therebydemonstrating its commitment to the principles of sustainable development.

Materiality

There is a need to increase the awareness in industry and the finance sector about thegrowing body of evidence that shows a positive relationship between improvedenvironmental and social corporate performance and financial performance. There isalso a need to develop case-study material to demonstrate this in the Australian context.

Recommendation 2 – the Commonwealth Government, in association with the financesector and industry, commission specific academic research into the financial value forbusiness of investments in sustainable development in Australia.

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Environmental and social disclosure

Noting the international trend towards increased voluntary public reporting and in someinstances, mandatory disclosure, additional consultation between government, industryand other stakeholders should be pursued to identify an optimal reporting and disclosureregime.

Recommendation 3 - the Commonwealth Government, in consultation with keystakeholders (the finance sector, industry, ASIC, the ASX, the accounting profession, stateEPAs and peak environmental groups) should commission a review of the existingmandatory and voluntary environmental and social disclosure requirements, in order toestablish an optimum reporting and disclosure regime.

Performance metrics

To ensure that environmental disclosure by industry addresses the informationrequirements of the financial sector, there should be closer dialogue between financialanalysts and industry.

Recommendation 4 – the Commonwealth Government, should establish a workinggroup to investigate ways to enhance the relevance of public environmental and socialdisclosure for use by financial analysts.

Management and reporting

International financial institutions are adopting company-wide approaches toenvironmental, and increasingly, social issues management, in order to demonstratetheir commitment to sustainable development and differentiate their services.

Recommendation 5 – the Commonwealth Government should work with the UNEPFinancial Initiative’s “Operational Environmental Management” advisory committee todevelop ways of promoting the adoption of environmental/social management andreporting guidelines by financial institutions.

In outlining the above recommendations we acknowledge that the CommonwealthGovernment will need to consider how it will expediate the carriage of these. Additionally the government will no doubt wish to develop a vision of the outcomes itwould expect from the further engagement of the finance sector and ensure that it canappropriately foster that relationship.

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Table of ContentsExecutive Summary

Section 1 Context 1

The concept of ‘sustainable development’

About this report

Our approach to the research

Section 2 Sustainability and business 3

Globalisation and sustainability

The business case for corporate sustainability

Section 3 International trends and issues 5

Analysis of the investment sector

Analysis of the pension fund sector

Analysis of the credit and lending sector

Analysis of the insurance and re-insurance sector

Key international trends

Section 4 Australian trends and issues 20


Analysis of the superannuation sector



A comparison between Australian and international trends

Section 5 Conclusions: key challenges for the future 31

Looking ahead

Section 6 References 33

Appendices

A North American financial sector sustainable developmentinitiatives

B European financial sector sustainable development initiatives

C Australian financial sector sustainable development initiatives

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Context

The concept of ’sustainable development’

The term ‘sustainable development’ has been in use for well over a decade, and hasbeen interpreted in different ways across the globe. The best known definition was givenin the Brundtland Commission Report in 1987, where it refers to development that’meets the needs of the present without compromising the needs of future generations.’

The World Business Council for Sustainable Development, which formed around thetime of the Earth Summit in 1992, stated that the business community’s contribution tosustainable development could be achieved by:

“…the delivery of competitively-priced goods and services that satisfy human needs andbring quality of life, while progressively reducing ecological impacts and resourceintensity throughout the lifecycle, to a level at least in line with the Earth’s estimatedcarrying capacity.”

These definitions bring together the notions of resource efficiency and the need forsocial and economic equity. For the purposes of this report we have used the WorldBusiness Council for Sustainable Development’s definition, as outlined above.

Financial institutions have typically believed that their potential environmental impactsare minimal and, as a result, appear not to have actively embraced the principles ofsustainable development. In the last decade the financial sector has howeveracknowledged that through their operations, (i.e. provision of capital) they can play asignificant role in promoting the principles of sustainable development.

About this report

This report was commissioned by the Minister for the Environment and Heritage to formpart of Environment Australia’s ongoing programme to promote improved environmentalperformance within Australian business and industry.

The purpose of this report is to provide an overview of the finance sector, bothinternationally and in Australia, and their relationship with sustainable development.

Section 2 of this report provides a background on the current global drivers forsustainable development, along with a summary of the existing evidence that supportsthe business case for adopting the principles of sustainable development.

An overview of the international trends in the finance sector in both Europe and NorthAmerica has been provided in Section 3 and a comparable analysis for the Australianmarket is presented in Section 4.

The key issues that emerge from the analysis of international and Australian trends isprovided in Section 5. In this section the report highlights the key challenges andopportunities the Australian financial sector faces in responding to sustainabledevelopment issues.

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Our approach to the research

This project was undertaken in three main stages, over a three week period,during the month of May, 2001. The first stage involved a desk-top review tobroadly identify the sustainability issues associated with four key financial sectors:

investment

superannuation

credit and lending

insurance and re-insurance.

The above areas are consistent with the advisory committee’s established underthe auspices of the United National Environment Programme (UNEP) FinancialInitiative in Australia. However for this study we have separated superannuationfrom the investment sector. Although we recognise that this is a sub-sector, thenature of activities undertaken to date has been sufficiently important to justifyexamining this area separately.

Information was collated and reviewed for the three regions of Europe, NorthAmerica (including Canada) and Australia and included academic studies,conference papers, industry sector reports, market literature and media reports.

The second stage involved identifying the trends for each of the regions andsectors reviewed. A comparison of international trends with current Australianpractices was then undertaken. This stage also included identifying the keystrengths, weaknesses, opportunities and threats for each of the regions andsectors studied.

The third stage of the project involved limited consultation with representativesfrom key Australian finance businesses, non-government organisations and theadvisory group established by Environment Australia for this study. The objectiveof this approach was to obtain a local perspective of the key issues affecting eachof the identified sectors. Although the consultation process was limited, theadvice and perspectives received formed an important part of finalising the report.

In keeping with the terms of reference for this study, this assignment was a highlevel desk top review. Given the time constraints, it has not been possible to dealsubstantively with many of the issues and themes identified in the report.

This report does not address the issue of fiscal instruments, for example,environmental taxes and incentives, as it was beyond the scope of this study. Thepotential role that government may play in this area was also not investigatedduring this project, however this issue could be investigated further in subsequentstudies.

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Sustainability and business

Globalisation and sustainability

The 1990s were characterised by a number of societal shifts that brought into focus thechanging roles of business, civil society and government in achieving sustainabledevelopment. The most prominent of these shifts have been:

global degradation – a growing global consensus as to the economic and socialimplications associated with environmental degradation and the need forcollaboration at regional and international level

globalisation – of trade, information and financial markets

inter-connectedness – of community groups and businesses through the rapiddeployment of information based technologies, such as the Internet

privatisation – the declining role of government agencies in favour of the privatesector in financing and developing infrastructure and new technologies

markets – increasing use of market incentives and mechanisms, in association withpolicy and regulation, to solve environmental problems

non government organisations (NGOs) – a resurgence in the ability of NGOs toscrutinise and mobilise against the perceived social costs of globalisation and thegrowing power of multinationals.

As a consequence of the above, multi-nationals are beginning to examine their role insociety. There is also a growing expectation that they can play an important role insustainable development.

The business case for corporate sustainability

A considerable amount of evidence is now available that purports to identify a positiverelationship between corporate sustainability, financial performance and ultimatelyshareholder value. As pointed out in the report, ‘Buried Treasure – Uncovering thebusiness case for corporate sustainability’ (SustainAbility, 2001) most of this evidence isanecdotal and lacks academic rigour. In particular, no one has managed to solve theongoing dilemma of whether responsible companies are more prosperous, or prosperouscompanies are more responsible.

Nevertheless, a number of studies have been undertaken (Feldman et al, 1996, Gottsmanet al, 1998 and Reed, 1998) which explore this relationship. These studies provideevidence of the growing case for businesses to adopt strategies that contribute tosustainable development.

A significant shortcoming however in the debate is that whilst these studies establish acorrelation between superior corporate environmental and financial performance, inmost instances it has been difficult to measure the value added from sustainabledevelopment investments.

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However, the Buried Treasure Report, found the following:

positive impact – overall, corporate sustainable development performance has apositive impact on business success

brand & reputation – brand and reputation is the measure most positively linked tocorporate sustainable development

financial results – positive links between sustainable development performance andfinancial results are supported by business case research

environmental process – environmental process improvement focus is supported bythe strongest business case

multiple measures – the business case is strongest when multiple measures ofbusiness success are considered

business strategy – the business case is strongest when companies incorporatesustainable development performance into mainstream business strategy.

A number of large multinational corporations including DuPont, Shell, Ford, BP andInterface have begun to examine and develop new business models aimed at integratingthe concepts of sustainable development into their core business objectives, strategiesand values. The rationale for doing this is predominately based on the belief thataligning corporate objectives with society’s needs is likely to generate sustainable growthin shareholder value over the long-term.

In our experience the ability to craft and implement a sustainable business strategywhich is able to deliver tangible benefits to increasingly discerning and informedstakeholders and shareholders, is a significant challenge for today’s CEOs.

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International trends and issues In recent years the international financial sector (primarily North America and Europe)has played a significant role in developing ‘sustainable’ products and integrating theprinciples of sustainable development into their own business operations. In this sectionwe provide an overview of the international trends and issues affecting the financialsectors of investment, pension funds, credit and lending, and insurance.

For the sectors of investment, pension funds and insurance, the analysis undertaken hasprimarily been based on the products offered. For the credit and lending sector however,the analysis has focused on internal processes, including risk assessment tools,management systems and public reporting. The nature of this assessment is a reflectionof the types of initiatives recently undertaken by these sectors.

Details of the recent international developments in these four sectors are provided inAppendices A (North America) and B (Europe), and include:

a description of the sector

the legislative drivers

the products and services offered

the analytical and rating tools used

key stakeholder groups and concerns

how financial institutions are now incorporating sustainable practices into theirinternal operations.

An overview of the analysis undertaken is presented in tables 3.1 and 3.2, whichsummarises the key strengths, weaknesses, opportunities and threats for each of theregions and sectors studied.

Analysis of the investment sectorSocially Responsible Investment (SRI) refers to an approach that explicitly integratespersonal values into investment decisions (Ethical Investment Association, 2000). Thisform of investment allows investors to consider personal values, including a concern forthe environment and society in their investment decisions.

SRI has grown in both Europe and North America, with a variety of products beingoffered by mainstream financial institutions to investors. In the US alone, of theinvestment market estimated at a value of US$ 16.3 trillion (funds under management),13% is deemed socially responsible (Social Investment Forum, 2000).

Approaches to socially responsible investment

The integration of personal values about society into investment decisions can beapproached in a variety of ways:

screening: individual companies are either included or excluded from investmentportfolios or mutual funds based on social or environmental criteria. A more recentform of screening has developed where companies are rated on their social andenvironmental performance and investment is made in the best performers within

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each sector of the economy. Investors who take this approach are attempting to useintra-sectoral competition to drive improved social and environmental performancein individual companies and across the entire sector.

shareholder advocacy: actions which investors take in their role as owners ofcompanies. These actions range from discussing issues of concern with companies tovoting proxy resolutions. The concept of shareholder advocacy is based on theprinciples of agency theory where management has an obligation to meet the needsof the company owners. This approach is gaining growing attention in both the USand the UK. There is a distinction however between the approaches adopted in theseregions. In the US it is the activist shareholders that are undertaking this activitywhilst in the UK, shareholder advocacy is primarily undertaken by the SRI fundmanagers.

community-based investments: primarily in the US, this form of investment involvesproviding capital to organisations for community based projects.

Figure 3.1, illustrates the distribution of SRI funds in the US, as at 1999 in each of theseinvestment types.

SRI in the US (US $2.16 trillion - 1999)

Growth drivers for socially responsible investment

Internationally, SRI is being characterised by retail and pension funds. In this section welook at retail trusts and individual investor trends (pension funds are examinedseparately in the next section).

In recent years the value of funds under management has grown considerably in size,with half the UK SRI market being made up of retail funds. These funds are open to allinvestors, and range from screened alternatives including best of sector, to targetedfunds, for example, sustainable energy funds, as well as social venture capital fundswhich invest in socially responsible start-up companies.

Shareholder advocacy only

Community investing

Screening only

Both screening and shareholder advocacy

Figure 3.1 Distribution of SRI funds in the US in 1999 Source: Proske, Saleeba et al, 2000

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Although the UK has largely dominated Europe in developing and promoting SRI,its uptake has been widespread across the region with most European countriesoffering SRI opportunities. The increase in investor interest has also led to thelaunch of a wide variety of SRI products which differ mainly on the basis ofscreening techniques.

The trend has been even stronger in North America and Canada, where suppliersprovide considerable detail on their products, principles and returns with the aimof increasing investor awareness.

The success of these overseas markets appears to be driven by a set of key factorsand influences:

size of the overall market: with the size of both the US and Europeanfinancial markets, SRI does not have to appeal to all investors before itbecomes commercially viable. The size and diversity of the investor poolallows for the development, support and success of alternative products. Thishas potentially contributed to an investment niche rapidly becomingmainstream

investor maturity and understanding of the products offered in the market:investors overseas have had exposure to SRI for several years. Discussions anddebates on the viability and transparency of these products have increased theoverall market awareness and probably, confidence in these alternatives.Nevertheless, concerns about fund transparency and viability still exist andwould appear to be one of the largest barriers to the further development ofthe sector. To reduce these risks, individual market players are attempting torespond to these concerns by maximising transparency. For example, the DowJones Sustainability Group Index (DJSGI) is independently verified byPricewaterhouseCoopers to demonstrate to the market the consistency of themethodology applied. In 2000, the DJSGI further opened itself toaccountability by publicly making available its methodology, as well as the listof companies included in its investment pool

availability of company information on social and environmentalperformance: in both the US and Europe, various legislative listingrequirements, as well as voluntary programmes such as the Eco Managementand Audit Scheme (EMAS) require that companies disclose a considerableamount of information on their environmental and, increasingly, socialperformance. These requirements ensure greater disclosure and in certaininstances, greater consistency and comparability in information. Ready accessto information facilitates and potentially reduces the cost of screeningcompanies for SRI.

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There is significant debate in the US regarding the role of the Securities ExchangeCommission (SEC) in enhancing non-financial disclosure (Chan-Fishel, 2000). This isbeing lead by ‘the Corporate Sunshine Working Group’ an alliance of investors andpublic interest organisations, working to broaden and deepen SEC corporate andfinancial disclosure rules to benefit investors, as well as the larger public interest.

Chan provides evidence of the importance of non-financial information in investmentdecision making. For example a national survey of investors conducted by theAmerican Institute of Certified Public Accountants in 2000 found that 79% of thosepolled believed that ‘corporate responsibility’ information was necessary(www.aipca.org).

Analysis of the pension fund sector

As international governments move away from providing pensions on retirement andpeople are generally living longer, the need for individual retirement funds is increasing.In the UK £25 billion (funds under management) are invested in SRI. Additionally, theUK Pensions Act 1995 was amended in July 2000 to require all pension trustees toreport on:

the extent to which social, environment or ethical considerations are taken intoaccount in their investments; and

their policy (if any) in relation to the exercising of rights (including voting rights)attached to investments.

Pension trustees are currently examining their investment policies and the basis forselecting companies. This focus on socially responsible performance has been a catalystfor the further promotion of SRI. Germany and France are currently looking at adoptingdisclosure legislation similiar to that in the UK.

Prescriptive disclosure has not been a key driver in the US. However, up to 35% ofmutual fund investors with defined retirement plans indicated that their employersoffered SRI options (Calvert Group Research, 1999). It also appears that investors areprepared to be more patient with the returns of pension funds and for their returns tomature over a longer period. This generally suits SRI as some investments involvecapitalising on changing market conditions, for example, opportunities such asrenewable energy sources.

Although short-term returns are not a priority, pension funds in keeping with theirfiduciary obligations, tend to adopt conservative investment principles. This haspotentially been a hurdle for SRI given the limited track record for such funds.

Corporate governance and disclosure

To date, there has been concern by the UK pension fund industry that offering sociallyand/or environmentally screened funds was in breach of a trustee’s ‘fiduciary obligation’. However, while statute and common law require financial return to be thedominant consideration, it is not the only consideration in the investment decision ofpension funds.

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Issues of corporate governance are also prompting pension funds to consider the socialand environmental performance of companies. Pension funds need not only considerwhich companies to invest in, but also whether they exercise their vote as shareholderswhen environmental or social issues are raised at company Annual General Meetings(Proske, Saleeba et al, 2000).

The voting of shares has the potential to be a powerful means of influencing acompany’s environmental and social behaviour (Proske, Saleeba et al, 2000). As morepension fund trustees take a more active role in voting their shares, they may prefer toavoid companies that have questionable performance in relation to social orenvironmental issues, particularly if their members (or beneficiaries) indicate that this istheir preference.


In the 1990s the international banking industry started to play a more active role insustainable development. The main trigger for this increased focus was concern overpotential environmental liability and damage to their reputation. In 1990, a major bankwas held liable by a US court for the environmental degradation that occurred as aresult of its lending practices. This case highlighted to banks that they were, in part,responsible for the environmental impacts associated with projects for which theyprovided funding. American banks were therefore the first to consider theimplementation of environmental polices in relation to lender liability, includingimplementing some form of assessment of environmental factors before approvingcommercial loans (Delphi, 1997).

Multilateral funding agencies such as the International Bank for Reconstruction andDevelopment and the International Finance Corporation have also played a significantrole in the development of social lending and investment guidelines. Events such as theThree Gorges Hydroelectric Power Scheme (refer to Box 3.1) were also instrumental indemonstrating to European banks the importance of balancing economic andcommercial interests with the social and environmental responsibilities of their lendingdecisions (Kearins and O’Malley, 2001).

Box 3.1: Three Gorges Hydroelectric Power Scheme

The significant social and environmental impacts of the Three Gorges HydroelectricPower Scheme Project received much attention from Non-GovernmentOrganisations, community groups and media the world wide. In April 1999, due tothe demands of shareholders concerned with the project, the management ofMorgan Stanley Dean Witter agreed to develop social and environmental guidelinesfor their lending, investment and underwriting practices. The World Bank alsowithdrew funding for the project.

Credit Suisse Group also suffered reputational damage through their involvement inthis project and as a result enhanced existing environmental risk lending assessmentprocedures.

Source: Kearins and O’Malley, 2001

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European banks have not been exposed to these environmental liabilities as significantlyas the North American sector, and hence have only recently begun to develop policiestowards incorporating environmental assessments into credit and lending decisions(Jeucken, 2001).

Banks and the community

In the US, community banks and credit unions have been developed for the purpose ofinvesting in and serving the traditionally under-serviced markets. They makeconventional credit available to people who would otherwise have difficulty obtainingmarket-rate finance. This trend can in part be attributed to the US Community Re-Investment Act (CRA),1997 which has been an important tool in improving access tocredit and promoting development in lower-income communities.

Although similar legislation does not exist in Europe, many EU lending institutions haverecognised the importance of investing in community projects. Such projects havepreviously been addressed by the smaller banks in the non-listed sector, such as thepioneering Tridos Bank, which has offices in Belgium, the Netherlands and the UK. Thisbank has effectively integrated environmental concerns into its core business and is wellknown for its innovative and transparent approach to banking. A profit of £1.24 millionin 1998 has shown that the combination of social, environmental and financial lendingcriteria can be successful (Louche, 2001).

Social inclusion has also become a focus of attention for the major Europeon banks whoare, to varying degrees, involved in philanthropy and providing funds for communityprojects. Examples include the Polish environmental bank recently implementingcommunity lending programmes and the Grameen Bank introducing micro-credit inBangladesh. In general the concept of micro-finance is gaining much wider currency asa means of alleviating poverty, as it gives the poorest in the world access to credit whileat the same time providing the opportunity for them to take the initiative to helpthemselves.

Other community initiatives undertaken by the credit and lending sector in the UK haveincluded Lloyds TSB donating £30 million in 1998 (over 1% of its pre-tax profits),NatWest £14.3 million and Barclays £13.5 million. These companies were amongst thetop ten corporate donors in the UK. Their contributions primarily focused on education,arts, sport, and community support (Giuseppi, 2001).

International banks and internal environmental performance

Although banks are not obvious environmental polluters, they are large consumers ofenergy and resources. This issue is increasingly being recognised by financialinstitutions, including those in the credit and lending sector. Many large internationalbanks have introduced internal environmental management systems and improvementprogrammes into their operations. As a result of these initiatives these organisations arenow seeing the financial benefits of such practices. Proactive companies such as theUnion Bank of Switzerland have reduced their energy usage by 25% between 1990 and1993 and between 1991 and 1995 NatWest saved approximately US$50 million inenergy costs. Some banks, such as Rabobank Group, are also turning to solar energy (Jeucken et al, 2001).

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Numerous industry associations have also played a role in promoting environmentalperformance improvements within the credit and lending sector. The British BankersAssociation has continued to play an active role in promoting the issue of sustainabledevelopment, as well as the Swiss Bankers Association, which recently developed aweb-site that outlines the experience of Swiss banks when setting up their environmentalmanagement systems (www.unep.ch).

The most recent development in the UK has been the development of environmentalmanagement and reporting guidelines, specifically for the financial sector. Theseguidelines were developed by the ‘Forge Group’ consisting of the Abbey NationalGroup, Barclays, CGNU, Lloyds TSB, Prudential, The Royal Bank of Scotland and TheRoyal Sunalliance.

In general the success and implementation of overseas initiatives appears to be driven by:

development and integration of credit risk assessment tools: due to the potentialliability issues associated with environmental risks, many large international bankshave adopted lending practices which involve screening credit applications based onenvironmental criteria. Approximately 88% of all commercial banks responded to theComprehensive Environmental Response Compensation and Liability Act (also knownas CERCLA or the ‘Superfund’ legislation) by changing their lending policies and46% stopped granting loans to companies in areas that were particularlyenvironmentally sensitive (Hansen, 1996)

environmental reporting and management guidelines: many initiatives regardingenvironmental information and reporting requirements have been widely supportedby this sector including the UNEP Financial Initiative, the Global Reporting Initiative(GRI) and more recently, the environmental management and reporting guidelines bythe ‘Forge Group’ in the UK.

As a result, numerous banks in both Europe and North America, including Co-operative Bank, ING Group, and NatWest have implemented environmentalmanagement systems and publish public environmental reports.

Despite the strong drivers and growing number of initiatives, banks in Europe andNorth America have still not fully incorporated the principles of sustainability into allof their business operations. To date, initiatives implemented have largely beenlimited to the areas of credit risk and lending. Transparency and accountability withregard to lending policies currently remains an issue to be addressed (Giuseppi,2001).

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The issue of climate change

Another driver that has influenced how the credit and lending sector responded to theissue of sustainable development has been that of climate change. Banks initial interestin climate change was prompted by a need to better understand the implications forcredit risk in their own lending activities, that is, the extent to which companies'profitability and asset valuations would be negatively impacted and therefore impairtheir credit risks. However, there is limited evidence to show that lending terms havebeen tightened for companies exposed to carbon liabilities.

Beyond lending activities, banks will likely play a key role in deploying their traditionalexpertise in project finance, credit enhancement, financial risk management servicesand trading in the climate change arena. These would provide a range of marketfacilitation services that contribute to the development of emissions trading markets.

For example, a major European bank is developing a credit enhancement product foremission reduction units. The bank would effectively purchase emission reduction unitsfrom diverse projects and issue these in its own name, thereby providing the end-investor with bank guaranteed emission reduction units.

Banks have also been significant participants in the emerging carbon markets. Theregulatory uncertainties and lack of liquidity have meant that finance sector participationhas been basically limited to broking. However, it is widely anticipated that the scale ofcarbon markets in the future will dwarf all other commodity markets and manytraditional financial markets. Hence, requiring the involvement of the finance sector inthe future.


The insurance sector has undergone significant changes in recent years as a result of theimpact of environmental risks. In response to numerous claims for pollution liabilitybeing made under general liability policies the insurance sector has reacted by:

writing policies on a ‘claims made’ basis to avoid indefinite on-going potentialexposure; and

drawing a distinction between ‘gradual’ pollution/seepage and ‘sudden andaccidental’ pollution. However the courts in the US have blurred this distinction,which to some degree has shifted the market towards total pollution exclusions fromgeneral liability policies and the introduction of specific environmental pollutionliability policies (Macinante J., 2001).

In the US these changes have largely been in response to the implementation of CERCLAlegislation and liability claims associated with asbestos use and disposal.

Numerous environmental insurance products have been developed and are offered inboth North America and Europe. Asbestos containment and owner’s spill liability coverare just some of the insurance products currently offered in the US market (refer toAppendix A for further details) and by 2000, approximately US $ 1.2 billion ofenvironmental liability insurance (premium value) had been purchased in the US(www.irmi.com).

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The insurance sector has also recently acknowledged its role in guiding companies toimplement environmentally sound practices. For example, an insurance company inGermany offers reduced car insurance premiums if a season public transport ticket isheld by the customer. This approach is based on the belief that minimising the use ofcars will reduce the potential for accidents as well as reduce air pollution levels(www.unep.ch).

In addition, the insurance industry’s views on sustainable development have beeninfluenced by their commitments undertaken as signatories to the voluntary UNEPStatement of Environmental Commitment by the Insurance Industry. This requiresinsurers to incorporate environmental considerations into their internal and externalbusiness activities. To date, 59 insurance companies from the EU and North America aresignatories to this statement.

The potential impact of climate change

The climate change debate remains one of the most important issues for the insuranceindustry, particularly for the re-insurance sector, which is responsible for covering lossesassociated with natural disasters. A dramatic increase in weather-related insured losseshas been witnessed in the last few years, including Hurricane Andrew which occurred inthe US in 1992 and resulted in over US $15 billion in claims, and more recentlyHurricane Fran in 1996 which cost over US $10 billion (Ganzi et al, 1997). Companieslike Munich Re monitor these trends and are concerned about the potential impact onthe insurance sector (refer to Box 3.2). In response to this concern, many Europeaninsurance companies have worked in partnership with national governments, to assist indeveloping possible solutions, including General Accident in the UK and Swiss Re. TheEuropean insurance sector has also been pro-active in its approach to global warming.The North American insurance sector however appears less convinced about the risks ofclimate change, stating recently that the science of climate change is far from settled andthe risks to the industry are overstated (AIA, 2000 cited Monash, 2000).

Box 3.2: Insurance and Climate Change

One of the leading re-insurance companies, Munich Re, has recently warned of anincrease in natural disasters due to the changing climate. The company announced850 natural disasters for 2000 and insured and economic losses amounted to $8.3billion and $30 billion respectively. Munich Re indicated that global warmingcombined with rapidly increasing population in high-risk areas would result in moredisasters in the future.

Source: Major, 2001

14

Key international trends

A number of developments in the international arena have shaped how the financesector, industry, government and society interact in the context of the emergingsustainable development agenda. These are discussed in more detail in the SWOT tables3.1 and 3.2 and in Appendices A and B. The main themes defining the state of play inthe international arena are:

disclosure and environment protection legislation: it would appear thatenvironmental legislation, such as CERCLA and the Securities Exchange Commission(SEC) listing and disclosure requirements in the US, as well as increased trusteedisclosure obligations required under recent changes made to the UK Pensions Act,have had an influence on how various financial organisations have responded tosustainable development drivers. The implementation and enforcement of suchlegislation has primarily affected the credit and lending sector and theinvestment/superannuation sector

role of government: the government sector (including multilateral developmentagencies) has had an important role in raising awareness and defining the financialsector’s obligations with regard to sustainable development. This has included thedevelopment of environmental and social lending and investing guidelines and theestablishment of the UNEP Financial Initiative

National governments and their agencies have also played a role in promotingresearch, developing policies and promulgating appropriate legislation that creates abasis for increased financial sector participation in solving environmental and socialproblems. As previously mentioned it was beyond the scope of this report toinvestigate the role that government may play in designing fiscal instruments thatpromote the involvement of the financial sector in sustainable development

voluntary performance reporting: Europe, followed by North America, leads theworld in voluntary public environmental and social reporting. The increasing level(quality and quantity) of voluntary public disclosure by industry and the financesector has resulted in:

environmental and social performance becoming a competitive business issue

increased analysis of environmental and social business risks by financial sector institutions.

greening of financial institutions: in keeping with the global trend of large listedcompanies publicly reporting on their sustainability commitments (policies, impacts,targets and systems) financial institutions are increasingly following this path. This isparticularly the case in the UK and Europe where large financial institutions areimplementing environmental management systems based on standards such as ISO14001 and EMAS

products and services: as a result of increasing awareness and market competition,financial institutions are now developing a range of environmental finance productsand services to meet market demand.

15

The rapid growth of the SRI market in the US and more recently in the UK has had asignificant impact on how industry and the finance sector have responded to thebusiness risks and opportunities associated with sustainable development. Asignificant feature of the SRI market in the US and UK is its large size and demand.The SRI market has also generated considerable interest in the finance sector withregard to the apparent positive correlation between corporate sustainability andfinancial performance. A range of associated services and products such as researchand rating agencies, indices, asset consultants and information services have alsobeen developed.

climate change: the dramatic increase in weather-related claims received by theglobal re-insurance industry in the late 1990s has raised considerable concerns aboutthe potential threat to this sector.

Secondly, the adoption of flexible market instruments in the Kyoto Protocol hasstimulated the finance sector to develop a range of financial instruments to facilitatethe trade of emission credits

commitment and awareness: the European financial sector, and to an increasingextent, North America, has been quick to respond to global and national initiatives topromote its role in sustainable development. In particular, the UNEP financialinitiative, Global Reporting Initiative and the environmental management andreporting guidelines by the ‘Forge Group’ in the UK have been widely supported.

Industry associations such as the British Bankers Association have also been proactivein promoting dialogue on sustainable development

materiality: perhaps one of the most problematic areas in sustainable development inrelation to the finance sector is the challenge of determining whether or notcorporate environmental performance is a significant business driver. The overallperception of financial analysts is that whilst environmental and social issues areimportant they are not material to financial performance. This perception may beattributable to a combination of factors, including the high cost of obtainingappropriate environmental information and the lack of analytical tools

civil society and shareholder activism: the role played by civil society, nongovernment organisations and shareholder activists in raising concerns aboutsustainability and globalisation has been a significant feature in North America andEurope. The finance sector, with the exception of multilateral organisations such asthe International Monetary Fund, have not been a regular target. There have howeverbeen some high profile events such as the Three Gorges Electric Power Scheme inChina which have raised the importance of incorporating sustainable developmentissues into future lending and investment decisions.

In addition to the above, the role of SRI fund managers in engaging companies onenvironmental and social performance issues is emerging as a considerable driver forcorporate change

16

analytical tools and capacity: an important development in recent years has been theincreasing rigour and quantification of corporate environmental and socialperformance. This has been facilitated by stakeholder demands for greater publicdisclosure and the ability of the non-government and business sector to respond tothe emerging market opportunity of offering services in this area. Despite someconcerns about the lack of rigour and inconsistent application of assessment criteria,Europe and North America have a well developed capability to deliver these services.

17

Table 3.1: SWOT analysis - North America

a significant numberof new ‘green’investment productsare being developed(SIF, 2000)

relatively high level ofnon-financialdisclosure

a significant numberof new ‘green’investment productsare being developed(SIF, 2000)

introduction ofenvironmental riskassessment criteriainto credit approvalprocesses

well establishedenvironmental ‘cleanup’ regulatory regime(www.irmi.com )

investors are stilldetermining the mostappropriatetechniques forintegratingenvironmentalperformance intofinancial analyses(EPA, 2000)

analysts believe theenvironment is not anissue that materiallyaffects stockperformance (Taylor,1998)

the complexity ofinvesting in sociallyand environmentallyresponsible funds isincreasing

analysts have difficultyobtainingenvironmentalinformation

information providedis different betweencompanies andindustrial sectors

reluctance to betransparent aboutlending policies(Giuseppi, 2001)

only a small numberof insurancecompanies arereporting on theirenvironmentalperformance

the impact of climatechange is not wellacknowledged withinthe industry (AIA,cited Monash, 2000)

Investment Superannuation Credit and Lending Insuranceand re-insurance

Criteria

Strengths

Weaknesses

moderate positiverelationships are beingseen betweencorporateenvironmentalperformance andfinancial measures(EPA, 2000)

consumer demand for‘green investments’ isincreasing (SIF, 2000)

consumer demand for‘green investments’ isincreasing (SIF, 2000)

demand for productsie community loans,accounts etc is rising(SIF, 2000)

liability legislationacts as a driver forbanks to manage theirexposure toenvironmental risks

liability legislation hasacted as a driver forcompanies to managetheir exposure toenvironmental risks

Opportunities

investors remainsceptical about thevalue ofunderstandingcorporateenvironmentalperformance (EPA,2000)

a lack of informationexchange onenvironmentalstrategies betweencorporations andanalysts (EPA, 2000)

legislation has notbeen implementedwhich requiresdisclosure onenvironment andsocial performance

banks are scepticalabout the importanceof environmentalissues (Taylor, 1998)

number of claims mayincrease due toclimate change and itsimpact on windstormfrequency and severity(Ganzi, 1996)

Threats

18

Table 3.2: SWOT analysis - Europe

the SRI sector isgrowing in both sizeand impact

investors view soundmanagement of socialand environmentalconcerns as a goodproxy for overallmanagement andquality (SustainAbility,2000)

ABI and NAPF, whorepresent the UKindustry, are adoptingguidelines whichrecognise that social,ethical andenvironmental risksshould be managed

a diverse range ofproducts are beingoffered

environmental riskevaluation proceduresfor lendingassessments have beendeveloped by banks

EU banks have totalassets over ECU11,000bn and hencehave an enormousinfluence on theeconomy of EU andits environmentalimpact (Delphi, 1997)

specific environmentalmanagement andreporting guidelineshave been developedin the UK andGermany

the UNEP FinanceInitiative and steeringcommittee forFinancial Institutionshas been operationalsince the mid 1990’s.

insurance companiesare applyingenvironmentalprocedures in riskassessments

the UNEP FinanceInitiative and steeringcommittee onInsurance has beenoperational since themid 1990s. Over 35Insurance companiesare signatories to theUNEP FinancialInstitutions InsuranceInitiative

screening of socialand environmentalissues adds anotherlayer of complexity tostock selection andadditional costs

investors are worriedabout poorperformance

managers are worriedabout financialperformance of ‘green’funds

some investmentmanagers are worriedabout financialperformance of ‘green’pension funds

lack of accountabilitywith regard to lendingpolicies (AMPHenderson, 2000)

banks are conservativein their attitudetowards transparencyabout their operations(AMP Henderson,2000)

banks typicallybelieve that theirresponsibility ends atthe point of sale of theretail product (AMPHenderson, 2000)

banks are still trying toassess whether theissues of sustainabilityare material

subsidiaries are notbeing requested tofollow parentrequirements

only a small numberof insurancecompanies arereporting on theirenvironmentalperformance


Criteria

Strengths

Weaknesses

19

Table 3.2: SWOT analysis - Europe continued

EMAS is resulting inmore formaliseddisclosure bycompanies

there is a high level ofpublic concern

the UK Pension fundsAct requires disclosureof environmental,ethical and socialpolicies (ERM, 2000)

the potential toimplementmechanisms tomeasure theircustomers’environmentalperformance, thusdriving performanceimprovement (AMPHenderson, 2000)

environmentalimpairment liabilityregulations areexpanding (Swiss Re,2000,)

European insurers arebeing pre-emptive intheir approach toglobal warming(Monash, 2000)

significant funds arebeing spent on theissue of climatechange and itspotential impact onweather patterns

the language andterminology used bythe SRI community isnot easily understoodby financialprofessionals(SustainAbility, 2000)

some companies areunwilling to discloseinformationvoluntarily andassessments are basedon best availableinformation (thedevelopment of betterand stricter assessmentcriteria has confusedcompanies providinginformation)

no standard reportingformat has beenadopted by companiesmaking the analysis ofinformation difficult

some companies areunwilling to discloseinformationvoluntarily

no legislation toenforce re-investmentin community projects

most Europeanlegislation does notenforce ‘joint andseveral’ or‘retrospective’ liabilityand as a resultconcern overenvironmental liabilityis limited (Delphi,1997)

the potential for anincrease in claimsrelated toenvironmental naturaldisasters


Criteria

Opportunities

Threats

20

Australian trends and issues In this section we describe the sustainability trends and issues affecting the Australianfinancial industry (for the sectors of investment, superannuation, credit and lending andinsurance). In comparing these trends to those overseas, it is important to recognise thatthe Australian market is smaller and has relatively fewer players.

For the sectors of investment, superannuation, and insurance the analysis undertaken hasprimarily been based on the products offered. For the credit and lending sector however,the analysis has focussed on internal processes including risk assessment tools,management systems and public reporting. This approach is a reflection of the recentinitiatives undertaken by these sectors.

A summary of the recent developments in the four key Australian financial sectors isprovided in Appendix C and includes:

the sector description

the legislative drivers

a description of the products and services offered

the analytical and rating tools used

an identification of key stakeholder groups and concerns

how financial institutions are now incorporating sustainable practices into theirinternal operations.

A summary of the key comparisons between the Australian and international financialindustry is provided in table 4.1. An analysis of the key strengths, weaknesses,opportunities and threats (SWOT) associated with each of the sectors addressing theprinciples of sustainable development has also been summarised in table 4.2.


Socially responsible investment in Australia has a recent history. A number of churchgroups have screened their investment portfolios for sometime, however the first productwas introduced into the market by Friends Provident in 1986. This was followed withproducts being launched by Australian Ethical Investments, Tower and others in the early1990s. More recently new generation SRI products have been launched by Westpac(1999), Rothschild and AMP (2001).

Fund managers however have raised a number of concerns about SRI in Australia,including:

equities market: the overall size and structure of the local market i.e. limited numberof listed companies, and the significant bias towards the resource sector

short-term performance focus: the media rates the performance of local funds on amonthly basis, which drives fund managers to seek short term returns

cost burden: SRI analysis is high due to limited public information. This additionalcost is not readily passed onto investors

quality of information: there is generally a low confidence in information currentlyavailable on the social and environmental performance of companies, with thepossible exception of the mining industry. The introduction of s299(1)(f) of the

4.

21

Corporations Act was intended to improve environmental disclosure. However thewording of s299(1)(f) and the nature of reporting guidelines has resulted in theprovision of variable information. In addition, the future status of s299(1)(f) is unclear.

Notwithstanding this, there is evidence of increased awareness by investors about theconcept of sustainable business and how to integrate this into investment decisions. Themedia has also published a significant number of articles on the merits anddevelopments of SRI in Australia.

Analysis of the superannuation sector

Unlike the US and the UK, the Australian superannuation scheme requires the majorityof employees to make compulsory contributions to their pension funds. It covers 97% offull time Australian employees and 81% of all employees (Westpac, 2000). This hasresulted in Australia managing AUD $454.7 billion in assets which are currently growingat around 15% per year.

This large pool of assets is held by around 7 million Australians. At present investorshave limited choice in the way their contributions are invested. In 1998 however, theCommonwealth government tabled the superannuation legislation amendment (Choiceof Superannuation Funds Bill, 1998), although the Bill is yet to be passed. If introduced,this amendment will enable employees to chose where their superannuationcontributions are invested.

The proposed introduction of this member choice amendment has resulted in trusteesundertaking activities to better understand and satisfy the needs of their members. Forexample in late 1999, HESTA, a local superannuation fund, introduced the EcoPool, anenvironmentally screened fund, managed by Westpac. The success of the EcoPoolresulted in other trustees offering SRI options to their members. In some cases trusteesare offering SRI funds as an investment alternative, while others apply a blanket screento all their investments.

The growth in SRI has continued in this sector, with both trustees and fund managersshowing interest and further investigating the needs of superannuation members. Asurvey undertaken in 2000 (Proske, Saleeba et al) found that although not all memberswere interested in SRI, a significant proportion were extremely interested. The interestedmembers felt that it was important to pursue social as well as financial returns,particularly when considering long term investment decisions for their retirement. TheAustralian Institute of Superannuation Trustees’ most recent annual survey also showedthat 75% of trustees now recognise SRI as a separate asset class (Ryan, cited Manning,2001).

The Australian superannuation industry also appears to acknowledge that offeringsocially and/or environmentally screened funds is not a breach of a superannuationtrustee’s ‘fiduciary obligation’. This opinion is based on the legal precedent developed inthe UK (The Allen Consulting Group, 2000).

The further growth of SRI will also be influenced by the extent to which trustees andsuperannuation fund managers can overcome the following:

22

Lack of awareness: members typically have limited knowledge and understanding ofSRI, the screening methodologies and financial track records of those products. In achoice environment, members may opt for more traditional investments

Investment policies: there have been concerns expressed about the regulatory andprudential oversight of superannuation funds. Increased focus by the regulators onissues such as liquidity, capital adequacy and investment decision criteria could seetrustees adopting conservative investment policies, which may exclude SRI.


This section aims to examine the extent to which the Australian banking sectorcontributes to sustainable development. It is beyond the scope of this analysis howeverto give a detailed account of the entire credit and lending sector (for example creditunions, building societies, and investment banks).

The Australian banking sector holds a high profile in the Australian community and hasa significant role as an employer, financial service provider and wealth creator. Thisprofile places the major players in the credit and lending sector in a position ofsignificant power and influence. At the same time, this position renders the banksvulnerable to scrutiny and criticism by the community and special interest groups. Overthe last decade the banking sector has endured ongoing community concern aboutbranch closures and fees and there is a widespread belief in the broader community thatbanks are failing to address these concerns.

This has led the banks to re-examine their social responsibilities at an industry level andas a result this sector has introduced community based initiatives, including thedevelopment and implementation of customer service charters and sponsoringcommunity based programs and charities.

One of the most important sustainable development related issues for the banking sectorover the last decade has been lender liability. The sector became concerned in the mid1990s over the legal precedent being established in the US. As a result the AustralianBankers Association became actively involved in protecting the interests of passivelenders in relation to lender liability concerns. The prospect of incurring environmentalliabilities has stimulated banks to introduce environmental risk assessment procedures aspart of their lending operations.

The manner in which the Australian credit and lending sector is currently addressingsustainable development issues is indicated below:

Products and services: in the credit and lending sector the main emphasis has beento protect the institutions from environmental risks. Some institutions are howeverdeveloping niche products, for example energy efficiency mortgages

Environmental management and reporting: all the large banks have implemented anumber of internal environmental policies and programmes including efficient energyand water management, recycling and sponsoring community based environmentalinitiatives. However many of these are adhoc and do not form part of an overallbusiness strategy. The recent PricewaterhouseCoopers UNEP (2000) FinancialInitiatives survey also found that it was difficult to establish managerial accountabilityfor these programs, their objectives, targets and performance

23

To date public environmental reporting has typically been limited to the annualfinancial report and compliance with s299(1)(f). Only one bank (Westpac) is asignatory to the UNEP Financial Initiative and to our knowledge, only one creditunion has published a triple bottom line report

Addressing stakeholder concerns: a number of environmental groups havecampaigned against banks to curtail their lending on projects in ecologically sensitiveareas, such as uranium mining. Given the increasing sensitivity in the communityabout these projects it is likely that financial institutions will further scrutinise theirlending activities.

Another area of concern in the community is the current land use practices in theagricultural sector. Whilst the financial industry is not responsible for these land usepractices, these community concerns provide the Australian financial sector with aunique opportunity to promote sustainable lending practices. Also at a portfolio levelthe problems of unsustainable agricultural practices may impact the banks risk profile

climate change: the banking sector has responded proactively in developing a rangeof climate change related services (refer to Box 4.2). To date however, based on thepublicly available information only the Westpac Banking Corporation is a member ofthe Greenhouse Challenge programme.

Box 4.1: The issue of climate change

Similar to their overseas peers, Australian banks' initial interest in climate changehas also been prompted by a need to understand the implications for credit risk.This is particularly relevant given the large capital requirements of Australian energyand resource companies and their relative exposure to climate change economicimpacts. However, in common with the overseas experience, there is no evidenceto date that lending terms have been tightened for companies exposed to potentialcarbon liabilities.

The Australian credit and lending sector is well positioned to provide climate-change related services on a number of criteria:

high levels of expertise in the energy and resources sectors

levels of expertise in project finance, credit enhancement, securitisation financial risk management services and commodity and financial trading

a track record of innovation in financial products and services

proximity to Asia where climate change-related project activity is expected be significant, particularly in China and India.

During 1999 and 2000, the Sydney Futures Exchange was developing an exchange-traded market for carbon sequestration credits. This did not proceed to anoperational stage but is an example of the market leading facilitation services thatAustralian institutions can provide.

24


A limited number of environmental liability products are currently offered by theAustralian insurance sector, with specialist cover for environmental conditions typicallyoffered in the two main forms of:

pollution legal liability for third party claims

clean up costs for responding to clean up orders.

As with the international insurance sector, the potential impact of climate change is asignificant issue to the Australian insurance industry. The re-insurance sector recordedAUD $3 billion in losses between 1999 and 2000 as a direct result of unforeseen naturaldisasters (Monash, 2000). However, it is important to note that Australia does not have alarge re-insurance industry.

Despite these recent concerns, the insurance industry in Australia appears not to haveimplemented as many sustainable development initiatives as its internationalcounterparts. This may, in part be attributed to:

the Australian insurance sector believes its operations have a limited impact on theenvironment: limited environmental reporting and management initiatives have beenimplemented by the Australian insurance sector. A further indicator of this is that onlyone Australian insurance company (QBE Insurance) has signed the UNEP Statementof Environmental Commitment by the Insurance Industry.

limited supply for environmental liability insurance: to date, there have been alimited number of environmental insurance products offered within the Australianmarketplace. This in part, can be attributed to the cautious approach adopted by thesector as well as the difficulty in pricing environmental risks.

Some positive initiatives however have recently been implemented by this sector, forexample, the Insurance Council of Australia has recently committed itself to aiding thereduction of greenhouse emissions as part of the Greenhouse Challenge (refer to Box 4.2.)

Box 4.2: The Insurance Council of Australia – Reaffirmation to the Programme

The Insurance Council of Australia (ICA) is committed to aiding the reduction ofgreenhouse emissions as part of the voluntary Greenhouse Challenge programme.ICA continues to recognise that its members have a major role to play in achievingnational goals to mitigate Australian greenhouse gas emissions. Therefore ICA willcontinue to have an active role in encouraging members to develop voluntaryemission reduction strategies, not only in their own activities, but also in areas ofinvolvement throughout the Australian General Insurance Industry.

Source: The Insurance Council of Australia, 2000

25

In response to external pressures exerted by stakeholders, primarily non governmentorganisations, the Export Finance and Insurance Corporation (EFIC) has recentlyimplemented an environmental policy and internal risk assessment procedures toidentify and mitigate its exposure to environmental risk. According to our information,these policies and procedures have been acknowledged as best practice by an OECDworking group on export credit agencies.

A comparison between key Australian and international trends

The above discussion and the detail contained in tables 4.1, 4.2 and Appendix C,highlight some of the key challenges that the Australian financial industry is currentlyfacing in dealing with the concept of sustainable development. An analysis of thesetrends and issues and their comparison with the international financial sector is providedbelow. The key issues identified include:

Environmental legislation, lender liability and disclosure: in general, theenvironmental legislation in Australia is similar to that in the UK and North America.A considerable difference however is that Australian legislation is primarily statebased and its enforcement is typically less stringent, when compared to the US. Thestrictest environmental regime is found in NSW, however according to the recentPerformance Audit Report of the NSW Environment Protection Agency, there aresignificant shortcomings in its enforcement (Audit Office NSW, 2001).

Also unlike the SEC listing requirements in the US, the provisions in theenvironmental disclosure provisions in Corporations Act are less onerous. In additionthe Australian Parliamentary Standing Committee has recommended has thats299(1)(f) be withdrawn

Materiality: to date, there is limited local information to support the correlationbetween improved corporate environmental/social performance and financial returns.There is also limited academic research in this area in Australia. However, similar tothe European and US experience the positive correlation associated with SRI indicesis generating interest in this relationship, with the Australian Institute ofSuperannuation Trustees finding from a recent survey that most trustees view SRI as anew asset class (Ryan, cited Manning, 2001)

Performance reporting: unlike overseas trends many Australian companies do notpublicly report on their environmental performance. Typically, information reported isinconsistent between companies and industry sectors. The Australian financial sectoris therefore currently finding it difficult to incorporate environmental considerationsinto its decision making processes

Environmental management and reporting: whilst many of Australia’s large financialinstitutions have developed environmental policies and undertaken internalenvironmental initiatives, few financial organisations have implementedenvironmental management systems or published public environment and/or triple bottom line reports. In part this trend can be attributed to the belief that the implementation of such systems will add an additional cost and provide limited benefit

26

Products and services: in comparison to the international sector, the Australianmarket has developed a limited number of environmental products and services, withthe exception of the recent introduction of SRI investment products and greenhousegas emission trading services. A significant factor contributing to this is theuncertainty of the demand for these products and the significantly smaller market

Climate change: the impact of climate change is seen as a concern by the Australianinsurance industry, with industry bodies recently committing to contribute to thereduction of greenhouse emissions. However, due to the Australian insurance sectorhaving a limited re-insurance market, the direct impact on the insurance sectors’financial performance is limited.

In keeping with international trends, local banks have developed a number ofproducts and services in response to emerging climate change market opportunities

Commitment and awareness: as an industry, the Australian financial sector does notappear to be as active as its European counterparts

Role of government: in keeping with international trends, government organisationsare playing an increasingly active role in promoting the issue of sustainability withinthe financial sector. For example, the Victorian EPA recently hosted the first UNEPFinancial Services conference in Australia and has been appointed as therepresentative of this UNEP Financial Initiative. As part of this commitment, theVictorian EPA is also currently supporting four working groups relating to thedevelopment of best practice in environmental credit risk assessment, SRI, insuranceand operational environmental management.

The Commonwealth government has also shown leadership in the area of publicenvironmental reporting and leads the world in establishing the AustralianGreenhouse Office which deals with policies and programmes relating to climatechange.

27

Table 4.1: A comparison of international sustainability drivers and theirstatus in the Australian finance sector

Sustainability International Relevance Current Status in Australia MarketDriver Trend to Finance

Industry in Challenges OpportunitiesAustralia

Legislation& governance

Tightening Significant Weaker than NorthAmerica, reluctance totighten, some pressure toincrease mandatorydisclosure from advocacygroups

Efficacy ofincreasedmandatorydisclosure

Policies andincentives forincreasedvoluntarydisclosure

Performancereporting

Increasing Significant Environmental disclosurelags international trend,exception being themining sector (leaders)

Integritystandards costs

Dialogue withindustry onfinancial sectorrequirements

Materiality Low Low Low value placed onenvironmental informationalthough increasing

PerceptionsEvidence

Develop casestudies

Commitment& awareness

Advanced Significant Increasing awareness inbanks and fund managers

Business caseunclear

Differentiateservices

Operationalmanagementand reporting

Mainstream Significant Less developed thaninternational counterparts,especially in reporting

Business costsFramework

Implement‘ForgeGuidelines‘

Products &services

Niche Niche Increasing SRI andemissions trading productsand services

Small marketUncertaindemand

Productdifferentiationdevelopment

SRI market Mainstream Significant Growing supply from bigplayers

Small market Growingdemand

Climatechange

Significant Significant Advanced capabilities Policyuncertainty

Developservices to meetclient needs

Analyticaltools &capability

Advanced Significant Good capabilities,undeveloped tools andmodelling techniques

Demand &profitability

International JVsR&D

Civil society Active Important Growing pressure andscrutiny of large financialinstitutions’ lending andinvesting activities.Increasing pressure forincreased disclosure ofnon-financial corporateperformance indicators

Lack of trustIdeologicaldifferencesCost ofengagement –"deep pockets"

Engage tounderstandconcerns andpartner on newproductdevelopmentopportunities

Role ofGovernment

Constant Low State Agencies eg Vic EPA,EFIC proactive

Resources Catalyst roleLegislation

28

Table 4.2: SWOT analysis - Australia

a significant numberof new SRI productsare being developed

some investmentdecisions are basedon internationalmethodologies whichhave been tried andtested.

a significant numberof new ‘green’investment productsare being developed

75% of trustees aresupportive of SRIalternatives (Ryan,cited Manning 2000).

banks have developedenvironmental riskassessment criteria aspart of their lendingevaluation processes.

the sector is currentlydeveloping acomprehensiveunderstanding ofenvironmental risks(Monash, 2000).

no genericenvironmental riskrating system, that canbe used by investorshas been developed(Mitchell, 2000)

limited andinconsistentinformation isprovided bycompanies to analysts

Australian investorshave been relativelyslow to take up SRI

the market is relativelyimmature (The AllensConsulting Group2000)

conservative views areheld by investmentmanagers about theirfiduciary responsibility(Mitchell, 2000)

environmentaldisclosure bycorporates appears tobe driven byregulatory needsrather than analysts’requirements.

the ethical option insuperannuation fundshas historically notproved popular(Mace, 2000)

argument overperformance andwhether SRIs are inthe members’ bestinterests (Mace, 2000)

conservative views ofsuperannuationtrustees about whetherSRIs compromise theirfiduciary responsibility(Mitchell, 2000)

funds are not verifiedor sufficientlytransparent such thatinvestors clearlyunderstand theprinciples of selection.

a low level ofawareness and actionin terms of sustainabledevelopment has beendemonstrated bybanks (Monash, 2000)

no banks appear tohave developeddifferentiated loanpricing based on aborrower’senvironmental riskprofile.

sustainability issueshave not featuredhighly in theinsurance sector(Monash, 2000)

current tools used areinadequate to assessrisk for underwritingpurposes (Monash2000)

responses to the issueof environmentalimpairment arereactive (Monash,2000)

environmental issues(apart from climatechange) and how theyrelate to the insurancesector do not appearto be well researchedor documented(Monash, 2000).


Criteria

Strengths

Weaknesses

29

Table 4.2: SWOT analysis - Australia continued


Criteria

Opportunities increasing demand forthe use ofenvironmentalscreening as part ofthe investment process(Mitchell, 2000)

anecdotal evidence ofa link betweenpositive financial andenvironmentalperformance (Mitchell,2000)

biodiversity andsalinity credits arebeing considered

speculators andbrokers could play acritical role inemission trading,renewable energycertificates and marketdevelopments

The UNEP/VictorianEPA advisorycommittee on SociallyResponsibleInvestment willprovide a forum forthose participating inthe growth of thismarket to share ideasand incorporate bestpractice developmentsfrom overseas

Westpac Eco Indexhas achieved 26.8%return compared tothe all ordinaries21.7%.

new legislationproviding for greatermember choice hasbeen promulgated

over 75% ofsuperannuationmembers would liketo know what theirsuper is invested in(Resnik-KPMG, 2000)

anecdotal evidence ofa link betweenpositive financial andenvironmentalperformance (Mitchell,2000)

lenders are a majorsource of capital forcompanies and hencecan play an extremelyimportant role inpromoting sustainabledevelopment (Brkic,1999)

banks can providesupport forenvironmentally orsocially responsibleprojects, innovativetechnologies andsustainable enterprises(Brkic, 1999)

Commonwealthgovernment isshowing specificleadership in the areaof climate change,salinity andbiodiversity trading

there is a potential forbanks to differentiateproducts and servicesbased on superiorenvironmentalperformance

The UNEP/VictorianEPA advisorycommittee onEnvironmental CreditRisk due to beoperational by mid2001 will foster abetter understandingand incorporation ofenvironmental issuesinto bank lendingpolicies.

the sector is wellplaced to promotemore responsibleenvironmentalpractices (Monash,2000)

a better understandingof environmental riskissues will improvethe insurer’s bottomline (loss prevention isbetter than paying outclaims) (UNEP, 1999)

The UNEP/VictorianEPA advisorycommittee onInsurance due to beoperational by mid2001 will driveawareness and abroader understandingof environmentalissues faced byinsurance companies

30

Table 4.2: SWOT analysis - Australia continuedInvestment Superannuation Credit and Lending Insurance

and re-insuranceCriteria

Threats legislation currentlydoes not enforcedisclosure onenvironmental, socialor ethicalconsiderations in theselection, retentionand realisation ofinvestments (Monash,2000)

reluctance byinvestors to use ethicalor socially responsibleinvestments(Rothschild, 2001)

the Sydney FuturesExchange haswithdrawn from thedevelopment of anEmissions TradingPlatform

companies arebecoming increasinglyannoyed at thenumber of multiplesurveys they are beingasked to complete byall of the screeningagencies

stakeholders areconcerned over thelevel of transparencyand verification offunds

no legislation to act asdriver to promotedisclosure on extent ofsocial or ethicalconsiderations

limited reliableevidence that SRI canresult in acceptableeconomic or financialbenefits to fundmembers (Charaneka,2000).

limited andinconsistentinformation iscurrently available ona company’senvironmental andsocial performance. Itis therefore difficult toincorporate thesefactors into lendingdecisions

the sector is subject tolimited legislation(Monash 2000)

potential exposure tosignificant financialloss due toenvironment relatedrisk exposures(Monash 2000)

insurers may withdrawfrom providingweather related claimsin certain areas.

31

Conclusion: key challenges for the future

Looking ahead

Barriers and Challenges

There are number of barriers and challenges unique to Australia which help explain whythe finance sector may not be as advanced as North America and Europe in respondingto sustainable development. These include:

Legislation – the enforcement of environmental legislation and the disclosurerequirements for companies and superannuation trustees in relation to environmentaland social issues is less onerous than North America and Europe

Market size – the supply of financial products that incorporate sustainabledevelopment principles, such as SRI, is restricted by size

Awareness – despite a high level of concern about environmental and social issues inthe community, this has not translated into a significant investment in “green”products or active campaigning to promote sustainable corporate practices

Public disclosure – the voluntary disclosure of environmental and social informationis less developed than in North America and Europe.

The only mandatory disclosure requirement, namely s299(1)(f) of the CorporationsAct is under review and may be repealed.

Opportunities for further development and recommendations

In the context of the international trends outlined in this report and given the extent ofsome of Australia’s sustainable development challenges, there are a number of key areasthat could be addressed to further engage the finance sector. The most important of these are:

Finance sector industry commitment and awareness

In addition to the initiatives currently undertaken by individual finance sectororganisations, there is scope for the finance sector, as an industry, to evaluate its role insustainable development. The objectives of this would be to:

demonstrate to stakeholders that the finance sector is aware of and is examining itsrole in contributing to sustainable development

identify opportunities that could have good commercial and sustainable developmentoutcomes, but which require expediting through collaboration between the financesector, industry, government and NGOs

identify, evaluate and provide a finance sector industry response to sustainabledevelopment “hot spots” such as biodiversity, climate change, salinity, landdegradation and water resources, especially in the context to regions such as theMurray Darling Basin.

Recommendation 1 - the Commonwealth Government should encourage the financialsector to provide continued support to the Australian UNEP Financial Initiative, therebydemonstrating its commitment to the principles of sustainable development.

5.

32

Materiality

There is a need to increase the awareness in industry and the finance sector about thegrowing body of evidence that shows a positive relationship between improvedenvironmental and social corporate performance and financial performance. There isalso a need to develop case-study material to demonstrate this in the Australian context.

Recommendation 2 – the Commonwealth Government, in association with the financesector and industry, commission specific academic research into the financial value forbusiness associated with investments in sustainable development in Australia.

Environmental and social disclosure

Noting the international trend towards increased voluntary public reporting and, in someinstances, mandatory disclosure, additional consultation between government, industryand other stakeholders should be pursued to identify an optimal reporting and disclosureregime.

Recommendation 3 - the Commonwealth Government, in consultation with keystakeholders (the finance sector, industry, ASIC, the ASX, the accounting profession, stateEPAs and peak environmental groups), should commission a review of the existingmandatory and voluntary environmental and social disclosure requirements, in order toestablish an optimum reporting and disclosure regime.

Performance metrics

To ensure that environmental disclosure by industry addresses the informationrequirements of the financial sector, there should be closer dialogue between financialanalysts and industry.

Recommendation 4 – the Commonwealth Government develop a working group thatwill investigate ways to enhance the relevance of public environmental and socialdisclosure for use by financial analysts.

Management and reporting

International financial institutions are adopting company-wide approaches toenvironmental, and increasingly social issues management, in order to demonstrate theircommitment to sustainable development and to differentiate their services.

Recommendation 5 – the Commonwealth Government should work with the UNEPFinancial Initiative’s “Operational Environmental Management” advisory committee todevelop ways of promoting the adoption of environmental/social management andreporting guidelines by financial institutions.

In outlining the above recommendations we acknowledge that the CommonwealthGovernment will need to consider how it will expediate the carriage of these. Additionally the government will no doubt wish to develop a vision of the outcomes itwould expect from the further engagement of the finance sector and ensure that it canappropriately foster that relationship.

33

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ASFA, "A new Class or a Process ?", An article written for Investor Weekly

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Brkic, T. 1999, Trends, Key Drivers and the Role of Banks. Banking and Sustainability

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Burbury R, 2001, Westpac Aims for Social Responsibility; p49, Australian FinancialReview, 17 April 2001

Business and Environment 2001, European Financial Institutions Fashion EnvironmentalGuidelines. January 2001:2

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Chaplin D, 1999, Investing Education – Financial Planning; Super Review, May 1999

Charaneka, S. 2001, Don’t believe the Hype – Socially Responsible InvestmentsConsiderations for Super, Fund Trustees, ASFA NSW legislation discussion group, April,Ebsworth and Ebsworth Lawyers

Citigroup, 2000, Global Corporate Citizenship Report; Citigroup Inc.

Delphi 1997, The Role of the Financial Institutions in Achieving SustainableDevelopment (Report to the European Commission; London: Delphi International; BerlinGmBH, November.)

Dunstan, B, 2000; Super choice: We Should Follow the US, Australian Financial Review,23 October 2000

Fayers C, 1998, Corporate Environmental Reporting, Investing Decisions, and ESD inAustralia: A Discussion, Department of Geography and Environmental Science, MonashUniversity

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6.

34

Fenech, A, 1999, Pension reform in the Land of Hope and Glory, Super Review; April1999

Flatz, A, 1998, Sustainable Asset Management, Market Transparency and ConsumerInformation, (Session 4); 7 October 1998

Ganzi J and Tanner J, 1997, Global Survey on Environmental Policies and Practices ofFinancial Services Industry: The Private Sector. Environment and Finance Enterprise

Ganzi, J. and Neubert, B. T. 1996, Research on the financial impact of environmentalevents and issues on the property and casualty insurance industry; US: ManagementInstitute for Environment, US: Business and Environment and Finance Enterprise

Giuseppi, J, 2001, Assessing the Triple Bottom Line: Social and Environmental Practicesin the European Banking Sector; Paper 7 Sustainable Banking, Greensleaf Publishing ;UK

Gottsman, L. and J. Kessler, 1998. “Smart Screened Investments EnvironmentallyScreened Equity Funds that Perform like Conventional Funds”, The Journal of Investing7(3), 15-24

GRI (Global Reporting Initiative), 1999, Sustainability Reporting Guidelines: ExposureDraft for Public Comment and Pilot Testing. Boston, MA

Hansen, S. 1996, Sustainable Banking: A Swiss Banker’s Perspective, CorporateEnvironmental Strategy Vol. 3 No. 3:67-72

Hinterberger F., D. Bannasch, K. Schlegelmilch, H. Stiller, T. Orbach and A. Mundl 1998,Greening the Financial Sector; Berlin: Carl Duisberg

Hugenschimdt, H. 1997, Environmental Issues in Asset Management and PrivateBanking and the impact on Environmental Reporting, UNEP Third InternationalRoundtable Meeting on Finance and the Environment 22-23 May; Zurich: Union Bank ofSwitzerland

Jeucken, M and Bouma J. 2001, The Changing Environment of Banks; Paper 1Sustainable Banking, Greensleaf Publishing, UK

Kearins, K and O’Malley G, 2001, International Financial Institutions and the ThreeGorges hydro electric power scheme; Paper 25 Sustainable Banking, GreensleafPublishing, UK

Louche, C, 2001, The Corporate Environmental Performance- Financial Performancelink: Implications for Ethical Investments; Paper 14 Sustainable Banking, GreensleafPublishing, UK

Mace, J. 2000, Using Ethics to win funds, Superfunds, edn. 233, February; Sydney:Association of Superannuation Funds of Australia Ltd

Macinate, J., 2001, Personal discussions with, 28 May, 2001

Major, T, 2001, Munich Re Warns of More Natural Disasters Following Climate Changes,p14 Financial Times, 13 March 2001

35

Manning P, 2001, Investor Weekly April 30 – May 6 p.21

Mathieu, E. 2000, Response of UK Pension Funds to the SRI Disclosure Regulation. UKSocial Investment Forum report; United Kingdom

McLachlan M, 2001, Community Bank Scheme Expanded, p28 Australian FinancialReview, 20 February 2001

McLaclan M, 2001, Older Customers Benefit as ANZ Steals March With Service Charter;p4 Australian Financial Review, 21 April 2001

Mitchell, P. and Mather, E. 2000 Environmentally Responsible Investment, inEnvironmental Resource Management, August, Issue 13; Australia: ERM

Monash Sustainability Enterprises, 2000, Towards Sustainable Finance: A Roadmap tothe Financial Services Industry; Melbourne: Monash University

Morley Fund Management, 2001, Morley Fund Management introduces environmentalreporting requirement to voting policy, press release; London, Morley Fund Management

O’Rourke C, 2000, Support for Arts and Culture but Human Rights Neglected; TheSydney Morning Herald, 30 October 2000

PFID, 2000, Guidelines for reporting on social, environmental and ethical matters. Draft.(Not published)

PricewaterhouseCoopers, 2000, Report on Financial Institutions Initiative Survey –Australia; United Nations Environmental Programme

PricewaterhouseCoopers, 2001, Draft FT Article, 2001, New UK Guidelines Turn theSpotlight on Socially Responsible Investment; 23 March 2001

Proske, Saleeba, Spruzen, Petrocelli 2000 Superannuation Members Perspective onEnvironmentally Screened Funds; Monash University, Australia

Reed, D. J., 1998, Green Shareholder Value, Hype or Hit? World Resources InstituteSeptember

Resnik-KPMG, 2000, Socially Responsible Investment Research, August 2000

Rothschild, 2001, Rothchild’s Ethical/Socially Responsible Investment Survey. Australia.

SAM Sustainability Group, 2000, Corporate Sustainability Assessment Questionnaire;Zurich: SAM Sustainability Group

Schanzenbacher, B. 1998, Environmental Policies and Practices in the Financial ServicesSector. United Nations Environment Programme, Environment and Trade Unit

Schmidheiny, S. and F. J. L. Zorraquin with World Business Council for SustainableDevelopment ,1996, Financing Change; Cambridge, MA: MIT Press

Shaw, J. A. Middlebur and F. Sgaragli., 2000, Money Does Grow on Trees!, A Review ofsocial, environmental and economic responsibility and the relevance to PwC. London:PricewaterhouseCoopers.

36

Social Investment Forum, 2000, Increasing Investment in Communities: A CommunityInvestment Guide for Investment Professionals and Institutions; SIF Industry ResearchProgramme, 15 September 2000

Social Investment Organisation, 2000, Canadian Social Investment Review 2000, Acomprehensive survey of socially responsible investment in Canada, SIO, Canada

SustainAbility, 2001, Buried Treasure, Uncovering the business case for corporatesustainability, Sustainability, UK

SustainAbility and UNEP, 2000, A Responsible Investment, An overview of the SociallyResponsible Investment Community for the Institute of Chartered Accountants of Englandand Wales (ICAEW), British Airways, Dow Chemical, Ford Motor Company and theNatwest Group, SustainAbility, UK

Swiss Re, 2000, Environmental Report; Zurich: Swiss Re

Taylor J. G. and P. J. Scharlin, 1998, Finance and EnvironmentalManagement/Assessment: Summary report of the United Nations meeting for theinternational investment community, April, 1998; New York

The Allen Consulting Group, 2000, Socially Responsible Investment in Australia, EthicalInvestment Working Group

The Insurance Council of Australia, 2000; Progress Report to the Greenhouse Challenge– January 1 to December 31 2000

UNEP (United Nations Environment Programme) 1995, Report of UNEP Advisory groupmeeting on commercial banks and the environment. Geneva: UNEP

UNEP (United Nations Environment Programme) and SustainAbility Ltd., 2000, GlobalReporters, international benchmark survey of corporate sustainability reporting; London:SustainAbility Ltd

UNEP (United Nations Environment Programme), 1997, Statement by FinancialInstitutions of the Environment and Sustainable Development

UNEP (United Nations Environment Programme), 1999, Financial Institutions Initiative1998 Survey; Paris

UNEP (United Nations Environment Programme), 2000, Statement of EnvironmentalCommitment by the Insurance Industry

US EPA (Environmental Protection Agency), 2000, Green Dividends, The RelationshipBetween Firms’ Environment Performance and Financial Performance; Washington DC:EPA

Westpac Investment Management (WIM), 2000, Linking Screened Investments toShareholder Value: An Overview of Screened Investments and the Potential for Impacton Shareholder Value, Investor Relations Forum 2000, paper prepared by Erik Mather;Australia: WIM

37

Additional Documents

Additional documents that were reviewed but have not been referenced in the report areoutlined below:

Advisory Committee on Business and the Environment (ACBE), 2000, Value, Growth,Success – How Sustainable is Your Business? A Briefing Note for Directors; London:Department of the Environment, Transport and the Regions

All Party Parliamentary Group On Socially Responsible Investment, 1999, AnnualReview of Activities 1999/2000; London

AMP Henderson Global Investors, 2001, Corporate Social Responsibility Questionnaire.London, UK

ASFA (Association of Superannuation Funds of Australia), 2000, Development of ASFApolicy on "Ethical Investment", paper prepared by Michaela Anderson; Sydney: ASFA

Belsom, T., 1998, Information required by fund managers, in final report of the workshop"Sustainable Development: Challenge for the Financial Sector", organised by theEuropean Commission, DGXI, Brusselss 30th October. Luxembourg: EuropeanCommission

Bennett, J., D. Chaplin, and K. Kachor, 2000, Ethical Investment Association

Bennett, M. and P. James, 1999, Views of Financial Stakeholders on EnvironmentalAccounting and Performance – Measurement in Business: report on a consultationproject, in Proceedings of Continuity, Credibility and Comparability: Key Challenges forCorporate Environmental Performance Measurement and Communication, InvitationalExpert Seminar, Eze France 13-16 June 1998, International Institute for IndustrialEnvironmental Economics, Lund University, Sweden

Boyer, M. and J.-J., Laffont 1994, Environmental Risks and Bank Liability. ScientificSeries N94s-22; Montreal: CIRANO

Burnup, C. 2000, Environmental Performance and Public Reporting. Business Council ofAustralia Papers Vol 2 No 1 April

Business Higher Education Round Table, 2000, The Triple Bottom Line: Shareholders,Society, Sustainability. Achieving the Triple Bottom Line. Issue 9, November; Australia

Centre for Corporate Public Affairs, 2000, Corporate Community Involvement.Establishing a Business Case, Australia

Citigroup, 2000, Global Corporate Citizenship Report; Citigroup Inc

Collie, B. M. Clark and J. Ilkiw, 1999, Does your SRI policy pass five tests ? Monograph10 August 1999 Frank Russell Company

Coulson, A. B. 1999, Capital Market Risk, workshop report of the Economic and SocialResearch Council Financial Sector Forum No3; Glasgow: University of Strathclyde

38

Credit Suisse Group, 1999, Environmental Report; Zurich: Credit Suisse Group

Davis, I. 2000, Choice unlikely before 2000, Superfunds, edn. 233, February; Sydney:Association of Superannuation Funds of Australia Ltd

Davis, I. 2000, Investment rules modified for DIY funds, Superfunds, edn. 233, February;Sydney: Association of Superannuation Funds of Australia Ltd

DJSGI (Dow Jones Sustainability Group Index), 2000, First Anniversary, IndexComposition for 2000/2001. 6 September. Zurich: DJSGI

DJSGI (Dow Jones Sustainability Group Index), 1999, Guide to the DJSG Indexes version2; DJSGI: Zurich

Dlugolecki, A. and M. Mansley, Climate Change and UK Pension Funds. First draft report

Elkington, J. 1996 Cannibals with Forks: The triple bottom line of 21st century business;Oxford: Capstone publishing

Environment Australia 2000, A Framework for Public Environmental Reporting: AnAustralian approach, March; Canberra: Environment Australia

European Federation of Financial Analysts’ Societies 1994 Environmental Reporting andDisclosures, The Financial Analyst’s view, September

Hawken, P., A. Lovins and L. H. Lovins, 1999, Natural Capitalism: Creating NewIndustrial Revolution and Culture; Boston, MA: Little, Brown and Co.

Henry, A. 1997, A lender’s Perspective on Environmental Performance Indicators forFinancial Transactions, Delange Woodlands Conference: Sustainable Development:Managing the Transition

Income Data Services and PwC, 1999, "Learning from Doing" Review: A report oncompany progress in implementing ethical sourcing policies and practices. EthicalTrading Initiative; London

Innovest Research, 2001, The Stuart Oil Shale Project, Implications of Carbon EmissionsConstraints for Suncor Shareholders; Greenpeace, Australia

Institutional Analysis Pty Ltd and Centre for Corporate Law and Securities Regulation,2000 Corporate Governance: The Role of Superannuation Trustees. Melbourne

International Herald Tribune 1999, "Business discover that going green is financiallyfriendly", International Herald Tribune, 22 September1999:24.

Kachor, K. 2001, Rothschild enters ethical market, Money Management; Sydney

Kahlenborn, W. 1998, "International Workshop "Green Investment: Market Transparencyand Consumer Information": Introductory Paper". in Green Investment: MarketTransparency and Consumer Information. Workshop Summary; Proceedings of theInternational Workshop; Berlin: Ecologic

39

Kerr, M. 2000, Corporate Environmental Performance: A different look at theperformance of Australia’s Top 100 Companies. Melbourne Australian ConservationFoundation

Kerr, M. 2000, Submission On The "Draft Financial Services Reform" Bill; Melbourne,Australian Conservation Foundation

Knight, D. 1998, "Environment-Finance: NGOs seek global environmental standards",World News Inter Press Service, 24 September 1998; Washington DC, US

Kolk, A. 2001, Environmental Reporting by the Fortune Global 250: Exploring theinfluence of nationality and sector. Business Strategy and the Environment 10: 15-28

KPMG International Environment Network and Institute for Environment Management(University of Amsterdam), 1999, KPMG International Survey of EnvironmentalReporting 1999; Netherlands: KPMG Environmental Consulting

Krockenberger, M., Kinrade, M. and Thorman, R., 2000, Natural Advantage. A Blueprintfor a Sustainable Australia; Australia: ACF (Australian Conservation Foundation)

Lloyds TSB Group, 1999, Environmental Report; Birmingham: Lloyds TSB

Lyster M., 1999 Sustainability and Shareholder Value, ASX Perspective 2nd Qtr. 1999;Sydney: Australian Stock Exchange

Lyster M., Birkensleigh S., 2000, Money Does Grow on Trees: Exploring Corporate socialresponsibility, sustainable development and sustainability in the new economy, paperpresented to the Social, Ethical and Environmental Responsibilities Conference, Sydney

Mills, J., C. Cocklin, C. Fayers and D. Holmes, 2001, Sustainability, Socially ResponsibleInvestment and the Outlook of Investment Professionals in Australia, Australia;Melbourne: Monash University

MORI, 2000, Socially Responsible Investment – Company Pension Funds, research studyconducted for SustainAbility, United Kingdom

Muller, K., J. de Frutos, K.-U. Schussler, H. Haarbosch, and M. Randel, 1996, Eco-Efficiency and Financial Analysis - The Financial Analyst’s view; European Federation ofFinancial Analysts’ Societies

NCC (National Consumer Council) 1997, In the Bank’s Bad books: How the BankingCode of Practice Works for Customers in Hardship; London: NCC

Peter, V. 2001, Talking the First Steps: An overview corporate social responsibility inAustralia. Sydney: The State Chamber of Commerce (NSW)

Rankin, M. 1996, Corporate Reporting – the Green gap. Report prepared for theenvironmental accounting task force of the ICAA; Institute of Chartered Accountants ofAustralia

Schaltegger, S. and F. Figge 2000, Environmental Shareholder Value, Study 54 12th edn.,1999; Basel: WWZ/Bank Sarasin

40

Snowy Mountains Engineering Corporation (Jeyeretnam T.) 1999 Public EnvironmentalReporting: Where does Australia Stand? Victoria: SMEC

Social Investment Forum (UK), 2000, Increasing Investment in Communities: ACommunity Investment Guide for Investment Professionals and Institutions; UK

Social Investment Forum (USA), 1999, 1999 Report on the Socially ResponsibleInvesting Trend in the United States. USA

Social Investment Forum 2000 Guidelines for reporting on social, environmental andethical matters. Draft

Taskforce on the Churches and Corporate Responsibility, 2000, Corporate Social andEnvironmental Responsibility – Commitment, Conduct and Transparency, Report;Canada

UNEP (United Nations Environment Programme) Finance Initiatives, 2000, Globalisationand Sustainable Development: Opportunities and Challenges for the Financials ServicesSector, report from the International Round Table Meeting on Finance and theEnvironment, 16-17 November, DeutscheBank; FrankfurtamMain, Germany

WBCSD (World Business Council for Sustainable Development), 2000, Corporate SocialResponsibility: Making good business sense, Geneva: WBCSD

Westpac Investment Management Reconciling Profitability and Responsibility – AnAustralian Perspective on a Global Phenomenon

Westpac Investment Management (WIM), 2000, Linking Screened Investments toShareholder Value: Occupational Health and Safety Screening, paper prepared by ErikMather; Australia: WIM

WRI (World Resources Institute), 1998, Green Shareholder Value: Hype or Hit?;Washington DC: WRI

WRI (World Resources Institute), 2000, Pure Profit: The financial implications ofenvironmental performance; Washington DC: WRI

41

Websites

Australian Ethical Investor – www.austethical.com.au

Australian Financial Review – www.afr.com.au

Australian Institute of Certified Practicing Accountants - www.aicpa.org

Australian Stock Exchange – www.asx.com.au

British Bankers Association – www.bba.org.uk

Business Review Weekly – www.brw.com.au

Calvert Group Research - www.socialinvest.org/areas/news/1999

Dow Jones Sustainability Index – www.sustainability-index.com

EnviroNet Australia - www.environment.gov.au

ERM - www.erm.com

Ethical Investment Association – www.eia.org.au

Ethical Investor - www.ethicalinvestor.com.au

Global Reporting Initiative – www.globalreporting.org

IRMI - www.irmi.com

Social Funds Information – www.socialfunds.com

Socially Responsible Investment – www.wiso.gwdg.de

Terra Nova - www.terra-nova.fr

The Age – www.theage.com.au

UK Social Investment Forum – www.uksif.org

United National Environment Programme – www.unep.ch

US Social Investment Forum – www.socialinvest.org

World Business Council for Sustainable Development – www.wbscd.ch

1

Appendix A – North American financial sector sustainable development initiatives

Table A1: Summary of financial sector sustainable development initiatives - North America

Investment

in the US $16.3 trillion is currentlyinvested in the investment market, ofwhich approximately 13% isinvested in retail socially responsibleinvestment (SRI) trusts.(www.socialinvest.org)

environmentally screened funds arethe fastest growing screened funds inthe US

one in every eight dollars invested inmanaged funds is screened from anethical or social perspective(Rothschild, 2001).

Superannuation

in the US, the 401(k) fund or pensionplan, is a voluntary savings system(Chaplin, 1999)

members of pension plans or 401(k)funds in the US can take out a loan,change their investment choice daily,choose from at least four and anaverage of 14 investment approaches,and make transactions via voiceresponse systems or the internet(Dunstan, 2000)

by 1998, 38 million workers tookpart in retirement funds and anestimated $1.41 trillion had beeninvested (Byte, 1998)

employers are now offering SRIoptions as part of retirement plansand employees are increasinglychoosing this option (The AllenConsulting Group, 2000)

Canada is currently investigatingimplementing legislation similar tothe UK Pension Act which requiresthe disclosure of the extent (if at all)to which social, environment orethical considerations are taken intoaccount.

Credit and lending

American banks were the first toconsider the implementation ofenvironmental policies in relation tocredit risk, and to implementmethods for assessing environmentalfactors into the commercial loanapproval process (Ganzi et al, 1997)

community banks have beenestablished for the purpose ofinvesting in and serving traditionallyunder-served markets (SustainAbility,2000)

as at 1999:- community development banks

held US$2,922 m in assets - community development credit

unions held US$601 m in assets(SustainAbility, 2000).

Insurance and re-insurance

the insurance sector is developingproducts to help industry reduce itsexposure to potential liabilities fromenvironmental damages(Schmidheiny, 1996)

major insurance companies in the UScurrently provide most environmentalinsurance products

approximately US$1.2 billion ofenvironmental insurance premiumshave been purchased in the US onenvironmental liability products(www.irmi.com)

in the US the premium volume isexpected to increase at an annualrate of 20 to 25 percent(www.irmi.com).

Criteria

SectorDescription

2

The Comprehensive Environmental Response, Compensation and Liability Act 1980 (CERCLA) (Superfund.)

provides a federal “Superfund” to clean up contaminated sites

enforces liability of persons responsible for releases of hazardous waste at contaminated sites

outlines legal liability for the clean-up of contaminated sites

sets out lender liability provisions

Superfund Amendments and Reauthorization Act 1986 (SARA)

made amendments to CERCLA

requires Superfund actions to consider the standards and requirements of State and Federal environmental laws

increases State involvement in every phase of the Superfund program

increased public participation in decision making on site cleanup

increased size of trust fund to US$8.5 billion

required US EPA to ensure hazards accurately assessed the risk to human health and the environment from hazardous waste sites on National Priorities List (NPL)

The Community Re-Investment Act 1997 (CRA)

requires lenders to make capital available in low and moderate-income urban areas. Concerns have arisen over potential environmental and financial liability for cleanupsat sites by lenders, developers and property owners. The CRA establishes initiatives for economic development while easing the fears of financial liability and regulatoryburdens

requires that financial institutions, whose annual turnover is above a certain level, to re-invest in registered community programs (AMP Henderson, 2000)

The Securities Act 1933 and the Securities Exchange Act, 1934

requires publicly traded companies to disclose actual or potential environmental liabilities under Regulation S-K, Items 101, 102 and 303

in determining what information should be disclosed, quantitative and qualitative factors, including the significance, the persuasiveness and impact of the matter, should betaken into account

Regulationscovering allFinancialSectors


NA Member choice – 401(k) plans

voluntary retirement savings system

facilitates choice of investment andplan flexibility

in 1990, a major bank was heldliable by a US court forenvironmental degradation thatoccurred as a result of its lendingpractices (Ganzi et al, 1997)

Footnote 24

requirement for reporting on asbestosand environmental exposure in aninsurance firm’s Annual Statement(Ganzi et al, 1996)

Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Criteria Investment Superannuation Credit and lending Insurance and re-insurance


3

Criteria

Product &Services

Investment

Types of products include:

community development venturecapital funds (CDVC) - examples include Boston

Community Venture Fund,Kentucky Highlands InvestmentCorporation

(Social Investment Forum, 2000)

community investment funds- examples include Trillium

Investment Management

micro-enterprise programs- examples include ACCION,

Cascadia Revolving Fund,Microenterprise


SRI funds using negative/positivescreens- examples include Dreyfus Third

Century Fund)

pooled funds- examples include National

Federation of CommunityDevelopment Credit Union’sNominee Deposit Program &Calvert Community InvestmentProgram


venture capital for sustainableprojects- examples include the Calvert

Group.

Superannuation

large pension funds invest inscreened funds eg NY MunicipalWorkers

A number of fund managers (egCitizen Funds, Calvert Group and PaxWorld Fund Family) offer SRIretirement products.

Credit and lending

Types of products include:

community development loan funds(CDLFs)- examples include FleetBoston,

Chicago Community(Social Investment Forum, 2000)

community development creditunions- examples include National

Federation of CommunityDevelopment Credit Unions

church funds- examples include Quakers,

Presbyterian church (SustainAbility, 2000)

energy efficient mortgages- examples include Fannie Mae

micro-enterprise lending- community based organisations

providing capital for micro-entrepreneurs unable to obtaincapital from conventional financialinstitutions

non-profit lending- lending to non profit organisations

pursuing a social mission that areunable to obtain capital

lending for social or affordablehousing- risk mortgages or construction

loans for housing targeted to lowincome markets

- examples include Bank of America(Social Investment Organization,

2000).


Types of environmental liabilityinsurance products include:- asbestos abatement liability- asbestos containment- cleanup cost cap- environmental and general liability

exposures- owner’s spill liability- storage tank pollution insurance(www.irmi.com)

providers include: - AIG Environmental ($200 M

capacity)- Environmental Compliance

Services Inc ($150M capacity),- Kemper Environmental ($200M

capacity)- Zurich-American ($150M capacity)(www.irmi.com).


4

Criteria

Analysis/ScreeningTools

Investment

positive, negative and best of sectorscreening methods are typically used.

analysts are using the services ofindependent environmental ratingagencies (eg CEP, IRRC Innovest)(Delphi, 1997)

tobacco is the most commonnegative screen used in sociallyscreened portfolios in the US (TheAllen Consulting Group, 2000)

many US mutual fund managers usemultiple screens, with 88% ofmanagers using three or more screens(The Allen Consulting Group, 2000)

Domini Social Equity Fund hasdeveloped a detailed list of positivescreening criteria for selecting stocks(The Allen Consulting Group, 2000).

Superannuation

Some fund managers now requiringboards of both US and internationalcompanies to develop polices andpractices to address environmentalissues and equal employmentopportunities (eg TIAA-CREF - largestUS pension fund)

Credit and lending

the majority of banks in NorthAmerica in 1997 requiredenvironmental due diligenceassessments to be conducted as partof all financial transactions(Delphi, 1997)

questionnaires and environmentalchecklist management systems havebeen implemented to assess thecustomer’s level of environmentalrisk (e.g. Bank of Nova Scotia, Bankof America).


screening tools used to assessenvironmental issues are welldeveloped due to the influences ofasbestos claims and contamination.

Investment

US investor concern is primarily onthe issues of:- military - weapons- tobacco- alcohol- gambling(Flatz, 1998)

investment in Northern Ireland isoccasionally used as a screen for SRIfunds, as well as firearmsmanufacture (SustainAbility, 2001)

the US has a high level ofshareholder activism. This is a resultof a high level of share ownershipand the ease of filing shareholderresolutions (Delphi, 1997)

Superannuation

US focus is primarily on the issues of:- military - weapons- tobacco- alcohol- gambling

(Flatz, 2000)

investors are also concerned aboutenvironmental issues and employeeworking conditions.

Credit and lending

the issue of providing access to creditand banking services for allcommunity members is high on theagenda of American Bankers’Association.


the use and disposal of asbestosrepresents the single greatestecological item to affect theinsurance industry in America. Thiswas a direct result of insurancepolicies being general in the 1980s.The medium sized insurance marketwas the hardest affected

the reinsurance industry in Americagenerally does not consider thepotential impact of global warming tobe a significant risk. Proposals toreduce carbon emissions conflictwith other social policy agendas forthe country (Mooney, 1998, citedMonash 2000).

Criteria

StakeholderIssues


5

Criteria

StakeholderIssues

Investment

US investors are also concernedabout environmental issues (i.e. therecent BP drilling in Alaska)

shareholder advocacy- Ethical Funds was the first mutual

fund company in Canada to:- adopt corporate dialogue programs - to file shareholder resolution on

socially responsible businesspractices

- to vote its shares on social andenvironmental issues(Social Investment Organisation,2000).

Superannuation

(refer to previous page)

Credit and lending




Criteria

Managementof InternalSustainabilityIssues

Investment

Trillium Assets Management reportson environmental and socialaccountability (The Global Reporters,2000).

Superannuation

New York State Common RetirementFund has adopted a responsibleContractor Policy to guide theselection of construction andbuilding operation contractors ontheir real estate properties (ASFA, 2001).

Credit and lending

The Bank of America prepares publicenvironmental reports

Citigroup published the “CitigroupGlobal Corporate Citizenship Report”in 2000 detailing its social andenvironmental involvement as well asother initiatives internal to theirorganisation.


CIS Co-operative Insurance haspublished environmental and socialreports.


6

Appendix B – Europe financial sector sustainable development initiative

Table B1: Summary of financial sector sustainable development initiatives - Europe

SelectionCriteria

SectorDescription

Investment

in the UK £51.7 billion is invested inSocially Responsible Investments (SRI)

the SRI market in the UK is expectedto exceed £300 billion by the end of2001 (PricewaterhouseCoopers, 2001)

SRI in Europe is a mature market (TheAllen Consulting Group, 2000)

the UK Social Investment Forum’ssurvey found that 101 (59%) of the171 funds, with collective assets of£302 billion, have asked their fundmanagers to adopt socially responsibleinvestment strategies.

the UK ethical investment market grewby 47.7% between 1998 and 1999

fund managers have developedguidelines for reporting on social,environmental and ethical matters.These guidelines are intended to assistcompanies in addressing the concernsand requirements of their shareholdersin relation to social, environmentaland ethical (SEE) matters. Theguidelines concentrate on thedisclosure of the board’s approach toSEE matters and also the company’spolicies, procedures and means ofverification.

Superannuation

it is not compulsory for individuals tocontribute to a pensions fund (Fenech,1999)

in 2000, the total pension fund marketin the UK was approximately £800billion of which £3.3 billion wasinvested in SRI

a recent study carried out by ERM,which involved surveying companiesthat represent nearly half of £800billion in UK pension fund assets,revealed that 21 out of the UK's 25largest pension funds intend toimplement SRI principles (AMPHenderson, 2000)

Germany and France are currentlylooking at implementing legislationsimilar to the UK Pension Act whichrequires the disclosure of the extent (ifat all) to which social, environment orethical considerations are taken intoaccount

in October 2000, France had SRIinvestments of 4.7 billion FRFmanaged by 27 funds (www. terranova.com).

Credit and lending

banks have been looking atenvironmental issues since the early1990s due to concerns overenvironmental lender liability (Delphi,1997).


almost all European insurers offerinsurance protection against liabilityfor ‘sudden and accidentalenvironmental impairment’ (Swiss Re,2000)

Germany and Finland haveintroduced a compulsoryenvironmental insurance system(Delphi, 1997 & UNEP, 1999)

the insurance industry is involved inthe climate change debate and havebeen pro-active in their approach toglobal warming (e.g. Swiss Re, MunchRe) (Monash 2000).

7

Table B1: Summary of financial sector sustainability initiatives - Europe

United Kingdom

Companies Act 1985 s226(2)– accounts must give ‘true and fair view’ of the affairs of the company.– specific environmental disclosures should only be included if they are material to the understanding of financial statements and are not misleading.

Section 234– requires a directors’ report to be prepared for each financial year that provides a fair review of the development of the business and outlines matters as set out in

Schedule 7 which includes matters of a general nature, including changes in assets and issues that relate to the health, safety and welfare of the company’semployees.

Section 256– this section is inserted to provide for accounting standards, that is, statements of standard accounting practice issued by such

body or bodies as may be prescribed by regulations.

Financial Services Act 1986 Part IV s146– general duty of disclosure of all such information as investors and their professional advisers would reasonably expect for the purpose of

making informed assessments.

Section 201– provides that directors are to secure compliance with any international obligations.

Listing Rules of the Council of the London Stock Exchange– chapter 6 gives types of information generally required– provides for a directors’ report which outlines the issues to be covered and includes any significant changes in the fixed assets of the company and an indication of

any significant difference between the book value and market value of land.

General Principles– currently no special rules in the UK dealing with environmental costs, liabilities and impaired assets– normal accounting principles apply on cost of environmental measures, fines, penalties, damages, and loss through impairment of assets.

Company Law Review– companies must ensure that their legal responsibilities towards the environment, employees and local communities are met. Internal policy, monitoring, management

and reporting activities help to ensure that compliance is maintained. Corporate Governance has been high on the agenda in recent months due to the proposedrevisions in company law, and the risk management approach promoted by the Turnbull Committee.

– the UK Department of Trade and Industry’s Company Law Review is analysing Directors’ duties and corporate responsibilities to stakeholders as a basis for legislation.Although this review is still in a draft format (it will be presented to Ministers in Spring 2001), recommendations are expected to include the requirement for an"inclusive" statement of directors’ duties "which require directors to have regard to all the relationships on which the company depends and to the long term as well asthe short term implications of their actions". Companies should be required to produce an Operating Financial Review each year that outlines ‘the performance anddirection of the business, including ... wider relationships, risks and opportunities and social and environmental impacts where these are relevant to an understandingof the performance of the business.’

Regulationscovering allFinancial sectors

Selection Criteria Investment Superannuation Credit and lending Insurance and re-insurance

8


European Commission

EC Fifth Environment Action Programme – section 7.4– proposed measure for "Redefinition of accounting concepts, rules, conventions and methodology so as to ensure that the consumption and use of environmental

resources are accounted for as part of the full costs of production and reflected in market prices. Such measures must include appropriate checks and controls so as toensure market transparency and fair competition."

Commission of the European communities White Paper on Environmental Liability– the White Paper sets out the structure for a future EC environmental liability regime that aims at implementing the polluter pays principle. It describes the key

elements needed for making such a regime effective and practicable. Environmental liability is seen as a way of implementing the main principles of environmentalpolicy enshrined in the EC Treaty (Article 174(2)), above all the polluter pays principle.

Directive of the Commission– the aim of a community environment policy is to improve the setting and quality of life, and the surroundings and living conditions of the community.

A Communication on the Sixth Environment Action Programme of the EC– this looks at improving the implementation of existing legislation, a community wide voluntary instrument, the eco-management and audit scheme. The Commission

intends to pursue a ‘name, shame and fame’ strategy for selected pieces of legislation. The Community has recognised the importance of integration of environmentalprotection into other policies by the inclusion of the objective in Article 6 of the Treaty.

– the European Commission is to use financial markets and SRI to drive increased disclosure.

Regulationscovering allFinancial Sectors


9


the Turnbull Committee published itsfinal guidance on internal control inSeptember 1999. The Guidancepromotes the identification andmanagement of risk, includingoperational risk such as that relatingto ‘health, safety and environmental,reputation and business probityissues.’ It forges the essential linkbetween risk-based management andthe achievement of businessobjectives and shareholder value.

the Danish Social Ministry establishedthe ‘S-Mark’ program which involvedthe government submittingquestionnaires to corporates and thenawarding them a rating (‘S-Mark’)(www.ethicalinvestor.com).

United Kingdom - Pensions Act 1995(Amended July 2000)

Section 36(5) - trustees or fundmanagers to whom any investmentdiscretion is delegated by the trusteesare required to give effect to theprinciples contained in the statementof investment principles(SIP). Astatement must be made on:

- the extent (if at all) to which social, environment or ethical considerations are taken into account in the selection, retention and realisation of investments; and

- their policy (if any) in relation to the exercise of rights (including voting rights) attachied to investments.

Local Government Pension Scheme(Management and Investment ofFunds) (Amendment) Regulations1999

Regulation 7(7) – the fund managermust not make investments whichwould contravene the administeringauthority statement of investmentprinciples.

France has developed an SRI related‘Employee Savings Plan Bill’(www.terranova.com).

NA individual European nations have putin place different environmentalliability laws however Germany andFinland are the only nations to haveintroduced a compulsoryenvironmental insurance system(Delphi, 1997 & UNEP Geneva,1999).

Regulations &CorporateGovernance


10


Type of investments include:

environmental industry funds– examples include German Focus,

Hypo Eco Tech

best-in-class or eco-efficiency funds– examples include Credit Suisse

Equity Fund, Storebrand ScudderEnvironmental Value fund

environmental support funds – funds donating money to financially

support environmentally friendlycompanies

– examples include Swedish BancoIdeella Miljofond

sustainable growth funds– invest in businesses that have a

long term role in the transitiontowards sustainable development

ethically screened funds – examples include United Charities

Ethical, Abbey Ethical

environmentally screened funds– examples include Eagle Star

Environmental Opportunities, TSBEnvironmental Investor(Delphi, 1997)

venture capital funds for sustainable projects – examples include Foursome Invest.

Type of investments include:

socially responsible funds – examples include Universities

Superannuation Scheme, which isthe third largest pension fund in theUK (£22 billion).

Environmental lending products include:

energy saver mortgages– examples include Woolwich,

Co-operative Bank

environmentally friendly investment loans– examples include Barclays in

conjunction with EuropeanInvestment Bank, Natwest(Monash, 2000)

ecological or ethical banks – examples include Ecology Building

Society, Triodos Bank(Hineterberger, 1998)

National Westminster Bank– National Westminster Bank have

made £50 M available for lendingto businesses at cheaper thannormal rates for environmentalprojects (Delphi, 1997).

Types of insurance products include:

sudden and accidentalenvironmental risk cover– provided in general liability policies – examples include Swiss Re

(Delphi, 1997)

accident insurance that supportsenvironmentally friendly behaviour– examples include Versiko

recycling insurance– examples include Tomas Tenga

(UNEP, 1999)

environmental damage insurance – examples include Jan Pieter Six

(UNEP, 1999).

Product & Services


11

Table B1: Summary of financial sector sustainable development initiatives - Europe

positive and negative screening toolsas well as best of sector analysis, aretypically applied to funds

analysts are using the services ofindependent environmental ratingagencies to screen funds (e.g. ERI,Oko-Invest, SERM, Triumvirate, SAM)(Delphi, 1997)

SAM provides Dow Jones screeningfor the Dow Jones Sustainability Index

the Ethical Investment ResearchService (EIRiS) assesses corporateactivity in 30 principles areas,including animal testing, gamblingand greenhouse gas emissions. EIRiSpredominately researches UKcompanies and provides informationto UK based socially responsibleinvestors. They are responsible for theFTSE4Good research.

Pensions Investment ResearchConsultants (PIRC) are starting toprovide rating services on SRI(competing with EIRiS)

Sustainability Indices e.g. Dow JonesSustainability Index, FTSE 4 Good,Industries of the Future – NPI.

positive and negative screening toolsas well as best of sector analysis, aretypically applied to funds

National Provident Institution (NPI)offers passive and active SRI fundsacross the full range of pensionproducts. (Note: NPI is part of theAMP Group) (The Allen ConsultingGroup, 2000)

Morley expects all FTSE 100companies, in all sectors, to haverobust processes to minimise damageto the environment. These companiesare required to publish acomprehensive environmental report.Where FTSE 100 companies do notpublish such a report, and afterconsultation as to managementintentions, Morley will vote againstthe resolution to adopt the report &accounts.

engagement rather than screening hasbecome the preferred option amongstmainstream UK fund managers. Thisapproach was championed by FriendsIvory Sime, a innovator in the UK.

49% of banks in Europe in 1997required environmental due diligenceon project finance (Delphi, 1997)

assessments typically consist of a twoor three tier approach, including thecompletion of checklists and detailedenvironmental information manuals(e.g. Deutsche Bank, Barclay Bank,Lloyds TSB) (Delphi, 1997).

Swiss Re has a general policy whichrequires the identification ofenvironmental risks and theconsideration of ecological criteria inall relevant reinsurance transactions.

Winterthur (Credit Suisse Group) isguided by an underwriting policy thatspecifically excludes the underwritingof exposed industries and projects(e.g. offshore oil exploration, nuclearplants)

re-insurance companies like Swiss Reand Munich Re have commissionednumerous studies on the impact ofclimate change on the insurance sector.

Analysis/Screening Tools


12


stakeholders are concerned over therelationship between environmentaland investment performance (Delphi, 1997)

main investor concerns include:– military - weapons– nuclear power plants– genetically modified organisms

(Flatz, 1998)– animal welfare (SustainAbility 2001)

NGOs have been running membercampaigns to raise the awareness ofSRI (Amnesty International, Friends ofthe Earth)

NGOs and trade unions have beenbuying shares or getting institutionalshareholders to sponsor shareholderresolutions. For example Greenpeaceowns shares in Shell and internationaltrade unions rallied to bringresolutions at last year’s Rio Tintomeeting.

mainstream investors are typicallyinterested in how effectivelycompanies are managing their social,ethical and environmental risks.

concern over the lack of transparencyand disclosure of bank operations(AMP Henderson, 2000)

environmental NGOs are targetinginvestment banks over theirinvolvement with environmentallydamaging companies (Delphi, 1997)

Three Gorges Dam – non governmentorganisations targeted Credit Suisseon the grounds of environmentaldegradation, who as a resultapologised and withdrew funding to China.

the insurance and re-insurance sectoris concerned over the potentialimpact of climate change

concern over environmental liabilityis limited as most Europeanlegislation does not strictly outlinethe enforcement of environmentalliability (Delphi, 1997).

Stakeholder Issues


13


Henderson Global Investors andMorely Fund Management haveextended their corporate governancepolicies to include criteria on theenvironment, human rights, employeerelations and community relationspolices (AMP Henderson, 2000)

Morely Fund Manger will vote againstthe financial statements at the annualgeneral meeting if the company hasnot published an environmental report.

Henderson Global Investors andMorely Fund Management haveextended their corporate governancepolicies to include criteria on theenvironment, human rights, employeerelations and community relationspolices (AMP Henderson, 2000)

Morely Fund Manger will vote againstthe financial statements at the annualgeneral meeting if the company hasnot published an environmental report.

Deutsche Bank and the Royal Bank ofScotland have developed internalenvironmental management programs(Hugenschimdt, 1997)

some banks have environmentalmanagement systems which arecertified to ISO 14001, (e.g. CreditSuisse and Deutsche Bank)

banks are reviewing their owninternal environmental performance

a key area of improved environmentalperformance has been in energyefficiency (e.g. ING Bank,Commerzbank) (Delphi, 1997)

the Royal Bank of Scotland’s energyefficiency programs has resulted insavings of around £1 million per annum.

Natwest Abbey National, Barclays, co-operativeABN AMRO and Prudentialhave prepared a public environmentalreport

in the UK in 1998 Lloyds TSB donated£30M (over 1% of its pre-tax profits)NatWest £14.3 M and Barclays£13.5M. (Jeucken et al, 2001)

environmental management andreporting guidelines for the financialsector have been developed by the‘Forge Group’ of financial institutions.

the Swiss Bankers association havedeveloped a web-site which outlinesthe experience gathered by Swissbanks when setting up theirenvironmental management systems(www.unep.org).

56 insurance companies from the EUare signatories to the UNEP InsuranceInitiative (www.unep.org)

CGU, ING, CGNU and Swiss Re havepublished public environmentalreports. (Swiss Re, 2000)

TSB,CGNU and ING have developedinternal environmental managementprograms which cover property,purchasing, transport and wastemanagement issues.

Management ofInternalSustainability Issues


14

Appendix C – Australian financial sector sustainable development initiatives

Table C1: Summary of financial sector sustainable development initiatives – Australia

Investment

currently more than $400 million hasbeen invested in ethical products(Rothschild, 2001)

Australian investors have beenrelatively slow to take up sociallyresponsible investments (SRI)(The Allen Consulting Group, 2000)

The SRI market in Australia isrelatively immature, (The AllenConsulting Group 2000).

Superannuation

superannuation trustees havehistorically not considered orrecommended SRI funds (The AllenConsulting Group, 2000)

$454 billion is held bysuperannuation funds of which onlya very small proportion is invested inscreened funds (Proske, Saleeba etal,2000)

the Australian Institute ofSuperannuation Trustees hasinterviewed its members and foundthat six percent offered an ethicalinvestment choice (Monash, 2000)

member choice legislation may beintroduced, which could be animportant driver in increasing thedemand for SRI products

75% of trustees are in favour of SRIalternatives (Ryan cited Manning,2000).

Credit and lending

the Australian banking sectortypically has a low level of awarenessand action in terms of sustainabledevelopment (Monash, 2000).


sustainability issues have not featuredvery highly in the Australianinsurance sector (Monash, 2000)

general liability product and publicliability policies provide verynarrowly defined cover for ‘sudden,unintended, unexpected andaccidental pollution for a specificevent in a specific timeframe’

the re-insurance market is very smallin Australia

the Australian re-insurance sectorrecorded $3 billion in losses in 1999-2000 as a direct result of unforeseennatural disasters (Monash, 2000).

Criteria

SectorDescription


Corporations Act (Commonwealth)

Section 299(1)(f) – mandatory disclosure of environmental performance in directors’ reports where the corporation is subject to any particular and significant environmentalregulation.

although many disclosures do not include much detail they have been a catalyst for developing governance systems to collect the information.

Section 296(1) – listed companies are to prepare annual financial reports disclosing material liability (including environmental) in accordance with accounting standards.

15

Investment Superannuation Credit and lending Insurance and re-insuranceCriteria


Investment

the Company Law Review Act 1998s249D was amended to allow at least100 registered shareholders torequest a general meeting of acompany (EA, 1999, cited The AllenConsulting Group, 2000). Thisamendment enables shareholder tochallenge directors on theenvironmental performance of acorporation.

Superannuation

in 1998 the Commonwealthgovernment tabled thesuperannuation legislationamendment (Choice ofSuperannuation Funds) Bill, 1998.This Bill will amend the currentlegislation that requires employees tomake superannuation contributionsto the fund chosen by theiremployee. This Bill however has notyet been passed.

Credit and lending

the Federal opposition has proposedto introduce a new layer of regulationin the banks, requiring them to signup to an enforceable ‘social charter’.This will require banks to provide feefree and no frills services to allcustomers (Mclachlan, 2000).


the Australian Prudential RegulationAuthority (APRA) are proposing newlegislation to encourage theupgrading of the industry’s riskmanagement practices (Monash,2000).

Criteria

Regulations &CorporateGovernance

ASIC Practice Note 68

ASIC guidelines stipulate licensing and other regulatory conditions as prima facie examples of s299(1)(f) Corporations Act requirements.

the requirements relate to performance under environmental regulations, not specifically financial disclosures (eg. contingent liabilities and capital commitments).

the information in the directors’ report is required even though it has already been provided to a regulatory authority under environmental legislation.

the information would usually be more general and less technical than that provided in compliance reports to an environmental regulator.

the expectation of ASIC is that compliance will be with the spirit as well as the terms of the Corporations Act.

This guideline is currently under review.

ASX Listing Rule 3.1

Listing Rule 3.1 – imposes a continuous disclosure requirement concerning information that might affect the company’s share price. Once a listed company becomes aware ofany information concerning the company that a reasonable person would expect to have a material effect on the price or value of the company’s securities, the company mustimmediately inform the ASX.

Section 1001B imposes continuous disclosure obligations on unlisted disclosing entities.

Accounting Standards

accounting standards require disclosure of contingent liabilities (including environment) and have developed standards for the accounting of mining rehabilitation costs.

EPA Victoria is presently working in conjunction with Environment Australia and the Institute of Chartered Accountants of Australia on an environment management accountingproject. This project aims to promote improved practises and reform in management accounting techniques so that firms are able to improve profitability by reducing costswhilst achieving better environmental outcomes.


16

Investment

ethical and socially responsiblescreened funds, examples include:- Challenger- AMP- Rothschild- Australian Ethical Investment- Tower- Hunter Hall- Westpac

OHS funds - examples include Westpac

human rights fundings- prepared to be released by

Westpac

renewable energy funds- examples include SEDA

venture capital investing intoenvironmental type assets including:- water- renewable- contaminated land.

Superannuation

ethical and socially responsiblescreened investment options.A number of products are offered inthe market by various organizationsincluding: - UniSuper- Hesta(Rothschild, 2001).

Credit and lending

greensmart home loan products- examples include Macquarie Bank

and Housing Industry Association(Monash, 2000)

renewable energy project loans andfunding- examples include SEDA, CVC REEF

& Federal Government(Monash, 2000)

ethical deposit account- examples include Bendigo Bank

with Ethical Investment Trust

GGAP – greenhouse gas abatementprogram- $400 million over a 3 year period

has been allocated

credit unions and community Banks(eg Bendigo Bank) appear to beproviding services where large bankshave withdrawn services.


two main products include:- pollution legal liability for third

party claims that arise fromseepage and contamination “notpreviously identified”(eg RichardOliver)

- clean up costs - first party clean-upfor responding to clean up orderswhen and if made.

Criteria

Product &Services


17

Investment

the main forms of screening usedwithin the SRI industry in Australiaare negative and positive screens aswell as best of sector(The Allen Consulting Group, 2000)

there is anecdotal evidence thatanalysts do consider and havedeveloped approaches to evaluatingenvironmental investment risks(Fayens et al, 1998)

the ‘best of sector’ approach whereinvestment is in the best performersacross all sectors, is growing ininterest. This approach does not biasagainst any industry and henceallows for greater diversification ofrisk across the portfolio

a number of independent SRI ratingagencies have been establised forexample, Sustainable InvestmentResearch Institute

environmental advocacy groups suchas the WWF and ACF provide publicinformation on companyperformance

the Sydney Morning Herald/Agereputations index is publishedannually.

Superannuation

rating tools have been developed byAMP

Westpac are using the Eco-Indexrating system developed by MonashUniversity. This system uses a best-ofsector approach and has focused itsscreening criteria on environmentalissues (The Allen Consulting Group,2000)

Westpac have purchased a ratingsystem from SAM to screen theirinternational funds. This is the samerating scheme as that used by theDow Jones Sustainability Index(DJSI).

Credit and lending

most banks have implementedenvironmental risk criteria as part oftheir corporate and project lendingactivities

environmental assessments tend to beonce off and are not monitored forthe duration of the loan period

some financial institutions aredeveloping a range of environmentaladvisory products as part of theircorporate and project financeservices, eg identification andevaluation of emission credits andrenewable energy projects.


limited consideration is given toenvironmental risk

in general no specific screens or toolsappear to be used to assessenvironmental and/or sustainabilitydevelopment issues.

Criteria

Analysis/ScreeningTools


18

Investment

SRI has traditionally been a nicheinterest and is viewed as providinginadequate returns (Proske, Saleebaet al, 2000)

SRI funds have primarily had anenvironmental focus (The AllenConsulting Group, 2000)

traditional ethical fund managers arecritical of new ‘best of sector’mainstream SRI products

environment groups are concernedthat ‘mainstream’ fund mangersinvest in ‘unsustainable projects’whilst simultaneously offering SRIproducts.

Superannuation

stakeholders generally do notunderstand superannuation and arenot interested in actively managingtheir funds (Proske, Saleeba et al,2000)

a growing proportion of stakeholderswant to invest in SRI alternatives(Proske, Saleeba, et al, 2000)

typical concerns include:- social issues in the areas of:- health & safety - human rights - tobacco

environmental issues in the areas of:- energy efficiency - recycling - resource and material - waste and emissions (Proske, Saleeba et al, 2000).

Credit and lending

stakeholders are typically concernedabout:- charges to low income people- closing of local branches- increased fees - access to banking services for aged- environmental impact of lending

decisions, with particular regard toprojects in sensitive areas(O’Rourke, 2000).


stakeholders of the insurance sectorare concerned about the issue ofclimate change, with particularregard to the issue of claimsassociated with flood damage

Aid Watch has raised concernregarding the government provisionof subsidised insurance services toexporters to less developed countriesvia government agencies such as EFIC.

Criteria

StakeholderIssues

Table C1: Summary of financial sector sustainability initiatives – Australia

19

Investment

of the top 100 Australian companies,25% of the investment sectorincluded a statement on theirenvironmental performance (inaccordance with the CorporationsAct s299(f)) in their Directors Reportin their 1999 Annual Report.(Ecobusiness, 2000). This statementon environmental performancehowever only requires disclosure ofthe bare minimum level ofcompliance with existing statelegislation.

Superannuation

some superfunds are nowinvestigating blanket screening allinvestments on social/environmentalissues as opposed to just screeningindividual funds.

Credit and lending

banks are developing internalenvironmental policies andenvironmental improvementprograms (ie Commonwealth Bank,Westpac, ANZ)

Westpac is the only Australiansignatory to the UNEP Statement byFinancial Institutions on theEnvironment and SustainableDevelopment (PricewaterhouseCoopers, 2000)

some banks have signed theGreenhouse Challenge

Maleny Credit Union has a TripleBottom Line report.

Australian banks are nowimplementing community initiativesincluding :- ANZ’s community service charter,

foodbank Australia and Youth atRisk programs

- Westpac’s Smith Family and youthand education programs

no stand alone public environmentalreports are currently published.


QBE Insurance Group Ltd is the onlyAustralian insurance group to signthe UNEP Insurance Initiative

the Insurance Council of Australiahas committed to aiding thereduction of greenhouse gas emissionas part of the Greenhouse Challenge(Insurance Council of Australia,2000)

some companies have reported ontheir environmental performancelocally. The focus of these reportshas been on internal operationalmanagement rather than a change inbusiness practices

Export Finance & InsuranceCorporation (EFIC) has implementedinternal environmental risk screeningprocedures and an environmentalpolicy

some companies are reporting as partof parent companies publicenvironmental reports

no stand alone public environmentalreports are published.

Criteria

Managementof InternalSustainabilityIssues

Table C1: Summary of financial sector sustainability initiatives – Australia

For further information please contactSandra Birkensleigh Partner, PricewaterhouseCoopersTel (02) 8266 2808email [email protected]

Corinne Proske Senior Manager, PricewaterhouseCoopersTel (03) 8603 3809email [email protected]

Elizabeth Kazakoff Manager, PricewaterhouseCoopersTel (02) 8266 2366email [email protected]

Judith Kendrick Director Financial Sector Projects Team, Sustainable Industries Branch, Environment AustraliaTel (02) 6274 2209email [email protected]