SUNS4509 Thursday 16 September 1999

Finance: Slow race in effort to 'Green' bankers

Chicago, Sep 13 (IPS/Abid Aslam) -- Top US bankers held talks in Chicago last week on 'New Roles for Finance in the Race to Sustainability,' but it seemed that many had stumbled at the starting gate.

Fundamental questions remained unanswered at the fifth annual International Roundtable on Finance and the Environment, organised by the United Nations Environment Programme (UNEP).

There was broad agreement among participants that global finance had to be made more environmentally sensitive but disagreement simmered over what reforms were needed and how they should be achieved.

The stakes are high: even at their lowest level amid economic crises in Asia, Russia and Latin America, private financiers churned 50% more money into developing countries last year than did public lenders - including the World Bank. The IMF expected private capital flows to more than double from last year's level,
reaching $145 billion by the year 2000.

A boom in infrastructure projects - including transportation, energy and other environmentally-charged ventures - also was in the offing.

Multilateral development banks have estimated that, over the next decade, the cost of these projects in countries such as China, India and Indonesia could reach 14 trillion dollars. Most of that business was expected to be handled by private firms.

"It is difficult to imagine a more timely event. We are witnessing the convergence of the environment and finance," said Richard Sandor, chairman of Environmental Financial Products and senior adviser to the international auditing firm PricewaterhouseCoopers.

At times, however, the convergence looked more like a collision between environmentalists and financiers.

Most of the companies present had endorsed UNEP's 'Statementby Financial Institutions on the Environment and Sustainable Development', drawn up in the aftermath of the 1992 'Earth Summit.

Few showed willingness, however, to adopt standard and binding rules to live up to the declaration's broad principles. As a result, a number of signatory firms had raised capital for prickly projects such as China's Three Gorges Dam.

They are now embroiled in a venture that even the Chinese government has begun to investigate for corruption and environmental problems - and that clearly was at odds with the UNEP manifesto, said Doris Shen of the US-based International Rivers Network.

At one of the sessions, leaders of the international movement for environmentally-sound banking were bombarded with questions about their involvement in the Three Gorges project.

Linda Descano, who chaired the steering committee of the Financial Institutions Initiative organised by the United Nations Environment Programme (UNEP), found herself forced to answer charges that her company - Salomon Smith Barney - was raising money for the Chinese dam, under construction since 1994.

Salomon, a subsidiary of Citigroup, was one of only five US firms to sign on to UNEP's 'Statement by Financial Institutions on the Environment and Sustainable Development - the declaration of broad principles outlined after the 1992 'Earth Summit'.

Descano, who held the post of Director of Social Awareness Investment at the firm, declared: "we are not involved in the Three Gorges dam.

"There is a perception that anyone who does business with 'China, Inc.' is responsible for Three Gorges but the bonds we're handling are to raise general-purpose capital for the China Development Bank. None of the money has been earmarked for the dam."

China Development Bank, formerly the China State Development Bank, was a leading government fund-raiser for the project, she acknowledged, but Salomon had received assurances from it that Three Gorges would receive no capital from a $500 million, May 1999 bond issue for which Descano's firm was a lead manager and bookrunner.

Doris Shen of the International Rivers Network challenged the firm to make public the promises it had received from the Chinese bank.

"Enough concern has been raised about the project to make it worth Salomon Smith Barney's while to say they have received assurances" but those would be worthless so long as they remained secret, Shen said.

Apart from ensuring the Chinese bank's accountability, "this is a litmus test of whether (UNEP signatory) companies have any real environmental and social guidelines or policies," she added.

Even firms not involved in the Three Gorges project- which the World Bank had rejected as too fraught with risk - continued to back ruinous oil, mining, pulp and paper projects.

But Descano sought to deflect the challenge, arguing that activists were playing politics with business deals. "The NGOs are trying to engage in a war with China and involve anyone else. That's not constructive," Descano said. "They're frustrated with governments' decisions and are looking for new weapons. We're not
an appropriate weapon."

But the banking executives nevertheless admitted to political considerations in their bid to tap existing and potential markets in the world's most populous country.

At the same time bankers maintained a shroud of secrecy over the specific criteria by which they assessed projects' environmental and social aspects and the ways in which those considerations were brought to bear on investment decisions, complained environmental activists.

"This is why people question voluntary 'codes of conduct' initiatives," said Julie Tanner, senior financial analyst at the non-governmental U.S. National Wildlife Federation (NWF).

Other analysts said that apart from Smith Barney in the Three Gorges Dam, other UNEP signatories or affiliates were also involved including Barclay's Capital, Credit Suisse First Boston, Deutsche Bank of London and the HSBC Markets.

Once they signed the UNEP's statement of principles, banks and investment houses essentially were left to monitor themselves with no independent oversight. And the initiatives steering committee id dominated by the firms themselves - and NGOs or other 'stake-holders' had no seats.

Companies have begun to respond to demands for transparency by publishing annual 'corporate environmental reports' but "these need to be more than the public relations exercise I frankly think they are," said Hans Stielstra of the European Commission's Directorate-General for Environment, Nuclear Safety and Civil Protection.

'Green' activists wanted commercial, investment and retail banks and insurance companies to agree on uniform and binding standards for assessing, monitoring, and reporting on their loans.

"As the individuals who are involved and approve many of these transactions, you have the power to shape the environmental impacts of development every time you take a decision to finance a particular project," NWF vice-president Steve Shimberg told bankers.

For their part, executives were eager to discuss eco-friendly initiatives launched by their institutions but U.S. bankers in particular were reluctant to accept increased regulation and to take on the role of what they called "eco-police" - telling their clients what they may and may not do.

They had missed the point, according to Michelle Chan-Fischel of Friends of the Earth. When banks received environmentally- questionable loan applications, "we're not asking them to tell anyone, 'You can't do that'. We're asking them to say, 'We won't do that'."

But that would be asking too much, said one banker. "Sure we have to think 'eco' but, if we don't get in on a project, our competitors will. Why should I lose out?"

In what often resembled a schoolroom show-and-tell session, bankers touted efforts to improve day-to-day eco-performance - trimming waste, introducing recycling schemes and installing energy-efficient light bulbs and air conditioners in their offices. They also showcased 'green' products such as small loans for organic farming, garbage recycling and cooperative housing.

UNEP was encouraging the 161 firms that endorsed its principles to develop such "niche markets but we have yet to quantify the financial results and real impacts," said Mike Kelly, coordinator of the agency's Financial Institutions Initiative.

Some, notably European firms, explained their efforts to use environmental considerations in processing loans and securities offerings. Germany's Deutsche Bank had adopted an environmental policy that prohibited involvement in the most ecologically dangerous projects and mandated higher loan costs for ventures
deemed environmentally "risky."

As a rule, however, few firms appeared aware of the real impact of their lending operations, according to John Cusack of Innovest Strategic Value Advisors.

All this pointed to the conclusion that "many financial sector decision-makers remain ignorant of the benefits of sustainability and of the public demand for it," said Jacqueline Aloisi de Larderel, director of UNEP's Technology, Industry and Economics Division.

Many technical explanations were offered as a reason for this - seven years after the 'Earth Summit' and following four previous rounds of UNEP meetings with financiers.

For all the talk of environmentally and socially sustainable investment, for example, there remained scant research on how this affected financial performance of firms.

The crux of the problem remained that, "despite the speed of the financial markets, (finance companies) are very stodgy bureaucracies; and stodgy bureaucracies resist fundamental change," said Donald Reed, finance expert from the Washington- based World Resources Institute.