china and the world discuss the environment

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Turning awareness into action

Isabel Hilton

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Global financial leaders will gather in October to discuss how to balance the environment with the bottom line. Paul Clements-Hunt, head of the UNEP Finance Initiative, tells Isabel Hilton how investors are beginning to wake up to the issues that matter.
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Paul Clements-Hunt seems accustomed to the challenge of changing the image of big investors in the minds of a sceptical public, though sometimes he interrupts himself to apologise. "I am beginning to sound like a public relations man for the finance sector," he laughs. Since November 2000, he has been head of the United Nations Environment Programme (UNEP) Finance Initiative (FI), based in Geneva, Switzerland, with the job of persuading the world's biggest investors to take a responsible attitude to the environment – and, seven years on, to persuade the world's publics that it's working.

UNEP FI is a UN body with a relatively low public profile, but it is the UN's largest partnership with the financial services sector, and it counts more than 170 banks, insurers and asset managers as members. Before he joined UNEP FI, Clements-Hunt has worked for the International Chamber of Commerce in Paris, and run an environmental strategy consultancy in Bangkok, so he is familiar both with the challenge of achieving sustainable development in Asia, and with the priorities of the financial sector and big investors.

On the face of it, as someone who is concerned both with the environment and with high finance, Clements-Hunt has a lot to worry about: the image of high finance in the public mind is hardly green. But, he insists, things are changing.

The old attitudes among the people who manage the world's biggest investment funds – that it is their job to deliver maximum returns as fast as possible – is, he says, beginning to change as fund managers increasingly recognise chasing maximum short-term returns may not earn the biggest profits in the long term.

Clements-Hunt and his team work to persuade investors fund managers that they must factor in three issues when they make investment decisions: the environment, social issues and governance. These are central risk factors for any investor to consider, he says, and they ignore them at their peril.

"The key to it with financial institutions" he explains, "is that if they actually consider the full range of risks and opportunities associated with environmental and social issues, they put themselves in a better position to do better business. Whatever type of financial institution you are, it gives you a both a bigger radar screen and new market opportunities"

Clements-Hunt and his colleagues in UNEP FI were instrumental in the 2006 launch of the UN Principles for Responsible Investment (UNPRI), principles that are now backed by $10,000 billion of institutional assets.

"There's a range of principles that have grown up over the last ten years in the financial sector," he says, "that deal with environment and community issues, and we are now seeing the development of a rules-based set of guidelines that allow institutions to understand what is best practice, what is best policy and how you build this into what you are doing on a daily basis."

Big investors are not famous for their altruism but, says Clements-Hunt, they do not have to be persuaded that the environmental, social and governance issues matter.

"Over the past two to three years," he says, "some of the world's biggest investors – pension funds, foundations, government reserve funds – have really woken up to the issue of responsible investment. It's partly because of climate change, but also because, if you go back to the dot-com bust and the corporate scandals of the beginning of this century, something like 7 trillion dollars were lost." It's a sum big enough to persuade any fund manager that good governance is a bottom line issue.

Even an optimist like Clements-Hunt admits that present day market capitalism is not green yet: at present, he estimates, only 2% to 4% of global funds are sustainably invested. To him, though, that signals the huge potential of a change that he is convinced is already underway.

"Markets move every second, and tens of trillions of dollars are traded every day. The trader on the desk," he admits, “is certainly not going to be thinking about sustainable development issues. But there is now an effort to ensure that the issues are incorporated into the market systemically, so that they become part of institutional investment policy. There's a new understanding among very big investors about responsible investment, and that sends a signal to the broader market. It's a systemic change that, hopefully, in 10 or 20 years will change the way money is invested. It is about changing the DNA of capitalism to appreciate that the issues of sustainable development are both risks and opportunities."

"Markets need to react quickly - to be dynamic. That's the nature of capitalism. But if institutions and investors want to protect capital in the long term, sustainability has to be part of the short-term thinking."

"Today, the global capital market is worth 50 trillion dollars. Pensions funds, and institutions like them, hold about 25% of the market – about 12.5 trillion dollars. At the moment there are about 10 trillion dollars of institutional investors, including some of the world’s largest pension funds, which are committed to investing their entire portfolio in all asset classes on a responsible basis as a result of their support for the PRI. That doesn't mean they are doing it yet," he adds, "but they recognise that it's in their interest to take environmental and social factors on board, because environmental concerns have the long term potential to undermine whole sections of the global economy. Responsible investment is just good business and we have seen an upsurge of commitment from these institutions to responsible investment. The biggest concentration of wealth in the world, for instance, is held on in the pension funds of teachers and nurses. The trustees of those funds are beginning to see that issues like water and climate change will impact on companies and economies, and that they have to be much more responsible in how they place their investments, because pension funds have to pay out 25 or 30 years down the track."

Paul Clements Hunt sees important changes in thinking in all the key financial sectors. In the insurance industry, for instance, where, by 2040, annual losses from climate change are predicted to reach 1 trillion dollars in a given year, he sees the industry bringing out products designed to support sustainability.

"There are new insurance products that support green and renewable energy," he says, "such as discounted insurance products for energy efficiency. In banking there is interest in using capital markets to bring additional liquidity into microfinance. In the project finance side, more than 40 of the biggest banks that control 85% of the global market  have signed up to the Equator Principles. They do it to protect their reputations and to balance project risks more effectively. It is also good business.

"Last year, for the first time, more than half the world's population lived in cities. Many of the mega cities are basically unliveable because of pollution and lack of clean water. For the banks there is a tremendous opportunity in investing in water supply, urban air quality and sanitation projects. They are looking for that business and for financial models that will allow them to take advantage of it. The big banks are all looking for senior staff who understands these issues."

It adds up, he says, to a fundamental shift in values.

"It's clear that the brightest and best people want to work in value-based institutions, that offer products and services that meet a real need."

He even sees potential for responsible investment among the new global elite - the super rich, who have made vast fortunes out of globalisation while the majority remains poor.

"If you go back to 2002, the rich and super rich had assets of 23 trillion dollars. By 2020, it's predicted to be 43 trillion dollars," he says. "That's raw red globalisation: a few people making an awful lot of money. When these people are surveyed, 30% of high net-worth individuals express an interest in responsible investment in environment and social issues. At the moment a minimal percentage of their assets are invested on that basis, but there is an upsurge in demand for responsible products."

And the next generation of super-rich, he believes, will bring another change in attitude.

"The next 15 years will bring the biggest transfer of private wealth ever seen, when the baby-boomers transfer wealth to the next generation. They, in turn, have grown up more sensitised to environmental and social issues. So you have three factors coming together: an explosion of wealth, a transfer of wealth and a willingness to invest responsibly."

It all adds up, he believes, to a growing interest amongst the smartest investors in favour of responsible investment.

"You have to put the picture together like that," he explains. "It's about momentum. There's a real spike in interest, and even when that spike has peaked, the plateau will be at a higher level."

"The question we ask is," he says, "is whether this activity is making a difference yet in the market place. The honest answer is yes, but it's only beginning. There's a lot of hype and lot of spin, but things are just beginning to change in the way money is invested and allocated. There is a lag factor."

There is a lag factor, too, he admits, in awareness of these issues in Asia, but he sees signs that the region wants to catch up.

"The traditional OECD markets and institutions have been at this for a while," he says. "But UNEP FI's fastest growth is in Asia in numbers of institutions signing up and looking to learn what they need to know about climate change and other issues.

In India, Indonesia, southeast Asia and China we are seeing a spike in what we consider step one - understanding the issues. They want to understand the business case for financial institutions to think about environment. Sometimes, in dynamic economies, it's difficult to sell it on the risk side. It's easier to sell the idea of the commercial opportunities offered by environmental utilities, emission control and things like that."

This new understanding in Asia, he says, also includes China.

"It's massively relevant to China," he insists. "And the policy community in China has a clear understanding of the absolute need for good environmental management and the harmony that sustainable development brings. We can see all the right signals. With such phenomenal industrial growth the challenges are very direct and very clear."

That, says Clements-Hunt, is why the UNEP-FI is inviting the Chinese financial services sector to join them in Melbourne, Australia, on October 24-25, 2007, to explore how leaders in the global financial services sector can move from awareness to action in terms of sustainability.

Paul Clements-Hunt is head of Secretariat at the UNEP Finance Initiative

Isabel Hilton is editor of chinadialogue

Homepage photo by Paul Wicks via Flickr

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