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The role of Australia’s financial

sector in sustainability
A report prepared for Environment Australia
The views and opinions contained in this reportare not necessarily those of the
Commonwealth Government. The Commonwealth Government does not accept
responsibility for the accuracy or completeness of the contents of this report (and shall
not be liable for any loss or damage that may be occasioned directly or indirectly
through the use of or reliance on the contents of the report.)
Executive Summary
Sustainable development and the finance sector
The finance sector has the potential to promote the principles of sustainable
development through its lending insurance and investment activities, as well as its
internal policies and processes. Internationally, financial institutions have begun to
respond to this opportunity by actively participating in global forums, developing
and promoting socially responsible investment products and greening their internal
operations.

Purpose of the study


Recognising the growing opportunities for the finance sector to contribute to sustainable
development, the Minister for the Environment and Heritage commissioned this high
level study, which aims to:
identify international trends (in North America and Europe) in sustainable
development in the finance sector
evaluate the Australian finance sector (investment, superannuation, credit and lending
and insurance) in the context of these trends; and
identify barriers and opportunities for the Australian financial sector to contribute to
sustainable development.
This study was conducted over a three week period, with the support of an industry
advisory group and gives an overview of recent developments. It provides a basis for
further discussions between government and business on enhancing the role of the
Australian financial sector in sustainable development.

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

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

Study findings

International developments
The findings of this study indicate that leading international finance sector organisations
are responding positively to sustainable development and, in the process, enhancing
stakeholder and shareholder value. Financial institutions in North America and Europe
are involved in the following activities:
commitment and awareness – participation in international sustainable development
forums such as the UNEP Financial Initiative, the World Business Council for
Sustainable 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 and
UK. This has been a significant positive reaction by the finance sector to the business
opportunities associated with sustainable development
climate change – the prospect of a carbon constrained economy and subsequent
adoption of market-based trading mechanisms as a result of the Kyoto Protocol (yet to
be ratified), has stimulated significant awareness and response from the financial
sector which suggests that it is well positioned to play a significant role in solving
environmental problems.
products and services – a growing number of environmental products and services
have been developed in response to market demand.
greening of own operations – in keeping with other industry sectors, an increasing
number of financial institutions are implementing company-wide environmental
management systems and have also published separate public environmental reports.
Notwithstanding the above developments, a significant barrier to the further contribution
of the finance sector to sustainable development is a prevailing view held by financial
analysts that environmental and social risks, whilst important, are not material to
company 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 sustainable
development mirrors the trends in the international arena. In some areas however the
Australian finance sector is not as advanced as its international counterparts:
commitment and awareness – until recently, at an industry level, little interest had
been shown in sustainable development. Unlike its European peers, only two
financial 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 of
climate change and community banking needs.
greening of own operations – most financial institutions appear to have implemented
environmental risk assessment procedures and undertaken energy efficiency and
recycling programmes. However few have implemented company-wide
environmental management systems or published public environmental and/or triple
bottom line reports.
Barriers and Challenges
There are number of barriers and challenges unique to Australia which explain why the
finance sector may not be as advanced as its North American and European counterparts
in responding to sustainable development. These include:
legislation – the enforcement of environmental legislation and the disclosure
requirements for companies and superannuation trustees in relation to environmental
and social issues is less onerous than North American and European systems
market size – the supply of financial products that incorporate sustainable
development 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 in
the 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 information
is less developed than in North America and Europe. The only mandatory disclosure
requirement, namely s299(1)(f) of the Corporations Law 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 of
some of Australia’s sustainable development challenges, there are a number of key areas
that 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 sector
organisations, there is scope for the finance sector as an industry to evaluate its role in
sustainable development. The objectives of this would be to:
demonstrate to stakeholders that the finance sector is aware of and is examining its
role in contributing to sustainable development
identify opportunities that could have good commercial and sustainable development
outcomes, which require collaboration between the finance sector, industry,
government and NGOs
identify, evaluate and provide a finance sector industry response to sustainable
development “hot spots” such as biodiversity, climate change, salinity, land
degradation and water resources, especially with a regional context, such as the
Murray Darling Basin.
Recommendation 1 - the Commonwealth Government should encourage the financial
sector to provide continued support to the Australian UNEP Financial Initiative, thereby
demonstrating its commitment to the principles of sustainable development.

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

Recommendation 2 – the Commonwealth Government, in association with the finance


sector and industry, commission specific academic research into the financial value for
business 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 some
instances, mandatory disclosure, additional consultation between government, industry
and other stakeholders should be pursued to identify an optimal reporting and disclosure
regime.

Recommendation 3 - the Commonwealth Government, in consultation with key


stakeholders (the finance sector, industry, ASIC, the ASX, the accounting profession, state
EPAs and peak environmental groups) should commission a review of the existing
mandatory and voluntary environmental and social disclosure requirements, in order to
establish an optimum reporting and disclosure regime.

Performance metrics
To ensure that environmental disclosure by industry addresses the information
requirements of the financial sector, there should be closer dialogue between financial
analysts and industry.

Recommendation 4 – the Commonwealth Government, should establish a working


group to investigate ways to enhance the relevance of public environmental and social
disclosure for use by financial analysts.

Management and reporting


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

Recommendation 5 – the Commonwealth Government should work with the UNEP


Financial Initiative’s “Operational Environmental Management” advisory committee to
develop ways of promoting the adoption of environmental/social management and
reporting guidelines by financial institutions.

In outlining the above recommendations we acknowledge that the Commonwealth


Government 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 it
would expect from the further engagement of the finance sector and ensure that it can
appropriately foster that relationship.

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Table of Contents
Executive 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 investment sector
Analysis of the superannuation sector
Analysis of the credit and lending sector
Analysis of the insurance and re-insurance 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 development
initiatives

B European financial sector sustainable development initiatives

C Australian financial sector sustainable development initiatives

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1. Context
The concept of ’sustainable development’
The term ‘sustainable development’ has been in use for well over a decade, and has
been interpreted in different ways across the globe. The best known definition was given
in 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 the
time of the Earth Summit in 1992, stated that the business community’s contribution to
sustainable development could be achieved by:

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

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

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

About this report


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

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

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

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

The key issues that emerge from the analysis of international and Australian trends is
provided in Section 5. In this section the report highlights the key challenges and
opportunities the Australian financial sector faces in responding to sustainable
development 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 to
broadly 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 under
the auspices of the United National Environment Programme (UNEP) Financial
Initiative in Australia. However for this study we have separated superannuation
from the investment sector. Although we recognise that this is a sub-sector, the
nature of activities undertaken to date has been sufficiently important to justify
examining this area separately.

Information was collated and reviewed for the three regions of Europe, North
America (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 and
sectors reviewed. A comparison of international trends with current Australian
practices was then undertaken. This stage also included identifying the key
strengths, weaknesses, opportunities and threats for each of the regions and
sectors studied.

The third stage of the project involved limited consultation with representatives
from key Australian finance businesses, non-government organisations and the
advisory group established by Environment Australia for this study. The objective
of this approach was to obtain a local perspective of the key issues affecting each
of the identified sectors. Although the consultation process was limited, the
advice 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 high
level desk top review. Given the time constraints, it has not been possible to deal
substantively 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. The
potential role that government may play in this area was also not investigated
during this project, however this issue could be investigated further in subsequent
studies.

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2. Sustainability and business
Globalisation and sustainability
The 1990s were characterised by a number of societal shifts that brought into focus the
changing roles of business, civil society and government in achieving sustainable
development. The most prominent of these shifts have been:
global degradation – a growing global consensus as to the economic and social
implications associated with environmental degradation and the need for
collaboration at regional and international level
globalisation – of trade, information and financial markets
inter-connectedness – of community groups and businesses through the rapid
deployment of information based technologies, such as the Internet
privatisation – the declining role of government agencies in favour of the private
sector in financing and developing infrastructure and new technologies
markets – increasing use of market incentives and mechanisms, in association with
policy and regulation, to solve environmental problems
non government organisations (NGOs) – a resurgence in the ability of NGOs to
scrutinise and mobilise against the perceived social costs of globalisation and the
growing power of multinationals.
As a consequence of the above, multi-nationals are beginning to examine their role in
society. There is also a growing expectation that they can play an important role in
sustainable development.

The business case for corporate sustainability


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

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

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

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However, the Buried Treasure Report, found the following:
positive impact – overall, corporate sustainable development performance has a
positive impact on business success
brand & reputation – brand and reputation is the measure most positively linked to
corporate sustainable development
financial results – positive links between sustainable development performance and
financial results are supported by business case research
environmental process – environmental process improvement focus is supported by
the strongest business case
multiple measures – the business case is strongest when multiple measures of
business success are considered
business strategy – the business case is strongest when companies incorporate
sustainable development performance into mainstream business strategy.
A number of large multinational corporations including DuPont, Shell, Ford, BP and
Interface have begun to examine and develop new business models aimed at integrating
the concepts of sustainable development into their core business objectives, strategies
and values. The rationale for doing this is predominately based on the belief that
aligning corporate objectives with society’s needs is likely to generate sustainable growth
in shareholder value over the long-term.

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

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3. 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 the
principles of sustainable development into their own business operations. In this section
we provide an overview of the international trends and issues affecting the financial
sectors of investment, pension funds, credit and lending, and insurance.

For the sectors of investment, pension funds and insurance, the analysis undertaken has
primarily 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 reflection
of the types of initiatives recently undertaken by these sectors.

Details of the recent international developments in these four sectors are provided in
Appendices 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 their
internal operations.
An overview of the analysis undertaken is presented in tables 3.1 and 3.2, which
summarises the key strengths, weaknesses, opportunities and threats for each of the
regions and sectors studied.

Analysis of the investment sector


Socially Responsible Investment (SRI) refers to an approach that explicitly integrates
personal values into investment decisions (Ethical Investment Association, 2000). This
form of investment allows investors to consider personal values, including a concern for
the environment and society in their investment decisions.

SRI has grown in both Europe and North America, with a variety of products being
offered by mainstream financial institutions to investors. In the US alone, of the
investment 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 be
approached in a variety of ways:
screening: individual companies are either included or excluded from investment
portfolios or mutual funds based on social or environmental criteria. A more recent
form of screening has developed where companies are rated on their social and
environmental 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 use
intra-sectoral competition to drive improved social and environmental performance
in individual companies and across the entire sector.
shareholder advocacy: actions which investors take in their role as owners of
companies. These actions range from discussing issues of concern with companies to
voting proxy resolutions. The concept of shareholder advocacy is based on the
principles of agency theory where management has an obligation to meet the needs
of the company owners. This approach is gaining growing attention in both the US
and the UK. There is a distinction however between the approaches adopted in these
regions. In the US it is the activist shareholders that are undertaking this activity
whilst in the UK, shareholder advocacy is primarily undertaken by the SRI fund
managers.
community-based investments: primarily in the US, this form of investment involves
providing 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 these
investment types.

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

Community investing
Shareholder advocacy only
Both screening and
shareholder advocacy

Screening only

Figure 3.1 Distribution of SRI funds in the US in 1999


Source: Proske, Saleeba et al, 2000

Growth drivers for socially responsible investment


Internationally, SRI is being characterised by retail and pension funds. In this section we
look at retail trusts and individual investor trends (pension funds are examined
separately 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 all
investors, and range from screened alternatives including best of sector, to targeted
funds, for example, sustainable energy funds, as well as social venture capital funds
which invest in socially responsible start-up companies.

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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 countries
offering SRI opportunities. The increase in investor interest has also led to the
launch of a wide variety of SRI products which differ mainly on the basis of
screening techniques.

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

The success of these overseas markets appears to be driven by a set of key factors
and influences:
size of the overall market: with the size of both the US and European
financial markets, SRI does not have to appeal to all investors before it
becomes commercially viable. The size and diversity of the investor pool
allows for the development, support and success of alternative products. This
has potentially contributed to an investment niche rapidly becoming
mainstream
investor maturity and understanding of the products offered in the market:
investors overseas have had exposure to SRI for several years. Discussions and
debates on the viability and transparency of these products have increased the
overall market awareness and probably, confidence in these alternatives.
Nevertheless, concerns about fund transparency and viability still exist and
would appear to be one of the largest barriers to the further development of
the sector. To reduce these risks, individual market players are attempting to
respond to these concerns by maximising transparency. For example, the Dow
Jones Sustainability Group Index (DJSGI) is independently verified by
PricewaterhouseCoopers to demonstrate to the market the consistency of the
methodology applied. In 2000, the DJSGI further opened itself to
accountability by publicly making available its methodology, as well as the list
of companies included in its investment pool
availability of company information on social and environmental
performance: in both the US and Europe, various legislative listing
requirements, as well as voluntary programmes such as the Eco Management
and Audit Scheme (EMAS) require that companies disclose a considerable
amount of information on their environmental and, increasingly, social
performance. These requirements ensure greater disclosure and in certain
instances, greater consistency and comparability in information. Ready access
to information facilitates and potentially reduces the cost of screening
companies for SRI.

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There is significant debate in the US regarding the role of the Securities Exchange
Commission (SEC) in enhancing non-financial disclosure (Chan-Fishel, 2000). This is
being lead by ‘the Corporate Sunshine Working Group’ an alliance of investors and
public interest organisations, working to broaden and deepen SEC corporate and
financial disclosure rules to benefit investors, as well as the larger public interest.
Chan provides evidence of the importance of non-financial information in investment
decision making. For example a national survey of investors conducted by the
American Institute of Certified Public Accountants in 2000 found that 79% of those
polled 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 and
people 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, the
UK Pensions Act 1995 was amended in July 2000 to require all pension trustees to
report on:
the extent to which social, environment or ethical considerations are taken into
account 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 for
selecting companies. This focus on socially responsible performance has been a catalyst
for the further promotion of SRI. Germany and France are currently looking at adopting
disclosure legislation similiar to that in the UK.

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

Although short-term returns are not a priority, pension funds in keeping with their
fiduciary obligations, tend to adopt conservative investment principles. This has
potentially 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 socially
and/or environmentally screened funds was in breach of a trustee’s ‘fiduciary
obligation’. However, while statute and common law require financial return to be the
dominant consideration, it is not the only consideration in the investment decision of
pension funds.

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Issues of corporate governance are also prompting pension funds to consider the social
and environmental performance of companies. Pension funds need not only consider
which companies to invest in, but also whether they exercise their vote as shareholders
when 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 a


company’s environmental and social behaviour (Proske, Saleeba et al, 2000). As more
pension fund trustees take a more active role in voting their shares, they may prefer to
avoid companies that have questionable performance in relation to social or
environmental issues, particularly if their members (or beneficiaries) indicate that this is
their preference.

Analysis of the credit and lending sector


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

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

Box 3.1: Three Gorges Hydroelectric Power Scheme

The significant social and environmental impacts of the Three Gorges Hydroelectric
Power Scheme Project received much attention from Non-Government
Organisations, community groups and media the world wide. In April 1999, due to
the demands of shareholders concerned with the project, the management of
Morgan Stanley Dean Witter agreed to develop social and environmental guidelines
for their lending, investment and underwriting practices. The World Bank also
withdrew funding for the project.

Credit Suisse Group also suffered reputational damage through their involvement in
this project and as a result enhanced existing environmental risk lending assessment
procedures.

Source: Kearins and O’Malley, 2001

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European banks have not been exposed to these environmental liabilities as significantly
as the North American sector, and hence have only recently begun to develop policies
towards 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 of
investing in and serving the traditionally under-serviced markets. They make
conventional credit available to people who would otherwise have difficulty obtaining
market-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 to
credit and promoting development in lower-income communities.

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

Social inclusion has also become a focus of attention for the major Europeon banks who
are, to varying degrees, involved in philanthropy and providing funds for community
projects. Examples include the Polish environmental bank recently implementing
community lending programmes and the Grameen Bank introducing micro-credit in
Bangladesh. In general the concept of micro-finance is gaining much wider currency as
a means of alleviating poverty, as it gives the poorest in the world access to credit while
at the same time providing the opportunity for them to take the initiative to help
themselves.

Other community initiatives undertaken by the credit and lending sector in the UK have
included 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 the
top 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 of
energy and resources. This issue is increasingly being recognised by financial
institutions, including those in the credit and lending sector. Many large international
banks have introduced internal environmental management systems and improvement
programmes into their operations. As a result of these initiatives these organisations are
now seeing the financial benefits of such practices. Proactive companies such as the
Union Bank of Switzerland have reduced their energy usage by 25% between 1990 and
1993 and between 1991 and 1995 NatWest saved approximately US$50 million in
energy 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 environmental
performance improvements within the credit and lending sector. The British Bankers
Association has continued to play an active role in promoting the issue of sustainable
development, as well as the Swiss Bankers Association, which recently developed a
web-site that outlines the experience of Swiss banks when setting up their environmental
management systems (www.unep.ch).

The most recent development in the UK has been the development of environmental
management and reporting guidelines, specifically for the financial sector. These
guidelines were developed by the ‘Forge Group’ consisting of the Abbey National
Group, Barclays, CGNU, Lloyds TSB, Prudential, The Royal Bank of Scotland and The
Royal 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 potential
liability issues associated with environmental risks, many large international banks
have adopted lending practices which involve screening credit applications based on
environmental criteria. Approximately 88% of all commercial banks responded to the
Comprehensive Environmental Response Compensation and Liability Act (also known
as CERCLA or the ‘Superfund’ legislation) by changing their lending policies and
46% stopped granting loans to companies in areas that were particularly
environmentally sensitive (Hansen, 1996)
environmental reporting and management guidelines: many initiatives regarding
environmental information and reporting requirements have been widely supported
by this sector including the UNEP Financial Initiative, the Global Reporting Initiative
(GRI) and more recently, the environmental management and reporting guidelines by
the ‘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 environmental
management systems and publish public environmental reports.
Despite the strong drivers and growing number of initiatives, banks in Europe and
North America have still not fully incorporated the principles of sustainability into all
of their business operations. To date, initiatives implemented have largely been
limited to the areas of credit risk and lending. Transparency and accountability with
regard 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 the
issue of sustainable development has been that of climate change. Banks initial interest
in climate change was prompted by a need to better understand the implications for
credit risk in their own lending activities, that is, the extent to which companies'
profitability and asset valuations would be negatively impacted and therefore impair
their credit risks. However, there is limited evidence to show that lending terms have
been tightened for companies exposed to carbon liabilities.

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

For example, a major European bank is developing a credit enhancement product for
emission reduction units. The bank would effectively purchase emission reduction units
from 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. The
regulatory uncertainties and lack of liquidity have meant that finance sector participation
has been basically limited to broking. However, it is widely anticipated that the scale of
carbon markets in the future will dwarf all other commodity markets and many
traditional financial markets. Hence, requiring the involvement of the finance sector in
the future.

Analysis of the insurance and re-insurance sector


The insurance sector has undergone significant changes in recent years as a result of the
impact of environmental risks. In response to numerous claims for pollution liability
being made under general liability policies the insurance sector has reacted by:
writing policies on a ‘claims made’ basis to avoid indefinite on-going potential
exposure; and
drawing a distinction between ‘gradual’ pollution/seepage and ‘sudden and
accidental’ pollution. However the courts in the US have blurred this distinction,
which to some degree has shifted the market towards total pollution exclusions from
general liability policies and the introduction of specific environmental pollution
liability policies (Macinante J., 2001).
In the US these changes have largely been in response to the implementation of CERCLA
legislation and liability claims associated with asbestos use and disposal.

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

12
The insurance sector has also recently acknowledged its role in guiding companies to
implement environmentally sound practices. For example, an insurance company in
Germany offers reduced car insurance premiums if a season public transport ticket is
held by the customer. This approach is based on the belief that minimising the use of
cars 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 been


influenced by their commitments undertaken as signatories to the voluntary UNEP
Statement of Environmental Commitment by the Insurance Industry. This requires
insurers to incorporate environmental considerations into their internal and external
business activities. To date, 59 insurance companies from the EU and North America are
signatories to this statement.

The potential impact of climate change


The climate change debate remains one of the most important issues for the insurance
industry, particularly for the re-insurance sector, which is responsible for covering losses
associated with natural disasters. A dramatic increase in weather-related insured losses
has been witnessed in the last few years, including Hurricane Andrew which occurred in
the US in 1992 and resulted in over US $15 billion in claims, and more recently
Hurricane Fran in 1996 which cost over US $10 billion (Ganzi et al, 1997). Companies
like Munich Re monitor these trends and are concerned about the potential impact on
the insurance sector (refer to Box 3.2). In response to this concern, many European
insurance companies have worked in partnership with national governments, to assist in
developing possible solutions, including General Accident in the UK and Swiss Re. The
European 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 of
climate change, stating recently that the science of climate change is far from settled and
the 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 an
increase in natural disasters due to the changing climate. The company announced
850 natural disasters for 2000 and insured and economic losses amounted to $8.3
billion and $30 billion respectively. Munich Re indicated that global warming
combined with rapidly increasing population in high-risk areas would result in more
disasters in the future.

Source: Major, 2001

13
Key international trends
A number of developments in the international arena have shaped how the finance
sector, industry, government and society interact in the context of the emerging
sustainable development agenda. These are discussed in more detail in the SWOT tables
3.1 and 3.2 and in Appendices A and B. The main themes defining the state of play in
the international arena are:
disclosure and environment protection legislation: it would appear that
environmental legislation, such as CERCLA and the Securities Exchange Commission
(SEC) listing and disclosure requirements in the US, as well as increased trustee
disclosure obligations required under recent changes made to the UK Pensions Act,
have had an influence on how various financial organisations have responded to
sustainable development drivers. The implementation and enforcement of such
legislation has primarily affected the credit and lending sector and the
investment/superannuation sector
role of government: the government sector (including multilateral development
agencies) has had an important role in raising awareness and defining the financial
sector’s obligations with regard to sustainable development. This has included the
development of environmental and social lending and investing guidelines and the
establishment of the UNEP Financial Initiative
National governments and their agencies have also played a role in promoting
research, developing policies and promulgating appropriate legislation that creates a
basis for increased financial sector participation in solving environmental and social
problems. As previously mentioned it was beyond the scope of this report to
investigate the role that government may play in designing fiscal instruments that
promote the involvement of the financial sector in sustainable development
voluntary performance reporting: Europe, followed by North America, leads the
world in voluntary public environmental and social reporting. The increasing level
(quality and quantity) of voluntary public disclosure by industry and the finance
sector 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 listed
companies publicly reporting on their sustainability commitments (policies, impacts,
targets and systems) financial institutions are increasingly following this path. This is
particularly the case in the UK and Europe where large financial institutions are
implementing environmental management systems based on standards such as ISO
14001 and EMAS
products and services: as a result of increasing awareness and market competition,
financial institutions are now developing a range of environmental finance products
and services to meet market demand.

14
The rapid growth of the SRI market in the US and more recently in the UK has had a
significant impact on how industry and the finance sector have responded to the
business risks and opportunities associated with sustainable development. A
significant 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 with
regard to the apparent positive correlation between corporate sustainability and
financial performance. A range of associated services and products such as research
and rating agencies, indices, asset consultants and information services have also
been developed.
climate change: the dramatic increase in weather-related claims received by the
global re-insurance industry in the late 1990s has raised considerable concerns about
the potential threat to this sector.
Secondly, the adoption of flexible market instruments in the Kyoto Protocol has
stimulated the finance sector to develop a range of financial instruments to facilitate
the trade of emission credits
commitment and awareness: the European financial sector, and to an increasing
extent, North America, has been quick to respond to global and national initiatives to
promote its role in sustainable development. In particular, the UNEP financial
initiative, Global Reporting Initiative and the environmental management and
reporting guidelines by the ‘Forge Group’ in the UK have been widely supported.
Industry associations such as the British Bankers Association have also been proactive
in promoting dialogue on sustainable development
materiality: perhaps one of the most problematic areas in sustainable development in
relation to the finance sector is the challenge of determining whether or not
corporate environmental performance is a significant business driver. The overall
perception of financial analysts is that whilst environmental and social issues are
important they are not material to financial performance. This perception may be
attributable to a combination of factors, including the high cost of obtaining
appropriate environmental information and the lack of analytical tools
civil society and shareholder activism: the role played by civil society, non
government organisations and shareholder activists in raising concerns about
sustainability and globalisation has been a significant feature in North America and
Europe. The finance sector, with the exception of multilateral organisations such as
the International Monetary Fund, have not been a regular target. There have however
been some high profile events such as the Three Gorges Electric Power Scheme in
China which have raised the importance of incorporating sustainable development
issues into future lending and investment decisions.
In addition to the above, the role of SRI fund managers in engaging companies on
environmental and social performance issues is emerging as a considerable driver for
corporate change

15
analytical tools and capacity: an important development in recent years has been the
increasing rigour and quantification of corporate environmental and social
performance. This has been facilitated by stakeholder demands for greater public
disclosure and the ability of the non-government and business sector to respond to
the emerging market opportunity of offering services in this area. Despite some
concerns about the lack of rigour and inconsistent application of assessment criteria,
Europe and North America have a well developed capability to deliver these services.

16
Table 3.1: SWOT analysis - North America
Criteria Investment Superannuation Credit and Lending Insurance
and re-insurance

Strengths a significant number a significant number introduction of well established


of new ‘green’ of new ‘green’ environmental risk environmental ‘clean
investment products investment products assessment criteria up’ regulatory regime
are being developed are being developed into credit approval (www.irmi.com )
(SIF, 2000) (SIF, 2000) processes
relatively high level of
non-financial
disclosure

Weaknesses investors are still analysts have difficulty reluctance to be only a small number
determining the most obtaining transparent about of insurance
appropriate environmental lending policies companies are
techniques for information (Giuseppi, 2001) reporting on their
integrating information provided environmental
environmental is different between performance
performance into companies and the impact of climate
financial analyses industrial sectors change is not well
(EPA, 2000) acknowledged within
analysts believe the the industry (AIA,
environment is not an cited Monash, 2000)
issue that materially
affects stock
performance (Taylor,
1998)
the complexity of
investing in socially
and environmentally
responsible funds is
increasing

Opportunities moderate positive consumer demand for demand for products liability legislation has
relationships are being ‘green investments’ is ie community loans, acted as a driver for
seen between increasing (SIF, 2000) accounts etc is rising companies to manage
corporate (SIF, 2000) their exposure to
environmental liability legislation environmental risks
performance and acts as a driver for
financial measures banks to manage their
(EPA, 2000) exposure to
consumer demand for environmental risks
‘green investments’ is
increasing (SIF, 2000)

Threats investors remain legislation has not banks are sceptical number of claims may
sceptical about the been implemented about the importance increase due to
value of which requires of environmental climate change and its
understanding disclosure on issues (Taylor, 1998) impact on windstorm
corporate environment and frequency and severity
environmental social performance (Ganzi, 1996)
performance (EPA,
2000)
a lack of information
exchange on
environmental
strategies between
corporations and
analysts (EPA, 2000)

17
Table 3.2: SWOT analysis - Europe
Criteria Investment Superannuation Credit and Lending Insurance
and re-insurance

Strengths the SRI sector is a diverse range of environmental risk insurance companies
growing in both size products are being evaluation procedures are applying
and impact offered for lending environmental
investors view sound assessments have been procedures in risk
management of social developed by banks assessments
and environmental EU banks have total the UNEP Finance
concerns as a good assets over ECU Initiative and steering
proxy for overall 11,000bn and hence committee on
management and have an enormous Insurance has been
quality (SustainAbility, influence on the operational since the
2000) economy of EU and mid 1990s. Over 35
ABI and NAPF, who its environmental Insurance companies
represent the UK impact (Delphi, 1997) are signatories to the
industry, are adopting specific environmental UNEP Financial
guidelines which management and Institutions Insurance
recognise that social, reporting guidelines Initiative
ethical and have been developed
environmental risks in the UK and
should be managed Germany
the UNEP Finance
Initiative and steering
committee for
Financial Institutions
has been operational
since the mid 1990’s.

Weaknesses screening of social some investment lack of accountability only a small number
and environmental managers are worried with regard to lending of insurance
issues adds another about financial policies (AMP companies are
layer of complexity to performance of ‘green’ Henderson, 2000) reporting on their
stock selection and pension funds banks are conservative environmental
additional costs in their attitude performance
investors are worried towards transparency
about poor about their operations
performance (AMP Henderson,
managers are worried 2000)
about financial banks typically
performance of ‘green’ believe that their
funds responsibility ends at
the point of sale of the
retail product (AMP
Henderson, 2000)
banks are still trying to
assess whether the
issues of sustainability
are material
subsidiaries are not
being requested to
follow parent
requirements

18
Table 3.2: SWOT analysis - Europe continued
Criteria Investment Superannuation Credit and Lending Insurance
and re-insurance

Opportunities EMAS is resulting in there is a high level of the potential to environmental


more formalised public concern implement impairment liability
disclosure by the UK Pension funds mechanisms to regulations are
companies Act requires disclosure measure their expanding (Swiss Re,
of environmental, customers’ 2000,)
ethical and social environmental European insurers are
policies (ERM, 2000) performance, thus being pre-emptive in
driving performance their approach to
improvement (AMP global warming
Henderson, 2000) (Monash, 2000)
significant funds are
being spent on the
issue of climate
change and its
potential impact on
weather patterns

Threats the language and some companies are no legislation to most European
terminology used by unwilling to disclose enforce re-investment legislation does not
the SRI community is information in community projects enforce ‘joint and
not easily understood voluntarily several’ or
by financial ‘retrospective’ liability
professionals and as a result
(SustainAbility, 2000) concern over
some companies are environmental liability
unwilling to disclose is limited (Delphi,
information 1997)
voluntarily and the potential for an
assessments are based increase in claims
on best available related to
information (the environmental natural
development of better disasters
and stricter assessment
criteria has confused
companies providing
information)
no standard reporting
format has been
adopted by companies
making the analysis of
information difficult

19
4. Australian trends and issues
In this section we describe the sustainability trends and issues affecting the Australian
financial industry (for the sectors of investment, superannuation, credit and lending and
insurance). In comparing these trends to those overseas, it is important to recognise that
the Australian market is smaller and has relatively fewer players.

For the sectors of investment, superannuation, and insurance the analysis undertaken has
primarily 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 recent
initiatives undertaken by these sectors.

A summary of the recent developments in the four key Australian financial sectors is
provided 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 their
internal operations.
A summary of the key comparisons between the Australian and international financial
industry is provided in table 4.1. An analysis of the key strengths, weaknesses,
opportunities and threats (SWOT) associated with each of the sectors addressing the
principles of sustainable development has also been summarised in table 4.2.

Analysis of the investment sector


Socially responsible investment in Australia has a recent history. A number of church
groups have screened their investment portfolios for sometime, however the first product
was introduced into the market by Friends Provident in 1986. This was followed with
products being launched by Australian Ethical Investments, Tower and others in the early
1990s. 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 number
of listed companies, and the significant bias towards the resource sector
short-term performance focus: the media rates the performance of local funds on a
monthly basis, which drives fund managers to seek short term returns
cost burden: SRI analysis is high due to limited public information. This additional
cost is not readily passed onto investors
quality of information: there is generally a low confidence in information currently
available on the social and environmental performance of companies, with the
possible exception of the mining industry. The introduction of s299(1)(f) of the

20
Corporations Act was intended to improve environmental disclosure. However the
wording of s299(1)(f) and the nature of reporting guidelines has resulted in the
provision 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 the
concept of sustainable business and how to integrate this into investment decisions. The
media has also published a significant number of articles on the merits and
developments of SRI in Australia.

Analysis of the superannuation sector


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

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

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

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

The Australian superannuation industry also appears to acknowledge that offering


socially and/or environmentally screened funds is not a breach of a superannuation
trustee’s ‘fiduciary obligation’. This opinion is based on the legal precedent developed in
the UK (The Allen Consulting Group, 2000).

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

21
Lack of awareness: members typically have limited knowledge and understanding of
SRI, the screening methodologies and financial track records of those products. In a
choice environment, members may opt for more traditional investments
Investment policies: there have been concerns expressed about the regulatory and
prudential oversight of superannuation funds. Increased focus by the regulators on
issues such as liquidity, capital adequacy and investment decision criteria could see
trustees adopting conservative investment policies, which may exclude SRI.

Analysis of the credit and lending sector


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

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

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

One of the most important sustainable development related issues for the banking sector
over the last decade has been lender liability. The sector became concerned in the mid
1990s over the legal precedent being established in the US. As a result the Australian
Bankers Association became actively involved in protecting the interests of passive
lenders in relation to lender liability concerns. The prospect of incurring environmental
liabilities has stimulated banks to introduce environmental risk assessment procedures as
part of their lending operations.

The manner in which the Australian credit and lending sector is currently addressing
sustainable development issues is indicated below:
Products and services: in the credit and lending sector the main emphasis has been
to protect the institutions from environmental risks. Some institutions are however
developing niche products, for example energy efficiency mortgages
Environmental management and reporting: all the large banks have implemented a
number of internal environmental policies and programmes including efficient energy
and water management, recycling and sponsoring community based environmental
initiatives. However many of these are adhoc and do not form part of an overall
business strategy. The recent PricewaterhouseCoopers UNEP (2000) Financial
Initiatives survey also found that it was difficult to establish managerial accountability
for these programs, their objectives, targets and performance

22
To date public environmental reporting has typically been limited to the annual
financial report and compliance with s299(1)(f). Only one bank (Westpac) is a
signatory to the UNEP Financial Initiative and to our knowledge, only one credit
union has published a triple bottom line report
Addressing stakeholder concerns: a number of environmental groups have
campaigned against banks to curtail their lending on projects in ecologically sensitive
areas, such as uranium mining. Given the increasing sensitivity in the community
about these projects it is likely that financial institutions will further scrutinise their
lending activities.
Another area of concern in the community is the current land use practices in the
agricultural sector. Whilst the financial industry is not responsible for these land use
practices, these community concerns provide the Australian financial sector with a
unique opportunity to promote sustainable lending practices. Also at a portfolio level
the problems of unsustainable agricultural practices may impact the banks
risk profile
climate change: the banking sector has responded proactively in developing a range
of climate change related services (refer to Box 4.2). To date however, based on the
publicly available information only the Westpac Banking Corporation is a member of
the Greenhouse Challenge programme.

Box 4.1: The issue of climate change

Similar to their overseas peers, Australian banks' initial interest in climate change
has also been prompted by a need to understand the implications for credit risk.
This is particularly relevant given the large capital requirements of Australian energy
and resource companies and their relative exposure to climate change economic
impacts. However, in common with the overseas experience, there is no evidence
to date that lending terms have been tightened for companies exposed to potential
carbon 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 an
operational stage but is an example of the market leading facilitation services that
Australian institutions can provide.

23
Analysis of the insurance and re-insurance sector
A limited number of environmental liability products are currently offered by the
Australian insurance sector, with specialist cover for environmental conditions typically
offered 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 a
significant issue to the Australian insurance industry. The re-insurance sector recorded
AUD $3 billion in losses between 1999 and 2000 as a direct result of unforeseen natural
disasters (Monash, 2000). However, it is important to note that Australia does not have a
large re-insurance industry.

Despite these recent concerns, the insurance industry in Australia appears not to have
implemented as many sustainable development initiatives as its international
counterparts. This may, in part be attributed to:
the Australian insurance sector believes its operations have a limited impact on the
environment: limited environmental reporting and management initiatives have been
implemented by the Australian insurance sector. A further indicator of this is that only
one Australian insurance company (QBE Insurance) has signed the UNEP Statement
of Environmental Commitment by the Insurance Industry.
limited supply for environmental liability insurance: to date, there have been a
limited number of environmental insurance products offered within the Australian
marketplace. This in part, can be attributed to the cautious approach adopted by the
sector as well as the difficulty in pricing environmental risks.
Some positive initiatives however have recently been implemented by this sector, for
example, the Insurance Council of Australia has recently committed itself to aiding the
reduction 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 of


greenhouse emissions as part of the voluntary Greenhouse Challenge programme.
ICA continues to recognise that its members have a major role to play in achieving
national goals to mitigate Australian greenhouse gas emissions. Therefore ICA will
continue to have an active role in encouraging members to develop voluntary
emission reduction strategies, not only in their own activities, but also in areas of
involvement throughout the Australian General Insurance Industry.

Source: The Insurance Council of Australia, 2000

24
In response to external pressures exerted by stakeholders, primarily non government
organisations, the Export Finance and Insurance Corporation (EFIC) has recently
implemented an environmental policy and internal risk assessment procedures to
identify and mitigate its exposure to environmental risk. According to our information,
these policies and procedures have been acknowledged as best practice by an OECD
working 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 currently
facing in dealing with the concept of sustainable development. An analysis of these
trends and issues and their comparison with the international financial sector is provided
below. The key issues identified include:
Environmental legislation, lender liability and disclosure: in general, the
environmental legislation in Australia is similar to that in the UK and North America.
A considerable difference however is that Australian legislation is primarily state
based and its enforcement is typically less stringent, when compared to the US. The
strictest environmental regime is found in NSW, however according to the recent
Performance Audit Report of the NSW Environment Protection Agency, there are
significant shortcomings in its enforcement (Audit Office NSW, 2001).
Also unlike the SEC listing requirements in the US, the provisions in the
environmental disclosure provisions in Corporations Act are less onerous. In addition
the Australian Parliamentary Standing Committee has recommended has that
s299(1)(f) be withdrawn
Materiality: to date, there is limited local information to support the correlation
between improved corporate environmental/social performance and financial returns.
There is also limited academic research in this area in Australia. However, similar to
the European and US experience the positive correlation associated with SRI indices
is generating interest in this relationship, with the Australian Institute of
Superannuation Trustees finding from a recent survey that most trustees view SRI as a
new asset class (Ryan, cited Manning, 2001)
Performance reporting: unlike overseas trends many Australian companies do not
publicly report on their environmental performance. Typically, information reported is
inconsistent between companies and industry sectors. The Australian financial sector
is therefore currently finding it difficult to incorporate environmental considerations
into its decision making processes
Environmental management and reporting: whilst many of Australia’s large financial
institutions have developed environmental policies and undertaken internal
environmental initiatives, few financial organisations have implemented
environmental 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

25
Products and services: in comparison to the international sector, the Australian
market has developed a limited number of environmental products and services, with
the exception of the recent introduction of SRI investment products and greenhouse
gas emission trading services. A significant factor contributing to this is the
uncertainty 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 Australian
insurance industry, with industry bodies recently committing to contribute to the
reduction of greenhouse emissions. However, due to the Australian insurance sector
having 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 of
products and services in response to emerging climate change market opportunities
Commitment and awareness: as an industry, the Australian financial sector does not
appear to be as active as its European counterparts
Role of government: in keeping with international trends, government organisations
are playing an increasingly active role in promoting the issue of sustainability within
the financial sector. For example, the Victorian EPA recently hosted the first UNEP
Financial Services conference in Australia and has been appointed as the
representative of this UNEP Financial Initiative. As part of this commitment, the
Victorian EPA is also currently supporting four working groups relating to the
development of best practice in environmental credit risk assessment, SRI, insurance
and operational environmental management.
The Commonwealth government has also shown leadership in the area of public
environmental reporting and leads the world in establishing the Australian
Greenhouse Office which deals with policies and programmes relating to climate
change.

26
Table 4.1: A comparison of international sustainability drivers and their
status in the Australian finance sector
Sustainability International Relevance Current Status in Australia Market
Driver Trend to Finance
Industry in Challenges Opportunities
Australia

Legislation Tightening Significant Weaker than North Efficacy of Policies and


& governance America, reluctance to increased incentives for
tighten, some pressure to mandatory increased
increase mandatory disclosure voluntary
disclosure from advocacy disclosure
groups

Performance Increasing Significant Environmental disclosure Integrity Dialogue with


reporting lags international trend, standards industry on
exception being the costs financial sector
mining sector (leaders) requirements

Materiality Low Low Low value placed on Perceptions Develop case


environmental information Evidence studies
although increasing

Commitment Advanced Significant Increasing awareness in Business case Differentiate


& awareness banks and fund managers unclear services

Operational Mainstream Significant Less developed than Business costs Implement


management international counterparts, Framework ‘Forge
and reporting especially in reporting Guidelines‘

Products & Niche Niche Increasing SRI and Small market Product
services emissions trading products Uncertain differentiation
and services demand development

SRI market Mainstream Significant Growing supply from big Small market Growing
players demand

Climate Significant Significant Advanced capabilities Policy Develop


change uncertainty services to meet
client needs

Analytical Advanced Significant Good capabilities, Demand & International JVs


tools & undeveloped tools and profitability R&D
capability modelling techniques

Civil society Active Important Growing pressure and Lack of trust Engage to
scrutiny of large financial Ideological understand
institutions’ lending and differences concerns and
investing activities. Cost of partner on new
Increasing pressure for engagement – product
increased disclosure of "deep pockets" development
non-financial corporate opportunities
performance indicators

Role of Constant Low State Agencies eg Vic EPA, Resources Catalyst role
Government EFIC proactive Legislation

27
Table 4.2: SWOT analysis - Australia
Criteria Investment Superannuation Credit and Lending Insurance
and re-insurance

Strengths a significant number a significant number banks have developed the sector is currently
of new SRI products of new ‘green’ environmental risk developing a
are being developed investment products assessment criteria as comprehensive
some investment are being developed part of their lending understanding of
decisions are based 75% of trustees are evaluation processes. environmental risks
on international supportive of SRI (Monash, 2000).
methodologies which alternatives (Ryan,
have been tried and cited Manning 2000).
tested.

Weaknesses no generic the ethical option in a low level of sustainability issues


environmental risk superannuation funds awareness and action have not featured
rating system, that can has historically not in terms of sustainable highly in the
be used by investors proved popular development has been insurance sector
has been developed (Mace, 2000) demonstrated by (Monash, 2000)
(Mitchell, 2000) argument over banks (Monash, 2000) current tools used are
limited and performance and no banks appear to inadequate to assess
inconsistent whether SRIs are in have developed risk for underwriting
information is the members’ best differentiated loan purposes (Monash
provided by interests (Mace, 2000) pricing based on a 2000)
companies to analysts conservative views of borrower’s responses to the issue
Australian investors superannuation environmental risk of environmental
have been relatively trustees about whether profile. impairment are
slow to take up SRI SRIs compromise their reactive (Monash,
the market is relatively fiduciary responsibility 2000)
immature (The Allens (Mitchell, 2000) environmental issues
Consulting Group funds are not verified (apart from climate
2000) or sufficiently change) and how they
conservative views are transparent such that relate to the insurance
held by investment investors clearly sector do not appear
managers about their understand the to be well researched
fiduciary responsibility principles of selection. or documented
(Mitchell, 2000) (Monash, 2000).

environmental
disclosure by
corporates appears to
be driven by
regulatory needs
rather than analysts’
requirements.

28
Table 4.2: SWOT analysis - Australia continued
Criteria Investment Superannuation Credit and Lending Insurance
and re-insurance

Opportunities increasing demand for new legislation lenders are a major the sector is well
the use of providing for greater source of capital for placed to promote
environmental member choice has companies and hence more responsible
screening as part of been promulgated can play an extremely environmental
the investment process over 75% of important role in practices (Monash,
(Mitchell, 2000) superannuation promoting sustainable 2000)
anecdotal evidence of members would like development (Brkic, a better understanding
a link between to know what their 1999) of environmental risk
positive financial and super is invested in banks can provide issues will improve
environmental (Resnik-KPMG, 2000) support for the insurer’s bottom
performance (Mitchell, anecdotal evidence of environmentally or line (loss prevention is
2000) a link between socially responsible better than paying out
biodiversity and positive financial and projects, innovative claims) (UNEP, 1999)
salinity credits are environmental technologies and The UNEP/Victorian
being considered performance (Mitchell, sustainable enterprises EPA advisory
2000) (Brkic, 1999) committee on
speculators and
brokers could play a Commonwealth Insurance due to be
critical role in government is operational by mid
emission trading, showing specific 2001 will drive
renewable energy leadership in the area awareness and a
certificates and market of climate change, broader understanding
developments salinity and of environmental
biodiversity trading issues faced by
The UNEP/Victorian insurance companies
EPA advisory there is a potential for
committee on Socially banks to differentiate
Responsible products and services
Investment will based on superior
provide a forum for environmental
those participating in performance
the growth of this The UNEP/Victorian
market to share ideas EPA advisory
and incorporate best committee on
practice developments Environmental Credit
from overseas Risk due to be
Westpac Eco Index operational by mid
has achieved 26.8% 2001 will foster a
return compared to better understanding
the all ordinaries and incorporation of
21.7%. environmental issues
into bank lending
policies.

29
Table 4.2: SWOT analysis - Australia continued
Criteria Investment Superannuation Credit and Lending Insurance
and re-insurance

Threats legislation currently no legislation to act as limited and the sector is subject to
does not enforce driver to promote inconsistent limited legislation
disclosure on disclosure on extent of information is (Monash 2000)
environmental, social social or ethical currently available on potential exposure to
or ethical considerations a company’s significant financial
considerations in the limited reliable environmental and loss due to
selection, retention evidence that SRI can social performance. It environment related
and realisation of result in acceptable is therefore difficult to risk exposures
investments (Monash, economic or financial incorporate these (Monash 2000)
2000) benefits to fund factors into lending
decisions insurers may withdraw
reluctance by members (Charaneka, from providing
investors to use ethical 2000). weather related claims
or socially responsible in certain areas.
investments
(Rothschild, 2001)
the Sydney Futures
Exchange has
withdrawn from the
development of an
Emissions Trading
Platform
companies are
becoming increasingly
annoyed at the
number of multiple
surveys they are being
asked to complete by
all of the screening
agencies
stakeholders are
concerned over the
level of transparency
and verification of
funds

30
5. Conclusion: key challenges for the future
Looking ahead
Barriers and Challenges
There are number of barriers and challenges unique to Australia which help explain why
the finance sector may not be as advanced as North America and Europe in responding
to sustainable development. These include:
Legislation – the enforcement of environmental legislation and the disclosure
requirements for companies and superannuation trustees in relation to environmental
and social issues is less onerous than North America and Europe
Market size – the supply of financial products that incorporate sustainable
development principles, such as SRI, is restricted by size
Awareness – despite a high level of concern about environmental and social issues in
the 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 information
is less developed than in North America and Europe.
The only mandatory disclosure requirement, namely s299(1)(f) of the Corporations
Act 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 of
some of Australia’s sustainable development challenges, there are a number of key areas
that 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 sector
organisations, there is scope for the finance sector, as an industry, to evaluate its role in
sustainable development. The objectives of this would be to:
demonstrate to stakeholders that the finance sector is aware of and is examining its
role in contributing to sustainable development
identify opportunities that could have good commercial and sustainable development
outcomes, but which require expediting through collaboration between the finance
sector, industry, government and NGOs
identify, evaluate and provide a finance sector industry response to sustainable
development “hot spots” such as biodiversity, climate change, salinity, land
degradation and water resources, especially in the context to regions such as the
Murray Darling Basin.
Recommendation 1 - the Commonwealth Government should encourage the financial
sector to provide continued support to the Australian UNEP Financial Initiative, thereby
demonstrating its commitment to the principles of sustainable development.

31
Materiality

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

Recommendation 2 – the Commonwealth Government, in association with the finance


sector and industry, commission specific academic research into the financial value for
business associated with investments in sustainable development in Australia.

Environmental and social disclosure

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

Recommendation 3 - the Commonwealth Government, in consultation with key


stakeholders (the finance sector, industry, ASIC, the ASX, the accounting profession, state
EPAs and peak environmental groups), should commission a review of the existing
mandatory and voluntary environmental and social disclosure requirements, in order to
establish an optimum reporting and disclosure regime.

Performance metrics
To ensure that environmental disclosure by industry addresses the information
requirements of the financial sector, there should be closer dialogue between financial
analysts and industry.

Recommendation 4 – the Commonwealth Government develop a working group that


will investigate ways to enhance the relevance of public environmental and social
disclosure for use by financial analysts.

Management and reporting


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

Recommendation 5 – the Commonwealth Government should work with the UNEP


Financial Initiative’s “Operational Environmental Management” advisory committee to
develop ways of promoting the adoption of environmental/social management and
reporting guidelines by financial institutions.

In outlining the above recommendations we acknowledge that the Commonwealth


Government 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 it
would expect from the further engagement of the finance sector and ensure that it can
appropriately foster that relationship.

32
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35
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36
Additional Documents
Additional documents that were reviewed but have not been referenced in the report are
outlined below:

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All Party Parliamentary Group On Socially Responsible Investment, 1999, Annual


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Corporate Environmental Performance Measurement and Communication, Invitational
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Series N94s-22; Montreal: CIRANO

Burnup, C. 2000, Environmental Performance and Public Reporting. Business Council of


Australia 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 ? Monograph
10 August 1999 Frank Russell Company

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

37
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;
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DJSGI (Dow Jones Sustainability Group Index), 2000, First Anniversary, Index
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DJSGI (Dow Jones Sustainability Group Index), 1999, Guide to the DJSG Indexes version
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38
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KPMG International Environment Network and Institute for Environment Management


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NCC (National Consumer Council) 1997, In the Bank’s Bad books: How the Banking
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39
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Social Investment Forum (UK), 2000, Increasing Investment in Communities: A


Community Investment Guide for Investment Professionals and Institutions; UK

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Social Investment Forum 2000 Guidelines for reporting on social, environmental and
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Taskforce on the Churches and Corporate Responsibility, 2000, Corporate Social and
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UNEP (United Nations Environment Programme) Finance Initiatives, 2000, Globalisation


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WBCSD (World Business Council for Sustainable Development), 2000, Corporate Social
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Westpac Investment Management Reconciling Profitability and Responsibility – An


Australian Perspective on a Global Phenomenon

Westpac Investment Management (WIM), 2000, Linking Screened Investments to


Shareholder Value: Occupational Health and Safety Screening, paper prepared by Erik
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environmental performance; Washington DC: WRI

40
Websites
Australian Ethical Investor – www.austethical.com.au

Australian Financial Review – www.afr.com.au

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Australian Stock Exchange – www.asx.com.au

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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

41
Appendix A – North American financial sector sustainable development initiatives

Table A1: Summary of financial sector sustainable development initiatives - North America
Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Sector in the US $16.3 trillion is currently in the US, the 401(k) fund or pension American banks were the first to the insurance sector is developing
Description invested in the investment market, of plan, is a voluntary savings system consider the implementation of products to help industry reduce its
which approximately 13% is (Chaplin, 1999) environmental policies in relation to exposure to potential liabilities from
invested in retail socially responsible members of pension plans or 401(k) credit risk, and to implement environmental damages
investment (SRI) trusts. funds in the US can take out a loan, methods for assessing environmental (Schmidheiny, 1996)
(www.socialinvest.org) change their investment choice daily, factors into the commercial loan major insurance companies in the US
environmentally screened funds are choose from at least four and an approval process (Ganzi et al, 1997) currently provide most environmental
the fastest growing screened funds in average of 14 investment approaches, community banks have been insurance products
the US and make transactions via voice established for the purpose of approximately US$1.2 billion of
one in every eight dollars invested in response systems or the internet investing in and serving traditionally environmental insurance premiums
managed funds is screened from an (Dunstan, 2000) under-served markets (SustainAbility, have been purchased in the US on
ethical or social perspective by 1998, 38 million workers took 2000) environmental liability products
(Rothschild, 2001). part in retirement funds and an as at 1999: (www.irmi.com)
estimated $1.41 trillion had been - community development banks in the US the premium volume is
invested (Byte, 1998) held US$2,922 m in assets expected to increase at an annual
employers are now offering SRI - community development credit rate of 20 to 25 percent
options as part of retirement plans unions held US$601 m in assets (www.irmi.com).
and employees are increasingly (SustainAbility, 2000).
choosing this option (The Allen
Consulting Group, 2000)
Canada is currently investigating
implementing legislation similar to
the UK Pension Act which requires
the disclosure of the extent (if at all)
to which social, environment or
ethical considerations are taken into
account.

1
Table A1: Summary of financial sector sustainable development initiatives - North America
Criteria Investment Superannuation Credit and lending Insurance and re-insurance
The Comprehensive Environmental Response, Compensation and Liability Act 1980 (CERCLA) (Superfund.)
Regulations
covering all provides a federal “Superfund” to clean up contaminated sites
Financial enforces liability of persons responsible for releases of hazardous waste at contaminated sites
Sectors
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 cleanups
at sites by lenders, developers and property owners. The CRA establishes initiatives for economic development while easing the fears of financial liability and regulatory
burdens
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 be
taken into account

Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Regulations NA Member choice – 401(k) plans in 1990, a major bank was held Footnote 24
covering all voluntary retirement savings system liable by a US court for requirement for reporting on asbestos
Financial environmental degradation that and environmental exposure in an
facilitates choice of investment and occurred as a result of its lending
Sectors plan flexibility insurance firm’s Annual Statement
practices (Ganzi et al, 1997) (Ganzi et al, 1996)

2
Table A1: Summary of financial sector sustainable development initiatives - North America

Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Product & Types of products include: large pension funds invest in Types of products include: Types of environmental liability
Services community development venture screened funds eg NY Municipal community development loan funds insurance products include:
capital funds (CDVC) Workers (CDLFs) - asbestos abatement liability
- examples include Boston A number of fund managers (eg - examples include FleetBoston, - asbestos containment
Community Venture Fund, Citizen Funds, Calvert Group and Pax Chicago Community - cleanup cost cap
Kentucky Highlands Investment World Fund Family) offer SRI (Social Investment Forum, 2000) - environmental and general liability
Corporation retirement products. exposures
community development credit
(Social Investment Forum, 2000) unions - owner’s spill liability
community investment funds - examples include National - storage tank pollution insurance
- examples include Trillium Federation of Community (www.irmi.com)
Investment Management Development Credit Unions providers include:
micro-enterprise programs church funds - AIG Environmental ($200 M
- examples include ACCION, - examples include Quakers, capacity)
Cascadia Revolving Fund, Presbyterian church - Environmental Compliance
Microenterprise (SustainAbility, 2000) Services Inc ($150M capacity),
(Social Investment Forum, 2000) energy efficient mortgages - Kemper Environmental ($200M
- examples include Fannie Mae capacity)
SRI funds using negative/positive
screens micro-enterprise lending - Zurich-American ($150M capacity)
- examples include Dreyfus Third - community based organisations (www.irmi.com).
Century Fund) providing capital for micro-
pooled funds entrepreneurs unable to obtain
capital from conventional financial
- examples include National
institutions
Federation of Community
Development Credit Union’s non-profit lending
Nominee Deposit Program & - lending to non profit organisations
Calvert Community Investment pursuing a social mission that are
Program unable to obtain capital
(Social Investment Forum, 2000) lending for social or affordable
venture capital for sustainable housing
projects - risk mortgages or construction
- examples include the Calvert loans for housing targeted to low
Group. income markets
- examples include Bank of America
(Social Investment Organization,
2000).

3
Table A1: Summary of financial sector sustainable development initiatives - North America
Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Analysis/ positive, negative and best of sector Some fund managers now requiring the majority of banks in North screening tools used to assess
Screening screening methods are typically used. boards of both US and international America in 1997 required environmental issues are well
Tools analysts are using the services of companies to develop polices and environmental due diligence developed due to the influences of
independent environmental rating practices to address environmental assessments to be conducted as part asbestos claims and contamination.
agencies (eg CEP, IRRC Innovest) issues and equal employment of all financial transactions
(Delphi, 1997) opportunities (eg TIAA-CREF - largest (Delphi, 1997)
US pension fund) questionnaires and environmental
tobacco is the most common
negative screen used in socially checklist management systems have
screened portfolios in the US (The been implemented to assess the
Allen Consulting Group, 2000) customer’s level of environmental
risk (e.g. Bank of Nova Scotia, Bank
many US mutual fund managers use of America).
multiple screens, with 88% of
managers using three or more screens
(The Allen Consulting Group, 2000)
Domini Social Equity Fund has
developed a detailed list of positive
screening criteria for selecting stocks
(The Allen Consulting Group, 2000).

Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Stakeholder US investor concern is primarily on US focus is primarily on the issues of: the issue of providing access to credit the use and disposal of asbestos
Issues the issues of: - military - weapons and banking services for all represents the single greatest
- military - weapons - tobacco community members is high on the ecological item to affect the
- tobacco agenda of American Bankers’ insurance industry in America. This
- alcohol
Association. was a direct result of insurance
- alcohol - gambling
policies being general in the 1980s.
- gambling (Flatz, 2000) The medium sized insurance market
(Flatz, 1998) was the hardest affected
investors are also concerned about
investment in Northern Ireland is environmental issues and employee the reinsurance industry in America
occasionally used as a screen for SRI working conditions. generally does not consider the
funds, as well as firearms potential impact of global warming to
manufacture (SustainAbility, 2001) be a significant risk. Proposals to
the US has a high level of reduce carbon emissions conflict
shareholder activism. This is a result with other social policy agendas for
of a high level of share ownership the country (Mooney, 1998, cited
and the ease of filing shareholder Monash 2000).
resolutions (Delphi, 1997)

4
Table A1: Summary of financial sector sustainable development initiatives - North America
Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Stakeholder US investors are also concerned (refer to previous page) (refer to previous page) (refer to previous page)
Issues about environmental issues (i.e. the
recent 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 business
practices
- to vote its shares on social and
environmental issues
(Social Investment Organisation,
2000).

Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Management Trillium Assets Management reports New York State Common Retirement The Bank of America prepares public CIS Co-operative Insurance has
of Internal on environmental and social Fund has adopted a responsible environmental reports published environmental and social
Sustainability accountability (The Global Reporters, Contractor Policy to guide the Citigroup published the “Citigroup reports.
Issues 2000). selection of construction and Global Corporate Citizenship Report”
building operation contractors on in 2000 detailing its social and
their real estate properties environmental involvement as well as
(ASFA, 2001). other initiatives internal to their
organisation.

5
Appendix B – Europe financial sector sustainable development initiative

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

Selection Investment Superannuation Credit and lending Insurance and re-insurance


Criteria
Sector in the UK £51.7 billion is invested in it is not compulsory for individuals to banks have been looking at almost all European insurers offer
Description Socially Responsible Investments (SRI) contribute to a pensions fund (Fenech, environmental issues since the early insurance protection against liability
the SRI market in the UK is expected 1999) 1990s due to concerns over for ‘sudden and accidental
to exceed £300 billion by the end of in 2000, the total pension fund market environmental lender liability (Delphi, environmental impairment’ (Swiss Re,
2001 (PricewaterhouseCoopers, 2001) in the UK was approximately £800 1997). 2000)

SRI in Europe is a mature market (The billion of which £3.3 billion was Germany and Finland have
Allen Consulting Group, 2000) invested in SRI introduced a compulsory
a recent study carried out by ERM, environmental insurance system
the UK Social Investment Forum’s (Delphi, 1997 & UNEP, 1999)
survey found that 101 (59%) of the which involved surveying companies
171 funds, with collective assets of that represent nearly half of £800 the insurance industry is involved in
£302 billion, have asked their fund billion in UK pension fund assets, the climate change debate and have
managers to adopt socially responsible revealed that 21 out of the UK's 25 been pro-active in their approach to
investment strategies. largest pension funds intend to global warming (e.g. Swiss Re, Munch
implement SRI principles (AMP Re) (Monash 2000).
the UK ethical investment market grew Henderson, 2000)
by 47.7% between 1998 and 1999
Germany and France are currently
fund managers have developed looking at implementing legislation
guidelines for reporting on social, similar to the UK Pension Act which
environmental and ethical matters. requires the disclosure of the extent (if
These guidelines are intended to assist at all) to which social, environment or
companies in addressing the concerns ethical considerations are taken into
and requirements of their shareholders account
in relation to social, environmental
and ethical (SEE) matters. The in October 2000, France had SRI
guidelines concentrate on the investments of 4.7 billion FRF
disclosure of the board’s approach to managed by 27 funds
SEE matters and also the company’s (www. terranova.com).
policies, procedures and means of
verification.

6
Table B1: Summary of financial sector sustainability initiatives - Europe

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

Regulations United Kingdom


covering all
Companies Act 1985 s226(2)
Financial sectors
– 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’s
employees.
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 proposed
revisions 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 as
the short term implications of their actions". Companies should be required to produce an Operating Financial Review each year that outlines ‘the performance and
direction of the business, including ... wider relationships, risks and opportunities and social and environmental impacts where these are relevant to an understanding
of the performance of the business.’

7
Table B1: Summary of financial sector sustainability initiatives - Europe

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

Regulations European Commission


covering all
Financial Sectors 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 to
ensure 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 environmental
policy 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 environmental
protection 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.

8
Table B1: Summary of financial sector sustainability initiatives - Europe
Selection Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Regulations & the Turnbull Committee published its United Kingdom - Pensions Act 1995 NA individual European nations have put
Corporate final guidance on internal control in (Amended July 2000) in place different environmental
Governance September 1999. The Guidance liability laws however Germany and
Section 36(5) - trustees or fund
promotes the identification and Finland are the only nations to have
managers to whom any investment
management of risk, including introduced a compulsory
discretion is delegated by the trustees
operational risk such as that relating environmental insurance system
are required to give effect to the
to ‘health, safety and environmental, (Delphi, 1997 & UNEP Geneva,
principles contained in the statement
reputation and business probity 1999).
of investment principles(SIP). A
issues.’ It forges the essential link
statement must be made on:
between risk-based management and
the achievement of business - the extent (if at all) to which social,
objectives and shareholder value. environment or ethical
considerations are taken into
the Danish Social Ministry established
account in the selection, retention
the ‘S-Mark’ program which involved
and realisation of investments; and
the government submitting
questionnaires to corporates and then - their policy (if any) in relation to
awarding them a rating (‘S-Mark’) the exercise of rights (including
(www.ethicalinvestor.com). voting rights) attachied to
investments.

Local Government Pension Scheme


(Management and Investment of
Funds) (Amendment) Regulations
1999
Regulation 7(7) – the fund manager
must not make investments which
would contravene the administering
authority statement of investment
principles.
France has developed an SRI related
‘Employee Savings Plan Bill’
(www.terranova.com).

9
Table B1: Summary of financial sector sustainability initiatives - Europe
Selection Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Product & Type of investments include: Type of investments include: Environmental lending products include: Types of insurance products include:
Services
environmental industry funds socially responsible funds energy saver mortgages sudden and accidental
– examples include German Focus, – examples include Universities – examples include Woolwich, environmental risk cover
Hypo Eco Tech Superannuation Scheme, which is Co-operative Bank – provided in general liability policies
the third largest pension fund in the – examples include Swiss Re
best-in-class or eco-efficiency funds UK (£22 billion). environmentally friendly (Delphi, 1997)
– examples include Credit Suisse investment loans
Equity Fund, Storebrand Scudder – examples include Barclays in accident insurance that supports
Environmental Value fund conjunction with European environmentally friendly behaviour
Investment Bank, Natwest – examples include Versiko
environmental support funds (Monash, 2000)
– funds donating money to financially recycling insurance
support environmentally friendly ecological or ethical banks – examples include Tomas Tenga
companies – examples include Ecology Building (UNEP, 1999)
– examples include Swedish Banco Society, Triodos Bank
Ideella Miljofond (Hineterberger, 1998) environmental damage insurance
– examples include Jan Pieter Six
sustainable growth funds National Westminster Bank (UNEP, 1999).
– invest in businesses that have a – National Westminster Bank have
long term role in the transition made £50 M available for lending
towards sustainable development to businesses at cheaper than
normal rates for environmental
ethically screened funds projects (Delphi, 1997).
– examples include United Charities
Ethical, Abbey Ethical

environmentally screened funds


– examples include Eagle Star
Environmental Opportunities, TSB
Environmental Investor
(Delphi, 1997)

venture capital funds for


sustainable projects
– examples include Foursome Invest.

10
Table B1: Summary of financial sector sustainable development initiatives - Europe
Selection Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Analysis/ positive and negative screening tools positive and negative screening tools 49% of banks in Europe in 1997 Swiss Re has a general policy which
Screening Tools as well as best of sector analysis, are as well as best of sector analysis, are required environmental due diligence requires the identification of
typically applied to funds typically applied to funds on project finance (Delphi, 1997) environmental risks and the
analysts are using the services of National Provident Institution (NPI) assessments typically consist of a two consideration of ecological criteria in
independent environmental rating offers passive and active SRI funds or three tier approach, including the all relevant reinsurance transactions.
agencies to screen funds (e.g. ERI, across the full range of pension completion of checklists and detailed Winterthur (Credit Suisse Group) is
Oko-Invest, SERM, Triumvirate, SAM) products. (Note: NPI is part of the environmental information manuals guided by an underwriting policy that
(Delphi, 1997) AMP Group) (The Allen Consulting (e.g. Deutsche Bank, Barclay Bank, specifically excludes the underwriting
SAM provides Dow Jones screening Group, 2000) Lloyds TSB) (Delphi, 1997). of exposed industries and projects
for the Dow Jones Sustainability Index Morley expects all FTSE 100 (e.g. offshore oil exploration, nuclear
companies, in all sectors, to have plants)
the Ethical Investment Research
Service (EIRiS) assesses corporate robust processes to minimise damage re-insurance companies like Swiss Re
activity in 30 principles areas, to the environment. These companies and Munich Re have commissioned
including animal testing, gambling are required to publish a numerous studies on the impact of
and greenhouse gas emissions. EIRiS comprehensive environmental report. climate change on the insurance sector.
predominately researches UK Where FTSE 100 companies do not
companies and provides information publish such a report, and after
to UK based socially responsible consultation as to management
investors. They are responsible for the intentions, Morley will vote against
FTSE4Good research. the resolution to adopt the report &
accounts.
Pensions Investment Research
Consultants (PIRC) are starting to engagement rather than screening has
provide rating services on SRI become the preferred option amongst
(competing with EIRiS) mainstream UK fund managers. This
approach was championed by Friends
Sustainability Indices e.g. Dow Jones Ivory Sime, a innovator in the UK.
Sustainability Index, FTSE 4 Good,
Industries of the Future – NPI.

11
Table B1: Summary of financial sector sustainability initiatives - Europe
Selection Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Stakeholder Issues stakeholders are concerned over the mainstream investors are typically concern over the lack of transparency the insurance and re-insurance sector
relationship between environmental interested in how effectively and disclosure of bank operations is concerned over the potential
and investment performance companies are managing their social, (AMP Henderson, 2000) impact of climate change
(Delphi, 1997) ethical and environmental risks. environmental NGOs are targeting concern over environmental liability
main investor concerns include: investment banks over their is limited as most European
– military - weapons involvement with environmentally legislation does not strictly outline
– nuclear power plants damaging companies (Delphi, 1997) the enforcement of environmental
Three Gorges Dam – non government liability (Delphi, 1997).
– genetically modified organisms
(Flatz, 1998) organisations targeted Credit Suisse
on the grounds of environmental
– animal welfare (SustainAbility 2001)
degradation, who as a result
NGOs have been running member apologised and withdrew funding
campaigns to raise the awareness of to China.
SRI (Amnesty International, Friends of
the Earth)
NGOs and trade unions have been
buying shares or getting institutional
shareholders to sponsor shareholder
resolutions. For example Greenpeace
owns shares in Shell and international
trade unions rallied to bring
resolutions at last year’s Rio Tinto
meeting.

12
Table B1: Summary of financial sector sustainability initiatives - Europe
Selection Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Management of Henderson Global Investors and Henderson Global Investors and Deutsche Bank and the Royal Bank of 56 insurance companies from the EU
Internal Morely Fund Management have Morely Fund Management have Scotland have developed internal are signatories to the UNEP Insurance
Sustainability extended their corporate governance extended their corporate governance environmental management programs Initiative (www.unep.org)
Issues policies to include criteria on the policies to include criteria on the (Hugenschimdt, 1997) CGU, ING, CGNU and Swiss Re have
environment, human rights, employee environment, human rights, employee some banks have environmental published public environmental
relations and community relations relations and community relations management systems which are reports. (Swiss Re, 2000)
polices (AMP Henderson, 2000) polices (AMP Henderson, 2000) certified to ISO 14001, (e.g. Credit TSB,CGNU and ING have developed
Morely Fund Manger will vote against Morely Fund Manger will vote against Suisse and Deutsche Bank) internal environmental management
the financial statements at the annual the financial statements at the annual banks are reviewing their own programs which cover property,
general meeting if the company has general meeting if the company has internal environmental performance purchasing, transport and waste
not published an environmental report. not published an environmental report. management issues.
a key area of improved environmental
performance has been in energy
efficiency (e.g. ING Bank,
Commerzbank) (Delphi, 1997)
the Royal Bank of Scotland’s energy
efficiency programs has resulted in
savings of around £1 million per annum.
Natwest Abbey National, Barclays, co-
operativeABN AMRO and Prudential
have prepared a public environmental
report
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 and
reporting guidelines for the financial
sector have been developed by the
‘Forge Group’ of financial institutions.
the Swiss Bankers association have
developed a web-site which outlines
the experience gathered by Swiss
banks when setting up their
environmental management systems
(www.unep.org).

13
Appendix C – Australian financial sector sustainable development initiatives

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

Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Sector currently more than $400 million has superannuation trustees have the Australian banking sector sustainability issues have not featured
Description been invested in ethical products historically not considered or typically has a low level of awareness very highly in the Australian
(Rothschild, 2001) recommended SRI funds (The Allen and action in terms of sustainable insurance sector (Monash, 2000)
Australian investors have been Consulting Group, 2000) development (Monash, 2000). general liability product and public
relatively slow to take up socially $454 billion is held by liability policies provide very
responsible investments (SRI) superannuation funds of which only narrowly defined cover for ‘sudden,
(The Allen Consulting Group, 2000) a very small proportion is invested in unintended, unexpected and
The SRI market in Australia is screened funds (Proske, Saleeba et accidental pollution for a specific
relatively immature, (The Allen al,2000) event in a specific timeframe’
Consulting Group 2000). the Australian Institute of the re-insurance market is very small
Superannuation Trustees has in Australia
interviewed its members and found the Australian re-insurance sector
that six percent offered an ethical recorded $3 billion in losses in 1999-
investment choice (Monash, 2000) 2000 as a direct result of unforeseen
member choice legislation may be natural disasters (Monash, 2000).
introduced, which could be an
important driver in increasing the
demand for SRI products
75% of trustees are in favour of SRI
alternatives (Ryan cited Manning,
2000).
Regulations Corporations Act (Commonwealth)
covering all
Section 299(1)(f) – mandatory disclosure of environmental performance in directors’ reports where the corporation is subject to any particular and significant environmental
Financial regulation.
Sectors
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.

14
Table C1: Summary of financial sector sustainable development initiatives – Australia
Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Regulations ASIC Practice Note 68


covering all ASIC guidelines stipulate licensing and other regulatory conditions as prima facie examples of s299(1)(f) Corporations Act requirements.
Financial
the requirements relate to performance under environmental regulations, not specifically financial disclosures (eg. contingent liabilities and capital commitments).
Sectors
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 of
any 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 must
immediately 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 accounting
project. This project aims to promote improved practises and reform in management accounting techniques so that firms are able to improve profitability by reducing costs
whilst achieving better environmental outcomes.

Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Regulations & the Company Law Review Act 1998 in 1998 the Commonwealth the Federal opposition has proposed the Australian Prudential Regulation
Corporate s249D was amended to allow at least government tabled the to introduce a new layer of regulation Authority (APRA) are proposing new
Governance 100 registered shareholders to superannuation legislation in the banks, requiring them to sign legislation to encourage the
request a general meeting of a amendment (Choice of up to an enforceable ‘social charter’. upgrading of the industry’s risk
company (EA, 1999, cited The Allen Superannuation Funds) Bill, 1998. This will require banks to provide fee management practices (Monash,
Consulting Group, 2000). This This Bill will amend the current free and no frills services to all 2000).
amendment enables shareholder to legislation that requires employees to customers (Mclachlan, 2000).
challenge directors on the make superannuation contributions
environmental performance of a to the fund chosen by their
corporation. employee. This Bill however has not
yet been passed.

15
Table C1: Summary of financial sector sustainable development initiatives – Australia
Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Product & ethical and socially responsible ethical and socially responsible greensmart home loan products two main products include:
Services screened funds, examples include: screened investment options. - examples include Macquarie Bank - pollution legal liability for third
- Challenger A number of products are offered in and Housing Industry Association party claims that arise from
- AMP the market by various organizations (Monash, 2000) seepage and contamination “not
including: previously identified”(eg Richard
- Rothschild renewable energy project loans and
- UniSuper Oliver)
- Australian Ethical Investment funding
- Hesta - clean up costs - first party clean-up
- Tower - examples include SEDA, CVC REEF
(Rothschild, 2001). for responding to clean up orders
- Hunter Hall & Federal Government
when and if made.
- Westpac (Monash, 2000)
OHS funds ethical deposit account
- examples include Westpac - examples include Bendigo Bank
with Ethical Investment Trust
human rights fundings
- prepared to be released by GGAP – greenhouse gas abatement
Westpac program
- $400 million over a 3 year period
renewable energy funds
has been allocated
- examples include SEDA
credit unions and community Banks
venture capital investing into
(eg Bendigo Bank) appear to be
environmental type assets including:
providing services where large banks
- water have withdrawn services.
- renewable
- contaminated land.

16
Table C1: Summary of financial sector sustainable development initiatives – Australia
Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Analysis/ the main forms of screening used rating tools have been developed by most banks have implemented limited consideration is given to
Screening within the SRI industry in Australia AMP environmental risk criteria as part of environmental risk
Tools are negative and positive screens as Westpac are using the Eco-Index their corporate and project lending in general no specific screens or tools
well as best of sector rating system developed by Monash activities appear to be used to assess
(The Allen Consulting Group, 2000) University. This system uses a best-of environmental assessments tend to be environmental and/or sustainability
there is anecdotal evidence that sector approach and has focused its once off and are not monitored for development issues.
analysts do consider and have screening criteria on environmental the duration of the loan period
developed approaches to evaluating issues (The Allen Consulting Group, some financial institutions are
environmental investment risks 2000) developing a range of environmental
(Fayens et al, 1998) Westpac have purchased a rating advisory products as part of their
the ‘best of sector’ approach where system from SAM to screen their corporate and project finance
investment is in the best performers international funds. This is the same services, eg identification and
across all sectors, is growing in rating scheme as that used by the evaluation of emission credits and
interest. This approach does not bias Dow Jones Sustainability Index renewable energy projects.
against any industry and hence (DJSI).
allows for greater diversification of
risk across the portfolio
a number of independent SRI rating
agencies have been establised for
example, Sustainable Investment
Research Institute
environmental advocacy groups such
as the WWF and ACF provide public
information on company
performance
the Sydney Morning Herald/Age
reputations index is published
annually.

17
Table C1: Summary of financial sector sustainability initiatives – Australia
Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Stakeholder SRI has traditionally been a niche stakeholders generally do not stakeholders are typically concerned stakeholders of the insurance sector
Issues interest and is viewed as providing understand superannuation and are about: are concerned about the issue of
inadequate returns (Proske, Saleeba not interested in actively managing - charges to low income people climate change, with particular
et al, 2000) their funds (Proske, Saleeba et al, - closing of local branches regard to the issue of claims
SRI funds have primarily had an 2000) associated with flood damage
- increased fees
environmental focus (The Allen a growing proportion of stakeholders - access to banking services for aged Aid Watch has raised concern
Consulting Group, 2000) want to invest in SRI alternatives - environmental impact of lending regarding the government provision
traditional ethical fund managers are (Proske, Saleeba, et al, 2000) decisions, with particular regard to of subsidised insurance services to
critical of new ‘best of sector’ typical concerns include: projects in sensitive areas exporters to less developed countries
mainstream SRI products (O’Rourke, 2000). via government agencies such
- social issues in the areas of:
as EFIC.
environment groups are concerned - health & safety
that ‘mainstream’ fund mangers - human rights
invest in ‘unsustainable projects’ - tobacco
whilst simultaneously offering SRI
environmental issues in the areas of:
products.
- energy efficiency
- recycling
- resource and material
- waste and emissions
(Proske, Saleeba et al, 2000).

18
Table C1: Summary of financial sector sustainability initiatives – Australia
Criteria Investment Superannuation Credit and lending Insurance and re-insurance

Management of the top 100 Australian companies, some superfunds are now banks are developing internal QBE Insurance Group Ltd is the only
of Internal 25% of the investment sector investigating blanket screening all environmental policies and Australian insurance group to sign
Sustainability included a statement on their investments on social/environmental environmental improvement the UNEP Insurance Initiative
Issues environmental performance (in issues as opposed to just screening programs (ie Commonwealth Bank, the Insurance Council of Australia
accordance with the Corporations individual funds. Westpac, ANZ) has committed to aiding the
Act s299(f)) in their Directors Report Westpac is the only Australian reduction of greenhouse gas emission
in their 1999 Annual Report. signatory to the UNEP Statement by as part of the Greenhouse Challenge
(Ecobusiness, 2000). This statement Financial Institutions on the (Insurance Council of Australia,
on environmental performance Environment and Sustainable 2000)
however only requires disclosure of Development (Pricewaterhouse
the bare minimum level of some companies have reported on
Coopers, 2000) their environmental performance
compliance with existing state
legislation. some banks have signed the locally. The focus of these reports
Greenhouse Challenge has been on internal operational
Maleny Credit Union has a Triple management rather than a change in
Bottom Line report. business practices

Australian banks are now Export Finance & Insurance


implementing community initiatives Corporation (EFIC) has implemented
including : internal environmental risk screening
procedures and an environmental
- ANZ’s community service charter,
policy
foodbank Australia and Youth at
Risk programs some companies are reporting as part
- Westpac’s Smith Family and youth of parent companies public
and education programs environmental reports

no stand alone public environmental no stand alone public environmental


reports are currently published. reports are published.

19
For further information please contact
Sandra Birkensleigh Judith Kendrick
Partner, PricewaterhouseCoopers Director Financial Sector
Tel (02) 8266 2808 Projects Team, Sustainable Industries Branch,
email sandra.birkensleigh@au.pwcglobal.com Environment Australia
Tel (02) 6274 2209
Corinne Proske email judith.kendrick@ea.gov.au
Senior Manager, PricewaterhouseCoopers
Tel (03) 8603 3809
email corinne.proske@au.pwcglobal.com

Elizabeth Kazakoff
Manager, PricewaterhouseCoopers
Tel (02) 8266 2366
email elizabeth.kazakoff@au.pwcglobal.com

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