Current investment vehicles include sovereign wealth funds, asset management funds, and banks. There are substantial problems with all three. Some case studies (Generation Investment Management, Highwater Global Fund, Banco Bradesco, and Westpac Bank) are described that illustrate these problems and point to some solutions. Generation Investment Management was set up by Al Gore and David Blood. It has good principles but the availability of information about its application of these policies is poor. What information is available raises some questions. Highwater Global Fund was established by Michael Baldwin and Paul Hawken. It does follow through on its principles, but it is not as transparent as Portfolio21. Banco Bradesco and Westpac Bank do not have sustainability policies. HSBC is the leading international mainstream bank, but many of its policies are not sustainable.
While the case studies provide insights into how to invest sustainably, the sector as a whole will not provide the means for the shift to sustainability without government intervention. The market can not require adequate principles and standards, direct change through incentives and taxes, and establish funds to counterbalance market failures. The market can neither assist developing countries to prepare and cope with the inequities nor provide the assets needed to adequately adapt to the consequences of ecological degradation and limited resources. A substantial percentage of Sovereign Wealth Funds is not investing sustainably, and this illustrates the difficulty of achieving commitment to sustainable investment at a global level. Investment strategies therefore need to include adaptation as well as mitigation issues.
There is considerable scientific evidence of ecological degradation (Intergovernmental Panel on Climate Change, 2007; Millennium Ecosystem Assessment, 2005; Rockström, et al, 2009; International Climate Conference, 2009). The consequences of a 3-4oC or greater warming of the Earth are summarised by Lynas (Lynas, 2007; 2009) and Hamilton (Hamilton, 2010), but the summary does not include the consequences of overstepping the planetary boundaries of biodiversity loss and interference with the nitrogen and phosphorus cycles (Rockström, et al, 2009). Nor does it take into account the limits and decline of conventional energy sources, and the inability of alternative sources to make up the difference (Heinberg, 2009). This evidence indicates that there are significant threats to human life, with a likely future of widespread loss of life and a hostile environment for those who survive.
There is no consensus among scientists as to when this bleak future may arrive, or whether we have passed a point of no return. However, many leading climate scientists see a 2oC limit as unrealistic: 3-4oC is now a likely minimum level (International Climate Conference, 2009). To stay within acceptable limits involves peaking in the very near future, with severe declines in emissions beyond then (Hamilton, 2010). Humankind faces a very difficult transition to a healthy and safe future, and any transition will involve major challenges to the financial sector. Any move away from the goods and services that destroy the Earth, to those activities and products that save it, will require investment.
What are these changes? Are there any banks or funds that can provide role models? This article describes the limitations of managed funds, the Socially Responsible Investment (SRI) industry, sovereign wealth funds (SWF), and the mainstream banks. An earlier article described the case studies of Portfolio21 and HSBC Holdings. It assessed how strongly sustainable they are, and whether their risk analysis included the major global change drivers that will significantly influence the next few decades and beyond (Howell, 2010b). This article describes case studies of funds (Highwater Global Fund, and Generation Investment Management) and banks (Banco Bradesco and Westpac Bank), and identifies the lessons that can be learned from the six case studies. It describes some public policy changes needed for the transition to a sustainable world.
Definitions, Principles and Standards
The terms ‘sustainability’ and ‘sustainable development’ are used in many ways. The Intergovernmental Panel on Climate Change (IPCC) discusses a number of difficulties with the term ‛sustainable development’ (IPCC, 2007, III, 12, 695-699). The report states that the term is variously defined, is vague, can be used to support green washing or cosmetic environmentalism, is inherently delusory and oxymoronic, is anthropocentric, and avoids reformulation of values that may be required to pursue true sustainability. Unfortunately the IPCC adopts a model of weak sustainability, where the three dimensions of economic, social and ecological are seen as independent but linked pillars of sustainable development (IPCC, 2007, II, 20, 815; Howell, 2009). Weak sustainability that includes the triple bottom line (TBL) model allows economic matters to dominate social and environmental matters (Sustainable Aotearoa New Zealand, 2009). The need for economic activities to be based within the limits of the Earth’s systems and ability to nourish life is not a necessary condition of weak sustainability and TBL. This will not change the business-as-usual (BAU) model, because economic returns will dominate social and environmental factors in business decision making (Howell, 2008; Howell 2009). Strong sustainability requires the preservation of the integrity of all ecological systems in the biosphere (Sustainable Aotearoa New Zealand, 2009).
Many principles and standards established for ethical investment use a weak (if any) definition of sustainability. Many have no adequate content and construct validation processes to show that the standards measure the essential components of what they claim to measure. Many have ranking and scaling processes that give methodologically unjustified weights or values (Howell, 2001). In a study that examined the SRI funds worldwide in 2003, Hawken found that the combined portfolio of conventional mutual funds were virtually no different from the cumulative investment portfolio of the combined SRI funds. Most SRI funds allow practically any publicly held corporation to be considered as an SRI company. The environmental screens used by portfolio managers are loose and do little to help the environment (Hawken, 2004).
The initiatives taken by the UN Environment Programme Finance Initiative, the UN Principles for Responsible Investment, and the Equator Principles (Equator Principles 2010), do not distinguish between weak and strong sustainability. While sustainable companies need to make profits, the TBL model permits companies to avoid the difficult transitions to sustainability that substantially deal with the ecological degradation threats. While they encourage financial institutions to adopt policies that are a move in the right direction, they are based on a modified BAU economics model, rather than an ecological economic model. The Equator Principles, founded on a distinction between Categories A, B and C, are not well defined. A strong definition of sustainability will be used in evaluating existing investment and the case studies.
Current Unsustainable Finance: SRI
SRI is “a generic term covering ethical investments, responsible investments, sustainable investments, and any other investment process that combines investor’s financial objectives with their concerns about environmental, social and governance (ESG) issues” (EuroSIF, 2009). This is a very broad definition covering a wide range of values. The traditional SRI approach is for the investor to select key values they want to be considered. Certain types of investment can then be excluded. An engagement process can be taken to try to persuade the company to change its behaviour. The investor can also ask for certain positive investments to be made (Council for Socially Responsible Investment, 2010)
For the establishment of sustainable investment, there are problems with the tradition SRI model. EuroSIF (EuroSIF, 2009) estimates that 17.6% (€2.665 trillion) of the European asset management industry can be classified as SRI. However, 14.2% (€2.154 trillion) is reached when there is a single screen, such as weapons, norms-based, or tobacco. The Social Investment Forum USA estimates that 11% of $US27.1 trillion under professional management is SRI (Social Investment Forum, 2007), but the bulk of this (77%) is simple screening, mainly tobacco, followed by alcohol and gambling (Social Investment Forum, 2005). Less than 5% is estimated to be ethical, and most probably less than 1% is strongly sustainable (Howell 2009b).
Current Unsustainable Finance: Sovereign Wealth Funds
The largest 50 SWF have $3891 billion under investment (SWF Institute, 2010). Just under 60% is oil and gas related. Norway is currently the second largest investor, with $443 billion or 11%, and is the leader in setting ethical requirements. One of the ethical standards it is required to meet is the avoidance of investment in companies that cause severe environmental damage (Council on Ethics, 2010). The Norwegian Fund has invested in Shell, which is involved in Canadian tar sands extraction. Tar sands extraction is a major contributor to Canadian greenhouse gas emissions, yet no companies have been excluded by the Council of Ethics on the basis of extraction of tar sands. Because the Norwegian Fund excludes only companies causing severe environmental damage, rather than companies that have a high carbon impact and are ecologically unsustainable, investment of SWFs that are strongly sustainable is likely to be less than 5% and closer to less than 1% (Howell, 2010b).
Case Study: Description of Banco Bradesco
Banco Bradesco was founded in 1943. One of Brazil’s largest private banks, it has over 3000 branches serving all levels of the population as well as nearly 6000 branches in partnership with the Brazilian Post Office. It claims to be the only Brazilian bank among the ten most valuable financial institutions in the world, with US$13.3 billion (Banco Bradesco, 2010).
The Bank’s 2009 Sustainability Report describes a number of initiatives taken and standards adopted. It has used the Global Reporting Initiative guidelines for its Report. It has adopted SA8000 standard certification and the Equator Principles, and the UN’s Global Compact and Millennium Development Goals. It has joined the Brazilian platform Companies for Climate. It is listed on the Dow Jones Sustainability World Index and the Corporate Sustainability Index of the Sao Paulo Stock exchange. It has a number of initiatives for inclusion in staff and community activities. It has assisted with funding for environmental agencies, including organisations planting nearly 2 million native tree seedlings annually. It has used positive screening to identify environmental loans, environmental lines of credits, and socially responsible investment funds. It paid a small fine due to non-compliance of Brazilian Government rules dealing with investment, and a larger fine for failures in security devices. The independent auditors recommended more transparency under the balance principal, with the inclusion of both the positive and negative aspects of the organisation’s performance (Banco Bradesco, 2010).
Evaluation of Banco Bradesco
Banco Bradesco is one of the banks chosen by Portfolio21 (Howell 2010b) and Highwater Global Fund. Portfolio21 states that Banco Bradesco’s sustainability report is in line with the Global Reporting Initiative guidelines, achieving an application level of A+. Also, unlike many of its emerging market peers, Banco Bradesco has initiated several supplier initiatives, including its Social-Environmental Questionnaire. Areas for improvement include creating and implementing sector policies that would further minimise the indirect environmental risks associated with the company’s corporate lending (Portfolio21, 2010).
In its Sustainability Report, Banco Bradesco states that between 2007 and 2009 it approved ten high-risk, eighteen average-risk, and no low-risk projects. These categories use the Equator Principles. In 2009 there were three high-risk projects, and they were energy projects. In the same year, five average-risk projects were financed and they were agribusiness projects (Banco Bradesco, 2010).
Banktrack, in its report Close the Gap, has evaluated 49 banks for how they meet socially and environmentally sustainable standards (Banktrack, 2010). The scores given in the Banktrack analysis are seven 0s, ten 1s and one 3. (A score of 0 is given where there is no policy; a 4, where essential elements are included in policy.) The Bank was graded 0 for Agriculture, Fisheries, Forestry, Military Industry and Arms Trade, Operation in Conflict Zones, Taxation, and Accountability. They scored 1 for Mining, Oil and Gas, Power Generation, Biodiversity, Climate Change, Corruption, Human Rights, Indigenous peoples, and Labour. They scored 3 for Transparency.
Banco Bradesco is a significant bank in Brazil and the Amazon area where deforestation and other resource extractions degrade the environment. Although the bank has still to develop sustainable policies in many areas, there is work in progress.
Case Study: Westpac
Westpac Banking Corporation is the largest bank in Australia (by market capitalisation) and the second-largest bank in New Zealand. It had assets of $590 billion, with around 34,000 employees and 10 million customers. Westpac has about 25% of the banking market in Australia. This is in part because of the four-pillar policy initiated in 1990 by Paul Keating, the Australian Treasurer, disallowing acquisitions and mergers of the main banks (Four Pillar Policy, Wikipedia, 2010) to ensure adequate competition.
Westpac has stated that it aims to be a global leader in sustainability. It has adopted the UN Environmental Program Finance Initiative as well as Equator Principles, and participates in the Carbon Disclosure Project. In the Dow Jones Sustainability Index from 2004-2007, it was assessed as the global sustainability leader for the banking sector. Sustainable Asset Management Group and the World Wildlife Fund have named Westpac as one of only six mainstreamers in the global banking community to have integrated climate change strategy into core business practice. Its strategic focus for 2009-2013 covers key areas dealing with environmental impact: applying sustainable principles through key product lines; providing community services; helping customers and employees move to a low-carbon economy; advocating for sustainable business practices; and mainstreaming governance and risk issues (Westpac, 2010).
Westpac defines sustainability as ‘managing what matters’. This means it includes issues like water security; an aging population; and areas of business performance, such as governance or human capital management. In regard to its own footprint, Westpac measures its emissions, energy use, business travel, paper, waste and water usage, and it sets targets for their reduction. It has developed a Sustainable Supply Chain Management policy and process, and requires its suppliers to adhere to its principles, practices and requirements (Westpac, 2010).
Westpac’s Responsible Lending Policy commits the Bank to lending only what its customers can afford to repay; marketing its products and services responsibly; supporting customers facing financial difficulty; and helping to improve its stakeholders’ financial literacy and capability. Its policy for SRI Products and Services commits the Bank to developing SRI funds where there is a market for them; developing products that promote positive social and environmental outcomes; lending with high social and environmental benefit; implementing trading mechanisms that support better environmental outcomes and, through its funds management business, BT Financial Group, the United Nations Principles of Responsible Investment. Additionally, the Bank voluntarily incorporates environmental, social and corporate governance issues into mainstream analysis, investment decision-making and ownership practices (Westpac, 2010).
Efforts have been made to build capacity into the organisation to cope with carbon and water risk. Forums have been held for the Westpac Institutional Bank, and the Retail and Banking groups. The Agribusiness Division has developed a dedicated carbon and water strategy and has appointed carbon champions in each Australian State. Carbon risk has been explicitly incorporated into the Westpac Institutional Bank credit manual with templates for industry sector strategy reviews.
The Renewable Energy Target, requiring that 20% of all energy generation in Australia come from renewable resources by 2020, was established by the Australian Government. Westpac has estimated that $A25 billion will be required, and has set up a renewable energy strategy. Currently, Infrastructure and Utilities financing for Australia and New Zealand totals $A2220 million. Renewables make up 13.4% of this: brown coal, 13.3%; black coal, 19%; gas, 16.8%; and hydro, 37.5%.
Risk is defined in a Material Issues Matrix in their Annual Review and Sustainability Report 2009. Some of the risks are being incorporated into Westpac Credit Policy, which is not a public document. However, Westpac does not lend to logging companies that log native forests. No account is taken in New Zealand of the impact of climate change (such as rising sea water levels) when analysing mortgage risk (D. McLean, personal communication 2010). Westpac’s reason is that there is a lack of conclusive science. Westpac is currently working on a water policy. It is recognised as a significant risk in the Westpac Credit Policy and is considered for all agricultural lending (S. Marsden, personal communication, 2010).
Evaluation of Westpac
Westpac’s definition of sustainability, ‘managing what matters’, is so general and unusual that it is misleading. Any bank could claim to be sustainable under this definition. It is misguided in that it does not provide clear qualities that Westpac wants to see for itself and its customers. Its application of materiality, inclusiveness and responsiveness are very general criteria, and may or may not lead to relevant sustainable policies.
The analysis of risk published by Westpac does not adequately account for the global drivers that deal with ecological degradation and resource depletion. A major weakness is that there are no publicly available policies. The stated reason for not including climate change risks into its mortgage polices is that there is no conclusive science. In one sense no science is conclusive, but there are probabilities of risk. There are a number of sites in New Zealand with high significant risk. There is no Westpac public policy dealing with adapting to the adverse effects of climate change, or the encouragement of clean-tech investments.
Westpac has a policy of leading beyond the corporate walls and speaking out in support of sustainable practices. In recent years, major changes in government policy in both Australia and New Zealand have made public engagement difficult. Westpac (along with other Australasian banks) has been too quiet. There is a place for companies to take a publicly principled approach that regards ecological degradation seriously without getting entangled in party politics.
Westpac received a score of 80 in the financial sector of the Carbon Disclosure Project (Carbon Disclosure Project, 2010). Other Australasian banks received higher scores: Australia and New Zealand Banking Group (82); National Australia Bank (82); Commonwealth Bank of Australia (81). The highest score, 92, was given to HSBC Holdings. In the Banktrack Report, Close the Gap (Banktrack, 2010), Westpac scored six 0s, and nine 1s. The Australia and New Zealand Banking Group scored five 0s, ten 1s and three 2s. The Commonwealth Bank scored ten 0s and eight 1s. National Australia bank scored nine 0s, seven 1s, and two 2s. HSBC scored two 0s, thirteen 1s, one 2, one 3, and one 4. (A score of 0 is given where there is no policy; a 4, where essential elements are included in policy.) A few years ago, Westpac was a leader in sustainability in the financial sector for Australia and New Zealand. This is no longer the case: it is now most probably the Australia and New Zealand Banking Group, but not by very much. HSBC is the leading international bank (Howell, 2010b).
Case Study: Description of Generation Investment Management
Generation Investment Management was set up in 2004 by Al Gore and David Blood. Their approach is that sustainability is a key factor in determining the long term performance of companies. The issues include climate change and environmental degradation, poverty and development, water, natural resource scarcity, health, demographics, migration and urbanisation. Corporate Governance, stakeholder engagement, bribery and corruption issues are also considered. Generation Investment management combines sustainability analysis with traditional analysis. Its first fund was Global Equity; the second, established in 2007, was Climate Solutions. The latter invests in private equity, restricted public equity, and unrestricted public equity. This fund focused exclusively on deploying capital into companies that are part of the transition from a high-carbon to a low-carbon economy. It has four areas of focus: renewable energy generation and distribution; energy efficiency and demand destruction; carbon markets and climate-related financial services; and solutions for the biomass economy. (Generation Investment Management, 2010).
Generation Investment is primarily an institutional investment management firm, operating at the wholesale level (major pension funds, foundations, family offices and a smaller number of insurance companies) rather than the retail level. The exception is the arrangement with Colonial First State, the distributor of the Generation fund in Australia, that constitutes about 1% of Generation Investment’s total investments. Because of its decision to work with institutional clients, Generation Investment can not make information about its services, strategy and investments widely available, and is not permitted to make it accessible to retail clients. Basically, the rules restricting the amount of information that firms offering an institutional product can provide are there to ensure that the general public is not enticed into investing in unsuitable and overly complex products (M. Mills, personal communication, 2010).
Global Equity, its flagship fund, concentrates on 30-50 companies that are high-quality businesses, with high-quality management teams, that can be bought at the right price. It has 21 investment professionals, with 20 additional partners, directors and associates (Generation Investment Management, 2010). As at 30 June 2010, it had an investment in Varian Medical Systems (who provide technologies for cancer treatment); Northern Trust (who manage investments and funds); Becton Dickinson (who provide medical technology); Henry Schein, (a health care company); Quanta Services (who provide specialised services for power, gas, and telecoms); Plum Creek Timber, (a forestry and timber operation); Qualcomm Inc (a communications company); Paychex (who provide payroll and payroll tax services); and C R Bard, (a health care company). These investments were 57% of the fund, the total of which was valued at $2.6 billion (Stockpickr, 2010).
Varian Medical Systems accounts for 8.24% of Generation Investment Management’s $2.6 billion investment. Currently, there is no assessment of Varian Medical Systems’ environmental impact on its website, apart from statements of legal risk. Its Annual Report states that it is subject to a variety of environmental laws regulating the manufacture and handling, storage, transport and disposal of hazardous materials. It follows procedures intended to comply with existing laws but acknowledges that it can not completely eliminate the risk of non-compliance (Varian Medical Systems, 2010).
Varian’s Corporate Communications & Investor Relations Director, Europe, stated Varian “committed to have a Global Reporting Initiative (GRI) based report available for public consumption and posted on our website by the end of 2011... Varian has always been socially and environmentally responsible, with initiatives dating back some 20 years, and we have much to be proud of. The missing link is that we’ve been very poor at communicating these achievements”. When asked about carbon emissions, renewable energy, fuel and water use, the company answered that they were working on these matters for the 2011 report. Its Salt Lake City operation has signed up to purchase ‘green power’ through its local utility. It has not adopted the Natural Step or its equivalent, although it does have environmental and health and safety prescribed operating practices. (N. Madle, personal communication, 2010).
Evaluation Of Generation Investment Management
The philosophy of this Fund is attractive. Al Gore has a long-standing commitment to facing the issue of climate change, has worked for many years internationally, and has deservedly received international awards. This fund has been set up as part of his work to deal with the causes and consequences of global warming. The arguments advanced for a more long-term and responsible form of capitalism are compelling.
The communication of the way in which these principles are applied is poor. Because of the organisation’s focus on the wholesale market, the responsibility for public information rests with the wholesale client. As primarily an institutional investment management firm, it is limited in the amount of information it can publicly provide. It was acknowledged that this did not apply to Colonial First State Investments (M. Mills, personal communication, 2010). However, more information should be available through institutions about Generation Investment’s activities, such as where pension and insurance monies are invested, and these funds should be able to reassure their clients and customers that they are investing sustainably. The Business-to-Business arrangement that Generation Investment has should be described on its website, and enquirers should be directed to pension funds and insurers for information.
The selection of Varian Medical Systems is puzzling. Varian may have some proud initiatives, but the absence of sustainable records and measures calls into question the evaluation, selection and engagement processes of Generation Investment Management. The lack of information means that the application of its principles is questionable. In comparison with Portfolio21 (Howell, 2010b) and Highwater Global funds, the public information available from Generation Investment Management is unsatisfactory.
Case Study: Description of Highwater Global Fund
Michael Baldwin and Paul Hawken started this fund in 2005 by linking with Baldwin Brothers, a privately owned independent advisory firm. The fund invests in companies to provide solutions for environmental and social challenges. Investments are diversified across geographies, market capitalisations and sectors. The investment horizon is medium to long term, with portfolio positions averaging between 30 and 40 holdings. It currently has around $60 million invested. A minimum investment bar means it is primarily for richer investors. The top ten equity holdings are Apple; Banco Bradesco; Cisco; EnerNOC; Ford Motors; Hyflux; Natura Cosmetics; Novozymes; SSL International; and Vivo Participacoes (Highwater Global Fund, 2010).
Highwater Global Fund has a three-stage selection process. (There are some inconsistencies between Hawken’s article and the Baldwin material (Hawken, 2010; Baldwin Brothers, 2010), but these were resolved by discussion with the Fund’s representative (Bill Marvel, personal communication, 2010).) The first stage is to determine the intentionality of the candidate company. The mission and performance are evaluated within the system of five attributes drawn from the work of Natural Capitalism (Hawken, 1999). Does the company provide innovative services and products that address the current and future needs of people and the Earth? Does it address climate change and carbon emissions? Does it work proactively to minimise natural resource use through resource productivity? Does it facilitate a shift from an economy of consumption to an economy of well being? Does it integrate and demonstrate a social and environmental commitment in corporate values and stated objectives? The majority of companies are excluded because of unacceptable activities such as human rights violations; the production of hazardous waste; industrial agriculture; animal cruelty; and corruption. From a field of over 5000 global public equities, around 350 were selected for the next step (Bill Marvel, personal communication, 2010).
The second stage is an assessment of whether the remaining candidates are innovators, shifters or neutrally good. Innovators are companies concerned with advanced research, technology and services. An example is the pioneer in large-scale wind turbines, Vestas. Shifters are companies such as Interface (the carpet company) and Canon, who are making a determined effort to reverse their traditional behavior. Neutrally good companies address a key issue by default. Examples are eBay and Amazon (Hawken, 2010; Baldwin Brothers, 2010).
The third stage is scoring the companies on a scale of 1 to 10 for 12 categories (leadership; employees; supply chain; community; diversity and women; intention; customers; materials; energy; water; climate; products and services) and over 200 factors, and making a final selection of 30-40 companies. The rating is not the deciding factor, and some companies are chosen when their scores are less favorable than other candidates’. Pragmatic considerations would include the availability and timing of purchase of stock. A decision was made to exclude Kellogg’s despite the company’s very good mission statement, because their performance does not address the children’s health crisis in the United States from obesity and type 2 diabetes. First Solar is included because its mission is to enable a world powered by clean, affordable solar electricity. Ford Motors is included because their operative intention today is to become the greenest, most efficient transport company in the world (Hawken, 2010; Baldwin Brothers, 2010).
Highwater Global has invested in Ford Motors, a company that accepts climate change as a serious threat. Recent claims that scientists have misrepresented the temperature record do not undermine the broad scientific basis for concern about climate change, states Ford. The company is committed to helping to achieve a 450 ppm climate stabilisation pathway (stated as 1.4-3.1oC) by 2200 (instead of 2050 for the BAU projections). It has set a number of goals to this end, including a goal to reduce US and EU new-vehicle CO2 emissions by 30% by the year 2020, compared to a 2006 model year baseline (Ford, 2010). The data for Ford US fleet fuel economy, US fleet CO2 emissions, and worldwide facility energy consumption shows improvements between 2007 and 2009, although energy consumption per vehicle does not (Ford, 2010). It is unclear is whether the calculation includes the amount of carbon and fossil fuels used in the production of electric cars, and the indirect costs of road building and maintenance.
Evaluation of Highwater Global Fund
Paul Hawken has an international reputation as an environmental author and activist. His Natural Capitalism: Creating the Next Industrial Revolution (Hawken, 1999), and The Ecology of Commerce: A Declaration of Sustainability (Hawken, 1993) illustrate his understanding of the threats to the health of the planet and the role of business. The establishment of Highwater Global Fund is an extension of that understanding and action.
The selection process is reasonably thorough. Highwater Global’s restriction to 30-40 companies indicates careful selection. The public information about the organisation’s scaling methodology is very general and does not mention whether validation and reliability studies have been done. If the items in the 12 categories, and the 12 categories, are given equal status, the ranking will differ from that derived where different weightings are given. Hawken has stated admiration for Portfolio21 but, in comparison, only 60% of its portfolio would qualify for Highwater (Gunther, 2010). Both, however, invest in Banco Bradesco. Highwater Global gives Banco Bradesco as an example of companies offering services that promote quality (and celebration) of life, but does not analyse the investment issues regarding energy and agribusiness that Banco Bradesco faces. With a restriction to 30-40 companies, and the initial selection criteria, this is not so critical for Highwater Global. But when funds invest in a much broader range of companies, the rating process and the nature of the tradeoffs become much more important.
Highwater Global Fund provides a list of the top ten equity holdings. While the names of some companies that the fund does not invest in are disclosed, they are not as public as Portfolio21. Portfolio21 gives a full list of their holdings and reasons for their inclusion. It also provides a list of some of the companies that they have excluded, with reasons. Highwater Global does not do this. Portfolio21 describes some of its engagement activities. Highwater Global does not do this. The link with Baldwin Brothers has avoided some start-up costs, but there are some restrictions on the promotion of the fund. There is some exploration about developing the fund to enable cheaper access and greater disclosure (Bill Marvel, personal communication, 2010).
Ford’s interpretation of 450ppm climate change stabilisation as between 1.4-3.1oC warming is most probably too cautious: it is more likely closer to 3oC. Motor companies in the United States have a dubious record regarding the introduction of sustainable technologies. It would be useful to have more information about what engagement Highwater Global does, so as to be more confident in their support of Ford.
Implications for the Transition to Financial Sustainability
While it is possible to argue over some details of Portfolio21’s and Highwater Global Fund’s application of their principles, the broader picture is that their approaches provide useful insights for sustainable investment. The similar principles of Generation Investment Management are also good. It convincingly argues that companies need to consider the longer term, and therefore the risks that ecological degradation brings. The application of these principles and their communication needs improvement. Portfolio21 states that there are no fully sustainable companies to invest in. It is therefore important to support and encourage those companies that aim to be sustainable, and engage with them to make the changes. Principles, standards, guidelines and benchmarks based on strong rather than weak sustainability are important in this respect. Many international standards are inadequate. Both funds can provide useful models for extending sustainable investment, although a challenge for the Highwater Global model is to lower the financial admission barrier so as to include less wealthy people. The initial selection stage of Highwater Global Fund eliminates the majority of investment options. Hawken says, “simply stated, we get rid of the chaff” (Highwater Global Fund, 2010). While there are many useful lessons from these case studies, it is the ‘chaff’ that is relevant for the transition to a sustainable world. In that respect, questions raised above about ranking procedures will become more critical for funds that are bigger and have a much greater range of investments. Also important are the issues of public reporting.
Banks provide important investment for the transition to sustainability. The case studies of Westpac and Banco Bradesco show that there is much work to be done, particularly in regard to policies for energy, mining and forestry. HSBC had good policies for forestry, but not for mining and energy (Howell, 2010b). There are other bank models that could be considered. Global Alliance for Banking on Values is a group of ten banks with combined assets of $10 billion, operating in 20 countries (Global Alliance for Banking on Values, 2010). The Alliance’s charter includes the principle of supporting sustainable and environmentally sound enterprises. Whether sustainability in the Alliance’s definition is strong sustainability is not clear. For Triodos Bank it most probably does mean this (Triodos Bank, 2010), but evidence for Banca Etica is not clear (Banca Etica, 2010). A number of these banks are cooperatives and not readily open to general investors. The Global Alliance for Banking on Values group does not include the German Government bank, KfW Bankengruppe, the UK’s Cooperative bank, or Sweden’s cooperative JAK bank. The UK Cooperative Bank does appear to have a commitment to strong sustainability, but JAK bank’s special feature is that it does not charge or pay interest on its loans, a principle similar to one in Islamic banking. The latter banks do not appear to significantly address the threat of ecological degradation.
However, the focus needs to be on the majority of banks that are not performing well. In a survey of 16 US and 24 non-US banks representing more than 60% of the total market capitalisation of the global publicly traded banking sector, it was found that many of the 40 banks have done little or nothing to elevate climate change as a governance priority. “While many banks have made improvements, the actions to date are the tip of the iceberg of what is needed to reduce greenhouse gas emissions consistent with targets scientists say are needed to avoid the dangerous impacts of climate change” (Cogan, 2008). The examples of HSBC, Westpac, and Banco Bradesco banks identify the policy changes that are needed.
The investment required by developing and developed countries is considerable, and will not be achieved alone by managed funds and banks. Stern has estimated that 2% of GDP is needed to move to a low-carbon economy (Jowit and Wintour, June 28, 2008). The world’s Gross World Product in 2008 was $61.22 trillion, so 2% amounts to $1.244 trillion. The EU’s GDP was $18.14 trillion and the USA’s was $14.44 trillion. In 2008 the USA’s spending on war amounted to 4.8% (Velasquez-Manoff, 2010). Two reports indicate that the required investment will not be obtained unless governments take an active role. The first report is by a group of individuals from NGOs (IndyACT, David Suzuki Foundation, German Watch, World Wildlife Fund, Greenpeace, National Ecological Centre of Ukraine) who produced a model climate treaty for the Copenhagen UN meetings in 2009 to achieve a reduction in admissions to below 2oC. They estimated that industrialised countries should provide at least $160 billion per year for the period 2013-2017 to developing countries. This will comprise $56 billion per year for adaptation activities; $7 billion per year for a multilateral insurance mechanism; $42 billion per year for REDD (forestation); and $55 billion per year for mitigation and technology diffusion (Meyer et al, 2009). The second report is by the Green Investment Bank Commission in the UK, who recommended the establishment of a Green Bank (Green Investment Bank Commission, 2010). This report describes the tasks for the UK in a transition to a low-carbon economy, the market failures and barriers to investment, and the case for intervention. It states that the scale of the investment required to meet UK climate change and renewable energy targets is unprecedented, with estimates of investment required reaching £550 billion between now and 2020. For comparison, only £11 billion was invested in Britain’s new gas industry during the 1990s. The Commission recommended that a Green Investment Bank be set up to work as part of overall Government policy to open up flows of investment by mitigating and better managing risk (Green Investment Bank Commission, 2010). These reports indicate that the required investment will not be provided for both developed and developing countries without the active intervention of governments.
The absence of any adequate sustainability criteria for the investment of the large majority of SWF is disappointing. It illustrates the lack of appreciation by these countries of the threats posed by ecological degradation. If SWFs were able to adopt policies that contained adequate sustainability criteria, this would be an important contribution to sustainable investment. It would not be easy as a large proportion of SWF are oil and gas related, but Norway provides the example of a country that has adopted ethical standards for its SWF.
The move to a low-carbon economy will need to consider the absence of an effective international decision-making process where international environmental and economic agreements are able to be achieved and enforced (Brown, P.G., Garver, G. et al, 2009). It also needs to consider dysfunctional states; weak states with corrupt, ineffective or inefficient legal, government and enforcement systems; and countries opposed to decisive action on climate change. Many developing countries fit into one or more of these categories, but so do developed countries like the United States. Its political system has been captured by large international companies, particularly the oil, gas and coal companies, and they have a disabling effect on moves to deal with climate change. This includes disrupting the attractiveness and growth of renewable-energy companies in the US: many initiatives for renewable energy lie with China and Germany (Bradin, 21 July, 2010). This means that companies like Ford Motors, and the funds that have strong sustainability as a cornerstone of their philosophy, need to take into account the negative impacts of the ‘chaff’. Ford’s commitments and plans in this respect, to help in the achievement of a 450 ppm climate stabilisation pathway by 2200, are unrealistic, because the assumption that others will play their part is also unrealistic.
The obstacles for a smooth transition to a sustainable financial sector are considerable. The changes involve foundational changes to the international political, economic and ethical decision-making structures and processes (Howell, 2009; Howell, 2010a; Howell and Cartwright 2009; Howell and Cartwright, In Press), and changes of this type occur infrequently and usually at times of major upheaval. Mitigation alone is no longer adequate: adaptation is required. The indications are that climate change and the trends in ecological degradation will bring widespread disorder and disruption (Lynas 2007; Lynas, 2009). During the next few decades and beyond, large loss of human life and deterioration in living standards is likely. Many of the goods that currently make up international trade patterns will disappear, as floods and storms, rising seawater, lack of water, and pollution destroy factories or production sites. Prudent investment will be in goods and services essential for simple and sustainable living, with a focus on local resources and production in the areas of food, housing, clothing, and water and energy systems. (This calls for simpler and less complicated low-carbon and clean-tech industries..) Production and distribution systems will need to be resilient, and able to cope with relatively rapid changes in temperature and weather. Transport and communication systems currently dependent on unsustainable energy and resource use will disappear. Investment needs to recognise the structural changes that will come through the global drivers associated with ecological degradation and resource limits, and that these will be more important than the usual business cycles.
Financial organisations have an important role in preparing their clients and the public to shift to strongly sustainable models of economic behaviour and to adapt to a turbulent future, because they need to identify risk. In this respect the case studies described above contain important lessons in the selection of companies that take sustainability seriously, and in the ways that principles and standards are defined, operationalised, monitored and reported. They illustrate the gap between the funds and companies that are responding significantly to the challenges of ecological threats, and the majority who are not. They also show that governments have important roles to play in establishing adequate standards, by using Sovereign Wealth Funds, and by supporting international efforts to reach international agreements on mitigation and adaptation policies and plans.
The Earth’s systems are not resilient enough to cope with the damage that humans have done to them. Currently, investment funds (including SRI) and Sovereign Wealth Funds are part of the problem. Consideration of Generation Investment Management, Highwater Global Fund, Portfolio21, Banco Bradesco, Westpac Bank and HSBC Holdings illustrates these problems, and points to some solutions. Adoption of principles, standards, benchmarks and guidelines needs to include strong sustainability as an essential component. Criteria for the selection of companies that aim to be strongly sustainable are necessary, but it is just as important that the operationalisation, engagement, monitoring and reporting be carried out properly. There is considerable room for improvement, particularly in the development of energy (including transportation), mining, forestry, and agribusiness policies and investment.
While there are companies that are inspiring in their attempts to deal with the ecological challenges, the financial sector as a whole will not be able to be part of the solution without governments taking a more supportive role. Standard setting, incentives and taxes that work for, rather than against, the solutions, and dealing with market failures, are some of the required actions. Unfortunately, dysfunctional, weak and failed states, governments unduly influenced by the major oil, gas and coal operations and companies, and the absence of an effective international decision-making and enforcement system, mean that a rapid shift to sustainable investment is unlikely until the impacts of ecological degradation are severe enough to confront the world’s political leaders and their constituencies. Investment strategies therefore need to take account of the risks that a deteriorating Earth will bring to continued human life.
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