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Über dieses Buch

This book provides evidence on the relevance of environmental and social factors in decision making. It discusses the Gold Standard Frameworks for integrating extra-financial risks into the philosophy, culture, strategies, products and value chain management procedures of investment and banking and highlights the current emergence of global administrative law. New emerging topics like positive impact investing and finance, climate friendly markets, human rights, the enhanced role of fiduciary duties and shared values are approached with a lot of examples for practical application. Steps towards a new banking culture, a new climate for double loop learning and sustainable financial innovation are outlined and the additional benefits of robust stakeholder engagement explained. The anthology paves the way from robust impact and risk management to positive impact creation and a new investment culture. As well, challenges for the implementation and ways to overcome them are broadly discussed. The book is rooted in the fact that institutions and investors which fail to professionally integrate the management of extra-financial risk into their whole lending and investment chain and fail to move to positive impact creation may well loose positions and mandates and finally the trust of their clients, partners and stakeholders. The contributing authors of this anthology are internationally renowned experts in the field of ESG and impact investing. The compendium brings together practitioners and academics to allow a confluence of thoughts, concepts and viewpoints. This huge variety of perspectives and approaches makes this volume a comprehensive compendium on responsible investment and banking.

Inhaltsverzeichnis

Frontmatter

Editor’s Contribution

“The business of business is business”, Milton Friedman replied, when asked what economics contributes to the welfare of society (Milton Friedman 1972). In his view, business contributes much to the welfare of society by producing goods and services, supporting economic growth and providing employment. But questions of finite planetary resources; climate change vulnerability; loss or reduction in biodiverse natural habitats; decrease in ecosystems services; drilling in the arctic; poor labour conditions in many markets; questions over human rights, accompanied by social unrest connected to infrastructure projects; and speculation in natural resources and soft commodities and the question of access to drinking water have brought new meaning to responsibility for business and the financial industry in particular.

Karen Wendt

Fit-for-Purpose and Effective Environment, Social and Governance (ESG) Management: ESG Implementation Challenges, Concepts, Methods and Tips for Improvement

This chapter explores the investment bank structure and the optimum approaches to integrate ESG into the credit risk process. The chapter also discusses key elements of building the business case for both why ESG is important and the need for closer oversight and integration into the “business-as-usual” process. It also explores how leadership, governance and culture can, or rather should be, created and maintained such that the successes of ESG integration once complete are not diminished through time. The chapter is written in the first person, drawing from the author’s risk management experience over the past decade, without reference to specific institutions to allow more open expression of core issues and challenges, providing valuable tips and techniques to achieve successful change programmes.

Alexander Cox

Challenges and Advantages of IFC Performance Standards: ERM Experience

This chapter discusses an interview with two partners from Environmental Resource Management (ERM) about important environmental and social issues in the IFC’s recently revised Performance Standards. These include climate change, biodiversity and ecosystems, stakeholder engagement, gender and business and human rights. They represent issues, where earlier requirements have been made more explicit, as well as emerging themes that have been introduced. This chapter addresses how these issues are reflected as cross-cutting themes rather than as stand-alone topics. This chapter also discusses conceptual and political dilemmas and challenges related to some of these themes, as well as practical aspects such as implementation and integration into decision-making and management systems.

Elena Amirkhanova, Raimund Vogelsberger

EBRD Environmental and Social Governance Standards and Their Impact on the Market

The European Bank for Reconstruction and Development (EBRD) aims to achieve impact by integrating sustainability into its investment strategies, departmental scorecards, due diligence standards, portfolio supervision systems and technical assistance. This forms an important part of the value that the EBRD brings to its clients and countries of operations, as well as delivering high-level environmental and social quality assurance. All EBRD-financed projects must meet rigorous environmental and social standards in accordance with the bank’s Environmental and Social Policy and are subject to detailed due diligence and monitoring. In this way, the EBRD provides assurance to its management, shareholders and stakeholders that the bank’s projects will contribute to sustainable development and avoid or minimise environmental and social risks. The EBRD seeks outcomes that not only protect and benefit society and the environment but which also address the business case for sustainability by helping clients reduce risk, improve efficiency and achieve business growth. This chapter explains the practical approach with which the bank implements its sustainability mandate.

Dariusz Prasek

Implementing Environmental and Social Risk Management on the Ground: Interfaces Between Clients, Investment Banks, Multi-laterals, Consultants and Contractors: A Case Study from the EBRD

Assessing and understanding the potential environmental and social (ESG) risks is an essential step in the preparation and development for a project seeking investment. Understanding the due diligence process, the scope of issues to be covered and how interfaces or relationships between key parties can potentially affect the risk profile of the project and timeline for financial approval is explored in this chapter. Including ESG requirements as a key component of the investment works best when incorporated early in the project cycle and should ensure that the project meets national requirements and standards. However, the introduction of International Lenders may broaden the ESG risk analysis and therefore require the project to be recalibrated to meet an additional set of standards, requirements or principles. This can be a challenge for all parties involved. This chapter considers some of the lessons learnt from the environmental and social appraisal processes and from the monitoring of project development and implementation in practice, or ‘on the ground’ of large-scale infrastructure projects. It explores some complexities of interfaces and how they address project ESG risks and highlights areas where there may be some capacity building needs.

Debbie Cousins

Translating Standards into Successful Implementation: Sector Policies and Equator Principles

The Equator Principles have become a market standard in the area of project finance within the space of a few years and now form the basis of environmental and social risk management systems among financial institutions of all sizes and nationality. This in itself is a great achievement that needs to be preserved. The third version of these principles, launched on their 10th anniversary, broadens the scope of application to certain corporate financing activities directly linked to a project. Even with this development, which concerns financing methods where it seems reasonable to carry out such due diligence procedures, the Equator Principles still only cover a small share of the activity of the commercial banks that have adopted them. Some financial institutions have thus decided to establish broader coverage of their activity using sector CSR policies that specifically set out the environmental and social analysis criteria to be considered when reviewing projects in specific economic sectors. Despite examples of cooperation between banks to establish agreement of the stakes involved and to define best practices, there has not been a coherent response from the financial sector. The implementation of shared policies seems a long way off, and even the definition of guidelines seems complex due to different sensitivities of the financial institutions, which generally reflect the social acceptability of their activities within the societies in which the banks operate. While difficult, cooperation between financial institutions in the area of sector policies is vital if these policies are to truly contribute to more sustainable development of the economy.

Eric Cochard

The Equator Principles: Retaining the Gold Standard – A Strategic Vision at 10 Years

Launched in 2003, the Equator Principles (EP) signaled a major shift by international banks in their approach and responsibility for environmental and social outcomes in the projects to which they were lending. Ten European, US and Australian banks originally adopted the EPs. Within the first year, this had grown to 25 financial institutions from 14 countries, including a Japanese bank and an export credit agency. Ten years later, there are 80 Equator Principles Financial Institutions (EPFIs) from countries as diverse as Mauritius, Mexico and Morocco. In 2006, the EP were revised to reflect changes in IFC's Performance Standards and needed modifications based on implementation experience. The update process took less than six months, expanded the scope of the EPs and introduced reporting requirements. In 2010, the EP Association embarked on another revision process (EP III), which took more than two-and-a-half years to complete. What changed to make the process so much slower? Were the EP Association’s aspirations for this revision higher, were the issues more complex, did the broad geographic scope of the EP membership make consensus more difficult or had the management of EP Association become less efficient? The management system of the EP Association with its rotating chair, 14-member steering committee and ten working groups is both a strength and a weakness. With its flat structure and lack of dedicated professional resources, the EP Association now has to work longer and harder to develop solutions, reach consensus and make decisions. This extended process provides some insight into the complexity of managing a voluntary global standard with a broad range of constituencies. Among the trade-offs that had to be navigated were the desire to introduce more robust and consistent reporting requirements while recognising that some countries have a culture of corporate privacy; and addressing climate change and promoting lower carbon outcomes while accommodating those countries actively developing carbon-intensive industries such as tar sands, hydraulic fracturing and coal reserves. EP III reflects breakthroughs including the expansion of the scope of the EPs to include Project-Related Corporate Loans and strengthened reporting requirements. The release of EP III at the Association’s 10-year anniversary provides the opportunity to reflect on what the EPs have achieved and where challenges remain.

Suellen Lambert Lazarus

Development Banking ESG Policies and the Normativisation of Good Governance Standards

Development Banks as Agents of Global Administrative Law

As investment banks, both multilateral development banks (MDBs) and private sector actors, adopt comprehensive environmental, social and governance policies and standards to circumscribe the projects and activities they finance, these policies and standards reflect and contribute to the formation of a range of widely accepted standards of good governance that are increasingly understood as formal legal or quasi-legal requirements. Such policies and standards promote a number of core ‘good governance’ values, including transparency of decision-making, broad public participation in decision-making and policy formulation, delivery of reasoned decisions, reviewability of decisions, accountability of decision-makers and respect for proportionality in decision-making and respect for human rights, which are prevalent in national systems of administrative law and increasingly applied, mandatorily or voluntarily, to a range of actors including private sector lenders. The ESG policies and standards initially adopted by MDBs, which often incorporate and informally enforce values set down in national and international law on environmental protection and human rights, are now reflected in the Equator Principles adopted by 80 private sector lenders in 35 countries. This tendency towards the emergence of a set of universally accepted good governance standards, applicable to both public and private actors at global, regional, national and local levels of administration, has been described as the phenomenon of ‘global administrative law’. The trend in investment banking towards the adoption and implementation of ESG policies and standards can therefore be explained in terms of global administrative law while, at the same time, the investment banking sector might be regarded as an exemplar of this gradual move towards the development of global standards of good governance practice.

Owen McIntyre

Environmental and Social Risk Management in Emerging Economies: An Analysis of Turkish Financial Institution Practices

Turkish Financial Institutions (FIs) have come to recently realise that nonfinancial factors can materially affect an institution’s long-term performance. Environmental and social issues (i.e. pollution, resource depletion, wastes, biodiversity, land acquisition and resettlement, labour and working conditions, occupational/community health and safety, cultural heritage) have been recognised to pose risks to the Turkish FIs through their project finance operations. This awareness developed in parallel to the concept of sustainability being embraced by Turkey’s corporate sector. Several large Turkish lending institutions have developed environmental and social (ES) management systems for evaluation of the projects considered for financing. Although the majority of these are based on international standards that include ES performance criteria of the International Finance Corporation (IFC), European Bank for Reconstruction and Development (EBRD) and European Investment Bank (EIB), they do not yet fully encompass the requirements of the international standards in the actual implementation process. The projects considered for financing are typically subject to the Turkish Environmental Impact Assessment (EIA) Regulations that set the commitments for the project owner for environmental protection based on the Turkish regulatory framework. Compared to the international standards, there are gaps in the Turkish EIA studies that include a lack of a structured impact assessment, insufficient baseline studies and limited community engagement programmes. These gaps may eventually pose legal risks to the project during development and operations and also to the lending institution in terms of financial and reputational risks. Although several institutions have developed ES management systems internally, experience shows that these systems initially focus on following the Turkish EIA process without fully assessing issues such as biodiversity, cultural heritage and social impact assessments including expropriation and resettlement issues. This chapter will provide an overview of ES procedures of large lending institutions in Turkey and discuss generic data gaps between Turkish EIA studies and international requirements as well as the evaluations of ES risk management systems in place. Discussions include main risks and opportunities in applying international standards in investment finance in Turkey as well as identifying future trends.

Işıl Gültekin, Cem B. Avcı

More Fun at Lower Risk: New Opportunities for PRI-Related Asset Management of German Pension Insurance Funds

The main focus of our chapter is to assess the suitability of Social Responsible Investments (SRI) for the strategic asset allocation of German pension insurance funds. Our analysis considers prevailing regulation in Germany for asset allocation as well as alternative investment models that disregard the strict investment framework currently in place. Using the Vector Error Correction (VEC) methodology, a multivariate stochastic time series model, we estimate the data generating process of the underlying input variables of a representative asset portfolio. A bootstrap simulation on the estimated VEC models allows generating future return paths of the underlying portfolios. These return distributions will subsequently be used as input for the various asset allocation strategies we have chosen (both outright as well as derivative overlay structures). The empirical results of our research study are valuable: SRI-structured portfolios consistently perform better than conventional portfolios and derivative overlay structures enable pension fund managers to mitigate the downside risk exposure of their portfolio without impacting average fund performance.

Christian Hertrich, Henry Schäfer

Hard Labour: Workplace Standards and the Financial Sector

A number of issues arise when considering the application of the principles contained within the Equator Principles and the IFC Performance Standards on labour to a range of transactional and advisory work of financial institutions. Many are difficult to assess, for example, freedom of association, non-discrimination and wages and the criticality of issues such as child labour and forced labour, so it is paramount that financial institutions better understand the scope of their potential actions and those of their clients in this area. It is also important to understand the terrain of engaged stakeholders, including trade unions and national government. This chapter will consider the following: standards to be applied; issues that arise, with examples of several; the tensions between the scope of Performance Standard 2 (PS 2) and national rules; practical steps that banks can take and the limits on banks’ activities; and the role of impact assessment studies, social auditing and other forms of assessment reports. The chapter will also place the question firmly in the context of financial sector implementation of the UN Guiding Principles on Business and Human Rights.

Steve Gibbons

UBS and the Integration of Human Rights Due Diligence Under the United Nations (UN) Protect, Respect and Remedy Framework for Business and Human Rights

UBS, headquartered in Switzerland, is one of the world’s leading financial services companies, offering international wealth and asset management as well as investment banking services. UBS is fully committed to corporate responsibility. This commitment is incorporated in the principles and standards set out in the bank’s Code of Business Conduct and Ethics. These apply to all aspects of UBS’ business and the ways in which the firm engages with its stakeholders—from the products and services offered to its clients, its management of environmental and social risks, to the way UBS protects the well-being of its employees and society at large. As part of this, and in line with the firm’s endorsement of the UN Global Compact, UBS adopted the ‘UBS Statement on Human Rights’ in 2006, setting out the firm’s position on human rights issues with regard to its employees, suppliers and clients. This chapter explains how the UBS environmental and social risk framework developed over time with regard to incorporating aspects of human rights when vetting prospective corporate clients and executing their transactions. In particular, it illustrates how the UN ‘Protect, Respect and Remedy’ Framework for Business and Human Rights, together with discourse between committed universal banks convened as the Thun Group, contributed to the successful integration of human rights into UBS’ due diligence process.

Liselotte Arni, Yann Kermode, Christian Leitz, Alexander Seidler

Strengthening the ‘S’ in ESG: What New Developments in Human Rights and Business Bring to the Table for Investors

Attention to environmental, social and governance (ESG) issues is moving along a trajectory from being a niche topic of specialised investors to a conventional consideration among an increasingly wide range of mainstream investors. The S (social) factor has always been the junior partner in the triumvirate, lagging behind the increasingly systematic and formalised approaches to environmental and corporate governance issues. This is partly due to a perceived lack of clarity and standards, a vagueness surrounding what falls into the S pot and a lack of the hard edges of national corporate governance or environmental regulations. S issues have often been seen instead as something nice to have in the annual report. However, with the infusion of human rights into the S agenda, the S is changing, taking on a more defined shape along with some hard edges that are prompting businesses, and increasingly investors, to wake up and pay attention.

Margaret Wachenfeld

The Social Reform of Banking

Recent developments in banking, including high-profile prosecutions for illegal activities, suggest further regulatory interventions on both sides of the Atlantic. Yet the structure of much banking regulation requires banks to make good faith determinations of the type of risks to which their loans give rise—determinations that can be and, in some cases have been, manipulated. Rather than evaluating specific regulatory interventions, this chapter will focus on the culture within financial institutions themselves, particularly the global entities that are explicitly or implicitly too big to fail, and on approaches to regulation that might affect and be affected by that culture. Our analysis is informed by the perspectives of anthropology, organizational and social psychology, and new governance regulatory theory.

Cynthia A. Williams, John M. Conley

The Global Reporting Initiative Guidelines and External Assurance of Investment Bank Sustainability Reports: Effective Tools for Financial Sector Social Accountability?

This chapter will examine the progression of financial sector social accountability since the late 1990s. In particular, it explores the role of the Global Reporting Initiative Financial Services Sector Supplement, as well as the external assurance of financial sector sustainability reports, in the evolution of investment bank social accountability. Specific attention is paid to the perceived effectiveness of the GRI guidelines and external assurance mechanisms to ensure the consistency and quality of environmental, social and governance disclosures across banks and hence whether these tools have enhanced investment bank social accountability to date.

Niamh O’Sullivan

Are the Equator Principles Greenwash or Game Changers? Effectiveness, Transparency and Future Challenges

This chapter will focus on an overall assessment of implementation of the Equator Principles (“EPs”) based on survey research from participating banks—Equator Principle Financial Institutions (“EPFIs”). It documents both how individual institutions have changed their organizational structures, policies and procedures following their decisions to adopt the EPs and how they have contributed to the growth and evolution of the regime. These measures, however, are not perfect proxies for “on the ground” performance, so the chapter also addresses the related issues of transparency and enforcement and proposes additional institutional structures that the EPFIs could adopt to enhance the EPs’ effectiveness.

Ariel Meyerstein

An Investigation on Ecosystem Services, the Role of Investment Banks, and Investment Products to Foster Conservation

As they have done in the past with global challenges such as rebuilding in the aftermath of WWII and financing the industrial revolution, banks have a central role to play in helping society meet their development goals in a resource-constrained world. In preparing for the challenges of this next century, society will need to manage issues such as population growth, food and water scarcity, and climate change while preserving the ecosystem services that underpin economic growth. “Sustaining innovations” in a banks’ business model are required—those that transform banking products to generate environmental and societal benefits. Banks can manage risk and seek opportunities by deploying latent capital into revolving funds, leverage public-private partnerships to develop the absorptive capacity of potential clients (particularly private equity investors), and establish innovative financial products that conserve ecosystem services in support of healthy, sustainable societies.

Sonal Pandya Dalal, Curan Bonham, Agustin Silvani

Mobilising Private Sector Climate Investment: Public–Private Financial Innovations

Public financial resources alone will not be adequate to limit greenhouse gas emissions to safe levels and build resilience to the impacts of climate change. Recognising this financial gap, public actors, such as governments, development finance institutions, and aid agencies, are considering how best to harness and redirect private sector investment towards activities that address climate change.

This chapter profiles trends and innovative public interventions used or considered to mobilise private sector investment, including policy and technical support, supplying incremental finance, de-risking investments, and fostering public–private partnerships. It draws on a mix of primary research and analysis, case studies, and consultations to identify innovative means that the public and private sectors can collectively pursue to foster climate-friendly markets.

Shally Venugopal

Implementing ESG in the Financial Sector in Russia: The Journey Towards Better Sustainability

While environmental and social considerations have become a standard practice within many national and international financial institutions over the past decade, the Russian financial sector is still only taking its first steps towards better sustainability. Environmental matters in Russia have traditionally been a prerogative of state regulatory bodies. The philosophy of industrial companies, therefore, was, and in many cases still is, to comply with environmental regulation. Financial institutions lending to and investing in industrial companies preferred to distance themselves from their clients’ environmental issues. Social aspects, as currently understood within the ESG concept, received even less consideration. Tighter environmental regulation, however, and, more importantly, better enforcement, political developments, wider international cooperation, increased public awareness, and promotion of sustainability standards by major international finance institutions acting in Russia have now instigated a change of approach by financial sector companies to address ESG issues. This chapter will discuss what is happening, and why, and the key challenges to implement sustainability strategies into the financial sector operations in Russia.

Alexey Akulov

Implementing International Good Practice Standards: Pragmatism Versus Philosophy

Mainstreaming environmental and social considerations is something people have been working on for many years, and still are. For economists, the environment was considered an externality—if you cannot quantify it, you cannot incorporate it into your economic model. This is an ongoing problem, though tremendous strides have been made. John Dixon at the World Bank was one of the first to tackle this divide. Two years prior to the creation of the original Equator Principles, the four founding banks—Citibank, Barclays, WestLB and ABN Amro, each experienced a reputational crisis fomented by NGOs that led them to found what later was to become the Equator Principles. The four banks—Citi, Barclays ABN Amro and West LB—eventually got together, and this was the catalyst for the Equator Principles. They discussed that they needed some sort of environmental and social policy framework for project finance lending across the board. Although it was a cautious approach, it was a brave move. It took two more years of lobbying to recruit another six banks to have a critical mass of 10 for the original launch in June 2003. It has taken another 10 years to exceed 75 members.

L. Reed Huppman

Tipping Points: Learning from Pain

A Commentary by Herman Mulder

At this year’s OECD Global Forum on Responsible Business Conduct (June 2013), the terrible tragedy of the collapse of the Rana Plaza garment factory in Bangladesh that killed more than 1,000 workers rightly took centre stage. It reminded us all—governments, factory owners, product off-takers, but also financial institutions (investors and banks)—that we must take responsibility for the value chains of our businesses. The sustainability agenda is progressing with regard to public and private sector stakeholders, including the financial sector, and current momentum is irreversible in eliminating the short-termism that has dominated the financial sector for too long: the Working Party conclusions at the OECD forum re-confirmed that the financial sector is now part of the OECD MNE Guidelines, and European Commissioner Michel Barnier’s structural reform of banks has indicated that “corporate transparency is key to a prosperous and sustainable future”. Barnier’s “report or explain” proposal that insists large companies disclose information on the major economic, environmental and social impact of their businesses as part of their annual reporting cycle is also of major importance. Unfortunately, the uncomfortable truth is that pain is often the driver of gain and many of the successes of the sustainability agenda have relied on a push from a major crisis or serious wake-up such as Rana Plaza. It is my opinion, that there could be another serious crisis around the corner that will emanate from the workers in the value chain upon whom we, the affluent society, increasingly depend and continue to ignore, even exclude, and whose natural environment and GDP we are seriously affecting. The warning signals are there and, if we take our feet off the accelerator this, too, could be a global game changer.

Herman Mulder

Sustainable Private Equity Investments and ESG Due Diligence Frameworks

Conventional wisdom states that ESG is a necessary cost centre that reduces reputational risk, whereas this chapter introduces ESG as a framework for profit creation and strategic direction. Drawing on experience of a private equity fund that looks for environmental companies and grows them into viable international enterprises, this chapter also showcases how detailed ESG due diligence can add value to portfolio companies throughout the investment process from selection and structuring to portfolio management and profitable exits. Continuous improvement highlights the mechanisms through which ESG drives the bottom line.

Gavin Duke

In Principle Good: The Principles for Responsible Investment

More than 1,200 institutional investors, asset managers and financial institutions have committed themselves by recognising the Principles for Responsible Investment (PRI) to integrate sustainability criteria into their investment. Together they manage more than US$30 trillion, representing a share of around 45 % of global investments. A success story, then? This chapter gives an overview of the aims and development of the PRI, introduces the contents of the six principles and highlights the opportunities and risks of signing the PRI for investors and asset managers. The updating of the success story requires—according to the authors—a dual strategy: outreach and enlarging the membership and opinion leaders supporting responsible investments and, at the same time, going deeper—focusing on improving the quality of implementation of the PRI by the signatories in addition to further expansion. The chapter is a starting point for the development of the PRI and concentrates on evolution and development of the PRI in terms of ‘broadening and deepening’.

Rolf D. Häßler, Till Hendrik Jung

Investing in the ESIA and Stakeholder Engagement Process to Improve Project Bankability

Twenty years ago, engagement with communities affected by projects was limited, even non-existent in some parts of the world. Today, Project Sponsors invest in stakeholder engagement programmes with affected communities and stakeholders with varying degrees of effort and success. Environmental and Social Impact Assessments (ESIA) and stakeholder engagement programmes are a regulatory requirement for many development projects and a condition of the majority of project financiers who require the Project Sponsor to comply with international environmental and social standards. These can be referred to as “soft laws” or “performance benchmarks”, and include the Equator Principles, IFC’s Environmental and Social Sustainability Framework and EBRD’s Environmental and Social Policy. Compliance with regulatory and international standards should not be the only driver for undertaking ESIA and stakeholder programmes. Such activities can broadly reduce and control environmental and social project risks and improve project bankability. Environmental and social risks and impacts can result in delay, cost increase and can affect the Project Sponsor’s ability to repay existing project finance and access further capital at a reasonable cost. Many Project Sponsors, however, remain unconvinced. This chapter demonstrates that ESIA and stakeholder engagement are not just about compliance with regulations and international standards but an essential part of project risk management. Drawing on practical experience, it gives examples of how risks can be reduced or increased depending on the adopted approach. The chapter concludes with a summary of the business case for using the ESIA and stakeholder engagement processes to support risk management and timely project delivery.

Elizabeth van Zyl

Positive Impact Business and Finance: A Challenge for Industries and Services, A Preeminent Role for the Financial Sector

Positive Impact Business (PIB) has to be integrated into the mainstream strategy of industry and services, since the growth of the population to nine billion by 2050 will create great business opportunities. PIB will have to address the market with the basic needs of the population (housing, access to energy and water, food security, transportation, health, education), while consideration of the limits of the planet will require new technologies and business models. But the main hurdle (and that is the primary environmental and social responsibility of the financial community) will be the huge, anticipated, long-term financial gap at a time when the United Nations estimates the need for annual investment of between US$1,300 billion and US$9,600 billion. Fundamentally, this is what the creation of a successful long-term debt PIB asset class is all about.

Denis Childs

Adopting EP in India: Challenges and Recommendations for Future EP Outreach

Throughout the world, environmental and social concerns are increasingly integrated voluntarily by businesses into their operations and interaction with stakeholders as part of sustainable and long-term business models. This has led to greater emphasis on disclosure, evident from business participation in forums such as the CDP, UNGC, UNPRI and UNEPFI. Environmental and social issues cannot be ignored in the pursuit of greater economic development. This is particularly relevant to emerging economies such as India where building infrastructure and the utilisation of natural resources are imperative for the development of the economy. Industry insiders look for a balance between these two seemingly contradictory requirements, often exacerbated by poor governance and enforcement of regulations. One of the main concerns for investors in India is the lack of proper infrastructure. Growth of infrastructure is imperative for the long-term growth of the Indian economy and, as such, has been spearheaded through the PPP model under the project financing framework. This necessitates the large-scale acquisition of land and use of natural resources, making the principles of sustainable development assume greater importance. Internationally, financial institutions have met the ESG challenges posed by project financing activities by adopting the Equator Principles, often driven by brand reputation, best in class commitment, globally aligned systems and procedures, new financial business opportunities and access to low-cost funds. Regional disparity, however, means that few organisations from emerging economies have joined the EP association, particularly from the big emerging economies of China and India. This chapter examines the reasons behind the lack of EP adoption in India. It will attempt to answer the basic questions: What are the challenges in adopting EP for Indian banks and financial institutions? What are the opportunities? How can ESG concerns in the project financing operations of banks and financial institutions in India become mainstream?

Alok Dayal, Ashok Emani

CSR Reporting and Its Implication for Socially Responsible Investment in China

Corporate social responsibility (CSR) reporting has grown significantly in China during the past decade. This chapter assesses the status of Chinese CSR reporting and its main drivers as well as firms’ subsequent social, environmental and financial performance. Employing data from 130 Chinese listed companies, we assessed the development trend of CSR reporting and suggest that such a growth is mainly driven by external pressure (e.g. regulations). Our statistical testing found positive associations between CSR reporting and firms’ subsequent social, environmental and financial performance. Our results have important implications for social responsible investors who focus on both financial and social returns. They, therefore, can leverage firms’ CSR reports as indicators for their investment decisions.

Olaf Weber, Haiying Lin

Sustainability on Planet Bank

The past decade has seen an enormous growth of sustainability initiatives in the banking sector. Acronyms such as CSR (corporate social responsibility) and ESG (environmental and social governance) have become standard bank vocabulary. Most large commercial banks have signed on to a multitude of voluntary commitments such as the Equator Principles, the Global Compact or the UNEP FI Statement on Sustainable Development, to name a few. Many banks produce regular CSR reports to document their achievements, and a new class of consultants has sprung up to analyse banks’ environmental management systems. Commercial banks now compete among each other to receive favourable environmental ratings or to be included in so-called ethical indices. Sustainability has become a financial industry standard.

Heffa Schücking

Sex Matters: Gender Differences in the Financial Industry

For the past 20 years, the number of women working as fund managers in the US equity mutual fund industry has hovered at around 10 %, which is surprisingly low. While there are probably some self-imposed factors that contribute to this, such as career interruptions and the choice to work in other industries, our evidence shows that investors discriminate against funds run by women, investing less in them, making it less attractive for companies to employ women and less appealing for women to work in the sector.

Alexandra Niessen-Ruenzi

Women on Board: Female Supervisory Board Members in Shareholder Circles and Their Role in Changing Risk Culture and Sustainable Management

From 2016, Germany will introduce a legal quota requiring listed companies and companies subject to codetermination legislation to fill 30 % of open supervisory board seats with female candidates. Ms Schulz-Strelow, have you achieved what you set out to in terms of gender equality in the boardroom? Does it feel good? We are still a long way off, but at least one thing will be achieved through this new legal requirement: There will be no going back. Because, unfortunately, the number of women in top management has actually gone down again. This is something we have seen time and time again in recent history, contrary to loud assurances that there will be gender equality.

Monika Schulz-Strelow

Corporate Social Responsibility in Modern Central and Eastern Europe

Central and Eastern Europe (CEE) is a region made up of various countries. A statement made for one country is not necessarily true for another. Corporate Social Responsibility (CSR), therefore, has to be translated to serve local requirements and expectations. The political, economic, historical and cultural backgrounds of society all have an impact on these requirements. The socialist-communist era after World War II has shaped the mindset of society and subsequently built the base for the outstanding economic growth of the region after the fall of the Iron Curtain. Foreign direct investment plays a major role in this context. The decision of foreign companies to do business in CEE is based on various advantages of location, for example, economic backlog demand and the tax regime, but also on social and environmental legislation. What is a modern corporation’s current understanding of its social and environmental responsibility? Why is it attractive to corporates to take CSR seriously: as an additional risk measure, as an innovative approach to deal with future economic and societal requirements or purely as green branding? In any of these cases, CEE has a unique opportunity to learn from CSR-relevant initiatives active in economically advanced countries and to present itself as a relevant socio-ecological global player.

Heidrun Kopp

10 Years’ Equator Principles: A Critical Appraisal

4 June 2013 marked the formal launch of the third generation of the Equator Principles (EP III) and the tenth anniversary of the EPs—enough reasons for evaluating the EPs initiative from an economic ethics and business ethics perspective. This chapter deals with the following questions: What has been achieved so far by the EPs? Which reform steps need to be adopted to further strengthen the EPs Framework? Can the EPs be regarded as a role model in the field of sustainable finance and CSR? The first part explains the term EPs and introduces the keywords related to the EPs Framework. The second part summarises the main characteristics of the newly released third generation of the EPs. The third part critically evaluates EP III from an economic ethics and business ethics perspective. The chapter concludes with a summary of the main findings.

Manuel Wörsdörfer

The New Development Cooperation: The Importance of the Private Sector

The world is changing fast, but policies are changing slowly. In the past, development cooperation was mainly focused on the public sector and on poverty in low-income countries. Over the past two decades, we have seen

four important

trends, which should affect development cooperation policies.

Nanno Kleiterp

Respecting Human Rights in Investment Banking: A Change in Paradigm

One of the most frequently invoked arguments in discussions on human rights in investment banking is the alleged profit-driven attitude of investors and the related consequences on the fiduciary agreement and its underlying duties. In this concept, managing funds in the best interest of the investors is often interpreted as seeking maximum return on investments (Sandberg 2013).

Christine Kaufmann

Fiduciary Duty and Responsible Investment: An Overview

The extent to which pension funds and other fiduciary investors can take account of environmental and social issues when making investment decisions has long been subject to debate. This chapter examines some of the key legal arguments and argues that fiduciary investors’ scope for action on such issues is considerably wider than is often supposed. Although the primary focus is on the UK legal context, similar issues arise in various other jurisdictions. In 2013, the UK Law Commission was asked to review this area of law and make recommendations to policymakers with a view to addressing uncertainties among market participants. The chapter makes reference to the Law Commission’s provisional findings where appropriate, but at the time of writing, its final report had not yet been published.

Christine Berry

The Case for Environmental and Social Risk Management in Investment Banking

The debate about sustainable finance focuses mostly on responsible investment. Considerably less attention tends to be paid to the direct relationships between banks and their corporate clients. Some of these clients are associated with controversial business practices, sectors, projects, and/or countries that, in turn, are associated with detrimental environmental and social impacts. In the context of this article, environmental and social (E&S) risks are those risks that occur when investment banks engage with such clients. This article discusses five factors that put pressure on banks to address E&S risks more systematically. It makes the case that E&S issues harbour considerable potential for damage in the here and now and that investment banks take a risk if they underestimate them.

Olivier Jaeggi, Nina Kruschwitz, Raul Manjarin

Responsible Investment Banking and Asset Management: Risk Management Frameworks, Soft Law Standards and Positive Impacts

Global Standards and Responsible Leadership: Reviewing the Role of ISO 26000 and Its Relationship with the UN Global Compact and the Global Reporting Initiative

The past 15 years has seen a proliferation of soft law standards aimed at promoting responsible business practice across all types of business sectors, including specifically within the banking and asset management sectors. Amongst this profusion of standards and initiatives, there are arguably three global standards that cut across all sectors and that enjoy prominence amongst those sustainability practitioners looking for international guidance: ISO 26000, the United Nations Global Compact (UNGC), and the Global Reporting Initiative (GRI). This chapter focuses on the potential contribution that ISO 26000 can play in promoting responsible business practice in the investment banking and asset management sectors. After providing a broad introduction to ISO 26000, identifying some suggested unique features that distinguish the standard from other social responsibility initiatives, the chapter reviews how ISO 26000 can and is being used to promote responsible investment practices. The chapter will argue that while these initiatives have a potentially significant role to play in promoting sustainable development, it is critical to recognise their limitations.

Jonathon Hanks

How Private Equity Models and Practitioners Can Advance Impact Investing in Emerging Markets

Recognising the growing importance of impact investing, the Emerging Markets Private Equity Association (EMPEA) established an Impact Investing Council in 2013 to play a leading role in professionalising and scaling the industry, focusing specifically on market-based solutions to major global social and environmental challenges. EMPEA believes that private equity investors have much to contribute to impact investing in emerging markets. The private equity discipline lends commercial expertise and financial rigour, and private equity practitioners have years of experience operating in inherently impactful geographies, sectors (e.g. financial services, healthcare, education, agribusiness, and housing), and customer segments (e.g. low-income people and those excluded from traditional sources of finance).

The Opportunity for Bonds to Address the Climate Finance Challenge

2014 saw a niche, thematic ‘green bond’ market becomes a new asset class and a talking point among mainstream and SRI investors alike. Over US$36bn was issued in 2014—more than triple any previous year. The development of this thematic asset class has the potential to marginally, but significantly, reduce friction and transaction costs for investors looking for a means of addressing climate change, helping to reduce the cost of capital and speed flows of that capital. This chapter describes how the growth of this new asset class can help direct capital to meet the vast financial requirements involved in a rapid transition to a low-carbon and climate resilient economy and sets out steps to grow the theme.

Sean Kidney, Bridget Boulle

Prepared for the Future? ESG Competences Are Key

Banks are only gradually starting to realise that environmental and social risks have much wider repercussions than simply the potential damage to their reputation. The conventional initiatives taken by banks in the area of corporate social responsibility

(

CSR

)

are woefully inadequate for tackling the global environmental challenges they currently face. It is not enough to take environmental and social risks into consideration when financing projects and developing individual

green

investment products. Instead

,

a paradigm shift is required

in the interest of both the banks and their clients. To be properly prepared for the imminent changes such as disruptions resulting from the growing scarcity of resources or changing regulations and to be able to realistically assess potential risks and opportunities

,

banks must successfully incorporate environmental and social challenges into the decision processes of their core business activities

.

Katharina Serafimova, Thomas Vellacott

Stakeholder Engagement Model: Making Ecotourism Work in Peru’s Protected Areas

During the past two decades, there has been a shift in protected area management approaches from top-down management models to more diverse governance approaches that involve various forms and degrees of participation from local populations. These new participatory approaches seek to reaffirm cultural values, maintain cultural landscapes, recognise the relationship between people and nature, improve government-citizen relationships, create “partners” in conservation, and contribute to the alleviation of poverty by providing socio-economic benefits beyond protected area boundaries. The development of resource management plans through public participation has been identified as an important step to accomplish these objectives. In 2007, research to test a hybrid model of public participation focused on understanding the factors that make public participation processes and the implementation of their results effective from the point of view of the participants rather than the managers. The study evaluated participatory processes used to develop tourism plans for two Peruvian national parks (Huascaran National Park and Yanachaga-Chemillén National Park). The findings suggested that perceptions of “success” were influenced by different key factors depending on the identity of a participant. People who participated, but represented the government and nonprofits, viewed the process as “successful” if several specific criteria were met, whereas people who represented communities, businesses, and their own interests viewed the process as “successful” largely via other criteria. These differences suggest that future participatory processes should create strategies to address the factors that assist both kinds of participants to believe a process was successful and effective.

Alicia De la Cruz Novey

Why Not? Sustainable Finance as a Question of Mindset: A Plea for a Confident Sustainable Business Strategy

Sustainability in finance, including fundamental changes to business as usual and touching on alleged taboos, can and should be much more easily and effectively achievable than is generally accepted, but we shouldn’t be frightened by this. Current economic development is widely considered to be unsustainable, which results in a number of challenges for financial institutions as a whole and specifically within any transaction. Pace and quality incorporating sustainability considerations into decision-making in finance in order to answer these challenges is not nearly sufficient. The situation has reached a kind of gridlock: despite the importance of the underlying facts and concepts and the urgency for adequate adjustments, there is an ongoing debate about exact definitions, the likelihood of certain developments and about who is responsible for what. The resulting uncertainty and specific obstacles are often perceived as or (mis)used as an argument for restraint or opposition; as a result there is a lot of awareness but only little and slow move towards sustainable finance. On the other hand, what is often not seen, or what is not want to be seen, the wide field of sustainable finance debate and considerations paves the way for a confident and decisive move to incorporate sustainability extensively into finance since it offers a number of modifications and alternatives to business as usual. This move is just possible and appropriate; it is more a question of financial institutions’ self-conception and the underlying mindset. Determinedly navigating a way through the maze leads to innovation, development and mutual benefit for all parties involved. How to successfully break new ground and how to overcome the gridlock is exemplified in this article by looking at how sustainability management was developed and implemented at the corporate and investment bank WestLB between the years 2004 and 2012. From WestLB’s approach, key elements of sustainable finance are deduced including an elaboration of the question of sustainable finance as a matter of mindset. The examples given include a far-reaching stakeholder dialogue, a first of its kind business strategy in coal-fired power generation, and another one in offshore oil drilling and production including in the Arctic.

Dustin Neuneyer

Managing Assets in a Complex Environment: An Innovative Approach to Sustainable Decision-Making

In a world of accelerating innovation cycles and expanding plurality of interests, corporate environments become increasingly complex. This is particularly true for asset management efforts, with their long-term implications and manifold impacts on investment prospects. This chapter explores the matter of business environment complexity and related challenges for sustainable decision-making. It discusses key aspects of the issue, categorises related approaches and derives criteria for complex decision support. Finally, the innovative approach of SUDEST (“Sustainable Decision Support Tool”) is introduced. I developed SUDEST with Nils Mahnke, Professor of Applied Mathematics, as a pragmatic approach for corporate decision-makers. Part of this contribution is adopted from Jeschke and Mahnke (2013: 94–111).

Barnim G. Jeschke

Extra-Financial Performance Made Tangible: A Handprint Approach for Financial Institutions

The financial industry has been engulfed in a crisis of confidence since 2007. This impacts strategic considerations in the industry and changes the immediate prospects of individual business areas and products. The authors of this chapter argue that financial institutions will face further potentially bigger challenges in the next 15 years. They propose a strategic tool to prepare for these challenges. The so-called handprint approach applies an expanded value concept. It reflects the economic, social and environmental added value generated by a financial institution. In contrast to exclusively risk-centred sustainability approaches, it opens up ways to make sustainability a driver of business development, proactive reputation management and capacity building. This chapter describes the handprint approach and relates it to major concepts such as integrated reporting. It further provides applied examples for how other industries start using the handprint approach and points out potential implications of this trend for the financial industry. Finally, it names specific starting points for using the handprint approach to increase the future viability of financial institutions.

Sebastian Philipps, Henrik Ohlsen, Christina Raab

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