private financial organizations struggle to find green solutions

Presumably, the creation of sustainable livelihoods is a topic that private financial service organizations know something about. So, excitement ran high when UNEP discussed the environmental implications of globalization with several of them in Frankfurt last November. To be sure, a few saw that financial service organizations can encourage sustainable development. The market-based opportunities and challenges that one speaker identified include ethical or green funds, green securities, tradable permits, and mixed instruments such as environmental bonds. The knowledge-based openings that he made out could be voluntary agreements, certification, reporting, and disclosure of information. Another explained the workings of the Nikko Eco Fund (which invests in companies that excel in environmental conservation). But most others highlighted the direct, indirect, and image risks associated with environmentally sensitive projects. And, except for one speaker who reminded the audience that 1.3 billion people live on less than $1 a day, they contemplated only emerging markets. Predictably, then, few new business models were outlined. One participant (from UNEP) made clear the potential of cleaner production financing in terms of cost reduction (materials, energy, waste treatment), business upgrading (improved quality and competitiveness of green processes, products, services), and risk reduction (inherent to cleaner production). Even so, he recognized constraints, of which the small sizes of investments. (Others are the absence of business incentives, the lack of ability of the private sector to prepare creditworthy proposals, the longer payback period of such investments, undervaluation of environmental risks, and the fact that financial organizations often do not see the technical and financial merits of investment proposals.) One session on environmental management and reporting guidelines for the financial services sectors also came unstuck. A panelist explained the endeavors of the Global Reporting Initiative. But subsequent talks described separate attempts to develop a common reporting framework at the national level, and in isolation from the global initiative. Yet the relationship between companies and the environment in which they operate is more and more important, and senior managers recognize increasingly that companies have a responsibility not just to shareholders but to other stakeholders. Environmental (and social) accounting could embed these responsibilities. But despite its topicality, UNEP's roundtable did little to advance knowledge and much remains to be done before a practical framework for action comes about. The emphasis that several speakers placed on image risks is not encouraging. So, those who lament aid fatigue will take comfort in the fact that most of the examples provided on smart environmental lending were drawn from multilateral development banks such as ADB. This suggests that they could help the financial services sectors of their developing members to incorporate environmental considerations in their activities, and share their practical experiences of environmentally friendly lending. And there surely exists potential for cleaner production financing—the hidden cost of waste is far greater than the cost of its treatment and disposal (counting compliance with regulations, wasteful use of raw materials, energy, and labor, tarnished images, and liability). For this reason, constraints on cleaner production financing ought not to be insurmountable, and development banks could mitigate them by means of credit lines, trust funds, policy dialogue, and training. But the growing number of initiatives on environmental reporting, which use very different reporting frameworks, is cause for worry. It could set off a race to the top and spawn restrictive trade practices. What is more, the applicability in developing countries of the frameworks advertised is debatable. Should environmental reporting allow for regional variations? And, if this is not the case, how should the drafting process for global guidelines proceed? (December 2000) Copyright ©2002 Olivier Serrat