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September 25, 2009
Emerging Markets Financial Institutions Should Increase Attention to Climate Change
    by Robert Kropp

Report commissioned by DEG and prepared by Ceres and RiskMetrics finds improvements in corporate governance, but much work yet to be done in emissions measurement and reporting.

In January, 2008, Ceres and RiskMetrics Group collaborated on a report entitled Corporate Governance and Climate Change: The Banking Sector, which analyzed the responses of 40 of the world's largest banks to the risks and opportunities of climate change. Using a Climate Change Governance Index developed by Ceres, RiskMetrics, and the Investor Network on Climate Risk (INCR), the report evaluated the banks' activities in the five governance areas of board oversight, management execution, public disclosure, emissions accounting and strategic planning.

Given the growing attention to the risks and opportunities posed by climate change in developing countries, a new report from Ceres and RiskMetrics that analyzes the activities of financial institutions in emerging markets is especially timely. The new report, entitled Addressing Climate Risk: Financial Institutions in Emerging Markets, the authors surveyed 154 emerging markets financial institutions in the portfolio of DEG, a Germany-based development bank that finances investments of private companies in developing countries.

Utilizing the same Climate Change Governance Index that they employed in their 2008 report, the authors analyzed the activities of the 64 financial institutions that responded to the DEG survey. According to Megan Good, a senior research analyst at RiskMetrics and a co-author of the report, "We zeroed in on risk management and opportunities, and we found that a majority recognized opportunities in renewable energy and energy efficiency." The report also listed waste management as an area of opportunity for the respondents.

"Two-thirds of respondents acknowledged that climate change will affect their activities," Good told

Two-thirds of respondents reported having an environmental or sustainability policy, a third of which specifically address climate change. Twenty-eight percent of respondents indicated that their boards of directors are directly involved with climate change initiatives.

"The issue of board governance has always been of interest to the Socially Responsible Investing (SRI) community," Good said, "And the fact that about one-third has board oversight of their environmental policies is impressive, given that the performance is similar to that of the large banks in the earlier report."

In the governance area of greenhouse gas (GHG) emissions management, only eight percent of respondents are currently measuring their own organizational carbon footprint. Furthermore, as the report states, "nearly all of the GHG emissions from the financial sector are associated with institutions' lending and investment portfolios," and the authors found that only two of the financial institutions surveyed take GHG emissions into account in their financing decisions. None currently measure emissions from the projects in which they have invested.

Good did cite one institution that the report considers to be an example of best practice.

"Center-invest Bank, in Russia, looks at the energy and CO2 emissions of certain projects upfront, and then it tracks the energy savings and CO2 reduction over time. But such practices are still very rare in these markets."

In the area of risk management, 53 respondents reported having a risk management system that incorporates sustainability elements, but only five of those systems address climate change specifically. About one-third of respondents include climate change considerations in their investment decisions.

Referring to the opportunities presented to financial institutions by climate change, Good said, "We were surprised by the low involvement in carbon markets. We expected that the respondents would have seen this as a financing opportunity." Only three respondents reported involvement with the Clean Development Mechanism (CDM), which was created to assist developed countries in the practice of offsetting GHG emissions from developed countries, by investment in projects in developing countries.

Although overall participation of respondents in carbon trading markets was very low, a number did foresee becoming involved in them within the next three years.

The report concluded with recommendations for actions that financial institutions in emerging markets should consider undertaking. It calls for increased board-level governance on climate change matters, and improved disclosure on risks associated with climate change, as well as organizational emissions reduction strategies.

In order to more effectively manage climate change risks and opportunities in their investments, the financial institutions should measure the emissions resulting from projects in which they invest, factor carbon costs into their financing and investment decisions, and set progressively higher targets for emissions reduction in their portfolios.

However, as the report points out, "The predominant view of developing nations is that a successor to the Kyoto Protocol, to be negotiated this December in Copenhagen, should include financial and technology transfers from industrialized to non-industrialized countries to support this effort." In light of this, the report also included recommendations for international and national development banks, calling on them to provide technical assistance in the areas of risk assessment, GHG emissions measurement, and low-carbon project design.

Furthermore, international financial institutions should integrate adaptation issues relating to sustainable agriculture and water supply into their lending activities, and consider offering more opportunities relating to renewable energy and energy efficiency.

Good said, "If there were more examples from the international community in how to incorporate adaptation into investment analysis, these emerging markets institutions would be better prepared to finance sustainable agriculture and water supply."

Finally, international financial institutions should begin requiring emerging markets financial institutions develop and report on climate change policies.


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