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
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 SocialFunds.com.
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."
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.
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
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
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
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."
international financial institutions should begin requiring emerging markets financial institutions
develop and report on climate change policies.