The Finance Sector Environmental Law and Sustainability Implications

1
The Finance Sector Environmental Law and
Sustainability Implications

• Environmental sustainability in a medium and low
  impact environment

Justin Smith Nedbank
2
Agenda

• Why Sustainability/Environmental issues and the
  Finance sector?
• Finance sector specific issues
• Management and integration of Sustainability/Envir
  onmental issues - Nedbank experience

3
Rationale

• Save costs by reducing environmental impacts and
  treating employees well.
• Increase revenues by improving the environment
  and benefiting the local community by creation of
  new products and services such as
  sustainability/socially responsible funds and
  indices.
• Reduce risk through engagement with stakeholders.
  
• Risk Identification and management has become
  crucial. Environmental, social and sustainability
  concerns are also being recognized as risk areas
  with potentially negative financial, legal and
  reputational consequences responsible lending
• Renewed calls for transparency and governance.
• Regulatory/legal developments internationally and
  locally

4
Rationale

• Sustainability and CSI issues are now being seen
  as corporate reputation/brand issues, not just
  social responsibility related.
• Build reputation by improving environmental
  efficiency and social responsibility. Increase
  brand awareness and value.
• Setting of high environmental, social and
  governance standards by Multilateral Development
  Banks such as the World Bank (Equator
  Principles). If not have adequate standards in
  place may be excluded from tender opportunities.
• Reporting to improve transparency and disclosure.
  Growth of sustainability reporting worldwide and
  in South Africa.
• Pressure on Analysts and rating Agencies to
  expand social and environmental criteria

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Action Required-SA Driving Forces

• 1. Legislation
• Constitution
• National Environmental Management Act
• National Water Act
• King II
• Banking Charter
• Basle Accord
• 2. Marketing
• 3. Social Responsibility
• 4. Good Business Sense

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Legislative basis
Also Biodiversity legislation, Waste discharge
legislation, Protected areas legislation
7
US Lender Liability

• Environmental Protection Agency
• Superfund Legislation (CERCLA)
• Fleet Factors Case-lenders have potential
  liability based simply on capacity to control or
  influence the actions of borrowers.
• Lenders thus need to be aware of their potential
  liability during any period hold security
  interest in contaminated property, and during any
  period in which they hold actual title.
• Institutionalised environmental risk spread
  worldwide
• In Columbia Banco de Columbia held responsible
  for cleaning up a site contaminated with
  agrochemicals, received from the National
  Federation of Cotton Growers in payment of loan.
  Thus not just first world phenomenon.

8
SA Lender Liability

• SA followed first world liability strict (no
  fault), absolute (no differentiation between
  intent and negligence), joint and several
  liability
• Responsible Lending balance risks with not
  interfering too much in clients activities
• Development of environmental risk management as
  department in financial institutions

9
National Environmental Management Act

• Various principles endorsed
• Very wide liability
• Who can sue - locus standi
• Who can be sued polluter
• owner or
  successor in title
• person in control of
• land/right to use
• person who was negligent
• FINANCIER!

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Duty of Care/Precautionary Principle

• S28 Every person who causes, has caused or may
  cause significant pollution or degradation of the
  environment must take responsible measures to
  prevent such pollution or degradation from
  occurring, continuing or re-occurring or, insofar
  as such harm to the environment is authorised by
  law or cannot reasonably be avoided or stopped,
  to minimise and rectify such pollution or
  degradation of the environment

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Clean-up Costs

• Is or was responsible
• directly or indirectly contributed
• owner or successor in title
• in control of or right to use
• negligently failed to prevent
• benefited from clean up
• absolute liability
• directors personal liability

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Liability under the MPRDA

• Notwithstanding the Companies Act or Close
  Corporation Act, directors of a company or
  members of a CC are jointly and severally liable
  for any unacceptable negative impact on the
  environment, including damage, degradation or
  pollution advertently or inadvertently caused by
  the company or CC which they represented
• (section 38(2))

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Action required-Potential consequences

• Direct Liability (legal risk)- potential for
  lender to become legally responsible to pay for
  clean-up of pollution
• - value of property
• - reduced investment value
• - personal liability of directors
• - insurance
• Indirect Liability (credit risk) - weakens
  borrowing
• - customers ability to honour obligations
• - value of assets as security
• - default risk (counterparty exposure)
• Reputational risk- association with negative
  environmental/social acts or companies

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Environmental Management Reporting

• Recycling
• responsible energy/water consumption - targets
• supplier/contractor relationships - procurement
• increase awareness
• transport management
• Occupational Health
• Travel Policy
• property design facilities management
• Reporting on water and energy consumption, waste
  generated, emissions, recycling, land management
  etc.

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Why are Non-financial issues important?

• PWC/Economist Survey August 2004 of Risk
  Management in the Financial Services Industry
• Reputational Risk now regarded as greatest
  threat to organsations market value
• Risks, and especially non-financial risks need to
  look beyond regulatory requirements to
  opportunities for protecting and enhancing value
  of the company
• Wider choice to consumers, brands crucial
  illustrates importance of organisations moral
  capital
• Can be damaged by wrongful actions of customers,
  suppliers and partners!

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Business Review

• Industry sector? - Mining, chemicals, petrol
  stations, power, metals, infrastructure
• EIA/due diligence done, permits obtained?
• Environmental policy?
• Credit checklists
• Management technical capabilities of customer
• customers ability to meet financial obligations
• previous current environmental performance
• security/collateral/insurance
• land use past present, and location
• Know your customer requirements Money
  Laundering

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The "Equator Principles"

• An industry approach for financial institutions
  in determining, assessing and managing
  environmental social risk in project
  financingIn adopting these principles - seek to
  ensure that the projects financed are developed
  in a manner that is socially responsible and
  reflect sound environmental management practices.
  
• Undertake to review carefully all proposals for
  which customers request project financing. Will
  not provide loans directly to projects where the
  borrower will not or is unable to comply with
  environmental and social policies and processes.

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The Equator Principles

• So far, 28 companies have decided to adopt the
  Equator Principles includes 3 Brazilian banks,
  no African banks as yet.
• Accounting for - 90 of total global project
  finance.
• These principles apply to projects with a total
  capital cost of 50 million or more.
• Projects subject to greater scrutiny, ensuring
  that they are environmentally and socially sound.
• Consistency in approach and terminology among
  subscribing banks, thereby reducing project risk
  and providing certainty to customers who now has
  a prescribed framework.
• Competitive pressure on local banks to improve
  social and environmental risk practices to be
  considered
• To partner with subscribing banks or To win
  tender proposals from MDB funded projects.

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Example - Citigroup

• Pressure from Rainforest Action Network (RAN)
• Full page ads NY Times, etc, protests
• Financing policies- especially developing
  economies
• Adopted Equator Principles
• New comprehensive environmental policy in
  conjunction RAN deals with endangered
  ecosystems, logging, climate change, high caution
  zones
• Invest in sustainable forestry and renewable
  energy
• Environmental Affairs Unit
• Environmental and Social Policy Review Committee
• See www.banktrack.org

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Asset Management Developments

• Growth in Socially Responsible Investment and
  Sustainability indices
• US market till end 2002 13 all funds 2,7
  trillion
• European market by end 2003 more than 414 billion
  pounds
• Asia - 2,5 billion
• International benchmark indices Dow Jones
  Sustainability World Index, FTSE4Good, JSE SRI

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Asset Management Performance

• Dow Jones SAM index average return on equity of
  14.89 versus 8.43 of Dow Jones Industrial
  Average to end 2001
• Illustrates companies pursuing corporate
  sustainability tend to display superior share
  performance, since have long term focus and
  consider other drivers of future earnings
• Business in the Environment study 2002 found
  statistically significant negative correlation
  between high environmental standards and stock
  price returns volatility shares of
  environmentally conscious companies less
  volatile, attract risk-averse investors which
  have lower return expectations therefore
  lowering companies cost of capital
• A Morgan Stanley study found that sustainability
  leaders in the MSCI World Index financially
  outperformed sustainability laggards over the
  past 4 years.
• JSE SRI index expected to track Top 40 index
  closely

22
A. M. Legislative Developments

• Pension funds Regulation
• Corporate Governance Standards
• UK- Occupational Pension Schemes Amendment Act
  funds must disclose whether policies address
  environmental and social issues
• Similar legislation Germany, Australia, Europe
• Sweden- Government controlled pension funds must
  implement SRI criteria into investment processes

23
Asset Management in SA

• Approx 1,6 of total assets are SRI mostly
  focused on BEE and infrastructure development.
• BEE commission advocating 10 of all assets under
  management should be allocated towards areas of
  national priority via SRI
• Edward Nathan and Friedland (ENF) launched
  Sustainability Index in 2002
• JSE SRI index launched May 2004
• Albaraka Equity Fund (negative screening)
  21,86 return to June 2004 vs All share return of
  6,4
• Nedbank Renaissance Fund 3year return of 10,84
  

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Insurance - Effects

• Increasingly interlinked global financial market
• Rise of complex and potentially devastating
  natural disasters historical statistics and
  experience will not provide satisfactory basis
  for risk assessment
• Responsible for managing long term savings huge
  possible impacts of climate change on pension and
  life investment portfolios and human health.
• Insurers control substantial assets open to
  sustainable management, also good experience with
  loss prevention precautionary attitude.
  Unsustainable development clearly bad investment
  as degrades environment.
• New societal risks inequality, resource
  depletion, pollution, technology developments-
  GMO, Biotechnology, Aids.

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Insurance Case Study Swiss Re

• 100 m Sfr eco portfolio to participate in
  emissions reductions funds and renewable energy
  funds
• Provider of emissions reductions credit
  guarantees
• Lend project risk management, reinsurance and
  contingent capital experience to CDM projects
• Insurance solutions GHG professional liability
  insurance
• Internal facilities management

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UNEP FIUnited Nations Environment Programme
Finance Initiative is a unique global partnership
between UNEP, and 227 banks, insurers and asset
managers in 45 countries.MissionTo realise
best environmental and sustainability practice
across all levels of financial institution
operations. OriginUNEP Statement by Banks on
the Environment Sustainable Development
presented at Earth Summit Rio de Janeiro 1992.


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UNEP FI Activities
Regional Task Forces
Special Projects
Working Groups
Africa
Water
Asset Management
Asia
FinanceConflict
Climate Change
Sustainable Management, Reporting and Indicators
Oceania
Latin America
North America
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Hot Topics

• Internationally the Extractive Industries
  Review
• Environment Agency Operating and Financial
  Review regulations - recommendations UK
  environmental reporting
• UNEP/GRI project environmental reporting
  indicators for the finance sector
• Locally new EIA regulations
• Golf Courses press attention on Water issues

29
King Report

• Board is ultimately accountable and responsible
  for the performance and affairs of the company
  (2.1.1)
• Board must ensure the company complies with all
  relevant laws, regulations and codes of practice
  (2.1.5)
• Board must identify and monitor non-financial
  aspects relevant to the companys business
  (2.1.12)
• Directors have individual and collective
  responsibility for the companys environmental
  performance and compliance
• Directors should be aware of the standards
  applicable to their industry regarding
  environmental management
• Directors should ensure they are aware of and
  understand the principles in Chapter 1 of NEMA.

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How do you manage all these issues in Practice????

• Some Nedbank examples

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Integrated Sustainability Reporting

• King II Section 4 Integrated Sustainability
  Reporting
• Dedicated positions established
• Linkages with Corporate Governance
• Software system for information in place
• Key Performance Indicators defined
• Internal Awareness Workshops for buy-in
  training
• Policies and procedures to support

32
Sustainability Report

• Needs to be useful tool for business units,
  as well as building banks profile and
  communicating progress to stakeholders
• Corporate Governance
• Employees and Unions
• HIV/Aids
• Corporate Social Responsibility Foundation
• Affinities - Trusts
• Financial Sector Charter and Black Economic
  Empowerment
• Clients
• Government and external relations
• Environment

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Sustainability Report

• Aims for the next report
• Reporting against targets wherever possible
• More data on environmental performance
• More information on HIV/Aids
• More structured information on stakeholders
• Revision of key performance indicators with
  business units
• Information from foreign operations
• More input from staff in process

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Management Structure
TRANSFORMATION AND SUSTAINABILITY COMMITTEE
DIRECTORS AFFAIRS COMMITTEE
ARC COMMITTEE
EXCO
CEO
BOARD
CHAIRMAN
Group Transformation Committee
CORPORATE GOVERNANCE DIVISION
NEDBANK FOUNDATION
RECOVERY PROGRAMME
CORPORATE CITIZENSHIP COMMITTEE
CORPORATE GOVERNANCE MANCO
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Sustainability alignment

• Nedcor Foundation contributed over R130m to 350
  projects over last 4 years in education,
  leadership development, job creation and welfare
• Green, Sports and Arts Culture Trusts unique
  Affinity products and marketing relationships
  Green Trust for example over R60 m to
  conservation projects in conjunction with WWF.
  (Sports Trust R18m, Arts Culture Trust R9m)
• Staff participation culture
• Team Challenge programme
• Local Heros programme

36
Stakeholder Communication/Engagement

• Done in ad hoc fashion by various divisions
• Need for integrated approach and policy ito King
  II
• Identify list of stakeholders
• Stakeholder dialogue methods
• Information generated
• How information used
• Lack of structure, not ongoing, feedback to
  stakeholders
• Need for ongoing communication loop
• First stakeholder sessions held in JHB, CT,
  Durban
• Draft Stakeholder guidelines completed

37
Social Responsibility and Foundation

• Foundation key part of Corporate Governance
  division
• Work together closely on CSI and sustainability
  management
• Ensure consistency in approach, appropriate
  support and assistance
• Staff participation
• Financial Sector Charter
• Foundation often isolated from line management-
  strategically link CSI to core competencies
  alignment with business crucial

38
Environmental Policy

• The development of an Environmental Policy
  confirms Nedbanks commitment to develop an
  environmental protection and preservation culture
  in both its own operating environment and all the
  parties with which it has a business association.
  
• Managed as part of Occupational Health and
  Environmental Management Programme
• Currently being revised regarding
  lending/financing activities

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Project Structured Finance

• World Bank/IFC/other MDBs
• Equator Principles Criticism?
• Competition from Western banks in Africa/SA
• Environmental Impact Assessments/ Programmes
• Nedcor ensures legislation and requirements of
  World Bank etc. are complied with

40
Strategic Approach

• Leadership role existing green bank image
  broaden to sustainability and good governance.
  Selectively build reputation and profile
• Integration into business in order to identify
  opportunities and risks
• Competitive Sustainability Advantage
• Strategic partnerships WWF-SA, United Nations
  Environment Programme, UNISA, NBI participate
  in sectoral and cross-sectoral initiatives

41
United Nations Environment Programme Finance
Initiatives

• Nedbank first SA commercial bank to become UNEP
  FI signatory
• Involvement on UNEP FI African Task Force
  promoting sustainability considerations in Africa
• African representative on joint UNEP FI/GRI
  project developing environmental reporting
  indicators for the finance sector
• Nedbank leading project under UNEP FI banner to
  develop common approach to environmental/social
  risk issues in SA finance sector
• Aim to interact with local and international
  banks, and learn from experiences

42
Partnership with WWF-SA

• Green Trust partnership in place since 1990
• Nedbank and its clients have contributed over
  R60m to conservation projects in Southern Africa
• Broaden and strengthen partnership
• WWF input into policies, strategy and reporting
• Nedbank ensure responsible internal environmental
  management, approach to financing, staff
  involvement
• Novel partnership in SA context

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What are some of our achievements?

• Trialogue rates Nedcor as top in financial
  services sector for both corporate citizenship
  and corporate social investment
• Sustainability Report ito Global Reporting
  Inititative Guidelines
• First SA commercial bank to commit to the United
  Nations Environment Programme Finance Initiatives
• Environmental Policy
• Finalist in Mail and Guardian Greening the
  Future Awards and Investing in the Future
  Awards best corporate report
• JSE SRI Index inclusion
• Dow Jones World Sustainability Index (1 of 28
  banks worldwide)
• NBI Sustainable Futures Advisory Committee

44
Steps to Sustainability

• What are some of our key steps?
• Structure corporate citizenship committee at
  management level, Board Committee focusing on
  Transformation and Sustainability being
  re-constituted
• Bi-Annual Board presentation done in Feb/August
  on non-financial issues
• Approved Group Corporate Social Responsibility
  principles
• Internal roadshow throughout Southern Africa
  July to October and participation in CEOs
  roadshow awareness building
• Internal corporate governance and sustainability
  conference held in September
• Focused training sessions run concurrently

45
Steps Going Forward

• Manage reputation carefully
• Lending practices refine environmental policy
• Improve internal environmental performance
• Project Finance Equator Principles
• Training Awareness throughout organisational
  network
• View on Socially Responsible Investment
  products?
• Finance sector developments Finance Sector
  Charter
• Integration of non-financial/sustainability
  issues into business operations strategy
  guidance from top