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The Finance Sector Environmental Law and Sustainability Implications

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Title: 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

5
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

6
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!

10
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

11
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

12
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))

13
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

14
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.

15
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!

16
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

17
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.

18
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.

19
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

20
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

21
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

24
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.

25
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

26
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.


27
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
28
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.

30
How do you manage all these issues in Practice????
  • Some Nedbank examples

31
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

33
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

34
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
35
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

39
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

43
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
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