Memorandum submitted by Paul Wenman, SourceAsia
Ltd
1. SUMMARY
— There is a tremendous opportunity for
UKFI to use its current position of influence both to help drive
sustainability in international markets (including carbon reductions)
and at the same time to lay the foundations of its longer term
success.
— Adopting environmental and ethical factors
as core considerations in risk management and active engagement
is no longer appropriate just for "green banking"; it
is becoming an essential element of core 21st century banking
and investment activities.
— A clear corporate governance model can
be established to ensure these factors are embedded into banking
operations.
— International examples exist to demonstrate
how this approach can bring success, both financially and environmentally
and socially. The example of the Norwegian Government Pension
Fund is outlined.
2. INTRODUCTION
I am submitting this evidence and opinion on
the basis of 25 years as a professional in the areas of environmental
management and corporate responsibility.
I have practised as a consultant and business
entrepreneur for 15 years with the international group Environmental
Resources Management (ERM) and four years as Director of Environmental
Services for Ernst & Young. During my time with these organisations
I worked:
— across the whole range of technical environmental
assessment work in the UK and Hong Kong, for the power and petrochemicals
sectors, transport and manufacturing;
— on policy studies for the European Commission
(including key cost-benefit studies on acid rain in 1985—88
and global warming in 1990—92); and
— on corporate environmental management
strategies and systems, as well as corporate reporting and assurance,
for clients including BP, Procter & Gamble, Pfizer, GlaxoWellcome,
BG, Severn Trent, Novartis, Black & Decker, and others.
Since 2004 I have continued to act as an independent
consultant on corporate responsibility for companies like BA,
Next plc, E.ON UK and Charter plc. But have also built a business
focusing on corporate responsibility support for companies doing
business in China and Asia. More information can be found at www.source-asia.net
and www.csrchina.net.
Our focus is on using the web for performance
information management and monitoring. Of particular relevance
to this submission is our work, under a four-year contract, for
the Norwegian Ministry of Finance, to monitor the performance
of 3,000 Asian companies in their Government Pension Fund—Global,
against the Ethical Guidelines which govern the Fund. This is
explained in more detail below.
My formal qualifications are:
— B.Sc. in Chemistry and Environmental
Science from the University of East Anglia (1980).
— M.Sc. in Applied Meteorology and Climatology
from the University of Birmingham (1982).
3. MAIN RECOMMENDATIONS
(a) The financial sector has considerable
potential and, therefore, responsibility for influencing our path
to sustainable development, both within the UK and globally. There
is currently no evidence that UK Financial Investments (UKFI)
have grasped this and taken it on board as a core aspect of its
role. The current approach seems to address sustainable development
in a reactive, hands-off way, whereas a more proactive, strategic,
hands-on role would be more consistent with its position as major
shareholder and representative of the government and the people
of the UK with a number of the UK's most powerful financial organisations.
(b) Ethical criteria are no longer relevant
just to "green funds". They are recognised as valuable
proxy indicators of risk management and good corporate governance.
Increasingly they are being incorporated into the rating and management
frameworks of core funds, in particular I would highlight the
Co-operative Bank in the UK and the Norwegian Government Pension
Fund—Global.
(c) A responsible financial sector can,
not only drive responsible manufacturing and an environmentally
sustainable world, it can also ensure its own sustainability.
Investments in socially responsible enterprises are invariably
lower risk and more successful in the long term than others. The
markets for clean technology and renewables are booming around
the world and present a major opportunity, both to stimulate the
transition to greener economies and to secure a significant UK
slice of an important investment opportunity.
(d) UK and international examples show how
UKFI can seize this one-off opportunity to re-direct UK banking
towards a more responsible and sustainable path where it will
both support a low-carbon, greener, socially responsible world
and re-position UK banking as global leadership position in the
21st century financial services sector. This is no longer a green
fantasy or choice of "green or mean", but a practical
and sensible business strategy proven to be a driver of success.
(e) Key elements of a sustainable banking
programme that should be adopted by UK Financial Investments include:
— Ensuring that a comprehensive and ambitious
sustainability policy, with supporting ethical investment and
lending guidelines, is adopted by all the banks it holds equity
in, as part of the formal, corporate governance structure. Reviewing
compliance with these policies and guidelines should be a core
requirement of executive management.
— Insistence on formal accountability at
senior management level for environmental, social and ethical
performance and public transparency by way of annual, independently
audited performance reports.
— Establishing an independent advisory
and review panel with a remit to: assess performance against the
policy and guidelines; to advise on and require remedial action
in case of non-compliance; and to have authority to direct and
receive confidential reports from an independent ethical audit
department.
— Requiring that all such banks adopt a
proactive ownership approach, as well as a passive, reactive one,
whereby environmental and ethical considerations become core to
the banks' lending and investment decisions and where the banks
proactively use their influence to engage with the markets to
adopt more sustainable and responsible business plans and operating
practices.
(f) Specific opportunities the banks have,
which should be mandated by UKFI to be integrated into business
strategies, include:
— screening loans and investments against
key indicators of environmental efficiency (including energy and
carbon intensity) and social and ethical responsibility, to ensure
that no business is supported which does not have plans and capacity
to reduce its energy/carbon intensity and which cannot demonstrate
a positive approach to corporate social responsibility;
— offering favorable conditions for companies
planning to invest in clean technology and other business improvements
which can demonstrate gains in energy efficiency and/or reductions
in carbon intensity over time;
— establishing special packages to support
small- and medium-sized companies to upgrade their energy management
systems without the currently inhibitive requirement of upfront
capital investment—this is the primary hurdle to getting
UK industry more energy efficient; and
— seeking global opportunities to invest
in the expanding clean technology markets, preferably in cooperation
with UK based technology and engineering companies.
4. CASE STUDY—THE
NORWEGIAN GOVERNMENT
PENSION FUND
My company, SourceAsia Ltd, has a four-year
contract to support the Norwegian Ministry of Finance with monitoring
the ethical performance of their Government Pension Fund—Global.
We would like to bring your attention to the approach and success
of this Fund in making ethical considerations a core and critical
part of its success. Further information can be found at:
— http://www.regjeringen.no/en/sub/styrer-rad-utvalg/ethics_council/government-pension-fund--global.html?id=440567
and at
The Norwegian Government pension fund is not
only one of the world's largest sovereign wealth funds, but also
known for its strong ethical investment guidelines. The Norwegian
Government wants the Fund to act as a responsible investor, which
means that the Fund shall be managed in a way that promotes better
functioning, legitimate and efficient markets and sustainable
development in the broadest sense. Firstly, the Fund should be
managed with a view to achieving high return that will enable
coming generations to benefit from the country's petroleum wealth.
Secondly, the fundamental rights of those affected by companies
in which the Fund invests should be respected.
Previously, there have been two tools to help
ensure compliance with the Fund's ethical commitments: exercise
of active ownership in the companies in the portfolio and exclusion
of companies from the investment universe of the Fund. One of
the changes being introduced now is adoption of a broader perspective:
consideration of environmental and social aspects and good corporate
governance are going to be integrated to a greater extent as relevant
factors in all aspects of the management of the Fund.
In early April this year, after a broad evaluation
of the ethical guidelines for the Government Pension Fund, the
Government presented a more active and more cohesive perspective
on the ethical management: consideration of environmental and
social aspects and good corporate governance are going to be integrated
to a greater extent as relevant factors in all aspects of the
management of the Fund. Key developments include:
— Exclusion of tobacco-producing companies
from the portfolio.
— Introduction of a watch list as a new
measure vis-a"-vis companies that are in the grey zone in
terms of exclusion.
— Strengthening of the active ownership
effort, among others by asking Norges Bank to formulate more documents
outlining their expectations of companies the Fund invests in.
One will pertain to environmental issues, for instance concerning
the companies' strategies on climate change. Another will be related
to corporate governance, concerning transparency and reporting
on payment flows in companies. Clear expectations in this area
may help counteract the use of closed jurisdictions (so-called
tax havens) to conceal unlawful acts.
— New requirements concerning transparency
and reporting linked to the exercise of ownership.
— Establishment of a procedure for how
an excluded company can be re-included in the portfolio.
— Climate change has been raised by many
of the commenting bodies. As a broadly diversified and long-term
investor, the Fund has an interest in avoiding negative economic
repercussions of climate change. In addition to seeking an expectations
document within the environmental area, other new measures in
this area include:
— Initiation of a broad study to assess
how the challenges of climate change can affect the financial
markets and how investors ought to act in light of this.
— Establishment of an environmental programme
aimed at investments that can be expected to yield indisputable
environmental benefits, such as climate-friendly energy, improving
energy efficiency, carbon capture and storage, water technology
and management of waste and pollution.
Implementation of the Fund's ethical commitments
relies upon two core elements of its corporate governance and
management approach:
The Ethical Guidelines for the Government
Petroleum Fund are based on two premises:
— The Government Petroleum Fund is an instrument
for ensuring that a reasonable portion of the country's petroleum
wealth should benefit future generations. The financial wealth
must be managed with a view to generating a sound return in the
long term, which is contingent on sustainable development in the
economic, environmental and social sense. The Fund's financial
interests should be consolidated by using the Fund's ownership
interests to promote sustainable development.
— The Government Petroleum Fund should
not make investments which constitute an unacceptable risk that
the Fund may contribute to unethical acts or omissions, such as
violations of fundamental humanitarian principles, serious violations
of human rights, gross corruption or severe environmental degradation.
The role of the Council on Ethics is
to provide evaluation on whether or not investment in specified
companies is inconsistent with the established ethical guidelines.
The Ministry of Finance makes decisions on the exclusion of companies
from the Fund's investment universe based on the Council's recommendations.
Both the Ministry's decisions and the Council's recommendations
are made publicly available on its website. The Council has its
own secretariat which provides research for the Council. SourceAsia's
role is to provide this secretariat with monthly updates on web
media reports on incidents or allegations which may indicate contravention
of the Guidelines by any of the Asian companies in the Fund's
portfolio.
26 February 2010
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