around 7 per cent of the overall market of institutionally managed assets (PRI 2010).
Although progress remains slow, there is also evidence in the PRI’s Annual Assessment Survey of how the asset owners that lead this initiative are catalysing change throughout the investment chain. For example, 87 per cent of the investment managers that participated in the survey now have an overall investment policy that addresses ESG issues, and 66 per cent of asset owner signatories now put specific ESG considerations into their contracts with managers and investment advisors.
The banking sector has also shown positive signs of reform. In the late spring of 2010, the sector was warned that post crisis, “private players will be held accountable to new and stricter standards of economic integrity and prudent management” (Trichet 2010). An international body, the Basel Committee on Banking Supervision (BCBS), part of the Bank for International Settlements (BIS)5
5. The Bank for International Settlements was established 17 May 1930, and is the world’s oldest international financial organization. The BIS fosters international monetary and financial cooperation and serves as a bank for central banks. http://www.bis. org/about/index.htm
governing how banks handle risk to bolster the stability and resilience of the financial system, while ensuring sufficient lending to foster economic growth. The executive summary of the BCBS’s consultative document – Basel III – on major banking reforms states, “A strong and resilient banking system is the foundation for sustainable economic growth, as banks are at the centre of the credit intermediation process between savers and investors” (BCBS 2009).
Moreover, banks provide critical services to consumers, small and medium-sized enterprises, large corporate firms and governments who rely on them to conduct their daily business, both at a domestic and international level. Considering a broader range of environmental and social risks into banking processes and disciplines such as those governed by the BCBS would have profound implications for the banking sector and would catalyse the transition to a green economy.
, plays a key role internationally to define the rules 4.4 Expanding green insurance
The insurance industry is uniquely placed in our economies as a private market mechanism for the
Box 7: Banking risks around climate change As
carbon liabilities become internalised within
accounting and financial systems, banks will be affected increasingly both directly through impacts on the value of their own capital and indirectly through changes to the value and risk profiles of the loan portfolios of institutions and the collateral held against those loans. Climate change creates concerns at the macro prudential level in terms of its long-term systemic risks that jeopardise whole regions, economies and industries.
Climate change also creates concerns at the micro prudential level in terms of risks embedded in the financing and investment undertaken by banks. The policy, legislative and regulatory changes underway in many countries to more fully account for a broader range of ESG risks will also strengthen the fiduciary duty (UNEP FI AMWG 2009) and fiduciary legal (UNEP FI & Freshfields Bruckhaus Deringer 2005) arguments that call for a full and proactive effort to integrate financially material risks in all aspects of investment policy making and investment decision making.
These changes have implications for banks, as well as the many other forms of financial intermediaries that exist along the investment chain. In previous guidance, the BCBS has sought to “promote a more forward-looking
approach to capital supervision, one that encourages banks to identify the risks they may face, today and in the future, and to develop or improve their ability to manage those risks.” (UNEP FI AMWG 2009) It is in this forward looking perspective where full consideration by the BCBS of financially material ESG issues are required, such as the risks posed by climate change, resource scarcity and the destruction of ecosystems, as well as governance issues related to micro and macro prudential regulation. Aligning Basel regulations and standards with ESG issues carries the promise of a stable, resilient and robust financial system that can deliver capital for green projects and initiative.
Including a full range of ESG considerations in the capital, adequacy requirements of banks will be a significant step to align the worldwide banking system with the needs of a future green economy. Post crisis, and following criticisms that the Basel II framework was ineffective, the BCBS, under a G20 mandate from the Financial Stability Board (FSB) is in the vanguard of efforts to reassess the resilience of the banking system. To this end, a review of many of the key supervisory requirements was initiated in 2009. The opportunity to reinforce the importance of ESG issues into ongoing Basel Committee considerations remains current as the standards-setting pursues well into the next two years.