New hope in Washington

In november 2008 the Ethical Council travelled to Washington D.C. to deepen its knowledge about climate issues and learn more about how international lenders like the World Bank address environmental and social issues in their project financing.

In spite of the economic recession and dire financial problems among auto makers and other companies in the USA, there is hope that the American stimulus packages will include significant green infrastructure investments. This was one of many things insights gained by the AP Funds’ Ethical Council during a visit to the country’s capital city.

There are few pension funds worldwide that actively pursue responsible investment – we estimate that only around twenty funds do so with the held of internal resources – while the majority leave these issues to external asset managers.

However, there is one lender that has long been expected to take responsibility for the projects it finances. this is the World Bank Group, which has been providing loans and grants for projects in developing countries since the 1950s. The World Bank, the International Monetary Fund (IMF), the Inter-American Development bank and the International Finance Corporation, (IFC, which only finances private sector investment) all play different roles in the system.

The Ethical Council’s interest was focused mainly on the World Bank and IFC’s loans to development projects in third world countries. A series of scandals in the early 1990s connected to construction or planning of dams in Peru and India cast doubts on the credibility of both institutions with regard to environmental consideration and treatment of indigenous peoples. Investments in energy and mining projects, in particular, often lead to major environmental or social problems and are therefore questioned, which the Ethical Council has first-hand experience of.

The scandals set in motion a number of activities related not only to the World Bank’s own rules and policies, but also monitoring routines and procedures for consultation with and grievances from affected stakeholders in a project.

This led to drafting of the Equator Principles, a financial industry benchmark that has been developed by the World Bank and is used as a framework by some 60 project financing banks, including Sweden-based Nordea and SEB.

The Equator Principles contain a set of standards for management of environmental and social aspects in project planning and financing. This is especially important in projects involving infrastructure (such as roads and energy projects) in emerging markets, where construction is often located in previously unexploited areas. In addition, the World Bank has created a “wailing wall” which over the past decade has handled some 40 investigations initiated by grievances from stakeholder groups.

In 2008 the World Bank launched its first “green bonds”, designed to raise additional funding for projects targeting climate change. AP2 and AP3 both invested in the bond issue, which has aroused widespread attention and interest among investors, and we are likely to see more investment initiatives of this type in the future.

The Ethical Council met with the IFC and the Inter-American Development Bank, which explained that they often face daunting challenges in assessment of new projects. What are the environmental consequences of a road construction project in the Amazon that leads to destruction of rain forest? What are the implications for indigenous peoples who either own or consider themselves to own land that is of interest for use in a project? These are complex projects and issues that the institutions must weigh and consider.

All four institutions, the IMF, the World Bank, the IFC and the Inter-American Development Bank, showed a keen interest in the Ethical Council and the work of the various AP Funds.

Climate change and ecosystems

The second theme of the trip was related to global warming and ecosystems. Here, we met with the World Resources Institute (WRI), a think tank focused on environmental research. They gave us a behind the scenes assessment of how environmental issues are expected to be handled under President Obama’s administration. Obama has been very clear that the USA will introduce a system for trading of emission rights in which companies are required to pay for their carbon dioxide emissions, according to the same principles applied in Europe. Exactly how this will come about is hard to say, since American voters are strenuously opposed to taxes regardless of whether they are labelled as environmental charges or otherwise. It is also important to remember that a large share of the country’s electrical energy comes from coalfired power. How these power plants will be treated is a key issue, not to mention the price of petrol for private motorists. There is a powerful lobby to extract more oil inside US borders, but the main emphasis is on petrol prices and not the environment.

Another key concern is what stance the USA will take at the Copenhagen Conference in December 2009, where the participating countries are expected to reach a new climate change agreement to succeed the Kyoto Protocol. China, and possibly also India, have an important role to play in this context. Before signing the agreement, the USA has demanded that China commit to some type of taxation or regulation of carbon dioxide emissions. In the traditional American style, there is also discussion of import tariffs on products from countries with poor environmental regulation. In other words, the USA’s new administration will be fully focused on environmental issues and many of the new initiatives are likely to have a green tone, even though there is a major risk that they will be targeted more towards road investments than mass transit solutions.

At the World Resources Institute (WRI), the World Wildlife Fund (WWF), Oxfam (a group of non-governmental organizations) and the Global Environmental Facility (GEF), which helps fund initiatives to assist developing countries in meeting the objectives of environmental conventions in the UN system, we talked extensively about ecosystems that are threatened by human encroachment. topics ranged from the supply of water, which many people take for granted, to pollination, which is critical for many types of agriculture. The degradation of these systems in many places is potential threat to people, countries and investments.

We also met with the Cato institute, a non-profit public policy research foundation that has questioned the assumptions behind global warming.

Seminar at house of Sweden

The Ethical Council held a seminar for some 50 participants at the Swedish embassy in Washington, where representatives for the Ethical Council, the WRI, the GEF, the PRI and the IFC discussed climate issues and ecosystems.