SOCIAL TOPICS (Archive): EMERGING ISSUES

Published, March 2000

       Private capital flows directed to emerging economies reached nearly $150 billion in 1999. These loans and investments, made with little public scrutiny, went primarily to large-scale industries in mining, logging, manufacturing and energy production. Private lending is now the primary funding mechanism for development in emerging economies, exceeding tenfold the flow of capital from public sources like the World Bank and International Monetary Fund. Yet environmental and human consequences of banking and financial commitments are, at best, a footnote in the financial sector’s decision-making processes. While the financial sector has long been a staple in many socially screened portfolios, banking and investing activities outside of community reinvestment obligations have typically not been examined.

       The most dramatic example of privately funded development gone awry is the $27 billion Three Gorges Dam project on the Yangze River in China. If completed, Three Gorges will be the largest hydroelectric dam in the world and will displace over one million people. Environmentalists charge that riverbed erosion and changes in the river’s flood cycle will have dire consequences on the Yangze’s ability to support wildlife. A recent discovery of embezzlement by fourteen Chinese officials of $600 million dollars targeted to resettlement efforts suggests the project is rife with corruption. The World Bank, the U.S. Export-Import Bank and the Asian Development Bank have all refused to finance the project. Nevertheless, major financial institutions on Wall Street and around the world are underwriting bonds issued by the China Development Bank to fund Three Gorges.

       All is not lost, however. Stakeholder dialogue is playing a major role in reform.

       The Quantum Leap project, a joint project of National Wildlife Federation and the Friends of the Earth, has trained over 100 global environmental activists in the basics of finance and its impacts on the environment. Quantum Leap’s Sandy Buffet has told Walden that, “Commercial and investment banks don’t need to reinvent the wheel in figuring out how to deal with these issues. Private financial institutions can look to existing best practices. Two good examples are the World Bank’s Pollution Prevention and Abatement Handbook (PPAH) guidelines — the result of 15 years of dialogue between the World Bank, industry experts, and non-governmental organizations, as well as the U.S. Overseas Private Investment Corporation’s (OPIC) Categorical Prohibitions list. Both of these resources are recognized internationally.”

       The United Nations Environmental Programmes’ (UNEP) Financial Services Initiative has over 150 signatories to its statement on the environment and sustainable development. Involving a broad range of financial institutions in a constructive dialogue about the connection between economic development, environmental protection, and sustainable development, the Initiative promotes the integration of environmental considerations into all aspects of the financial sector’s operations and services.

       Our own discussions with Credit Suisse, Deutsche Bank and UBS — all early participants in UNEP’s Financial Services Initiative — suggest that these banks have incorporated environmental risk criteria in their credit assessment process. However, responsibility is in the hands of the credit manager, making implementation largely dependent on an individual manager’s training and interest. Currently more focused on internal operations such as achieving internationally recognized ISO14000 environmental certification than on the environmental and social impact of their lending and investment banking activities, there is also little consistency in the application of policies and procedures between home-country and global operations. Credit Suisse and UBS banks have cited that efforts are being made to improve the communication between home-country and global operations.

       Nonetheless, Walden has been encouraged by the willingness of these banks to embrace stakeholder dialogue. Credit Suisse has been responsive and thorough in addressing Walden’s questions and has maintained ongoing interest in our conclusions. Deutsche Bank has also taken our concerns seriously, having had both environmental department officials and credit managers at the table during our discussion.

       Projects like Three Gorges Dam make it clear that the financial sector must strengthen its environmental and social standards, and the assessment and monitoring procedures it applies to investment projects. Concerned investors must do their part by holding financial institutions accountable for their basic line of business. A continuation of broad, constructive stakeholder involvement will add immeasurable value to this process.