How green is your dollar?

Financing Change
July 5, 1996

Arguably the last bastion against environmentalism are the world's financial institutions. Major multilateral lenders, such as the World Bank, have not only acknowledged the central role played in economic and social development by environmental assets, they are now among the leading thinkers and researchers into the links between environment and the economy. But the financial sector itself has been slow to come on board. This cannot be because they think the greening of the economy is a passing fad: it is now fully integrated into mainstream political thought. One of the suggestions in this important book is that financial fund managers still operate under mandate from their clients and that mandate calls for maximising the value of financial assets, not the protection of the environment. Environment is about morality and the only morality acknowledged by financiers is market morality and financial law. Yet financial markets will play a crucial role in securing sustainable development, economic development in which the environment is afforded a central and fundamental role. It is true that massive environmental improvements could be secured without the resort to financing: fossil fuel subsidies alone are estimated to be some $200 billion per annum, four times the official aid flow. Total subsidies to energy, water, forests, agriculture and industry might exceed one trillion (1012) dollars, perhaps 5 per cent of the entire world's gross domestic product. But there will remain a role for financing, for if private investment and private flows of finance are not made greener, the world is missing a major opportunity.

Stephan Schmidheiny brings that rarity, a genuine ecological conscience, to bear on his very successful business activities and he has been instrumental in the formation of what is now the World Business Council for Sustainable Development. Where many businessmen mouth the right words and act cosmetically, Schmidheiny seeks to put the message across. This time the financial sector is analysed to see why it has been slow to adopt green perspectives. The approach is a familiar one: good examples are held up for praise, so that, by omission of mention, the bad examples define the rest. Some parts of the sector are having greenness thrust upon them: insurance companies already monitor the scientific progress on global warming and some already refuse insurance for vulnerable areas. No one in the banking community will be unaware of the revolutionary implications of customer liability for environmental damage. But that leaves huge flows of funds that are not sensitive to environmental factors. The authors call for companies to be "eco-rated" - given market ratings based on their environmental performance; for chief executives to copy the success of others in conservation, recycling and emissions reduction, success which has also brought significant cost savings. The sense throughout the book is that a failure to put the market in order will simply invite regulation from outside, through ecological taxes and other financial mechanisms. But industry has heard that before and the financial markets may be banking on their huge political influence to contain such a threat. As long as they doubt that the gains to them are going to be substantial (and if they were, they would surely have acted before now), corporate culture is unlikely to bend. But few attempts have been so articulate and persuasive as this book, and it also has a refreshing intellectual rigour in it, unlike so much that passes for literature on "business and the environment".

David Pearce is director, Centre for Social and Economic Research on the Global Environment, University College London and University of East Anglia.

Financing Change: The Financial Community, Eco-Efficiency and Sustainable Development

Author - Stephan Schmidheiny and Frederico Zorraquin
ISBN - 0 262 19370 1
Publisher - MIT Press
Price - £14.50
Pages - 211

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