Sustainable finance becomes a competitive factor

In its early days, sustainable business practice was sometimes seen as “green washing,” or a way to burnish a company’s public image. However, global competition and social pressures are forcing companies to take sustainability seriously.

By Karen Clarke-Whistler

The issue of sustainability has expanded out of the public relations department into other areas including finance. Now, a widening range of companies is finding that sustainable business practice is not just an “extra” that helps them appeal to some segments of their market, but is increasingly becoming a “must-do.”

Sustainability, broadly put, means practices that meet present needs without compromising the ability of future generations to meet their needs. In a corporate context, sustainability means addressing environmental, social and governance (ESG) risks and opportunities that may be material to the company. These risks and opportunities are company-specific. For example, forestry companies must plant trees to replace those they cut, mining companies that are expected to improve the long-term economic viability of mining towns after the mine closes, and manufacturing companies are expected to make their products more recyclable.

Companies increasingly recognize the materiality of environmental, social and governance (ESG) risks, which are in some ways a measure of sustainability, in their operations.

Sustainable finance, which was previously a niche market for socially responsible investment funds, is now going mainstream and this is having an impact on investment decision making, corporate finance and project lending.

The equator principles

This is perhaps best seen in the spectacular growth in acceptance of the Equator Principles, a financial industry benchmark for determining, assessing and managing social and environmental risk in project financing.

The Equator Principles signatories have pledged “to ensure that the projects we finance are developed in a manner that is socially responsible and reflect sound environmental management practices.”

Starting with just nine banks in 2003, there are now over 60 signatories including Export Development Canada and all of Canada’s Big Five banks. Some 85 per cent of project lending worldwide is carried out by Equator Principles signatories.

Other trends in this area include:

• While the Equator Principles apply to project lending, some banks are using ESG performance to screen companies seeking corporate financing.
• Originally intended primarily to guide resource projects in the developing world where weak national governments may be unable to effectively protect local communities and the environment, the effect of the Equator Principles is increasingly felt in developed-world projects as well where community interests, NGOs and the media can result in intense public pressure.
• Carbon risk is rapidly becoming a key ESG risk (and opportunity), although it is not explicitly mentioned in the Equator Principles.

The rising power of NGOs

Another way sustainability is affecting corporate Canada is through the growing profile of Non-Governmental Organizations (NGOs). This affects Canadian companies with operations or suppliers in other countries, particularly in the developing world, but also those who stay closer to home.

While many NGOs start around a kitchen table, some have grown into powerful international advocacy groups, with annual fundraising revenues approaching those of multi-national corporations. Equipped with strong public relations capabilities, Internet savvy and the ability to mount grassroots campaigns quickly, they can put pressure on what they see as undesirable activities of companies — and by extension, those companies’ financial backers.

Many companies now routinely include representatives of international NGOs in stakeholder engagement, or as corporate advisors. However, this is not a guarantee of increased public acceptance. In fact, what is increasingly revealed is a lack of ideological alignment, consistency and transparency among some of the very groups who have been so critical of “big business” on these issues. Furthermore, there is often disagreement between government policy, local community-based groups, and intentional groups operating from an ideological perspective. This can lead to real difficulty in assessing the true social risks of project development.

Quantifying and evaluating sustainability performance

Sustainability issues are becoming an increasing part of how corporations’ risk managers quantify, measure and manage risk. They have developed ways to put numbers to operational risks. Better testing, modelling and computer analysis of operations are helping to reduce risk in resource extraction, manufacturing and other company activities. However, many sustainability issues are intangible. They are not easy to measure and consequently it is difficult to assess their materiality, especially in the case of broad-based social issues. There are several methods and tools that can be used to assess project sustainability issues.

The Project Sustainability Management Guidelines developed by the International Federation of Consulting Engineers (FIDIC, 2004) provides a means of identifying key sustainability issues, goals and targets for large engineering projects.

Environmental and social impact assessments (ESIA), when coupled with effective public consultation and dialogue, can provide a good basis for identifying local issues and identifying means of eliminating, mitigating, or managing these. However, since ESIAs are usually part of environmental permitting associated with the project feasibility stage, they are often initiated long after the initial impacts associated with the project. Screening-level ESIAs should be undertaken at the earliest stages of project development in order to develop effective management systems, and operating procedures, including community relations and communications.

Clearly, sustainability is becoming a factor in how companies operate. Those that are competitive in this area have an edge in seeking financing, in selling products to businesses and consumers who consider sustainability issues in their purchasing decisions, as well as in recruiting employees who like the idea of working for a company that will help them live their values. Progress in this area, and being able to show that progress, is increasingly a competitive factor.

Karen Clarke-Whistler is team leader, sustainable development for Golder Associates, a global environmental and geotechnical group of companies. She can be reached at 905.567.4444 or by email: kwhistler@golder.com.

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