Carbon, Clean-Tech and Sustainable Markets Set to Attract Trillions

NEW YORK, New York, November 29, 2005 (ENS) - A newly formed alignment of legal, financial, and investment interests will direct "trillions" of U.S. dollars over the next 10 years into evolving markets linked to climate change, clean technology and sustainable use of natural resources, a report being prepared for the United Nations predicts.

"The Working Capital Report," to be published for the first time in March 2006 by the United Nations Environment Programme Finance Initiative (UNEP FI), is the culmination of a series of studies conducted during 2004 and 2005.

What was once considered a financial niche area is poised to become mainstream as institutions with trillions of dollars under management embed environmental, social and governance (ESG) thinking into their investment approach, UNEP said in a statement released simultaneously today in London, Melbourne, Nairobi, New York, Paris and Tokyo.


A trader explains the intricate workings of the New York Stock Exchange to U.S. Congresswoman Julia Carson, an Indiana Democrat. (Photo courtesy Office of the Congresswoman)
"There is no question that 2005 will be seen as the watershed when the mainstream banking, insurance and investment worlds realized the scale of the commercial opportunities unfolding in the new carbon, clean-tech and sustainable natural resource markets and, also, the legal risks of not being a leader in this area," said UNEP Executive Director Klaus Toepfer.

Financial institutions working with UNEP predict that greenhouse gas emissions trading markets could reach US$2 trillion a year by 2012 and that the market providing finance for clean energy technologies could reach US$1.9 trillion by 2020.

At the international climate negotiations that opened Monday in Montreal, the financial service companies in the UNEP FI partnership will ask governments for two key things, Toepfer says - to provide early, clear guidance on the continuation of international climate policy regime beyond 2012, the end date for the Kyoto Protocol and to foster an appropriate framework to ensure a liquid and efficient global carbon market

"They will also be looking for countries to meet their emissions reduction commitments under the Kyoto Protocol and a clear signal that nations will go beyond these post 2012 according to the principle of common but differentiated responsibilities," Toepfer said.


Traders on the floor of the London Stock Exchange (Photo courtesy Price College)
The "Working Capital Report" will explore the range of activities and initiatives taking place in the field of sustainable finance and analyze what they mean for financial markets. Right now, there is lots to explore.

Early this year, UN Secretary-General Kofi Annan took an initiative when he convened a group of 20 of the world's largest institutional investors, representing US$1.7 trillion in assets owned, to negotiate a set of Principles for Responsible Investment.

The investors formulated a set of voluntary Principles. They were finalized in London in October 2005 and are currently under embargo. A spring 2006 launch date is planned, say UNEP FI and the UN Global Compact, who cooperated to facilitate the PRI process.

The Principles for Responsible Investment, or PRI, are intended to provide guidance for the institutional investment community worldwide on how to incorporate ESG thinking into their investment decisionmaking and ownership processes.

In addition to its participation on this series, the UN Global Compact, an initiative of the secretary-general's, is working with several of the world's stock exchanges and the umbrella World Federation of Exchanges to advance the tenets of corporate responsibility in capital markets and with a broader number of public companies.

Several exchanges, including Bovespa, The Jakarta Stock Exchange and the Istanbul Stock Exchange, have joined the Global Compact, with others sharing information with listed companies on the Compact and exploring additional collaborative activities.

In 2005 institutional investors representing US$21 trillion in assets came together for the 3rd incarnation of the Carbon Disclosure Project, a collective request for the world's largest corporations to disclose information on greenhouse gas emissions and their approach to the management of carbon risks.

Thirty-six of the world's largest banks, totalling more than 80 percent of the global project finance market, have adopted the Equator Principles, a set of voluntary principles outlining environmental, social and human rights disciplines associated with project finance activities above US$50 million.


Investments based on ethical values are moving from a niche market into the mainstream. (Photo courtesy FreeFoto)
The Equator Principles build on safeguard guidelines originally developed by the International Finance Corporation, the private sector investment arm of the World Bank Group.

Now, ESG thinking is poised to permeate the policies of some of the world's largest and most influential financial corporations.

A report prepared for UNEP FI by London-based Freshfields Bruckhaus Deringer, the world's third largest law firm, is "a critical legal interpretation with the potential to change worldwide investment thinking on the importance of environmental, social and governance (ESG) issues to the investment decision-making process," said Toepfer.

Entitled "A legal framework for the integration of environmental, social and governance issues into institutional investment," the Freshfields study is "groundbreaking work that will accelerate the integration of ESG issues into the mainstream investment community worldwide," said the UNEP chief.

Freshfields undertook the work on behalf of the Asset Management working group of UNEP FI, a public-private partnership between UNEP and more than 170 banks, insurers and asset managers worldwide.


Paul Watchman specializes in environmental, planning and regulatory matters from his office in the London headquarters of Freshfields Bruckhaus Deringer. (Photo courtesy Freshfields)
To write it required the work of 517 partners and principal consultants, 2,486 total lawyers worldwide, from 28 offices in 18 countries.

The Freshfields report focuses on the largest capital markets jurisdictions - Australia, Canada, France, Germany, Italy, Japan, Spain, the United Kingdom and the United States.

Paul Watchman, partner at Freshfields Bruckhaus Deringer and senior author of the study, called "the perceived limitations" on the integration of environmental, social and governance issues into investment decisionmaking "illusory."

"Far from preventing the integration of ESG considerations, the law clearly permits and, in certain circumstances, requires that this be done," Watchman said. "This legal interpretation has far-reaching implications for the institutional investment community worldwide."

Evidence of rapid global warming will be the prompt needed by institutional investors to finance clean energy technologies, says Paul R. Epstein, MD, MPH, associate director of the Center for Health and the Global Environment, Harvard Medical School.

"The globe is warming, fast, and deep ocean warming is changing the climate," Dr. Epstein said. "In just two decades damages from weather extremes have skyrocketed 50-fold. The Freshfields report provides the basis for institutional investors to redirect practices and products to accelerate the clean energy transition, and policies that form the scaffolding for healthy, equitable and sustainable development."