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SECTON FOUR - Professor des Universities, Economist, University de Sfax (Tunisia) University de Nice-Sophia Antipolis (France)


SECTON FOUR

Environmental, Social & Governance (ESG)



This section of the Report aims to provide a brief overview into the concept of Environmental, Social & Governance as an investment tool and the concerns that this raises in terms of risk and potential environmental and social counter productivity. Drawing on recently conducted academic and empirical research, this summary also highlights many of the problems, which result from ESG being an unregulated investment tool and in this way is linked intrinsically to the issues raised in this Report concerning voluntary carbon standards.

A Background of ESG in Investment



All major banks and financial institutions are now requiring the presence of substantial ESG factors within their Carbon Offset financing activities and risk evaluations. The general view of most sectors involved in the Carbon Offset industry has been to welcome an increased focus upon the Social and Environmental issues and increased attention to the overall Governance factors; this may be viewed as a step in the right direction. That is until these aspects are examined in detail.

Banking institutions such as Société Générale, Credit Agricole , BNP Paribas, HSBC, Goldman Sachs and many others, promote and indeed make a virtue of their inclusion of ESG as an important factor in all financing decisions. This serves to allay the concerns of Civil Society Groups, Foundations and especially the global NGO sector. In fact, conversely, this inclusion of “ESG” factors can increase risk and serve to avoid tangible improvements in environmental conservation and the delivering of promised social upliftment to the communities involved, especially the poorest communities. Additionally, when private standards, implement subjectively based ESG Policies as “proof of intent”, as demanded by the funding entities, these entities (private standards and subjectively based pseudo metric ESG policies) then merge to form a toxic interrelationship.

The specialist knowledge and analysis methodologies related to ESG metrics linked to the history of this subject requires a separate detailed report to enable the non-specialist to fully understand the issues involved.

Understanding ESG as an Investment Tool



The emergence of ESG as an investment tool needs to be clearly distinguished from the field of Socially Responsible Investment (SRI) and other similar terminology.

The fundamental distinguishing feature between these two scenarios is motivation. Whereas SRI is essentially motivated by conscience driven ethical imperatives and aims to actively shape the market, (e.g. Greenwash), ESG integration is motivated by economic imperatives and is a risk-analytics tool aimed at capturing the effects of environment, social and corporate governance considerations on the risk-adjusted return of portfolios. In this regard, ESG integration is arguably a more tangible and effective method of addressing such issues given conventional investment practice, which relies heavily on quantitative measures and standardised benchmarks.

Clearly, any and all assertions made without the ability to verify those claims seriously questions the credibility of that information. Sustainably based, verified and quantified ESG risk metrics based upon accepted financial market rating principles take precedence over qualitative based data. As much as the CSR, SRI, Green and Eco practitioners claim that these acronyms represent ESG, they provably, do not.

Corporate Social Responsibility, (CSR)



Much of the environmental reporting data released by some of the world’s biggest companies is incomplete, inaccurate or deliberately distorted, according to a review of more than 4,000 CSR reports carried out by researchers from Leeds University in the UK and Euromed Management School in France.

According to a report in the UK Guardian Newspaper, corporate CSR statements are marked by “irrelevant data, unsubstantiated claims, gaps in data and inaccurate figures”, with companies routinely ignoring data from individual countries or failing to mention polluting subsidiaries.

“The quality of environmental data in sustainability reports remains appalling at times, even today,” said Dr Ralf Barkemeyer, a lecturer in CSR at Leeds and one of the team leaders. “In financial reporting to leave out an undisclosed part of the company in the calculation of profits would be a scandal. In sustainability reporting it is common practice.”

Among the inaccuracies cited by the University of Leeds researchers, is a company which stated that its carbon footprint was four times larger than that of the whole world, a power group that over-reported its sulphur emissions by a factor of 1,000 for three years in a row by using kilo-tonnes instead of tonnes and a large Swedish group that was not aware that it owned a paper and pulp business until the researchers pointed it out that it was the subsidiary of an acquisition.

The above sets the basis for corporate ESG claims and also the basis for the pseudo ESG metrics implemented by banks and investment houses claiming “a strong commitment to these ESG practices”,

These same funding entities often refer to their membership of a range of “International Protocols, Principles and Codes of Practice” aimed at assuring Civil Society that these entities act correctly in terms of Environmental, Social and Governance within their investment portfolios. There are 51 of these International Protocols, (please note; none of the listed Protocols and Codes are a “standard”. These include:

General



The Environment



Social Considerations



Governance



ESG Regulatory





Analysis of these Protocols and Codes of Good Practice produces similar findings to the Leeds University Research and in some key areas it finds an even more concerning lack of real standards of ESG performance.

All of the above are voluntary codes of practice, none contain or demand any form of third party verification of fact and neither do they contain any real sanctions for misreporting or failing to disclose. Under these circumstances, none of these Codes contain any form of predictive risk element since they are often reported up to 18 months post any significant ESG event. In terms of providing quantifiable baselines from which objective ESG related measures of risk may be derived or estimated, these Codes are incapable of delivering such metrics.

Within the EU, the current environmental and social reporting system does not create a level playing field among business as in most EU countries the reporting by companies on their non-financial impacts is voluntary. A number of companies including banks and finance houses currently publish voluntary reports on the ESG impacts of their business. However, because of their voluntary nature, these do not always provide a full and accurate picture of financial institutions activities. Mandatory, standardized reporting would ensure that reports are comparable and that all financial institutions would operate to the same objective and standardised baselines, all would have an equal advantage: since all organizations would be required to report on the same issues, under a measurable objective framework, whether their impact is positive or negative.

Fillip Gregor, Chair of the Board of the European Coalition for Corporate justice, (ECCJ) has noted that: “A financial institution’s environmental and social impact is a crucial part of its business. We need a mandatory system that allows investors and other stakeholders to assess the financial Institutions performance. That means that information should be based on clear indicators, covering core areas – including human rights, environmental standards and corruption risks. These will allow an institution’s performance to be compared with other financial institutions in the sector and allow investors and others to assess the their exposure;

The ECCJ and ETUC call for regulation that must ensure:
• Mandatory reporting, using clearly defined indicators developed with the involvement of stakeholder groups
• Reporting throughout the supply chain
• Objective information on whether the Institution has been involved in, or risks being involved in, violations of international standards for human rights and environmental protection to risk.”

Within Europe, France has become the leader in mandatory environmental and social reporting

.

All large listed and non-listed companies are now required under Grenelle II Law to disclose environmental and social information in their annual reports. Furthermore an independent third party must verify the information reported. In terms of developing a common objective in reporting standard for ESG, France has the best capability.


Summation



As has been previously demonstrated in regard to (private) Voluntary Carbon Standards, there is a recognised imperative to develop enforceable, standardised, common methodologies for both private standards and ESG metrics, without an integrated common approach. Clearly, without introducing the required underlying common standardisation, transparency and common methodologies to both private Voluntary Carbon Standards and ESG, the combining of the two will result in a toxic relationship, which will create substantially more risk for investors. In turn this could have serious consequences for the smaller and mid-sized projects and their dependent communities. As importantly, implementing subjectively based, non-audited ESG requirements within Projects could lead to environmental degradation and a lowering of social upliftment opportunities.

SECTION SIX

An Introduction to the Crucial Role of Due Diligence



This section of the Report presents a summation of key issues and improvements that should be made to all GHG standards with the aim of:

  1. Providing additional transparency to all standards

  2. Improving the identification of conflicts of interest and special interests

  3. Providing lower costs to communities even for small and medium sized projects

  4. Substantially improving Due Diligence with the aim of removing substandard/high risk entities at source

  5. To encourage significantly increased volume of potential investors, (especially for small & medium projects) via improved returns and risk identification

  6. To facilitate focus upon community development and improved environmental benefits via improved and more transparent project requirements.

In general terms, due diligence refers to the care a person or entity should take before entering into an agreement or a transaction with another party

The Authors of this Report with benefit of long term City of London financial experience included a review of due diligence methodologies across all private Voluntary GHG standards and the CDM.3 This was expected to be a brief description of what preventative measures are enacted to preclude entities from being accredited and provided with access to significant opportunities for fraud, bribery, money laundering and similar criminal activities. However, research revealed an extensive list of areas where across the industry these issues are not being addressed in the standards’ requirements.

Increasingly governments are legislating against foreign corrupt practices, for instance the United States government makes many demands under the Foreign Corrupt Practices Act, including the legal obligation on companies to include due diligence as part of their standard approach to business with any third party entity or individual, including but not limited to agents, vendors, suppliers and investment partners. Though originally enacted in 1977 the scope of the FCPA was extended in 1998 to include a cross border jurisdictional reach, with the direct intention of ensuring that US companies exercise the same if not more caution when entering into agreements in other countries. Like the comparatively recent Bribery Act 2012 in the UK, which also has an extra-territorial scope, it is necessary for entities to prove that they took measures to prevent corruption should they fall under investigation by the relevant authorities. In the simplest terms, it is now not possible for a company to claim they were unaware of an illicit practice, they must prove that they took proactive steps to avoid this occurring. Due diligence has been highlighted as one way in which a company or project owner/developer/investor can satisfy this legal requirement.

A sample due diligence checklist is attached here. This list is a very comprehensive illustration of the most extensive due now required or expected for even relatively small transactions.

The Authors of this Report do not suggest that all items mentioned in this checklist are appropriate or necessary in terms of voluntary Carbon transactions and agreements but in any recognised developed jurisdiction (EU, USA etc.) the need to comply with Anti-Money Laundering and Anti-Bribery legislation, demands that a certain level of due diligence should be taking place within the entire GHG Market. The rigour of any due diligence process will depend upon the risk/reward profile of the entity being assessed. A large scale GHG project carried out by a Global DOE may require very substantial due diligence whereas a small-scale project involving less risk may require a more basic approach.

The Authors of this Report in some cases like the title “Integrity Check”, especially where small scale projects are involved, we suggest that communities have the ability to complete an “Integrity Check” related to Project Developers, the standard under which the Project will be completed, the Validators and Verifiers and the source of potential investments to be made.

The following section of the Report aims to establish what intensity of due diligence is currently being conducted as part of the Accreditation process in the voluntary carbon market.

Anecdotal evidence suggests that Fund Managers and similar Asset Managers simply rely upon the fact that a project is developed under a “Standard” and Validated and Verified by an “Accredited” DOE, as the only assurance that appropriate regulatory compliant due diligence reviews have taken place. In addition to there being no requirement in the Standard for due diligence, these Accredited DOEs are often large companies with multiple functions, though very few will have internal due diligence capabilities. This reliance on DOEs in Voluntary or indeed CDM Projects is gross misjudgement, though there is no regulation or superior authority in place to flag this up as such. In fact the process closely mirrors the same circularity as caused the Sub–Prime collapse in that ,the, (Project) risk rating is linked to the perceived ranking of the “standard” (established “leader”) and the perceived rigour of process, which in fact is not present.
2010-07-19 18:44 Читать похожую статью
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