Finance and Insurance Report

Executive Summary

The finance and insurance sector have taken great strides to improve their environmental and sustainability performance since the 1992 Rio earth Summit. Banking, insurance and asset management companies, however, acknowledge that the task of establishing the sector as a key driver of a new 21st century global sustainability ethic is formidable. The sector stresses that it is not only willing to - but also realizes that it must - take on the diverse and complex sustainability challenges if it is to flourish in a global economy.

Within the finance sector, corporate policies and practice to effectively contribute to the realisation of a balanced "People, Planet and Prosperity" development process are emerging amongst the most progressive companies.

Across all elements of the sector, the development of standardised, internationally recognised sustainability metrics, accounting, and reporting protocols is a priority if the measuring, monitoring and reporting transaction costs associated with the sectoral move to sustainability are to be reduced. The Global Reporting Initiative (GRI), through its firm links with initiatives such as the UNEP Finance Initiatives (FI) Environmental Management and Reporting guidelines and the Sustainability Performance Indicators (SPI) initiative, is a significant sectoral development in this regard.

Sectoral voluntary initiatives, effective codes of conduct, and a collaborative approach with government and civil society for the development of innovative regulations, offers a powerful way forward to realize specific sustainability goals. Fiduciary authorities, capital markets, rating agencies, and those regulating the financial sector have an important role to play to reward sustainability leaders and nudge along laggards in the sector.

Asset Management
In mainstream asset management, integration of social, environmental and ethical concerns into investment analysis and portfolio construction, are embryonic at best. Since 1992, however, the Socially Responsible Investment (SRI) movement has witnessed a coming of age and has become a critical driver, demonstrating to the mainstream the correlation between good governance, sound sustainability practice and positive investment performance. The arrival of sustainability indices heralds the start of a process by which SRI will be mainstreamed. Governance, transparency, and disclosure will be a significant driver of future sustainability oriented asset management.

Insurance
The insurance sector will have to go "back to basics" and work within a multi-stakeholder dynamic if it is to develop new products and strategies to enable society to cope with emerging sustainability challenges. Risks associated with climate change are the foremost example of the new challenging environment in which insurers and reinsurers are operating. The vast majority of global economic losses associated with natural disasters remain uncovered by either public or private insurance and the burden inevitably falls on the poorest members of society. Government and the private insurance industry will be required to cooperate innovatively to underwrite or propose coping strategies for new societal risks stemming from excessive inequality, resource depletion, pollution of global commons and emerging technology risks. Increasingly, the insurance sector's historical expertise in risk assessment and management and their development of tools to mitigate and manage risk effectively, is being recognised by civil society activists as a powerful force to promote sustainability.

Lending
The lending sector, which historically regarded itself as a "clean industry" with a limited ecological footprint, was slow to adjust to environmental and sustainability concerns. During the 1980s and 1990s, however, the leading lending institutions have moved swiftly to deal with internal environmental management issues and, increasingly, are exploring how the sustainability risks linked to the external dimensions of their business can be managed and turned into new commercial opportunities. Once environmental liability became financial liability, very much driven by developments in the US in the 1970s and 1980s, the lending sector awoke to the new challenges. As the sustainability agenda has shifted during the 1990s, to incorporate more social and poverty alleviation concerns, so have the leading lending sector companies adjusted to these issues.

Development of new environmentally focused lending products, micro-finance, and the emergence of private equity businesses to feed capital to sustainability-oriented companies and technologies, are all signs that the lending sector now appreciates the growing commercial opportunities associated with sustainable development.

Further development of credit and project screening processes which fully account for the sustainability upside and downside of debt and equity investment is required. Lending of money - debt financing - today is dominated by speed, security and liquidity. But in future, success will also depend more heavily on trust.