Companies increasingly at risk for climate change litigation says UN
December 5, 2005
SUMMARY: Companies which contribute to climate change will increasingly face legal action according to a U.N.-sponsored report accounced last week but scheduled for release in March 2006. London-based law firm Freshfields is working with Dutch bank ABN Amro to produce the U.N. report which aims to encourage investors to address environmental, social and governance issues in their investment decisions. Below is the news released from UNEP.
Sustainability Business Worth $ Trillions
United Nations Environment Programme Finance Initiative news release
November 29, 2005.
A powerful alignment of legal, financial, and investment interests will see USD trillions directed in the next decade to 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 landmark studies undertaken during 2004-5 (see reports listed*).
This series of UN-backed studies explores the role of financial service companies and capital markets, and the legal context in which they operate, as they capitalise on new opportunities linked to the concept of sustainable development and more effective management of associated risks.
“There is no question that 2005 will be seen as the watershed when the mainstream banking, insurance and investment worlds realised 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,” explained Klaus Toepfer, Executive Director of the United Nations Environment Programme.
To illustrate the potential of the new global markets, the UNEP head explained that financial institutions working with UNEP predicted that greenhouse gas emissions trading markets could reach USD 2 trillion a year by 2012 and that the market providing finance for clean energy technologies could reach USD 1.9 trillion by 2020.
“Next week in Montreal at the international climate negotiations, the financial service companies in the UNEP FI partnership will ask governments for two key things: to provide early, clear guidance on the continuation of international climate policy regime beyond 2012; and to foster an appropriate framework to ensure a liquid and efficient global carbon market” explained the UNEP Executive Director. “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,” he added.
About the Working Capital Report
The planned “Working Capital Report” will provide a snapshot of the range of activities and initiatives taking place in the field of sustainable finance as well as an analysis of the implications of the UNEP FI-backed reports for financial markets. Recent areas of activity related to sustainable finance, amongst others, include:
In early 2005 the UN Secretary-General convened a group of 20 of the world’s largest institutional investors, representing USD 1.7 trillion in assets owned, to negotiate a set of Principles for Responsible Investment (the ‘PRI’). The voluntary Principles – finalised in London in October 2005 and currently under embargo – will be launched in Spring 2006 and will provide guidance for the institutional investment community worldwide on how to incorporate ESG issues into their investment decision-making and ownership processes. UNEP FI and the UN Global Compact cooperated to facilitate the PRI process.
In 2004-5, UNEP FI’s Asset Management Working Group joined with some of the world’s most respected research institutions, including Deutsche Bank, Dresdner Kleinwort Wasserstein, Goldman Sachs, HSBC and UBS, to explore the financial materiality of ESG issues to securities valuation. A second round of what has become known as the “Materiality” series will be released in 2006.
The UN Global Compact, an initiative of the UN Secretary-General, published the Who Cares Wins’ report in August 2004 , which brought together financial services sector professionals, governments and other stakeholders to assess the integration of ESG issues into mainstream financial markets. In November 2005, the International Finance Corporation (IFC) published ‘Who Cares Wins II’ which tracks the progress of the original UN Global Compact’s Who Cares Wins’ work.
The UN Global Compact is actively working with a number 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 USD 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.
36 of the world’s biggest banks, collectively representing more than 80% 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 USD 50 million. The Equator Principles build on safeguard guidelines originally developed by the International Finance Corporation (IFC), the private sector investment arm of the World Bank Group.
Amongst the studies to be covered in the forthcoming “Working Capital Report”, Klaus Toepfer singled out an October 2005 published report prepared for UNEP FI by Freshfields Bruckhaus Deringer, the world’s third largest law firm. He said the 150 page report was 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. “This is ground-breaking work that will accelerate the integration of ESG issues into the mainstream investment community worldwide.
“What was once considered a niche area is set to become mainstream as institutions with trillions of dollars under management embed ESG thinking into their investment approach.” added Mr. Toepfer.
The Freshfields study is entitled: “A legal framework for the integration of environmental, social and governance issues into institutional investment”. 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.
The report, which focuses on the largest capital markets jurisdictions – Australia, Canada, France, Germany, Italy, Japan, Spain, the United Kingdom and the United States – also, considers the likely evolution of the interpretation of the law with respect to investors and ESG issues.
Paul Watchman, Partner at Freshfields Bruckhaus Deringer and senior author of the study, commented: “The report confirms that a number of the perceived limitations on the integration of ESG issues into investment decision-making are illusory. Far from preventing the integration of ESG considerations, the law clearly permits and, in certain circumstances, requires that this be done. This legal interpretation has far-reaching implications for the institutional investment community worldwide.”
“The globe is warming, fast, and deep ocean warming is changing the climate. 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, “commented Paul R. Epstein, M.D., M.P. H., Associate director, Center for Health and the Global Environment, Harvard Medical School.