Should banks consider environmental effects when making loans for big projects? Are they living up to their promises and policies on green lending? And how much input should shareholders and environmental groups have in the process? Jon Sohn, World Resources Institute senior associate, and Competitive Enterprise Institute senior fellow Marlo Lewis discuss lending and the environment, what's working and what's good business.
Brian Stempeck: Hello and welcome to OnPoint. I'm Brian Stempeck. With us today is Jon Sohn, senior associate with the World Resources Institute. Also with us is Marlo Lewis, senior fellow with the Competitive Enterprise Institute. Gentlemen thank you both for joining us.
Jon Sohn: Nice to be here.
Marlo Lewis: Thank you.
Brian Stempeck: Jon, I'll start with you. Last month J.P. Morgan Chase adopted a major new environmental policy and it's really going to guide the type of loans they provide in the future. Give us a sense of what that environmental policy does and how that came about.
Jon Sohn: Well, it's a very exciting development in the world of private sector banking. What they have done is they have made a number of commitments on protecting the environment, specifically on issues related to forests, climate change and getting more rights to indigenous peoples who are impacted by investments they might make in developing countries. I think one of the most exciting things from the perspective of WRI is they're developing rules and tools to integrate into their business that makes sense in terms of expanding economic opportunity and protecting the environment.
Brian Stempeck: So can you give us a sense, how does something like this play out in the real world? When you're actually talking about J.P. Morgan looking at a loan application for a certain project going on in South America, what kind of rationale, what kind of steps do they go through as they process that loan?
Jon Sohn: Well, whenever you're working on a deal, a project finance deal, in particular in a developing country for instance, there are number of inherent risks with that project, economic, political and environmental and social. So what they're doing is integrating those risks into their decisionmaking process, which will be reflected in their loans. And there are number of banks under the equator principles that are now doing this and this is essentially 30 of the largest banks in the world adopting lending standards for project finance. So in a given project these issues are going to be there whether or not a bank like J.P. Morgan has standards in place for their lending and what they're doing is saying that rather than ignoring these risks and potentially running in the costs overruns when construction happens and environmental and social issues aren't that with, they're going to deal with the dishes upfront and save themselves some money.
Brian Stempeck: What kind of thing would cause one of these banks to reject a loan? What's the kind of thing that sends up a red flag to them and with these equator principles, these new environmental principles, what would say to them, no, we're not going to prove this project?
Jon Sohn: Well there's nothing in their standards that says they can't go forward with any particular loan. What they have to decide for themselves, as a bank, is whether the risks are acceptable and that's what all the equator principal banks are doing. They're looking at the risks, just like they look at any other environmental or economic risk or what have you and they're deciding whether the loan conditions that they place upon the project are sufficient to protect them against those risks.
Brian Stempeck: Marlo you object to some of these kinds of policies. Tell us why.
Marlo Lewis: Well, I see this as the Kyoto-ization of finance and lending and therefore development, and I think it's very dangerous for the developing countries in particular. These are countries that are desperately poor, where millions of people lack access to modern forms of energy, especially grid-based electricity. And building, for example, a coal-fired power plant in these countries would often dramatically improve the quality of people's lives. Women wouldn't have to go out and engage in backbreaking labor, for example, to pick and gather firewood, fuel wood, from the forests and bring it back home. Kids could actually read and study and improve themselves intellectually at night if they had, if they were hooked up to a grid. But as we know, coal is the most carbon intensive fuel and the one that really is most endangered by Kyoto-style policies. And in this case, the effort here is not just to make sure that lending practices don't aid and abet illegal logging, they're supposed to actually consider the impact in terms of reducing greenhouse gas emissions. So I see this as a threat to the development of desperately poor countries and I wish that J.P. Morgan actually had a set of standards or principles in which they would look at the property potential risk of restrictions on investment in these developing countries.
Brian Stempeck: Jon how do you respond to those allegations?
Jon Sohn: Well, I think they might be well intentioned, and we all want to try to alleviate poverty, that's a very big focus of what WRI does as well. But the suggestion that somehow these policies get in the way of economic development in developing countries I think is really off base. Rather than focusing on Kyoto and mandated reductions in developing countries actually what these policies do when you get down to climate change and carbon issues is they, they're more reflective of what's in the framework convention on climate change, which both the United States, India, China, Brazil and the rest of the key developing countries have all signed onto. And specifically in the framework convention it talks about the role of financial institutions in assisting and developing standards that can help the developing countries meet their goals for development and reduce their greenhouse gas emissions. That's what we've all signed up to and I applaud J.P. Morgan for wanting to take part in that effort.
Brian Stempeck: But is Marlo correct in saying that from now on J.P. Morgan is not going to be able to build, say a coal-fired power plant in South America? Is that accurate?
Jon Sohn: No, specifically what they've agreed to is to adopt certain local pollution standards as part of their loan conditions. And then in terms of climate change, what they've agreed to is to develop carbon mitigation option analysis, which basically says when a client comes to them for a loan they want to take a look at all the different options on the table in terms of less carbon intensive paths and decide what is the most feasible in light of those options and what might be the incremental cost of going with the less carbon intensive option.
Brian Stempeck: So the banks don't really have to do anything, they just have to kind of layout the suite of options available to them?
Jon Sohn: That's correct and then they work with the client to develop what's the best option. I think that's a good policy. It makes business sense. It integrates the risk of both climate change and local pollution issues into their decisions.
Brian Stempeck: Marlo, the equator principles have been around for about two years now, same sort of being J.P. Morgan is doing with some of these environmental standards. Have you seen any on the ground projects that have been stopped or banks that have said, "No, we're not going to do this project," that you think have hurt a group of people in any area?
Marlo Lewis: No, I haven't, but only because I haven't really looked into that, but what really concerns me, for example, is that J.P. Morgan adopted these new standards under pressure, some would say harassment, by the Rainbow Action Network and I would just like to read a statement by the founder of the Rainbow Action Network who said, "We can build an ecological --
Brian Stempeck: Excuse me, rainforest.
Marlo Lewis: Rainforest, I'm sorry, "We can build an ecological utopia on this planet and in many respects, we can do it within our lifetime. We could have, in 10 to 20 years, virtually all of our energy from renewable energy." Now that's pie-in-the-sky utopianism that would break the bank, I'm talking about the energy sector of this country, in the United States, which is a very wealthy country. What concerns me is the larger agenda, which is behind the adoption of these new standards by J.P. Morgan and J.P. Morgan's capitulation to the harassment that it received from Rainforest Action Network, is just going to incur, embolden Rainforest Action Network to do this to more and more companies. And eventually this ideology, this ridiculous notion that we can have most of our energy from renewable sources in 10 to 20 years, even in a wealthy country like the United States, will be broadly adopted and in the developing countries this is a death knell for their economies.
Brian Stempeck: But the Rainforest Action Network is not the one making final decisions on these projects and how they feel about renewable power is not necessarily how, you know, J.P. Morgan feels. When Rainforest Action Network went outside the Citigroup headquarters or, you know, the J.P. Morgan headquarters, I know they were protesting a lot of the illegal logging, human rights violations, things of that nature. I don't think they were really protesting in terms of wind power. And doesn't the final decision here really still lie with the banks? Are they, protesters generally are trying to shape them to consider some of these things as they move forward.
Marlo Lewis: I believe that they'll have a lot of input and influence in whatever decisions J.P. Morgan makes, especially on what counts as an environmentally acceptable investment or not. I mean you can't get them to adopt these principles and then think that your influence will disappear from then on. And what J.P. Morgan is talking about, of course, is an ongoing stakeholder dialogue including the very people that got them to sign up to this. So yes, J.P. Morgan will make be making the decisions, but those decisions will be made under the same kind of pressure that caused them to adopt the principles.
Brian Stempeck: Jon, some environmental groups really haven't been too happy so far with how this thing, a lot of these environmental principles have worked out. There's been a pipeline in Eastern Europe that's been approved that was pretty controversial and some other projects that have gone forward, kind of signaling that the banks are basically ignoring some of these principles. What's your take so far on how the equator principles and these new environmental standards for banks have worked over the last two years?
Jon Sohn: First of all, we welcome the adoption of the equator principles. They're a great step in the right direction. There will be projects inevitably where people disagree on whether the standards are met or whether the project should go ahead or not. Those sorts of debates are always going to be there, but I think the idea that these projects are actually going ahead, and my colleague's inability to actually come up with any specific examples of where these projects are being harmed by these standards, just goes to the point that this is a good idea for banks to develop risk management on environmental and social issues.
Brian Stempeck: Marlo?
Marlo Lewis: But the carbon standard or the climate change standard is new. I can't point to any examples of that because this is the first time it's been tried. Another thing that really bothers me is that J.P. Morgan has now taken upon itself to become a lobbyist for cap-and-trade, for Kyoto-style policy. I mean, that's another thing that Rainforest Action Network got them to sign up to do, to actually go out and organize other members of the financial community to lobby the U.S. government for policies like Kyoto or McCain-Lieberman. I'm not sure that that's what investors and shareholders in J.P. Morgan think is good policy for the United States. The U.S. Congress certainly doesn't think so.
Brian Stempeck: Well some people could argue that shareholders do want that. I mean, yesterday, earlier this week, the United Nations had all these investor groups kind of joining there and talking about what they want to do about climate change. You're seeing shareholder resolutions in a number of large companies, at Exxon Mobil, at other oil companies. I mean isn't this kind of the evolution of the environmental movement? Rather than going after the government and lobbying, instead they're lobbying corporations. I mean what's wrong with that?
Marlo Lewis: From their point of view it's a very good strategy. So in that sense it's an evolution of the environmental movement, but I mean if you look at the Exxon Mobil shareholder fights every year those resolutions are voted down. Actually, look, I think that if J.P. Morgan is really going to constrain its lending activities based on what I would consider to be climate hysteria they are going to end up creating investment opportunities for their competitors and to me that would be poetic justice.
Brian Stempeck: Jon, what do you make of the evolution so far, of how the environmental movement is going? Obviously, they can have success at J.P. Morgan and with some of the shareholder resolutions they also had success at some utilities, at American Electric Power, at Cinergy. These are companies that said, OK, we will build a report, do something at least on climate change, based on what our shareholders wanted to see. Why do you think the environmental groups are starting to look at this approach as opposed to lobbying the government?
Jon Sohn: Well I think there's two reasons. First of all, environmental groups and their own knowledge, our own knowledge of how the world works and how the economic decisions are made has evolved. So we're following the money more and more and realizing that's what's shaping this world in the era of globalization. That's part of it. The second part of it is that we're at a stage right now in the political agenda as it is in Washington, D.C., where we're not getting as far as we would like to get. So rolling up our sleeves and working with the private sector and finding solutions is an obvious way to go. So, I mean, that's just a natural evolution of things, and I think we're in a very historic time in terms of what the private sector is doing in terms of getting out ahead of Washington, D.C., and making decisions. You know, this week General Electric, hardly concerned just with protecting the environment in its past history, has made tremendous steps. They're calling for greenhouse gas emission reductions in their own portfolio. So we're seeing Wall Street's most trusted name making these commitments. We're seeing General Electric make these commitments and they're asking Washington, D.C., for certainty so that they can be competitive.
Brian Stempeck: Marlo, what do you make of the corporate trend? What do you make of this trend with J.P. Morgan, GE, you've seen lots of major utilities come out this year and say they want some kind of certainty on climate change.
Marlo Lewis: Right. Some of it is a capitulation to political correctness and it's just pure and simple cowardice. In some cases, it's rent seeking of the most shameless variety. We saw this to a great extent in the battle or the debate over early action credits or transferable credits, where you have aging utilities that are intending to shut down old coal-fired power plants and think they can get a credit when they switch to natural gas that they can later cash in under a cap-and-trade scheme. But you know, I think you raise a very important point in the preceding discussion, where you mentioned that there was litigation going on against these five largest utilities. One of the things that Rainforest Action Network got J.P. Morgan to agree to it was to disclose the greenhouse gas emissions of people that it lends to or businesses that it lends to. That's just putting a big bull's-eye, a big target around any company that uses a lot of fossil fuels because if you can sue the five largest utilities then you can sue anybody else when you get the data on their greenhouse gas emissions. So I mean I think that's also, I mean I think Rainforest Action Network understands this that these lending practices provide the database, they do some of the discovery that will be needed later for copycat lawsuits inspired by what the state attorneys general are doing right now.
Brian Stempeck: Clearly you disagree with what's going on and what J.P. Morgan is doing, but I mean it's pretty hard to argue that there's not a major trend going on here with GE. I mean GE doesn't really do some of the rent seeking that you're talking about. They only stand to gain in the same way that a lot of the utilities do and they have said they're going to invest billions of dollars into more efficient technology. Couldn't that also be driven by something like high energy prices?
Marlo Lewis: Well, high energy prices will certainly stimulate a search for cheaper ways of using energy or producing things, but you don't need a government policy to do that. That's what the marketplace does on its own, but even in the case of companies that are not utilities you see this kind of rent seeking. For example, DuPont, because it changed a manufacturing process, reduced emissions of nitric oxide and so if you just, if you translate that into carbon dioxide, because nitrous oxide has a much higher global warming potential, you can get a lot of credits --
Brian Stempeck: Right.
Marlo Lewis: For every ton of that that you reduce. All right, it's a lot cheaper to reduce that than it is to actually reduce your use of energy. So guess who was one of the main promoters of early action credits? DuPont.
Brian Stempeck: Sure.
Marlo Lewis: So, I think that a great deal of investigative journalism is needed in every case. Whenever a big corporation stands up and beats its chest and says it's doing something to save the planet or for the environment you also have to wonder whether or not they're trying to gain a competitive advantage just by virtue of a change in the law or regulation.
Brian Stempeck: Jon, I want to get back to you for one second and talk about what some of the banks are doing. The World Bank right now, the International Finance Corporation, is working on its own set of lending guidelines and these, some people say, could kind of undermine some of the equator principles and some of the things the banks are doing on their own. What's your take on that and kind of what's next for the World Bank and the banking sector as a whole?
Jon Sohn: Well, in terms of the International Finance Corporation, they're going through a review and update of their safeguard policies on environmental and social issues, a very comprehensive review. And why this is a particular concern to WRI and other organizations that follow these issues, is that the equator principles, which we talked about earlier, well the large banks are tied to the same standards as whatever at the IFC develops. Now at this point, what we've seen so far from the IFC is a tremendous step backwards in terms of the standards that they're going to apply. So just at the moment where we're getting all these banks to come up to a very high level, we're concerned that there's going to be a new level of discretion built into these standards that, in our opinion, will lead to less certainty and more risk in these projects when it comes to environmental and social issues. Now we're continuing to work with the IFC on this and the process isn't over yet, so we're still hoping for positive rules.
Brian Stempeck: All right. We're going to have to stop there. We're out of time. I'd like to thank both of our guests today, that was Jon Sohn, senior associate with the World Resources Institute, and also Marlo Lewis, senior fellow with the Competitive Enterprise Institute. I'm Brian Stempeck. This is OnPoint. Thanks for watching.
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