Leverage for the Environment: A Guide to the Private Financial Services Industry

In the years since the Earth Summit in Rio, financial globalization has compounded the challenge of reconciling economic growth with environmental sustainability. Over this period, the volumes of capital flows to developing and transition economies have risen dramatically with the increase accounted for entirely by private capital. A new report – Leverage for the Environment: A Guide to the Private Financial Services Industry – illuminates a newly prominent feature of the development finance landscape for members of the public interest community seeking to understand and influence how private financiers incorporate environmental considerations into their decision-making.

This report profiles eight segments of the financial services industry: commercial banks, investment banks, mutual funds, pension funds, property and casualty insurance, life insurance, venture capital and foundations. For each segment, the report presents a description of the industry, and key information such as how the industry is regulated, the extent of attention to environmental issues, and its relevance to developing and transition economies.

In addition, each chapter utilizes a diagram to provide a visual “map” of flows of capital and information between an industry segment and external actors.

The diagram is used to illustrate a set of “leverage points” for influencing various actors to integrate environmental considerations into decision-making, including:

• the operations of key segments of the private financial services industry;
• the influencers and decision-makers within each segment;
• the environmental issues related to the industry’s credit extension, underwriting, and investment functions, with attention to private investment flows to developing countries.

The report provides examples of strategies employed by environmental activists, public financial institutions and industry insiders to influence the behavior of private financiers. The report concludes that:

• the private financial services industry and the public interest community share an interest in enhanced corporate transparency and disclosure of information;
• financial industry professionals need to be made aware of the emerging literature linking environmental and financial performance;
• shareholder activism continues to be an important tool for putting environmental concerns on the agendas of financial institutions and can be used by financial institutions to influence operating companies; and
• in the context of financial globalization, the “rules of the game” for the financial sector are being written – or re-written – and it is critical to place environmental issues on the agenda of relevant policy arenas.

This report also includes a brief description of key financial concepts; a glossary of financial terms; a “snapshort” of the eight segments to convey their relative degree of regulation, availability of information, risk aversion, and time horizon; and guidance on where to go for additional information.

Leverage for the Environment is the first in a series of reports to be produced by WRI’s International Financial Flows and the Environment (IFFE) project. The purpose of the project is to identify and explore the most promising avenues of inquiry and advocacy for public interest organizations concerned with how international financial flows affect the environmental sustainability of developing and transition economies.