Footprint Network Blog - Footprint for Finance
Global Footprint Network first began encouraging greater environmental risk integration into bond credit analysis five years ago. Since then, a growing number of fixed income investors are following suit. We are particularly delighted by the recent announcement PRI (Principles for Responsible Investment), an influential investor group who is calling on credit rating agencies to incorporate environmental, social and governance (ESG) factors into their credit analysis more systematically and transparently.
Some of the world’s major rating agencies last June confirmed their willingness to participate in a project to make this vision a reality. Now the PRI is calling on fixed-income investors to sign a Statement on ESG in Credit Ratings before its official launch on Friday, May 6, to be at forefront of this call to action.
As of April 15, 14 investors already have signed on, including MN, an asset owner in the Netherlands and member of our Carbon Disclosure Working Group.
The initial success of this campaign underscores the widespread movement towards integrating environmental risk into investment decisions. A growing number of investors are coming around to realizing what our research has shown: Resource constraints and climate change are material risks that can affect national economies and credit worthiness not only long term but in the short- and medium-term as well.
The PRI makes a similar point in its press release, noting that integrating ESG into credit analysis provides more granular insight into issuer creditworthiness. The PRI further points out that ESG issues such as natural resource management affect government’s tax revenue, trade balance and foreign investment.
Credit rating agencies are a critical part of the world’s US$100 trillion debt capital markets. But currently they are not transparent in how they consider ESG factors. Indeed, 78% of 99 investors surveyed by the PRI believed ESG should be more explicit in ratings.
This new PRI initiative will go a long way toward increasing the systematic and transparent integration of ESG factors into credit ratings. We applaud the PRI for taking this bold, important step, and urge investors and credit rating agencies to endorse it.
Happy New Year from Global Footprint Network!
2015 has been a very important year for humanity and the health of our planet.
Building on the momentum of the historic Paris climate agreement, the stage is set to accelerate major shifts to a low-carbon and resource-secure future. While the goals are clear, the gap is still large, especially for the most vulnerable communities.
We look forward to even more progress next year, tracking our natural capital as carefully as we do our finances, and guiding decision-makers to take action in accordance with a resource-constrained planet.
With your generous support, we made substantial strides advancing global sustainability in 2015. Check out the slideshow below for highlights from the year:
Join us in helping all of humanity thrive within the means of our fabulous planet:
• Calculate: Measure your own Ecological Footprint with our online calculator, which we plan to update with a mobile version in 2016.
• Get social: Get news, photos and videos from Global Footprint Network’s Facebook, Twitter and LinkedIn communities. Invite your friends and family members to learn more about natural resource constraints, one of the most urgent issues of our time.
• Make a difference: Our interns, staff and board members are making a difference in such diverse areas as the Arctic, Iran, Switzerland and China. You can amplify our impact by donating to Global Footprint Network.
Thank you again for everything you do to preserve the only planet we have.
Mathis Wackernagel, President of Global Footprint Network, was in Florence, Italy, this week to receive the IAIA Global Environment Award for developing the Ecological Footprint. “The Global Environment Award is presented annually to a leading individual or institution that has made a substantial contribution to the practice of environmental assessment, management or policy at a global scale,” according to the International Association for Impact Assessment. This global network believes, in its own words, that “the assessment of the environmental, social, economic, cultural, and health implications for proposals is a critical contribution to sound decision-making processes, and to equitable and sustainable development.” IAIA is recognizing the Ecological Footprint for efficiently “translating the complexity of humanity’s impact on the environment into a compelling, understandable and actionable form.”
Previous recipients of the award include:
2014 John Ruggie, USA
2013 International Finance Corporation, USA
2012 Int’l Network for Enviro Compliance & Enforcement, USA
2011 Not awarded
2010 Nicholas Stern, UK
2009 The Carter Center’s River Blindness Program, USA
2008 Elizabeth Dowdeswell, Canada
2007 Lawrence E. Susskind, USA
2006 Wangari Maathai, Kenya
2005 James Gustave Speth, USA
2004 Margot Wallstrom, Sweden
2003 Mostafa Kamal Tolba, Egypt
2002 Jan Pronk, The Netherlands
2001 Maurice Strong, Canada
The text from Wackernagel’s acceptance speech is below:
Earth Day’s 45th anniversary is being celebrated today around the world. On this day—less than one-third into the calendar year—humanity already has used about half of all renewable natural resources and services that the planet can generate this year, according to Global Footprint Network’s data. Despite this sobering fact, let’s not lose sight of the many signs that a perfect storm is brewing for 2015 to be the most exciting year to date for sustainability.
All eyes are on the Paris Climate Summit, a much-anticipated event which is already boasting the tag line "For a universal climate agreement." Some 23 years after the first Rio Summit and 18 years after the historic Kyoto Protocol was signed, the nations of the world are closer than ever before to making a binding commitment to act on climate change. If the negotiations are successful, that commitment would entail a clear, shared goal (maintaining global warming within the 2-degrees-Celsius range,) detailed action plans and a timeline.
As we are greeting the New Year, we want to take a moment to pause, thank our generous supporters and celebrate what we accomplished over the past 12 months. Here are the highlights.
A major milestone for us was the launch, last June in London, of Phase II of ERISC with our partners in the finance industry. Environmental Risk Integration in Sovereign Credit, a research project that seeks to quantify how environmental risk can impact the balance sheet of nations, is a joint program with the United Nations Environment Programme Finance Initiative. We are grateful to participating institutions Caisse des Dépôts, the European Investment Bank, First State Investments, HSBC, Kempen Capital Management, KfW and Standard & Poor’s, who embarked on that journey with us. We are looking forward to announcing first research results and findings in 2015.
Our staff has been busy this past month spreading the word about the Ecological Footprint at conferences and engagements around the world. Click locations below to learn more about our work.
Statement by Mathis Wackernagel, President, Global Footprint Network
The landmark U.S.-China climate change agreement announced this week is a game changer for our energy future because it represents strong recognition of the need to wind down fossil fuel use to zero within a few decades. What had been a physical necessity but a political taboo is now being acknowledged by the two countries with the largest CO2 emissions.
Other countries have been waiting on the sidelines for the United States and China to act on climate change. So President Barack Obama and President Xi Jinping’s commitment to reduce greenhouse gas emissions and boost renewable energy adoption by 2025 and 2030 respectively—just 10 and 15 years away—sends a promising signal to the world community on the path to the Paris climate summit at the end of next year.
The new goals would keep the United States on the trajectory to achieve deep economy-wide carbon emission reductions on the order of 80 percent by 2050, according to the White House. China, meanwhile, has targeted total energy consumption coming from zero-emission sources to around 20 percent by 2030. Both actions will happen well within the lifetimes of many people today.
These targets represent a significant shift in political momentum and suggest that moving out of fossil fuels may finally have won mainstream acceptance.
Susan Burns, co-founder and CEO of Global Footprint Network, will be honored today at the International Society of Sustainability Professionals (ISSP) Conference in Denver, Colo., as both she and co-founder Mathis Wackernagel are inducted into the ISSP Sustainability Hall of Fame. She has taken this opportunity to share insights from her journey.
How did you "fall" into a career as a sustainability professional?
As a child I loved nature, and I somehow knew there was a problem with pollution and the extinction of species, even though during my suburban upbringing it wasn’t exactly kitchen table conversation.
After earning a degree in environmental engineering, I started working in the consulting industry. I like to joke with my younger colleagues that I was working in this field before “sustainability” was even a word! I started the pollution prevention practice at ERM West. Then I met Ernest Lowe and Gil Friend, some of the early thinkers around the idea of industrial ecology and how the waste of one industrial process can be used as the input for another industrial process. The idea is to mimic nature where production and “waste” are all incorporated into one closed loop, and everything is utilized. I ended up starting a small consulting firm, Natural Strategies, with Adam Davis and the late Charles McGlashan, two brilliant men. Our vision was to help global corporations adopt sustainability as a source of competitive advantage even though the business world was very skeptical at the time.
Did you know the Chinese province of Guizhou in southwest China bears some striking resemblance to Switzerland? I confess I didn't, until I was invited to Guizhou last month to speak at Eco-Forum Global. Since 2009, this annual conference gathers participants from around the world to share knowledge about policies regarding green economic transformation and ecological security. This year I spoke on a finance panel led by the chief economist of Bank of China, Ma Jun, and a panel organized by the Sino-Swiss Dialogue.
Just like Switzerland, Guizhou is landlocked and boasts a mountainous landscape. It is one of two provinces in China that President Xi Jinping declared to be testing grounds for China’s new focus on "eco-civilization" and the "China dream."
Credit to CGP Grey, CC BY 2.0
“Climate Change Is A Global Mega-Trend For Sovereign Risk.” That's not me talking. It’s the title of the latest report published by credit rating agency Standard & Poor's. While climate risk is not yet officially included in the agency’s credit rating model, it's the first time that a major rating agency has specifically recognized an environmental issue in its forecast of countries' economic health and their ability to honor their sovereign debt.
This report is a huge development as far as the financial sector is concerned. It is a clear signal that the message about the critical need for countries to incorporate environmental risk into their development strategies, economic plans and public policies is finally beginning to hit home. As such, it is great news.
S&P’s climate risk report is just the starting point of a much bigger conversation. The sovereign bond market has been a long overlooked portion of the financial system, even though it represents 41 trillion USD of total capital flows. Because a government's cost of borrowing is strongly related to its credit rating by agencies such as S&P, governments are powerfully motivated to manage issues that could harm their credit rating. Recent analysis has shown that environmental risks do impact national economic health, and by extension default risk, but are not currently incorporated into most country risk models. Incorporating environmental risks across the finance industry would undoubtedly cause nations to pay attention to ecological risk like never before, especially due to the potential for some governments to be downgraded (and others upgraded), thereby affecting their borrowing costs.
The S&P report looks at the economic impacts of climate change, such as changing rainfall patterns that could affect agricultural yields. But climate change isn’t the whole story. Our research has shown that resource constraints (limited supply of fossil fuels, metals and minerals, food and fiber) coupled with rising global demand also have a profound effect on the balance sheets of nations.
Taken together, the conclusion is clear: For countries to protect themselves from the erosion of economic performance due to climate change and growing resource scarcity they will need to redesign their economies in order to be ‘fit for the future.’ They will need to minimize their liabilities and optimize their opportunities. They will need to be resilient in the face of climate change but will also be compelled to view their natural resources as a source of wealth for their nations, rather than assets to liquidate on their way to economic growth.
Approximately 80 percent of the world’s population lives in countries that are in ecological deficit. In other words, their populations demand more resources and ecological services than can be supplied on a net basis by their own ecosystems. Deficit risks play out in three ways. Here goes, briefly:
1. Trade-related risks: countries that compensate for ecological deficits through imports are exposed to trade related risks such as commodity-price volatility and possible supply disruption.
2. Degradation of natural capital: soil, fisheries and forests that are overused or mismanaged can suffer from reduced yield, affecting production and possibly increasing countries’ reliance on imports.
3. Stranded assets risks: Many nations have invested in carbon-intensive infrastructure and industrial processes. Countries are unequally exposed in terms of the scale and impact of needed reforms as governments around the world respond to climate change.
Now, the good news is that governments do have options. The management of resources and fossil fuel dependence, to name but two aspects, belong in the realm of political choice.
We believe we're providing a very important lens for credit risk perspective. And so we're about to launch the second round of E-RISC (Environmental Risk Integration in Sovereign Risk Credit) research with seven partners from the financial industry: S&P, HSBC, European Investment Bank, Caisse des Dépôts in France, Colonial First State in Australia, KFW in Germany and Kempen in the Netherlands. Some 18 months after we launched the initiative, our focus is now on testing and refining the methodology to make it robust and useable in investment decisions.
Why is this important? Because getting the finance industry to incorporate environmental risks is one of the best ways to help governments pay attention. Ultimately, our goal is to see the implementation of policies at the national and regional level that address those risks.
The challenge is on.
Footprint for Finance