More Investment Banks Go Green

Mon May 16, 2005 5:06 PM EDT

Late last month, J.P. Morgan Chase became the third major corporate bank to announce that it will take environmental considerations into account when making investment decisions. Its plan—styled around the increasingly popular Equator Principles—seeks to assess the long term economic costs of climate change and environmental issues and factor those risks into loan considerations.

Several conservative think tanks such as the Competitive Enterprise Institute and the Free Enterprise Action Fund have attacked plans like these as financially irresponsible. One analyst, Marlo Lewis, in an interview with E&E TV, implied that J.P. Morgan was bullied into the decision by the Rainforest Action Network, and suggested that RAN would play a role in the firm's future decision making:

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.

Most people, though, find the notion that an environmental action firm with a staff of less than 30 will in any way be making decisions for one of the country's largest investment firms to be completely absurd.

In fact, there are legitimate reasons why corporate lenders are starting to pay attention to environomental factors. First of all, shareholders are demanding to know how corporations are planning to comply with existing and imminent environmental regulations such as global caps on carbon dioxide. Considering that those who are able to adapt sooner are expected to save money in the long run, it stands to reason that this should factor into investment decisions. Indeed, as the cost of what are often referred to as "negative externalities" becomes increasingly apparent, any firm that fails to account for them will not be making good economic sense.

The real threats of climate change are also being taken seriously by a growing numbers of CEOs and industry leaders. The insurance industry has figured it out. The head of Duke Energy has figured it out. As changes in climate begin to affect global business trends, failing to factor these into investment considerations makes poor economic sense as well.

While 30 of the world's largest banks have pledged to integrate climate change principles into their decision making, it's its still not clear what effect this will have. When asked whether banks will have to do anything beyond considering the suite of options available to them—sitting next to Lewis in the E&E interview—Jon Sohn, senior associate at the World Resources Institute, responded:

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.

Of course, risks can always be ignored, and the effects of many forms of environmental degradation may not have obvious financial consequences. But by putting dollars signs on environmental issues and pledging to take long term security into account, there's reason to believe that corporate bankers have reason to start thinking green in more ways than one.