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Equator News Coverage
 For people and planet, San Francisco Chronicle, 4 April 2006
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For Citigroup, Greening Starts With Listening By Christopher Wright Engaging its harshest critics in real conversations about change has helped Citigroup become a sustainability leader in the financial sector. The Ecosystem Marketplace finds out what the world's largest bank has to say about emerging markets for ecosystem services. Until the early 1990s, most banks still felt their business was as green as the greenbacks they shelled out from ATMs. Financial institutions, pure and simple, didn't pay much attention to environmentalists, because they didn't think banking had much to do with the growing degradation of the world's natural resources (see Conservation You Can Bank On). Fast forward to March 2005, when Shawn Miller, Director for Environmental and Social Risk Management at Citigroup, walked an audience of non-profit organizations through the bank's newly revised Environmental and Social Risk Management policy, discussing Citigroup's approach to forestry projects and its efforts to mitigate global warming. "If you looked at us seven to eight years ago and said environment issues will be a significant part of our corporate strategy, I am not sure I would have agreed," says Pam Flaherty, Citigroup's Senior Vice President of Global Community Relations. "At the time, it wasn't really an issue for financial services firms." Citigroup's 2005 meeting bears witness to just how much has changed in the past decade. These days, the bank regularly organizes meetings with non-profit groups and socially responsible investors. "It is a two-way conversation", says Flaherty, "We learn things from them, and sometimes they learn things from us." Brave New World While Citigroup has worked with stakeholders on community concerns and consumer lending policies for a long time, its engagement with the environmental community is more recent. In the late 1990s, Citigroup's investments in a number of large development projects around the world pushed it into the environmental spotlight amidst considerable controversy. In 2000, the Rainforest Action Network (RAN) launched a sustained advocacy campaign against Citigroup's environmental record. RAN used media blitzes, organized consumer boycotts, and confronted Citigroup in angry exchanges. Banks had never seen anything like it. After three years of confrontational dialogue, Citigroup officials decided to sit down with RAN to talk about a new environmental strategy. Less than a year later, Citigroup introduced what RAN characterized as the most far-reaching set of environmental commitments made by any bank in the world. The set of initiatives included the bank's new ESRM policy, which centers on an environmental review process for clients with high-risk projects. For example, project finance transactions (i.e., those subject to the Equator Principles), now require an Environmental Impact Assessment (EIA) and, if appropriate, an Environmental Management Plan (EMP). "Citigroup is very cautious, and they truly want to know what they are capable of doing before they commit to something," says Ilyse Hogue, director of the Global Finance Campaign at RAN. "They like to under promise and overachieve, which we are sometimes frustrated by. But we would rather have their actions exceed their commitments than fall short of them." Once environmental commitments had been made, Citigroup began integrating them into its internal operations, a process not without challenges. While the technicalities of an environmental assessment process may be intuitive and familiar terrain for environmentalists and policy gurus, they were bewildering for many of the 120 members of Citigroup's project finance and risk management team. "They understood why we needed to do this," remembers Miller, "both in terms of mitigating reputational risks and to add value to projects. So, the main challenge was to ensure that bankers understood the minutiae of the ESRM policy, such as what an environmental impact assessment looks like and why it needs to be covenanted into loan documentation." To train staff members, Citigroup developed an ESRM intranet site and launched a training program. And to further bolster its expertise and raise awareness internally, Miller, formerly a social development specialist at the International Finance Corporation (IFC), became Director of ESRM for Citigroup's Corporate and Investment Bank in 2004. In this capacity, he serves as a technical resource and counsel for ESRM specialists, reviewing projects predicted to have environmental and social concerns. "Having only five full-time staff dedicated to what the majority of the world is concerned with still falls short," says Hogue. "But they have made smart choices by not locating ESRM staff in a marginalized environmental affairs office, instead placing them in positions of power with real access to senior decision-makers. That has really been key." According to Miller, the integration of the ESRM policy and staff within the company has borne fruit. "Citigroup has a strong compliance-oriented culture," says Miller, "when a policy is adopted, we will implement it, and we will do it robustly." And, he notes enthusiastically, "I have seen a significant upswing in interest in terms of how the policy can add value to clients." "They are slowly but surely building some capacity, and building on their leadership, they have developed some momentum on these issues," says Jon Sohn, Senior Associate of the International Financial Flows and the Environment (IFFE) project at the World Resources Institute (WRI). In fact, Citigroup's amassed sustainability expertise is turning into a valuable asset in the marketplace. On one occasion, according to Miller, a company involved in a mining project in a high-risk region opted for Citigroup's project finance advisory services in part because of its demonstrated experience with managing sustainability issues in the sector. "Our project finance team absolutely saw the business value in having this expertise," says Miller. Warming to Climate? In 2004, Citigroup announced a greenhouse gas-reporting scheme for its project finance deals within the thermal power sectors. Under the scheme, Citigroup calculates and reports on its share of the projected lifetime emissions of thermal power projects. The scheme could serve as the foundation for managing the climate-related impacts of emission-intensive projects. The thinking behind the scheme represents the kind of pioneering that may be recognized as a milestone in the future, but, to date, its impact has been marginal. "We have made few project finance investments in the thermal power sector during the past two years," explains Miller, "The reporting scheme has only been applied once, to a power plant deal in 2004." And, to the frustration of some observers, Citigroup remains reluctant to manage the climate impacts associated with its broader portfolio. "Understanding and responding to climate change risks will enable banks and their clients to thrive in the future," says Sohn. "Private sector banks should design tools to manage the growing risks of exposure to climate change and identify opportunities through their client relationships to reduce emissions in the most greenhouse gas intensive sectors." While there are ongoing internal discussions at Citigroup regarding potential business opportunities in environmental markets (including emissions trading schemes), the bank lacks a strong appetite for tackling the climate change impacts associated with its portfolio, its so-called 'indirect' greenhouse gas emissions. "We cannot be held responsible for our clients' carbon footprints," says Flaherty. "Our belief is that we have to be there to help our clients, and the reality is that many of them are developing energy resources." However, in some cases, clients will, for reasons of cost, adopt new, cleaner technologies. And overall, Citigroup's sustainability expertise does come to bear. "We have a good story to tell about the business value of sustainability, and how it can help their bottom line," she says, "And we do engage with them on this." "On having banks address their indirect greenhouse gas emissions, we have barely broken the ice," concedes Hogue. "It is a much stickier problem than direct emissions associated with bank facilities, but we are seeing banks beginning to grapple with this by calculating their broader climate impacts." Citigroup is, in fact, well underway in calculating and reducing its direct emissions. Specifically, the bank has devoted considerable time and internal resources to measuring the greenhouse gas emissions associated with its 13,000 facilities and 300,000 employees worldwide. Since 2002, Citigroup's Corporate Realty Services has been tracking the CO2 emissions resulting from electricity, heat, water and waste production at each of its facilities. In 2004, the bank's emissions amounted to roughly one million metric tons. In January 2006, armed with a database that monitors facility performance and produces automatic notices when targets are exceeded, Citigroup announced a commitment to a 10 percent reduction of its direct greenhouse gas emissions by 2011. Investing in the Future Citigroup may make further contributions to mitigating climate change through its Sustainable Development Investment Program (SDIP), an investment scheme targeting private equity investment opportunities in the renewable energy, sustainable forestry, water resource management, waste management, clean technology and energy efficiency sectors globally. Located within Citigroup Venture Capital International, SDIP operates in close coordination with its Environmental Affairs unit. "We wanted to have a business venture specifically designed to prove the business proposition," says Flaherty, "We did not want to base the program on a subsidized approach." Hogue agrees with this strategy, "We don't want this to be a charity program either, financed through corporate grants. Ultimately, we want this financing to be mainstreamed." To date, Citigroup has only invested in two projects through SDIP. The first involved a $23 million investment in Suzlon Energy Ltd, Asia's leading wind turbine manufacturer. The other investment supports Balrampur Chini Mills, one of India's largest sugar producers, which intends to expand its ethanol manufacturing capacity. Hogue suggests that, in order to facilitate the growth of environmental markets, Citigroup should relax its financing parameters so as to increase the number of eligible projects. As an example, she argues that evaluative tools currently used in the financial sector often emphasize quarterly returns and should be altered to more effectively take into account the long-term benefits of many sustainable development projects. For Citigroup, however, maintaining the current parameters of the program is important. "We want to demonstrate that sustainable projects fitting our criteria can be successful," explains Flaherty, "When we first announced this program, we had a lot of inquiries for small venture capital deals. But because we were looking for larger investments, many of our early leads were not applicable to this program." Along the way, Citigroup has learned valuable lessons about investing in ecosystem services. For example, it has proved difficult to find sustainable forestry projects that fit the financial criteria of the program, as financial returns were not commensurate with those of projects in the other target sectors. In contrast, Citigroup considers projects promoting clean technologies and alternative energy to be much more promising. After hiring a private equity expert with a keen interest in this area, Flaherty says the project flow is expected to pick up. Currently, Citigroup is considering two separate projects, one in hydropower, the other in waste management. "Increased investment in sustainable energy is one of the key global economic and environmental challenges," says Sohn, "Banks that start designing their entry into these markets early and set ambitious targets for increased investment will have a significant competitive advantage in the coming years." While emphasizing that Citigroup's two alternative energy investments under SDIP represent a step in the right direction, environmentalists say more is still needed. "Not a single bank is doing enough right now to confront the magnitude of the ecological problems we face, such as global warming," says Hogue. And on this issue, she argues, investing in renewable energy sources, such as solar, is the way forward: "We won't run out of the sun." Christopher Wright is a London-based contributor to the Ecosystem Marketplace. He may be reached at c.m.wright@lse.ac.uk. First published: April 4, 2006 PRINTER-FRIENDLY VERSION | E-MAIL THIS PAGE |
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