Sustainable Financing and Insurance
In general, carbon finance refers to applying a financial management system, models, and tools to manage a company’s carbon dioxide and other greenhouse gas (GHG) emissions. Companies currently voluntarily attempt to reduce carbon dioxide and GHG emissions (air pollution associated with climate change), yet many believe regulations will soon emerge in this area, thus, the field of carbon finance is poised for growth.
Carbon finance encompasses various topics, such as cap-and-trade, carbon emissions trading, carbon tax, renewable energy certificates, and more.
A cap-and-trade system is an attempt to set a limit (a cap) on the amount of allowable carbon emissions from an industry, a geographic region, or a country. Companies are issued carbon permits for their share of allowable emissions. A company’s goal would be to reduce emissions so as not to exceed its permits.
Companies with fewer emissions than its permits can make money by selling their excess permits or carbon credits to another company; conversely, companies with more emissions than their permits allow must purchase additional permits. This gives rise to carbon trading, the buying and selling of company rights to emit carbon dioxide into the air.
Carbon trading is a market-based mechanism to allocate carbon emissions allowances within the emissions trading system. It is speculated that the rise of a cap-and-trade system could also give rise to the creation of an economically viable carbon capture and storage industry.
Carbon capture and storage involves removing carbon dioxide from fossil fuels before or after they are burned for energy. There are already a number of cap-and-trade systems in place that provide the mechanism for emissions trading markets.
Levying a carbon pollution tax, or carbon tax, is one of the many options to lower carbon emissions. The tax is enacted upon the amount of carbon emissions and is reflective of the societal costs of carbon pollution. In a carbon tax, the government translates the price per ton of carbon into a tax on nonrenewable fuels, such as natural gas or oil.
Rather than externalizing the costs of emissions from these energy sources, the carbon tax is an attempt to internalize costs and make consumers pay for the ultimate environmental damage resulting from the choice to use nonrenewable energy sources.
Banks, credit unions, independent credit agencies, venture capitalists, and insurance companies are financial intermediaries that raise capital from investors and provide financing to operations with public and personal borrowing. Along with the wave of positive economic, social, and environment impact projects, government and financial institutions’ attention has been drawn to the integration of green policies and practices for the financial services industry’s operations, product offerings, distribution, and customer access to services.
The insurance industry provides an excellent example of a proactive approach to ecologically friendly sustainability by offering green insurance to manage and reduce climate change risks.
Industry Principles and Standards
As a steward of the global economy, credit managers of financial institutions can base lending decisions on social, economical, and environmental guidelines that support sustainable businesses and their operations.
There are two primary industry standards:
• The Equator Principles
• The Wolfsberg Principles
The Equator Principles
The Equator Principles promote social and environmental policies to increase the positive impacts on ecosystems and communities, offering a consistent approach to environmental sustainability and social management. Equator Principles relate to the management of social and environmental issues in project financing.
An Equator Principles Financial Institution (EPFI) is a financial institution that has adopted and integrated all 10 Equator Principles. For any project financing deals above $10 million, EPFIs only provide financing to projects that are socially responsible and environmentally sound.
The Equator Principles are used for establishing procedures and standards related to an EPFI’s project financing activities.
The Wolfsberg Principles
With the concerted effort of 11 of the world’s largest private banks and the anticorruption organization Transparency International, the Wolfsberg Anti-Money Laundering Principles for Private Banking (Wolfsberg Principles for short) were established in 2000.
The Wolfsberg Principles provide guidelines specifically dealing with antimoney laundering, antiterrorism funding, and the identification and examination of unusual or suspicious activities. The principles also cover diverse policies that pertain to knowing your customers, especially for relationships between high net worth individuals and the financial institutions. So far, they are the best set of nonbinding guidelines concerning appropriate dealing between private bankers and global clients. Wolfsberg Principles deal primarily with appropriate monetary dealings between bankers and their customers.
A sustainability development program in banking would involve the adoption and incorporation of the Wolfsberg Principles and the Equator Principles into the banking business practices.
The adoption of both of those principles by financial institutions gives rise to the opportunity for the provision of funding to ecologically friendly, socially disadvantaged, and economically underserved communities and sectors.
Sustainable Development Labeling Project
Significant progress has also been made to improve the quality of investment information provided by financial institutions.
For example, French bank Caisse d’Epargne launched a sustainable development labeling system, Bénéfices Futur, to rate savings, loan, and insurance products based on the impacts of financial risk, social responsibility, and ecological changes.  The labeling system ranks bank products based on green marketing of products, accessibility of products, and the bank’s investments in and donations to socially responsible sectors and projects that support public interest causes. The labeling system also rates financial products that help to identify gaps between actual and perceived coverage and specify deductibles and effective time periods. Caisse d’Epargne’s sharing of the labeling system with other banks facilitates the spread of sustainability efforts in the banking industry.
Green financing enables investors to finance green projects less expensively, by offering attractive financing, a lower interest rate or tax incentives, and rebates for environmentally friendly investments and investment in green funds or bonds.
An energy-efficient mortgage (EEM) is an example of a green finance opportunity. In the EEM case, lenders can make an adjustment to the loan-to-value and stretch debt-to-income qualifying ratios for borrowers with energy-efficient houses because of the projected monthly energy savings.
For widespread adoption of green projects, financial institutions, residents, builders, and local government need to be equipped with affordable sustainability knowledge and practical information on how to finance those projects.
Apart from being green, sustainable finance also involves social finance activities that enhance local communities and social development. Social finance enables the channeling of investment capital to deliver positive social, economic, and environmental returns for the long run and for a global community.
These channels include, but are not limited to, community investing, social enterprise lending, sustainable business, philanthropic grant making, and program-related investments. The Center for the Development of Social Finance is a nonprofit education and research organization that strives to expand awareness of social finance.
Microfinancing has gained great exposure recently as a special variety of social financing. Microfinancing is access to capital for women, minorities, and low-income borrowers who are not able to access loans from traditional resources. Microfinancing provides smaller loans with favorable terms and, for some programs, requires no or little collateral. Microfinancing seeks to aid in the revitalization of urban and rural communities.
Microfinancing also involves making small loans (or microloans) to low-income businesses to stimulate economic growth in less developed countries. Grameen Bank, Kiva, and Prosper are examples of successful microfinance enterprises.
Grameen Bank offers no-collateral microloans to 7.5 million women in Bangladesh. Dr. Muhammad Yunus, founder of Grameen Bank, won the Nobel Peace Prize in 2006 for this nonprofit microfinancing concept.
Kiva and Prosper
Both Kiva and Prosper provide Internet microcredit to support sustainable causes. Kiva enables quick access to funds for small entrepreneurs especially in Indonesia and India. The average loan from Kiva is around $110 to be repaid in 6 to 12 months with no interest charged. Fifty percent of those borrowers in India were able to graduate out of poverty with the help of Kiva.  Prosper links suppliers and demanders of funds in the developed and developing world.
Community Development Financial Institutions
As an integral member of communities, financial institutions provide support for sustainable community social and economic development and ecological conservation. Specializing in promoting economic and community development, Community Development Financial Institutions provide financing to small businesses and housing and community facilities projects that revitalize economically distressed communities. There are four types of community development financial institutions:
• Community development banks
• Community development credit unions
• Community development loan funds
• Community development venture capital companies
Community Development Banks
Community development banks are for-profit banks committed to socially, economically, and environmentally sustainable community development.
ShoreBank is the largest and most well-known community development bank in the United States and is the only one that takes into consideration all three dimensions of sustainability (social, economic, and environmental). ShoreBank opened in 1973 in Chicago and currently boasts $2.4 billion in assets and $4.2 million in net income with offices and businesses around the country and internationally; it is the nation’s first community development and environmental banking corporation.
ShoreBank defines its triple bottom line mission as profitability, community development impact, and conservation. Community development banks exist around the world, the most notable of which is Grameen Bank, as discussed under the topic of social finance.
Community Development Credit Unions
Community development credit unions (CDCU) are nonprofit, cooperatively owned, government-regulated, tax-exempt and insured financial institutions specializing in social financing. They serve low- and moderate-income people and communities by providing below-market-rate small loans to imperfect or no credit history borrowers and by offering financial education for its members.
Major funding for CDCU institutions comes from banks, foundations, and other investors for deposits to support their work. Through partnerships with the private sector and participation in outreach and government programs, CDCU institutions are able to leverage community revitalization efforts. Federally chartered CDCU institutions are state regulated.
Community Development Loan Funds
Community development loan funds provide loan funds for businesses, nonprofits, and underserved areas for the purpose of economic development. Loan funds provide financing to traditionally unqualified borrowers who would use the funds for advancing sustainable actions. These loan funds require collateral, but they have flexible payment schedules.
The government’s sustainable development loan fund offers low interest loans up to $500,000 to businesses for green projects like utilizing sustainable resources, producing recyclable finished products, and installing pollution prevention procedures.
Community Development Venture Capital
Community development venture capital (CDVC) funds provide equity capital to entrepreneurial companies that will ultimately benefit low-income people and distressed communities. The amount of the investment funding from CDVC funds is generally less than that of their traditional counterparts.
The average CDVC fund investment for small businesses was about $331,000 per company in 2000.  Kentucky Highlands Investment Corporation (KHIC) runs a very successful rural economic development program. KHIC’s ventures contribute at least 68% of the net growth of manufacturing jobs in Kentucky Highland’s nine target counties from 1970 to 1990. The positive entrepreneurial capitalism spurs from the enhanced availability of community venture financing. 
Insurance Industry and Sustainability
The insurance industry is particularly interested in sustainability, given the impact that climate change has had on this industry’s profitability. In fact, climate change is the number one risk to the insurance industry. 
According to an Ernst & Young study, climate change could result in increased mortality and health problems, increased environmentally related litigation, increased conflicts over control of resources, and negative impacts on capital markets.
Insurers Interest in Sustainability
According to a 2005 study by the Association of British Insurers, if carbon dioxide emission levels are doubled, the capital requirement for insurers could increase by $76 billion, which is an 80%-90% increase due to the increased risk of tropical cyclones in the United States and Japan. 
Allianz, Europe’s largest insurer, estimated that losses due to climate change could be as high as $400 billion. In addition to property loss, insured companies may face carbon-regulatory risks governing its investment and insurance policies on green projects.
Given these challenges, the industry is addressing the concept of sustainability and is taking notice of social, environmental, and economic impacts.
Many insurers have increased their focus on financial risk management. Yet proactive insurers are making progress in developing both investment strategies to “participate in the ‘green’ revolution in the financial markets” and in creating new climate-friendly products to address climate change risk.
Many of these financial products deal with green building, hurricane-resistant design, promotion of alternate fuels, and sustainable driving practices to reduce carbon emissions.
Proactive insurers encourage the insured to participate in the insurance sustainability effort.
Insurance companies play an important role in social, economic, and ecologically friendly sustainability.
Swiss Re has sold weather-risk products to 320,000 small farmers in India.
As a pioneer in offering green-building policies, Lexington Insurance Company’s new policies will pay the insured to rebuild a home using environmentally friendly and energy-efficient materials after it is destroyed by natural disasters. 
For renewable energy-related insurance products, Willis Holdings covers potential power underproduction of wind farms.
Insurance Exclusion Clauses
Increasingly, insurance companies have utilized exclusion clauses-tightened conditions to foster the right decisions by customers. Some insurance companies limit liabilities for emitters of greenhouse gases and for companies that do not have a climate mitigation plan in place. “Development and establishment of business-continuity management (BCM) procedures [is used as] a prerequisite for adding on business interruption coverage to a company’s property insurance.” 
As one of the world’s largest re-insurers, Swiss Re, Munich Re requires disclosure of a company’s climate strategy in their directors and officers insurance application. 
 “Sustainable development labeling of banking products: Initial methodological approach”, Groupe Caisse d’Epargne. (2008, June). , vol. 1. https://www.financite.be/sites/default/files/references/files/719.pdf
 “Fighting poverty one micro loan at a time.”, Malhotra, H. (2008, August 4). The Epoch Times. http://printarchive.epochtimes.com/a1/en/ie/nnn/2008/08-Aug/14/ET130808006.pdf
 “Community development venture capital.” Ward, D., & Patterson, J. (2003, November 10). WTN News. http://wtnnews.com/articles/339/
 “Community development venture capital.” Ward, D., & Patterson, J. (2003, November 10). WTN News. http://wtnnews.com/articles/339/
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