Royal Bank of Sustainability: protecting taxpayers' interests, cutting carbon risk

8/9/2019 Royal Bank of Sustainability: protecting taxpayers' interests, cutting carbon risk

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Royal Bank of Sustainability 1

Royal

Bank

of

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lity


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2 Royal Bank of Sustainability Royal Bank of Sustainability 3

Towards a RoyalBank of Sustain-ability: protecting

taxpayers interests;cutting carbon risk.By Nick Silver 1

This report has been prepared with data supplied byInvestor Watch and PLATFORM. I would like to thank MelEvans, James Marriott and Kevin Smith (PLATFORM),

Julian Oram, Deborah Doane and Kate Blagojevic (WorldDevelopment Movement), Duncan McLaren (Friends of theEarth Scotland), Chris Hewett (Green Alliance), Howard

Reed (Landman Economics), Ian Leggett and Louise Hazan(People & Planet), Mark Campanale and Conor Rife(Investor Watch) for help in preparing the report.

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the purview of their boards. This report raises important and

timely questions about the role of UK Financial Investments, themajority owner of RBS, in fullling this role. There is no doubt adebate to be had about exactly what RBSs long-term strategicposition should be on the many controversial issues raised by thereport, but this debate is one in which its owners, government orotherwise, should be fully and intelligently engaged. The rootsof the nancial crisis lie partly in a failure of owners to play asufciently engaged part in the governance process of banks; itwould be ironic if the solution to the current crisis were to createa governance vacuum that contributes to the next one.

Dr. Craig Mackenzie, Director, Centre for Business andClimate Change, University of Edinburgh Business School2.

Foreword

It is widely accepted that the global economy is not on a

sustainable long-term path. World leaders will shortly meet inCopenhagen to secure a deal to change course. Whatever isagreed, without the active involvement of the worlds leadingcompanies, we will fail. We need companies to create essentialnew low carbon technologies; to transform the way we all dobusiness (e.g. tele-presence rather than business travel); and weneed them to build a new low carbon energy and transportationinfrastructure. Banks, like RBS, also have a fundamentallyimportant role to play we need them to channel much of thecapital required to pay for these transitions. This is no small task.The International Energy Agency estimates that, globally, we needto spend some $10 trillion on transport, energy efciency andpower generation by 2030 (IEA World Energy Outlook, 2009).

Enabling companies to play this role is partly aboutgovernments creating incentives through carbon pricing and other

regulations. But it is also a matter of leadership. To achieve thehuge transition ahead we need company leaders to understandthe risks and opportunities they face and to develop bold andimaginative strategies for long-term success. Board directorscannot formulate and execute these strategies without the activesupport and engagement of their largest shareholders.

As initiatives like the UN Principles for ResponsibleInvestment and the Carbon Disclosure Project demonstrate,many of the worlds largest investment institutions understandthis role and are committing themselves to become more activeand engaged owners scrutinising the companies in which theyinvest, not just on conventional governance issues but also onwider questions such as climate change strategy; challengingpoor transparency and weak risk management; and supportingand encouraging vision and leadership.

If banks are to return to full health, and play their role insustainable wealth creation, their boards must benet fromthe active scrutiny, challenge and support of their owners; notjust on short-term nancial issues, but on the full range oflong-term leadership and governance issues that fall within


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Executive Summary

In October 2008, the UK government purchased shares in anumber of troubled banks. It manages these shareholdingsat arms-length, through UK Financial Investments (UKFI), agovernment-owned company specially set up for the purpose.This report argues that the government now the principalshareholder in Royal Bank of Scotland (RBS) - should behaveas an active owner to initiate a transformation of RBS into asustainable bank.

Active engagement is not just good investor practice, it isgovernment policy: it is the governments view that the nancialcrisis was at least in part a consequence of the lack of activeinvestor engagement. By failing to take such an approach, UKFIis failing to monitor, assess or manage environmental, social andcorporate governance risks which are considered signicant bymainstream investors.

Active engagement is clearly a legitimate approach for UKFI,but this report argues that the unusual circumstances of UKFIsinvestments create not only an opportunity, but an imperative forit to take such an active investor stance.

The reasons for this include the major economic externalitiesinherent in RBS fossil fuel rich portfolio of loans andinvestments. These will impact on UKFIs stakeholders (thegeneral taxpayer) more severely and consistently than on RBS orother nancial institutions. Also, in line with the expectations ofthe Companies Act 2006, the government should set goals andobjectives for the companies that it owns through UKFI to providelong-term incentives for responsible investment that will protectshareholder value (where the shareholders and taxpayers are thesame).

The environmental and economic risks of climate change aresevere, yet they are largely externalised by nancial institutionsand their client companies. Moreover, the potential failure ofgovernment policy is seen as a signicant risk to investments inclean technologies. As a result RBS over-invests in fossil fuels andunder-invests in renewables and other clean technologies. This in

turn damages the wider credibility of government climate policy,and threatens its delivery.

On the other hand, if regulatory or scal policies adequate todeliver climate change policies are delivered by the UK and othergovernments there is a signicant risk that RBS investments infossil fuel companies could go bad. UKFI, as an active owner,should therefore seek to transform RBS lending and investmentstrategy.

Recommendations

Immediate recommendations to put UKFI in step with industrygood practice:

As a minimum, UKFI should follow standard goodpractice for institutional investors, which involves:

Becoming a signatory to the Carbon Disclosure Project(CDP) enabling UKFI to assess the climate risks of itsinvestments.Being fully transparent by stating clearly guidelineson Environmental, Social and Governance (ESG)considerations and undertaking a periodic independentaudit that takes into account ESG considerations.Seeking expert advice on how best to incorporate ESGconsiderations into investment analysis and decision-

making processes.Behaving as an active owner and incorporating ESGissues into its ownership policies and practices; as wellas seeking appropriate disclosure on ESG issues by theentities in which it invests.

Recommendations that would provide leadership by UKFI:

UKFI must also go beyond current industry goodpractice because of the governments socialand environmental policies and obligations.Recommendations to achieve leadership include:

Providing incentives for long-term, sustainablebehaviour by linking executive pay to the companieslong-term performance and to the banks environmentaland social performance.Ensuring bank lending is screened on environmentaland social criteria. The banks commercial customersshould be subject to independent audit on


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environmental and social criteria.Appointing a board member with specic ESGresponsibilities.Commissioning an independent review to investigate asustainable bank model, with recommendations andlessons learned that could be applied to RBS.

Recommendations to ensure coherence with the UK governmentspolicies:

RBS, in consultation with UKFI, should adopt a strategy

to reduce exposure to high carbon investments, usingthe governments estimate of the social cost of carbonto assess the risk/reward prole of potential fundingdecisions. It should:

Set targets for reducing emissions from its lendingportfolio, and monitor and audit those reductions.Allocate responsibility for climate change policy to theboard and senior management.Develop a revised investment mandate drawing onexpertise and guidance from independent sources andbest practices in the nancial sector to identify whichactivities should not be funded in future.

ConclusionsUKFI should engage actively with the Board and managementof RBS to ensure effective consideration and analysis ofenvironmental, social and corporate governance issues. UKFIshould pursue higher standards than industry good practicebecause it is representing the wider interests of taxpayers, anddefending the credibility of the governments policy and its UKLow Carbon Transition Plan.

A credible low carbon strategy for the UK would require thesubstantial economic risks of the fossil fuel sectors in which RBSis heavily involved to be internalised. This would represent aserious nancial risk to companies in these sectors. To managethese risks and protect the shareholder/taxpayer, RBS should, inconsultation with UKFI, adopt a strategy to reduce exposure tosuch investments.

There is a sound business case for RBS to initiate atransformation into a sustainable bank. For RBS owners -the government and taxpayers this becomes an imperativeto assess the risks and opportunities involved and to act asresponsible, engaged owners in driving such a transition.

Introduction

This report has been commissioned by People & Planet, WorldDevelopment Movement, PLATFORM, Friends of the EarthScotland, and BankTrack to investigate whether and how thegovernment should align its recent investment in the Royal Bankof Scotland (RBS) with social and environmental objectives,in particular to combat climate change. Although many of itsrecommendations can be applied to other government-rescuedbanks, this report focuses specically on RBS.

The report examines investment good practice with respectto environmental and social factors and focuses in particularon how the government, through UK Financial Investments Ltd(UKFI), might apply a risk management perspective to RBSslending to companies involved in fossil fuel extraction and highcarbon industries. It argues that such an analysis should form thebasis of the governments policy towards its investment in RBS.

The report does not suggest that government should be involvedin the day-to-day management of RBS; but argues that thegovernment, through UKFI, should be acting as an active owner,for example by setting goals, incentives and boundaries underwhich RBS operates, in the way that is considered good practiceby investors.

The government had to take majority ownership of RBSbecause the bank failed; which strongly suggests that itsrisk management was less than optimal. This has also led towidespread public anger at the use of public funds for the bail-out, along with concerns over executive remuneration at the failedbank. RBS reputation is currently at a low ebb, and the bankingindustry and RBS in particular are facing the widespread publicperception that they are unconcerned and disconnected withthe society in which their activities are embedded. Dealing withenvironmental and social issues should be a major priority forthe banks, if for nothing else than to help restore their tatteredreputation. However this report argues that with regards to RBS,there is a strong business case for UKFI to intervene, as an activeowner, to reorientate the investment strategy of the bank.


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The 2008 bank bail-outIn October 2008, the British government proposed a bank rescuepackage totalling 500 billion. This was made up of 3 parts:

A special liquidity scheme: made up of 200 billion ofshort term loansThe Bank Recapitalisation Fund: the government wouldpurchase shares of up to 50 billion in troubled banksA credit guarantee scheme: the government underwritesup to 250 billion in lending between banks

This report concentrates on the recapitalisation, the purpose ofwhich was described as: supporting stability in the nancialsystem, [protecting] depositors, [safeguarding] the interestsof the taxpayer.3 Through this Recapitalisation Fund, thegovernment has invested 37 billion into RBS, HBOS and LloydsTSB (the latter two now merged as Lloyds Banking Group).

In November 2008, the government set up (UKFI) to managethe governments shareholdings. UKFI also has responsibility formanagement of the governments investments in Bradford andBingley plc and will shortly take over this responsibility fromNorthern Rock plc.

In January 2009, another package was announced, consistingof 50 billion to purchase corporate debt, and the AssetProtection Scheme, which insures future credit losses. RBS hasassets worth 325 billion in the scheme.

The government stated that [the government] is not apermanent investor in UK banks. Its intention, over time, is todispose of all investments it is making as part of this scheme inan orderly way.4

This report is divided into 2 sections; the rst looks at howthe government should act as an investor in the banks withrespect to climate change. The second section examines the riskrepresented by banks lending to fossil fuel companies and howthey might manage that risk to ensure the long-term sustainablevalue of RBS.

Section 1

government as an institutional investorThrough UKFI, the government is a majority shareholder in RBSand other banks. This section investigates the environmental andsocial investment criteria UKFI could reasonably be expected toadopt given current institutional shareholder good practice andthe governments own guidance, policies and views.

UKFIs objectivesUKFI is effectively an institutional investor as it manages theinvestments of a large fund on behalf of a beneciary, in this casethe taxpayer. The government and UKFI acknowledge this in itsFramework Document5 which sets out an Overarching Objective that:

The Company [UKFI] should, in compliance with theInvestment Mandate described in Section 4, develop and execute

an investment strategy for disposing of the Investments in anorderly and active way through sale, redemption, buy-back orother means within the context of an overarching objective ofprotecting and creating value for the taxpayer as shareholder,paying due regard to the maintenance of nancial stability andto acting in a way that promotes competition. This objectiveincludes:

A. consistent with HM Treasurys stated aim that itshould not be a permanent investor in UK nancialinstitutions, maximising sustainable value for thetaxpayer, taking account of risk;B. maintaining nancial stability by having due regardto the impact of its value realisation decisions; andC. promoting competition in a way that is consistentwith a UK nancial services industry that operates tothe benet of consumers and respects the commercialdecisions of the nancial institutions.


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To achieve this aim:For these nancial institutions, the Company [UKFI] will engageactively with the Investee Company in accordance with bestinstitutional shareholder practice. The Company will (subjectto the other provisions of this Framework Document) exercisethe rights attaching to HM Treasurys Investments in thesecompanies, including voting rights.6

The government has also said that it is not a permanentinvestor in UK banks. Its intention over time, is to dispose of allthe investments it is making as part of the scheme in an orderlyway.7 The implication is that the government is just invested for

the short-term, and therefore does not have to consider long-termimpacts such as climate change. There is a wide divergence ofopinion amongst experts as to the outcome of the nancial crisis.However, it is clear that there is a great deal of uncertainty overhow severe and long-lasting the downturn will be, what the limitsof the banks losses are, and when or if the government will be ina position to dispose of its investments in the banks.8 When theinvestments in the banks are sold, there is no guarantee that theywill not fail again.

The government has set a clear precedent and expectationthat it will intervene again. Therefore the governmentsrelationship with the banks as owners or potential owners iseffectively indenite. Even if the relationship does prove relativelyshort-term, there are sound reasons - set out below - whythe government as investor cannot ignore long-term social or

environmental implications.

Setting best practice as an institutional investorAs an institutional investor, UKFI has duciary responsibilities it must act in the best interest of its beneciaries who arethe UK taxpayers. This is dened in its Overarching Objective,which specically refers to maximising sustainable value forthe taxpayer, taking account of risk.9 It is widely recognisedthat integrating ESG [environmental, social and corporategovernance] considerations into an investment analysis so as tomore reliably predict nancial performance is clearly permissibleand is arguably required in all jurisdictions.10

Best institutional shareholder practice is generally consideredto include active engagement with management to addressstrategic risks. The Institutional Shareholders CommitteeStatement of Principles suggests that instances wheninstitutional shareholders and/or agents might want to interveneinclude when they have concerns about ... the companysapproach to corporate social responsibility.11

In the UK, pension funds, the major category of institutionalinvestor, are legally required to report on their policy with respectto CSR issues. Lord McKenzie, the Parliamentary Under-Secretaryof State for the Department of Work and Pensions has stated thatIt is an obligation on pension fund trustees, not simply a right oroption, to state in their Statement of Investment Principles whatthe funds guidelines are on responsible investment and to whatextent social, environmental or ethical considerations are takeninto account.12

With respect to ESG issues, good practice for institutionalinvestors is dened by the United Nations Principles of

Responsible Investment (UNPRI), which has 582 signatorieswith total assets under management in excess of $14trillion.13The Principles state that As institutional investors, we have aduty to act in the best long-term interests of our beneciaries.In this duciary role, we believe that environmental, social, andcorporate governance (ESG) issues can affect the performanceof investment portfolios (to varying degrees across companies,sectors, regions, asset classes and through time). We alsorecognise that applying these Principles may better aligninvestors with broader objectives of society.

So, at best, by having no environmental or social policy,UKFI is not even following the minimum standards that couldreasonably be expected of an institutional investor, and is notproperly fullling its stated obligation of taking account of risk.

Recommendation 1The minimum standard that UKFI should adopt is in line withstandard good practice for institutional investors. It shouldbecome a signatory to the UNPRI, and follow guidance as set outin a recent United Nations Environmental Programme FinancialInitiative (UNEPFI) report. This would involve the following:

UKFI should become a signatory to the CarbonDisclosure Project (CDP) enabling UKFI to beginassessing the climate risks of its investments.UKFI should be fully transparent about investmentstrategies pursued, including to what extent suchstrategies incorporate ESG considerations; it shouldalso clearly state its guidelines on ESG considerationsand undertake a periodic independent audit thattakes into account ESG considerations. UKFI shouldseek expert advice on how best to incorporate ESGconsiderations into investment analysis and decision-making processes.


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UKFI should behave as an active owner, incorporateESG issues into its ownership policies and practices;and seek appropriate disclosure on ESG issues by theentities in which it invests.

By failing to take any of these actions, UKFI is failing to monitor,assess or manage ESG risks which are considered signicant risksby mainstream investors. A recent UNEPFI report concluded that:

it would be expected that the investment consultant

or asset manager would raise ESG considerations asan issue to be taken into account and discussed withthe client even if the pension fund had not speciedESG considerations as material to the tender. If theinvestment consultant or asset manager fails to doso, there is a very real risk that they will be sued fornegligence on the ground that they failed to dischargetheir professional duty of care to the client by failing toraise and take into account ESG considerations.14

However, UKFI, representing the taxpayers investment, shouldgo much further than standard good practice for a number ofreasons.

Firstly UKFI is not a standard institutional investor: UKFIinvests on behalf of the taxpayer to maximise sustainable

value for the taxpayer, taking account of risk. The theory ofthe Universal Investor is well established, namely that a largeinstitutional investor, such as a pension fund, is invested long-term in a wide diversity of assets, so that any externality causedby one company will impact the economy as a whole, and hencethe investors other assets.15 This argument is much strongerin the case of UKFI which has to maintain sustainable valuefor the taxpayer. It has been shown, most comprehensively byHM Treasurys Stern Review 16,that the damage to the economycaused by unmitigated climate change will be considerable. Innancing a company which contributes to climate change, UKFI iscausing damage to society and the economy, the cost of which isborne by the taxpayer. The implications of this are elaborated onfurther in section 2 below.

Secondly the governments own spending criteria, set outin the Green Book17, states that All new policies, programmesand projects, whether revenue, capital or regulatory, shouldbe subject to comprehensive but proportionate assessment,wherever it is practicable, so as best to promote the publicinterest. It goes on to say that There is a wide range of

generic issues that may need to be considered as part of anyassessment ... [including] Environmental impacts The effects onthe environment should be considered, including air and waterquality, land use, noise pollution, and waste production, recyclingand disposal. The Green Book also includes a number of socialcriteria on its spending decisions, such as equality, health andsafety. It can be argued that these criteria apply to signicantdecisions by UKFI, as well as to the initial establishment of thecompany.

Beyond the specic connes of the Green Book, thegovernment is bound by a range of social and environmental

obligations, policies and commitments. These include limitingglobal warming below 2C, promoting human rights and realisingthe UN Millennium Development Goals. If a company in whichthe government is by far the largest shareholder is engaging inactivities that undermine these aims (see Box 1 for an example),the government has a duty to intervene. This is very much theapproach taken by the Norwegian government Pension Fund (seeTable 1).

Lundin PetroleumIn October 2007, RBS underwrote loans of $1 billionfor Lundin Petroleum. The Sudan Divestment TaskForce (SDTF) has classied Lundin in its Top 5 HighestOffenders, for its direct support for the Sudanese

government during the continued ethnic cleansing inDarfur. Lundin was exploring for oil in Block 5B in southSudan, together with Sudapet, the Sudanese nationaloil company, which is part of the regime. Human RightsWatch and Christian Aid asserted that, if not complicit,the company enabled Sudanese military operationsagainst local civilians, including the clearing of villagesand widespread rape. 83 MPs signed EDM 1338 insupport of Sudan Divestment UK, while MEPs managedto divest the European Parliaments pension holdingsfrom Petrochina (also active in Sudan).

Thirdly, the government has itself introduced measures designedto better enable company directors to take account of socialand environmental performance in delivering long-term benetto shareholders in the 2006 Companies Act. The traditionalview that companies must only act in the interests of achievingprots was rejected as out-dated and unethical by the Act.Instead, the government put in statute an approach to corporate

Box 1

RBS client

activity

contrary to

the UK Gov-

ernments

policies


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governance based on what they termed enlightened shareholdervalue. Margaret Hodge, the Minister in charge of shuttling thelegislation through Parliament, explained that:

There was a time when business success in theinterests of shareholders was thought to be in conictwith societys aspirations for people who work in thecompany or in supply chain companies, for the long-term well-being of the community and for the protectionof the environment. The law is now based on a newapproach. Pursuing the interests of shareholders and

embracing wider responsibilities are complementarypurposes, not contradictory ones.

Specically, the 2006 Companies Act spelled out in statute forthe rst time that in discharging their duties to shareholders,company directors must consider the impacts of their decisionson employees, the community and the environment, and thattheir decisions should look to the long-term impacts on thecompany and its reputation (see Box 2). In fact, Alistair Darling,now the Chancellor, noted at the time that:

For the rst time, the Bill includes a statutorystatement of directors general duties. It providesa code of conduct that sets out how directors areexpected to behave. That enshrines in statute what the

law review called enlightened shareholder value. Itrecognises that directors will be more likely to achievelong-term sustainable success for the benet of theirshareholders if their companies pay attention to awider range of matters Directors will be required topromote the success of the company in the collectivebest interest of the shareholders, but in doing sothey will have to have regard to a wider range offactors, including the interests of employees and theenvironment.

A director of a company must act in the way heconsiders, in good faith, would be most likely topromote the success of the company for the benet ofits members as a whole, and in doing so have regard

(amongst other matters) tothe likely consequences of any decision in the longterm,

the interests of the companys employees,the need to foster the companys business relationshipswith suppliers, customers and others,the impact of the companys operations on thecommunity and the environment,the desirability of the company maintaining a reputationfor high standards of business conduct, andthe need to act fairly as between members of thecompany.

In essence, while the underlying duty of Directors remains thesame as it has been to act in the interests of its members theway in which companies discharge this duty is fundamentallydifferent. This Act tells us that the duty is fullled only whencompanies consider the wider impact they have on society andthe environment. The Act requires larger companies to report onthese matters where they constitute potential material risks. Withtaxpayers as the primary shareholder in RBS, the directors havea particular need to consider these issues in how the companysactions create benet for its members. And as the companyresponsible for managing the taxpayers shareholding in RBS,UKFI bears a unique responsibility for driving behaviour anddecision-making within the bank that lies in accordance with thelong-term interests of the taxpayer.

Finally, the governments own view on institutional investors

has been clear and critical. In 2001, HM Treasury published areview which was broadly critical of the governance practices ofmost institutional investors. Recently its author, Paul Myners,now the governments Financial Services Secretary, reiterated itsconclusions:

As you are only too well aware, market pressures andthe structure of corporate share ownership presentmajor challenges for shareholder engagement...Thefocus of an owner, with an emphasis on creatinglong-term value, does not sit comfortably with thecommercial pressures on an investor obliged toproduce short-term returns... Institutional investors areexpected to exert the inuence and exhibit the values ofowners but are incentivised to behave as investors,with performance scrutinised on a quarterly, monthly or

even a daily basis...

The picture I paint is one that has led us in thedirection of what I have characterised as the ownerless

Box 2: 2006

Companies

Act, Part

10, Chapter

2, Clause

172 Dutyto promote

the success

of the

company


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corporation, reected in fragmented share registersand inconsistent investor engagement... Any changethat will lead to fund managers behaving more likeowners and less like investors will have to comefrom the end client... Short-termism, as practised bypension funds, is self-defeating for those charged withdelivering pensions over many decades in to the future,and yet it remains a predominant form of behaviour...

A focus on shareholder value, as measured byrelative share price performance over quite short time

periods lies at the heart of a number of behaviourswhich have delivered less than ideal outcomes, suchas... A failure to take account of the longer-termconsequences of investment activity, including impacton the broader economy and society.18

In summary, the government should set goals and objectivesfor the companies that it owns through UKFI to provide long-term incentives for responsible investment that will protectshareholder value (where the shareholders and taxpayers are thesame). On 22 June RBS announced its 9.6 million pay packagefor Stephen Hester, the Chief Executive of RBS, with the backingof UKFI, much of it linked to long-term share price targetsover a 3 year time period.19 But UKFI has not, to our knowledge,asked for any information or incentives relating to long-term

value (unless a 3 year time frame can be considered long-term) orimpact on the broader economy and society.So what standards could we reasonably expect of UKFIs

management of the recapitalised bank shares? Best practice inthis eld has been established by a number of large institutionalinvestors, a selection of which are summarised in Table 1.

The pension funds listed in Table 1 are all large institutionalinvestors with a track record of many years, and are often seen asleaders amongst their peers. None of these investors believe thatESG considerations are detrimental to the funds performance,and instead see them as core to the long-term nancialperformance of the companies in which they invest. ResponsibleInvestment practices do not involve interference in the day-to-dayrunning of investee companies, but involve setting the correctincentives, time-frames and boundaries in which the companyoperates. Examples of responsible engagement by one of thesepension funds are described in Box 2.

Scheme Policy

Universities

Superannuation

Scheme (assets

under management

29 billion)

The Schemes approach to responsible investing is one ofengagement, not exclusion and USS aims to work with com-panies and managers to encourage responsible corporatebehaviour based upon the belief that:Management of such issues is good for long-term corporateperformance andBetter management of these issues protects and enhancesthe value of the funds investments.

The increasing popularity of responsible investment stemsfrom a growing recognition by investors that good ESG prac-tices can benet the nancial performance of companies,particularly over the long-term. This may be because inves-tors who are aware of all these factors are better placed tomanage risk and thus to seize opportunities to increasenancial returns.

APG believes that systematically taking environmental, so-cial and corporate governance considerations into accountcan contribute to better investment decisions. As we explainbelow, it is clear that these issues impact the nancial

performance of many of the companies we invest in. Byembedding responsible investment in its investment policy,APG helps pension funds not only to full their ambitions inrelation to social responsibility, but also to meet their long-term nancial targets.

Folketrygdfondet [the pension fund manager] has denedethical principles as an integrated part of the managementeffort, in order to promote long-term value creation. As amajor investor in the Norwegian stock market, Folketrygd-fondet attaches considerable weight to acting as a respon-sible and predictable owner. It has therefore prepared a setof fundamental ownership principles.

Table 1 A selection of investors ResponsibleInvestment Policies

Environment

Agency Pension

Fund (assets under

management 1

billion)

APG Group (assets

under management

205 billion)

Norway Govern-

ment Pension

Fund (assets under

management 87

billion Kroner)


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Measures against child labour at CVS CaremarkWe investigated accusations of involvement inchild labour aimed at companies including the USmultinational CVS Caremark. The company, which hadalready been convicted in 2007 in connection with childlabour, informed us that it had an arrangement withthe US Labour Secretary, in which managers and youngpeople receive training on what work the latter may andmay not do. Parents were also informed, and measureswere taken to avoid irregularities in the future. Thesteps taken give us condence that the company will

not overstep the rules again.Child labour in cocoa production

In 2008, APG launched an investigation into companiesthat use cocoa from Ghana and Ivory Coast in theirproducts. We want to encourage companies to take jointaction to ght child labour. Although this has been ahot topic for years, companies are by no means makingthe most of the opportunities to prevent children frombecoming recruited into cocoa farming. For thesecompanies, reports in the media of involvement in childlabour pose a real risk to their reputation. Collaboratingwith a Scandinavian investor, we entered into talkswith the key players in the sector to nd a structuralsolution.

UKFI is not a typical institutional investor as it is a very largeshareholder in only two companies as opposed to being a smallshareholder in many companies. It therefore cannot activelymanage its portfolio, by investment and disinvestment. However,much of the focus of the pension funds described in Table 1 refersto engagement with companies and not to (dis)investment, andis therefore applicable to UKFI. It also follows that as UKFI is asignicant shareholder in its investee companies, its engagementwill carry much more weight than a normal institutional investor.

Recommendation 2As an active owner, UKFI must engage effectively with RBSmanagement. RBS is predominantly a retail bank with a largepublic-facing presence which places great importance on brandand reputation. These have been signicantly tarnished by thebanks collapse and public anger over executive pay. The banksethical performance may be affecting its long-term value, and

this is likely to continue without active ownership, as there is noother impetus for the companys culture to change. At the veryleast UKFI should request that the board of RBS commission anexternal advisor to report on the companys ESG performance andhow this could be improved. UKFI should also engage activelywith RBS on the following issues:

Providing incentives for long-term, sustainablebehaviour. Executive pay should be linked to thecompanies long-term performance, for examplethrough company bonds and equity held in escrow

accounts for directors and released after 10-20 years.It could also be linked to the banks environmental andsocial performance. This would contrast signicantly tothe Executive pay that has actually been awarded.All lending over a certain level should be screened onenvironmental and social criteria. Companies that thebank lends to must be subject to an independent auditon environmental and social criteria so that they meetbasic government environmental and human rightscriteria.

A board member should be appointed with specic ESGresponsibilities.This would help place ESG decision-making at the centre of company policy.

UKFI should request reports both from the RBSBoard and an independent consultant investigatingsustainable banking models. A number of banks areconsidered to be sustainable banks (see box 3). Thelarger banks such as HSBC and Standard Charteredthat survived the nancial crisis have started to adoptsustainable practices. RBS should aim to be a leader inapplying such practices, where appropriate, to a high-street bank.

Box 2

Examples of

active en-

gagement

by APG20


12/21


Triodos BankTriodos Bank can claim to be the worlds mostsustainable bank. Winner of the Financial TimesSustainable Bank of the Year Award in 2009, Triodosoffers a pioneering banking model and the inspirationfor a genuinely sustainable nancial future. Crisis-resistant, genuinely transparent and only lending to andinvesting in organisations that benet people and theenvironment, Triodos is unlike any other commercialbank.Established in 1980 in The Netherlands, with a UK

ofce following in 1995, Triodos Bank enables moneyto work for positive social, environmental and culturalchange.Triodos offers a comprehensive range of bankingservices for social businesses, charities and groupsalong with a variety of savings accounts for individuals.It is a public bank with thousands of customers andshareholders. Our principles and independence areguaranteed through a special share-holding trustwhich protects the social and environmental aims ofthe bank. We have ofces in the UK, Belgium, Spainand The Netherlands as well as an InternationalDevelopment Investment Unit which nances fair tradeand micronance in developing countries.

The Co-operative BankThe Co-operative Banks Ethical Policy is based onextensive consultation with customers and reects theirethical concerns surrounding how their money shouldand should not be invested. It also informs The Co-operative Banks choice of partners and suppliers.The policy covers the following issues: Human Rights,The Arms Trade, Corporate Responsibility and GlobalTrade, Genetic Modication, Social Enterprise,Ecological Impact and Animal Welfare.During 2005, The Co-operative Bank turned away

some 30 businesses whose activities were in conictwith their customers ethical concerns. As a result,income worth some 10 million was denied to the Bank.At the same time, signicant monies were directed tobusinesses whose activities were supportive of theBanks customers ethical priorities.

Section 2

The lending risks of climate changeSection 1 identied the need for UKFI to take an active ownershipapproach to its investments with respect to environmental, socialand governance issues. This would be in the interests of thetaxpayer and be consistent with best practice which has beendeveloped over a number of years by institutional investors.Active ownership will both improve the long-term sustainablevalue of RBS and enhance its positive contribution to society as awhole. These are symbiotic, not mutually exclusive, objectives.

This section concentrates on lending risks with respect to

climate change, as it is the major environmental threat identiedby the government. It is also an issue on which RBS has beenspecically and heavily criticised. The fossil fuel-related activitiesof RBS clients represent a risk to the long-term value of thecompany, and will potentially impact the taxpayer-shareholder.

RBS is currently a leading nancier of the fossil fuel and carbonintensive industries which contribute to climate change. Inpractice, much of the risk associated with these industriesis borne by society and hence the taxpayer. However UKFIsobjective is to maximising sustainable value for the taxpayer,taking account of risk. From the taxpayers viewpoint, riskwould be reduced if fossil fuel investments were phased out ina managed way based on carbon intensity, while investmentsupporting the low carbon economy should be increased. This isnot only true of environmental risk, but also of economic risk, asdescribed in HM Treasurys Stern Review.

Box 3

Sustain-

able Banks


13/21


Background on climate changeThe evidence, cause and consequences of climate change havebeen well documented elsewhere. The reader is referred to, forexample, the latest Intergovernmental Panel on Climate ChangeAssessment Reports.21 Of particular relevance to this report, arethe following:

It has generally been agreed that an increase in globaltemperatures of more than 2C is dangerous, andthat emissions should be reduced to avoid this level ofwarming . This can only be achieved if global emissions

peak by 2015.The governments own emissions targets are 34%reductions by 2020 and 80% by 2050 22.A recent letterfrom the Committee on Climate Change, the body thatadvises the government on setting carbon budgets,concluded that because of aviation emissions, the cutof greenhouse gas emissions from other sectors wouldhave to be 90% by 2050 23.A recent paper24 estimates that to have just a 25%probability of limiting temperatures below 2C willrequire total emissions in the fty years between 2000and 2050 to be constrained to no more than 1,000Gigatonnes of CO2, of which the world has alreadyburnt a third (in less than 10 years). To achieve thistarget would mean limiting future emissions to, at most,

a further 667 Gigatonnes. This has been estimated asequivalent to burning just 22% of current fossil fuelreserves.25A recent report from PLATFORM26 found that embeddedemissions from project nance attributable to RBS was44 M tonnes of CO2 in 2006, greater than Scotlandsnational emissions. However, most of these projectswere in collaboration with other lenders and the totalannual emissions from these projects was 825 M tonnesof CO227, signicantly more than the UKs total directemissions and 3% of global emissions. So, through itsownership of RBS, the government potentially has alarger inuence on global carbon emissions than it doesthrough all domestic activities.The Stern Report made it crystal clear that a business-as-usual model of managing the economy would leadto the imposition of additional economic costs or to theloss of economic value.Those ndings have been reinforced by the World

Banks World Development Report 2010 in which a keymessage is that Economic growth alone is unlikelyto be fast or equitable enough to counter threatsfrom climate change, particularly if it remains carbonintensive and accelerates global warming. So climatepolicy cannot be framed as a choice between growthand climate change. In fact, climate-smart policies arethose that enhance development, reduce vulnerability,and nance the transition to low-carbon growth paths.A climate-smart world is within our reach if we act now,act together, and act differently

The report goes on to say, Acting now is essential, orelse options disappear and costs increase as the worldcommits itself to high-carbon pathways and largelyirreversible warming trajectories. Acting differently isrequired to enable a sustainable future in a changingworld. In the next few decades, the worlds energysystems must be transformed so that global emissionsdrop 50 to 80 percent.

The Stern Report made it crystal clear that a business-as-usual model of managing the economy would lead tothe imposition of additional economic costs or to the loss ofeconomic value.

Those ndings have been reinforced by the World BanksWorld Development Report 201028 in which a key message is that

Economic growth alone is unlikely to be fast or equitable enoughto counter threats from climate change, particularly if it remainscarbon intensive and accelerates global warming. So climatepolicy cannot be framed as a choice between growth and climatechange. In fact, climate-smart policies are those that enhancedevelopment, reduce vulnerability, and nance the transition tolow-carbon growth paths. A climate-smart world is within our reachif we act now, act together, and act differently (italics added)

The report goes on to say, Acting now is essential, or elseoptions disappear and costs increase as the world commitsitself to high-carbon pathways and largely irreversible warmingtrajectories. Acting differently is required to enable a sustainablefuture in a changing world. In the next few decades, the worldsenergy systems must be transformed so that global emissionsdrop 50 to 80 percent.


14/21

26 Royal Bank of Sustainability

The social cost of climate changeUKFIs objective is to maximising sustainable value for thetaxpayer, taking account of risk. Climate change represents asignicant risk to the taxpayer and the economy as a whole. HMTreasurys Stern Review, one of the most inuential reports on theeconomic impacts of climate change concludes that In summary,analyses that take into account the full ranges of both impactsand possible outcomes - that is, that employ the basic economicsof risk - suggest that business-as-usual policies will reducewelfare by an amount equivalent to a reduction in consumptionper head of between 5 and 20%.29

Since initial publication of the Stern Review, new research hasconcluded that Since the late 1990s, greenhouse gas emissionshave increased at close to the most extreme IPCC scenarios,meaning that rates of warming will be faster than most peopleexpect.30 This conclusion is supported by a recent report fromthe Hadley Centre which found that warming of more than 4degrees centigrade could happen within the lifetime of manytaxpayers. Such a high level of warming could have extremeconsequences, such as the Arctic warming by 15C31. Stern himselfhas acknowledged that his report was based on the understatedconclusions of the IPCC32. The cumulative message of recentresearch is that the accelerating pace of climate change is likelyto mean that the negative impact on consumption will be more,not less, signicant.

In assessing the economic costs the Stern Report goes on to

make it clear that Much (but not all) of the risk can be reducedthrough a strong mitigation policy, and we argue that this can beachieved at a far lower cost than those calculated for the impacts.In this sense, mitigation is a highly productive investment.

A business model that is based on unfettered investment inand support for fossil fuels needs to be recognised for what it is -a model that will increase the risks of reduced economic activitiesand one that chooses not to maximise the benets of investing inmitigation.

The reason that nancing the exploitation of fossil fuels iscurrently protable and low risk for a bank is that the risks ofclimate change are currently externalised. Neither the bank northe fossil fuel company has to pay the full costs of the damage(current or future), or directly face the risks caused by burningfossil fuels. The costs of adapting to the impact of climate changeare borne by the taxpayer for example, through increases inthe cost of ood defences or extra storm damage. The transfer ofownership of RBS to the taxpayer effectively means that, in thecase of RBS, these external costs from lending activity into theoil, gas and coal sectors are no longer carried by a third party.

Shareholders/taxpayers will have to face the cost and risk fromclimate-damaging investments unless steps are taken to factorthem into RBS decision making process.

Figure 1 Annual global emissionsreduction rate to stay within 2C33

GtCO2eq

Emissions

Halved global

emissions by 2050

(rel.1990)

Peaking Year

(following SRES

A2 initially)

Annual global

reduction rate to

stay within 1,750

GtC02eq budget

-2.0%-3.6%

-6%-12% -22.6%


15/21

28 Royal Bank of Sustainability

The risk and cost caused by burning fossil fuels is socialised sincethe cost falls on society and ultimately the taxpayer. This socialcost of carbon has been estimated by, for example Stern (2006)34,to be $85 per tonne of CO2, compared to the current price in theEmissions Trading Scheme (ETS) of $1935. The fossil fuel companypays the rst $19 of the damage caused by emissions, whereasthe taxpayer ultimately faces the cost of the remaining $66.

From the taxpayer-owners point of view, investment orlending decisions for both fossil fuel projects and renewableenergy projects should be based upon the social cost of carbon,as the taxpayer is effectively bearing the extra cost. Needless to

say, this would make fossil fuel lending much less attractive andlending decisions to renewable and clean technology projectsmuch more attractive. As part of its UK Low Carbon TransitionPlan, the government has recently adopted new guidance on thevaluation of carbon which suggests a shadow price of 70 pertonne of CO2 by 2030 and 200 by 205036. It is inconsistent, andnot in the interests of taxpayers as shareholders, for UKFI andRBS to use a lower carbon price in assessing risk than that set inthe governments guidance.

Risk from climate change to taxpayer as RBS shareholderTo signicantly reduce the risk from climate change, drasticaction is required. Figure 1 shows that global emissions need topeak before 2015, otherwise it will become virtually impossible

to avoid warming of 2C. Even if global emissions peak by2015, in 6 years, annual reductions thereafter of 3.6% willbe required. This compares to the UKs emissions (includingembedded emissions) increasing by 19% since 199037. Thescale of the challenge is daunting we will have to achievea low carbon re-industrialisation three times as great as theindustrial revolution38.To achieve this revolution the governmentwill, without delay, have to make effective use all of the toolsavailable.

Whilst it is growing, current investment in low-carbonindustries is much lower than required to meet the governmentscarbon reduction targets. A report by Ernst and Young concludesthat 234 billion of new investment by 2025 is required to meetthe UKs energy goals. Of this, approximately 169.8billion39 willneed to be invested in clean energy (Table 3). The governmentestimate that 100 billion will need to be invested in renewableenergy40. This compares with the current asset base in the entireenergy supply industry of 62 billion41. Venture capital investmentin renewable energy in the UK was only 74 million in 2008 (240million in 2007)42.

Annual investment will have to increase by an order of magnitudeto achieve the UKs clean energy targets. The global picture issimilar investment in renewable energy was $155 billion in200844, compared with estimates of required investment rangingfrom $500billion45 to $1trillion per annum46. So both in the UK andglobally there is a considerable funding gap to full the requiredscale up of clean energy technologies and infrastructure.

The government is legally obliged to oversee a massivegrowth in renewables and clean technology. For example, in 2007,renewables accounted for approximately 5% of the UKs energysupply47 whereas the governments target is for this to grow toaround 30% by 202048. Similar growth could be expected in low-carbon transport and energy efciency to meet the governmentstargets.

Why does a funding gap exist when the government has setlegally-binding targets for emissions reductions which could beexpected to lead to spectacular growth in these sectors?

For a project to be investible, a nancier will consider therisk/return prole of an investment; if the risk is perceived to behigh, then the cost of nance will increase, making the projectuneconomical. On this basis, renewable energy and clean technologyinvestments can appear high risk as they are often relatively new

technology and rely on specic policy intervention to make themprotable. For example, offshore wind requires appropriate powerpurchase agreements, timely access to the national grid andsufciently-priced renewable obligation certicates.49

Investment Type Increase in spend-

ing to 2025 (bn)

Renewable generation capacity

Transmission and distribution

Smart metering

Carbon emission reduction target/Supplier Obligation

Total

112.5

28.2

13.4

15.7

169.8

Table 3 Required investment in clean energy to 202543


16/21


This policy uncertainty is perceived as an extra risk. However,from RBS perspective, this risk is in the control of RBS majorityshareholder and could be promptly reduced by engaging in adialogue with its owner.

In contrast to renewable and clean tech investments, thenancing of fossil fuel companies arguably represents a higherrisk to RBS. If the governments ambitions for averting dangerousclimate change are credible, then RBS heavy exposure to thefossil fuel sector will represent a signicant credit risk to thecompany.

As an active owner of RBS the Treasury, or UKFI acting on

taxpayers behalf, has a duty to intervene on this issue to protectthe long-term sustainable value of RBS. By taking no action tomanage the risks associated with fossil fuel lending, RBS is actingas if the governments climate policy is not credible, which isclearly inconsistent with the governments controlling interest inthe bank through UKFI. Furthermore it encourages other businessinterests to draw similar conclusions about the credibility ofclimate change and low carbon policies, which in turn underminesthe governments ability to deliver them.

Reputational riskRBS is highly exposed in the fossil fuel sector, and this representsboth a reputational and a regulatory risk to the long-term valueof the business. RBS has described itself as The Oil and Gas

Bank and is considered a leader in the eld. Between May 2006and April 2008, it was involved in loans to the coal industry worth$95.83 billion (of which RBSs share was estimated to be $15.93billion)50, and between 2001 and 2006, RBS lent over $10 billionin loans to the oil and gas sector, along with structuring loans onover $30 billion of projects51. Whilst investments in renewableenergies are much smaller than those in non-renewable energiesit is worth noting that RBS is a relatively large investor in thissector, claiming to have invested 2billion in renewable energyprojects in 200652. The existence of signicant in-house capacityin assessing and supporting the renewables sector is an assetwhich should not be overlooked.

RBS is predominantly a retail bank with a large public-facingpresence which relies on brand and reputation. RBS publicreputation has already been highly damaged by its collapse andsubsequent bail-out with public funds, along with widespreadpublicity over the pay of the board members who oversaw thecollapse53. It is therefore not well placed to face a high prolepublic campaign over its lending to fossil fuel companies,highlighting concerns over the global impact that its lending has

on climate change, or the poor human rights, environmental andgovernance records of many of the companies it lends to (see Box4).

Arch CoalIn October 2006 RBS participated in an $800 millionrevolving credit facility for Arch Coal. Arch Coal is thesecond largest coal producer in the US, and owns anumber of mountain top mines in the Appalachia region.Its use of Mountain Top Removal (MTR) has attracted

high levels of controversy and criticism. Arch Coal hasbeen accused of responsibility for the disappearanceof 300,800 acres of biologically diverse hardwoodforest through MTR. In the US, the Bank of America hasadopted a policy to end nance for mining companiesengaging in MTR.

Tullow OilIn March 2009, RBS was part of a consortium of 14banks that lent $1,890 million to the Irish companyTullow Oil - providing in the region of $100 millionitself. The bank had already helped raise 402 millionby placing shares for Tullow in January. Tullow Oilsoperations on the border between the DemocraticRepublic of Congo and Uganda are taking place in a

region where resource-driven conict recently displaced30,000 people, adding to the existing 1.4 millioninternally displaced people in the region.

Box 4

Ques-

tionable

practices of

fossil fuel

companies

nanced by

RBS


17/21


Regulatory RiskRBS is a major lender to the fossil fuel sector and this couldpotentially represent a credit risk to RBS if either regulatory orscal measures are widely used (following global agreement topursue emissions reduction) to reduce the use of fossil fuels, orif the activities of the companies that RBS nances are directlycurtailed to such an extent that they can no longer service theirdebt to RBS.

RBS has itself identied credit risk as of major importance inits response to the Carbon Disclosure Project:

In our view the impact of climate change on creditrisk - either directly or indirectly - is potentially themost serious nancial risk for our business arising fromclimate change. Material risks to the business modelsof customers arising from climate change includeregulatory risks, physical risks, changes to purchasingpatterns and consumer rejection of less efcientproducts and services. Our ability to assess the impactof climate change on credit risk for corporate andcommercial loans will become increasingly important inthe future.54

Fiscal and regulatory policies to reduce fossil fuel consumption,as well as technical efciency regulations, would be a credibleresponse by governments to the adoption of more stringent

greenhouse gases emissions targets. Insofar as such measuresreduce fossil fuel usage or make it more expensive throughtaxation, they will reduce the protability of many businessesin the fossil fuel industries. In turn this could impair suchbusinesses capacity to service loans from RBS. It is also possiblethat measures to directly curtail the exploitation of fossil fuelreserves may be adopted. Insofar as such measures do not resultin proportionate price increases in fossil fuels, they may have asimilar effect on the future value of fossil fuel companies.

Table 2 shows the proven reserves of a few of the fossil fuelcompanies that RBS has lent to.

Proven reserves represent the reserves that these companies arecertain to be able to extract. In fact, the expected reserves of thesecompanies may be many times greater than proven reserves andthese play a key role in the valuation of fossil fuel companies.The ability of these companies to repay debt partly depends uponthem being able to extract and sell their reserves, unless they canswitch out of these industries into other industries.

Company: Proved oil/NGL

reserves (millions

of barrels)

Proved Natural Gas

reserves (billions of

cubic feet)

Proved and Prob-

able coal reserves

(millions of tonnes

CO2 emissions from

burning reserves

(millions of tonnes)

PDVSA

Gazprom

Qatar Petroleum

Rosneft

Shell

Exxon

Chevron

Conoco Phillips

Total

OXY

BG

Repsol

Cairn Energy

Arch Coal

77,500

19,959

15,200

14,448

10,903

10,135

7,350

5,817

5,695

2,979

2,459

2,404

240

150,000

1,051,708

900,000

65,879

23,075

29,948

26,218

2,540

42,535

71,908

60,723

6,247

4,714

8,346

4,566

4,317

4,040

1,288

1,063

1,039

104

24,982

Table 255 Reserves of largest companies that RBS has lent to:


18/21


The importance of reserves was illustrated in January 2004 whenRoyal Dutch Shell announced that it had over-reported its provenreserves by approximately 25%. This has been described as theworst crisis in the companys hundred year history56 - its shareprice plunged 8%, wiping 3 billion off Shells value within anhour of trading on the London Stock Exchange57.

And herein lies the contradiction; the UK government iscommitted to limiting temperature increases to below 2C and toachieve this aim the world must emit no more than a further 667giga tonnes of CO2 by 2050. Yet if only those companies in Table2 burnt of all their proven reserves, that alone would represent

35% of the worlds remaining carbon budget.To put it bluntly, the world can burn no more than 22% of

total proven fossil fuel reserves by 205058, and little if any morethereafter. It is therefore true that most of the worlds reserves,and those of the companies above, will have to stay in the groundin order to keep global warming below 2C59. How this is achievedis a matter of policy, but the most credible tools will inevitablyreduce the long-term value - and therefore the ability to servicedebts - of these fossil fuel companies.

It is unlikely that the value of these fossil fuel companiescould be maintained by simply raising the price of their reducedreserves. Oil prices are affected by numerous factors, but cruciallyit is demand for oil that is shifting and will be affected by policy.British Petroleum chief executive Tony Hayward commented inearly June 2009 that as the oil price went over $90 consumers

began to change their behaviour60

. Recent research by PeterHughes, who spent much of his career with BP and British Gasand is now Director of Global Energy for leading managementconsultant Arthur D Little, shows that we may be closer thanmost people currently believe to a tipping point which wouldsee long-term downward pressure on the demand for oil andoil products61. Driving this change are the coalescing policyincentives to avoid volatile prices, ensure security of supply, andavert the worst affects of climate change. As previously noted,policy measures to signicantly curb carbon emissions will beaccompanied by policies supporting alternative energy growth,which will simultaneously curtail demand for fossil fuels.

The risk from RBS perspective is that its clients will facefalling demand for their products, and/or not be able to utilisethe vast majority of their reserves or continue with their carbonintensive activities which increases the risk that they will beunable to service their loans.

Recommendation 3The cost of damage caused by climate change is only partiallyborne by fossil fuel companies through the carbon price, thevast majority will ultimately have to be paid by the taxpayerwho is also the owner of RBS. Therefore, RBS should use thegovernments estimate of the social cost of carbon to assess therisk/reward prole of potential funding decisions. This wouldresult in reduced lending to fossil fuel companies and projectsand increased lending to renewable energy and into the low-carbon economy. Additionally, much of the perceived risk ofinvesting in renewable energy projects is caused by uncertainty

over policy, which is lessened for RBS as this policy is controlledby RBS major shareholder. RBS, in consultation with UKFI,should:

1. Set targets for reducing emissions from its lendingportfolio, and monitor and audit those reductions.2. Allocate responsibility for climate change policy tothe board and senior management.3. Develop a revised investment mandate drawing onexpertise and guidance from independent sources andbest practices in the nancial sector to identify whichactivities should not be funded in future.

Conclusions

There is a clear case for UKFI to engage actively with the Boardand management of RBS to ensure effective consideration andanalysis of environmental, social and corporate governanceissues. UKFI should pursue higher standards than industrygood practice because it is representing the wider interests oftaxpayers, and defending the credibility of government policy andits own UK Low Carbon Transition Plan.

A credible low carbon strategy for the UK would require thesubstantial economic risks of the fossil fuels sectors in whichRBS is heavily involved to be internalised. This would representa serious nancial risk to companies in these sectors. To managethese risks and protect the shareholder/taxpayer, RBS should, inconsultation with UKFI, adopt a strategy to reduce exposure tosuch investments.

There is a sound business case for RBS to initiate atransformation into a sustainable bank. For RBS owners - thegovernment and taxpayers - there is an imperative to assessthe risks and opportunities involved and to act as responsible,engaged owners in driving such a transition.


19/21

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As at 29 September

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ibid

42

Investment trends in European

and North American clean energy

2003 to 2008 ( Carbon Trust)

43

Ernst & Young (2009) Securing the

UKs Energy Future: Meeting the

nancing challenge

44

Global trends in Sustainable

Energy Investment 2009 Report

http://se.unep.org/leadmin/

media/se/docs/publications/Ex-

ecutive_Summary_2009_EN.pdf

45

ibid

46

Mallon and Hughes (2009) Climate

Solutions II: Low Carbon Re-

industrialisation

47

http://www.berr.gov.uk/les/

le46983.pdf

48

HM Government (2009) The UK

Low Carbon Transition Plan

49

See for example ht tp://www.

bwea.com/media/news/articles/

government_action_needed_to_

ke.html

50

PLATFORM (2008) Cashing in

on Coal

51

PLATFORM (2007) The Oil and

Gas Bank

52

http://www.ethicalcorp.com/

content.asp?ContentID=6615&ne

wsletter=24

53

In June 2009, three NGOs the

World Development Movement,

People and Planet and Platform

led a legal case against the

Treasury, claiming that the

Government had acted unlawfully

as it had not under taken an as-

sessment against environmental

or human rights criteria. The High

Court has ruled that there is an

arguable case and has granted an

oral hearing in October which will

determine if there are sufcient

grounds for a full hearing.

54

RBS 2008 response to Carbon

Disclosure Project

55

Reserve gures supplied by

Investor Watch from company

accounts and statements. This

table is incomplete as not all data

is available about companies RBS

lends to or reserve gures for all

companies. Specically RBS lends

to a number of coal companies

whose reserves are not available,

which is not fully reected in the

table.

56

C. Evans, (2004), Shell Shocked,

Accountancy, Institute of Char-

tered Accountants in England &

Wales

57

The crisis also ultimately led to

the resignation of the companys

Chairman, nance chief and head

of exploration and production. The

crisis was also about Shells nan-

cial impropriety in covering up the

real extent of its reserves, but the

differential between the perceived

valuation of the company and the

actual valuation on the basis of

what reserves it could extract rep-

resented a very real risk to both

investors and lenders. (I. Cummins

and J. Beasant (2005) Shell Shock,

Mainstream Publishing, p. 11)

58

http://www.nature.com/nature/

journal/v458/n7242/abs/na-

ture08017.html

59

Some of the reserves could be

used if carbon capture and storage

proves successful. However, it has

not as yet been proved to be com-

mercially viable and it has only

been proposed for coal, so from

a risk management perspective it

cannot be assumed that it can be

developed and deployed rapidly

enough (if at all) to enable busi-

ness as usual for all fossil fuel

companies.

60

Tony Hayward, in response to

questions at the launch of the BP

Statistical Review of World Energy.

10 June 2009. View the webcast or

download the audio le at: http://

www.bp.com/iframe.do?categoryI

d=9024230&contentId=7044938

61

The Beginning of the End for

Oil? Peak Oil: A Demand-side

Phenomenon? Arthur D Little,

February 2009. Available from

http://www.adl.com/reports.

html?&no_cache=1&view=356 fol-

lowing free registration.


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Ultimate Holding Company

is an ethical art and design

co-operative specialising in

creative solutions for value

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