Lord Turner is one of the leading figures in public life in the UK, with a resumé covering business, think tanks, policy and regulation. He is currently Chair of the Energy Transitions Commission and the Institute for New Economic Thinking. He previously chaired the Financial Services Authority and the Climate Committee. He also worked at McKinsey & Company, the Confederation of British Industry and Merrill Lynch. We meet to discuss a new report by the WWF, of which he is an ambassador, looking at the role of banks in protecting UNESCO World Heritage sites. The report – How Banks can Safeguard our World Heritage – shows that, despite some good practice, no major global bank has robust enough policies in place to safeguard World Heritage sites.
Responsible Investor: If I were an asset owner or the head of risk at a bank, can you explain why this is material, why is this interesting to me?
Lord Turner: Caring is the motivation for most of the bankers and the asset managers that engage in this.
There are always three motivations for financial people engaging with environmental responsibility:
1) They care about it personally, and this is true about climate change as well as these more specific things. They may be a businessperson trying to make money but they are also a human being…
2) A motivation is that, even if I don’t believe, I have shareholders and I have investors and they want me to act responsibly, and if I don’t act responsibly it will be a disadvantage to me.
3) The third might be, though it is less important here than on climate stuff, it will actually be that they’ll turn out to have made an investment that doesn’t bring in good returns: the whole issue around stranded assets. If you invest in coal companies, wherever they are in the world, you might find that you have been completely blind-sided by the fact that prices are collapsing and it turns out to not be a very good investment.
RI: Part of the problem is that you cannot value these sites. You can value a barrel of oil in the ground, but how do you value the Great Barrier Reef?
It is an interesting point, but I’m a little bit wary of saying ‘if only we put a monetary value on it we’d value it adequately’. Because once you’ve done that you’ve accepted the terms of a purely financial debate across the whole area of how to balance economic growth with the environment. There is an attempt to say ‘price in the externalities’… so if you do this, the price of climate change on the economy will be ‘x’ percent of GDP. But if you talk to Nick Stern [the climate economist], he will say that is only indicative and that there are huge uncertainties about those calculations. So that probably isn’t the best way to think about it. The best way to think about it is, ‘let me describe a set of things that might happen as a result of climate change, let me describe its effects, let me describe that it might destroy people’s livelihoods and unleash large waves of migration’.
RI: How far up the value chain within a bank does that conversation go?
This has got to go much further up. One has got to find a way of grabbing the attention right at the top of the bank to say ‘this is something we just don’t want to do’. You have this on many areas, you have banks who will not fund tobacco, or will not fund the arms trade.
Here we are trying to get pretty close to a ‘no go rule’, and when there is a ‘no go rule’ it is good if that can be signed off at a very high level of the company. Once you have a ‘no go rule’, the crucial issue is operational: Does it just cover project finance or does it cover general purpose loans and in what fashion? I think this is the single most tricky issue here, which then requires an honest engagement within the companies about how they are really going to do it.RI: Part of that is around disclosure, both internal disclosure and external disclosure.
Internal disclosure is an interesting issue because you are quite right that top management of a major bank sits atop a huge organisation doing stuff all over the world, and it would be very easy for top management to turn up at an event and say ‘we don’t do loans in world heritage sites’ – but not really know if that is true in terms of what everybody’s doing. Suppose you’re not funding the company which is actually doing the extraction, but you are directly funding the provider of the extraction equipment, where does that stand?
You need a combination of some very, very strong no go principles and then you need to have a real engagement with these banks to set up a process and policy that is absolutely transparent in what they describe to the world, and which is pinned together by internal processes that make sure you’ve really dealt with the tricky issues here. In a sense the easy bit is to say ‘I do not directly finance a specific extractive project, specifically in a world heritage site itself’. That’s probably relatively easy to achieve. The stuff around the edge of it – buffer zones, the suppliers to it, the general purpose loans – which makes it a bit more complicated and can’t be signed off on the principle “tick, go home, sleep easy it’s all done”. You need an on-going process to keep challenging yourself whether you are really keeping honest to that principle.
RI: The problem is sometimes that you are counting apples and oranges: different policies, different levels of disclosure, different metrics, different performance indicators. So the problem for the outside world is to make sense of this in aggregate…
The outside world will always find it difficult to work out if the words in an annual report are greenwash or reality because you read an annual report and it says ‘we have some principles’. But you need quite a rich set of disclosures about what the processes are, what decisions you have consciously made. We need examples in order for it to be something which is, as it were, ‘police-able’ by the outside world. I don’t think that this will ever be perfect. The fact is, unless you actually think that there is a significant core of the management that wants to do the right thing and is trying to work it out, I think transparent disclosure can help keep them honest to themselves, can help put pressure on them but you’ve got to capture the internal motivation.
RI: The example I have in mind is the CDP, which could be good model for something like this, to promote a race to the top.
The great power of the CDP, who I have worked with for many years, is there is that there is a quantitative measure there. I suspect in this instance it’s more difficult to get a league table because if you have a league table you’d have to design a points system to rate different things, someone would have to turn a set of processes and policies into a single score. Whereas with carbon emissions stuff, because there is an issue of how many tonnes, it is easier to turn into a league table score. But it should be explored here as well. I think we know that all of these league tables, these external measures, become extremely powerful devices.
RI: In the context of UNESCO world heritage sites and the UN Sustainable Development Goals etc., is there a role for the United Nations to have more of a voice, why is it up to the WWF to mobilise here?
I think it is always going to be a major role for voluntary, charitable entities…you can say the same for the CDP, it was just created by Paul Dickinson and co., it’s a voluntary organisation. I think the UN does some good work but it is a large bureaucratic organisation. To agree that it is going to launch a new initiative require votes, it requires decisions, it can be vetoed by individual countries…it does a fantastic job on world heritage sites but there are individual governments that might not like it poking around.
In a sense the core of all public policy and charity activity is dealing with things where the pure market doesn’t work. If pure markets worked according to a hard line Chicago free marketer, we would all just wake up in the morning, compete to make money and by the end of the day we’d live in the most perfect of perfect worlds because competition would have got us there.
RI: You have the extractive companies themselves, you’ve got the banks providing the capital, and you’ve got the end owner, the pension fund and insurance company, providing capital to the banks AND providing capital directly to the companies. There are three legs to this stool.
Banks have clearly tended to focus on the loan issue. In the extractives industry loan finance is a clear point of leverage, and also it is probably an easier point of leverage on this issue because you can get specific.I think it is quite difficult for the pension fund or the asset manager to get that leverage point because you’d really have to get into the guts of it. Asset managers are not as into the guts of a business as bankers.
Banks in this sort of business are actually looking at how much are you going to spend on this project year by year. I think it is somewhat different when it gets to climate change, where you are saying not ‘what are you doing in one geographic area of the world but what is your overall strategy?’ This is where I believe there can be far more effective pressure from the asset managers.
RI: Should the asset managers have that granularity?
It is very difficult to get right down to that level, when you are looking at a major oil company: they are doing thousands of projects. It is difficult, it may be impossible, to that level of granularity as an asset manager. Banks have that information as they do project finance, it is part of the inherent business of banking, it isn’t part of the inherent business of being the investor.