Financial Institutions: Challenges and Opportunities
Amy Davidsen, Director of Environmental Affairs, JPMorgan Chase

David Nissen: Thank you, David, for Time's corporate focus on sustainable development, and thank you for your journalistic focus on the problems we face.

Our last speaker we return to the financial sector. Amy Davidsen is Director of the JP Morgan Chase Office of Environmental Affairs which was created in 2004 to establish global policies and procedures regarding environmental issues and to increase the company's focus on the environment. Amy is a banker with twenty years' banking experience in line activities, and how do you get into banking at Morgan Chase? Well, Amy began with a BA in mathematics from Brown University. She will speak on Financial Institutions: Challenges and Opportunities. Amy Davidsen.

Amy Davidsen: Hi. Let me say thank you, it's a pleasure to be here at the Earth Institute with such thoughtful and engaged company. Being the final speaker on this panel I'm sure everybody's full of a lot of questions, as am I. I'm actually not going to have a PowerPoint, so hopefully you're a little PowerPoint out and can bear with some with some oral comments.

Let me start by saying that on behalf of our 170,000 employees operating in 50 countries worldwide we believe it is our responsibility to lead the industry in finding solutions to preserve and enhance our environment, as well as in particular to reduce our greenhouse gas emissions. Last April, so we're very much a neophyte compared to David here, JP Morgan announced its environmental policies. We've had about a year to digest it and begin implementation. So we have definitely learned a lot in this process of a year, but we have a long journey to go, which David had mentioned, as I think all of us do towards sustainable. I'll also mention to Joe's comments we don't pretend that we've really even more than scratched the surface of sustainability in our policy.

And usually the first question that comes to people's minds regarding environmental issues in financial institutions is what does it have to do with a bank? You know, we're not heavy emitters or polluters. So I'll start by answering that question and then walk you through our policy's main elements, and then address them at the main challenges that I see.

So why did we develop an environmental policy? This has also been touched upon a little bit this morning. It's a combination of our external stakeholders, peer positioning, so the good old competition, as well as some employee concerns. The external stakeholders were the socially responsible shareholders, and we call the ESG shareholders, such as Trillium Asset Management, Domini and F&C, as well as environmental activists such as the Rainforest Action Network and Friends of the Earth. Our stakeholders were concerned not as much with our direct impact on the environment, but more with our indirect impact on the environment. And the question was did we have a system in place to assess environmental and social impacts created by our business activities with clients? So the kind of impacts they were concerned about were not just about effluence, which you know, many of our policies already address, but the impacts on natural habitats, biodiversity, indigenous communities, for example. And after listening very carefully to our stakeholders and benchmarking our peers it became clear that we needed to put more policies in place internally to address these issues, not only to do the right thing for today but for future generations.

The next step we took was determine what role made sense for JP Morgan to play. As a financial institution we wanted to make policy decisions that were both good for our business as well as had the most impact on the environment. After much discussion, again internally as well as externally with the scientific NGOs as well as our clients, we came up with three main policy elements. One was our internal footprint which is how do we consume and use resources. The second was risk management, was really the indirect impact with our clients. And the third is climate change which we've heard a lot about this morning.

So I'm just going to touch on the internal footprint because we really haven't been focusing on that as much this past year. We sort of have the strategy is place, but there's still a lot more to do. So the two impacts are paper and energy use. Our goal is to use our copier paper usage, as well as increase the environmental content of our papers to be either recycled or certified paper. And 70% of the bank's waste stream is paper, so it's really important to us. And I think we're going to certainly talk to David a little bit more about the Paper Working Group which I hear is a wonderful group. The second thing is the energy and corresponding emissions. We've set a goal to reduce our internal greenhouse emissions by 5 to 7% by 2012 using a 2005 benchmark. About 85% of our emissions are indirect coming from the purchase of electricity, so our focus is to reduce these emissions through energy efficiency. That's really going to be the low-hanging fruit that we want to tackle immediate. We're also looking at carbon offsets but we don't have a specific strategy in place yet for purchasing offsets. So this is clearly about cutting waste, improving efficiency. It's a good demonstration of our values as well as helps us understand what our clients are doing on greenhouse gas emissions that we can sort of understand what it takes to reduce. It's also really what our employees are the most concerned about.

But secondly, on indirect impacts with our clients, it's how do we imbed environmental awareness into our business activities? And we have adopted the Equator Principles, which maybe some of you are familiar with. And the Equator Principles are a voluntary set of guidelines which serve as a framework for determining, assessing and managing environmental and social risk in project financing. And these are based upon the World Bank and the IFC guidelines. There are now forty banks that have adopted these principles which represent about 80% of the global project financing market.

JP Morgan is not a big player in project finance, so we chose to take these principles and apply it [them] more broadly to our lending, our underwriting, financial advisory, as well as certain derivative transactions, where the use of proceeds is designated. Just to give you a high level sense of what this means or how we look at it is that we're looking at risk of these projects a little differently. We look at the location risk, we look at the project risk, and we look at client risk. So location risk is where is the project located, so a lot of this is in emerging markets where maybe the laws and the regulations and enforcement don't work as well as they might in high income OECD countries. And also where within that country is the project sited, is it in an existing industrial complex or is a green field in an environmentally sensitive area? Is it near a critical natural habitat or is it near a high conservation forest? So those are important elements that we are now taking into consideration.

And then we look at project risk, so what kind of project is it, is it the building of a hotel or is an extractive project such as mining or oil and gas? And then what are those impacts? So is there is an impact on watershed, biodiversity, forest habitat, indigenous communities? Will a new road need to be built for that project to be up and running, and what happens to people if they need to be resettled? So again, these are new things that we hadn't been thinking about before, and now we're imbedding that into our risk management.

And the third piece is looking at how experienced our client is in managing these risks. And this was also touched upon earlier I think by John. Does our client have the capacity to manage these risks, and to avoid as well as mitigate as well as manage the risk? And have they done this well in the past, and if not then we kind of look at it as a different kind of assessment of the client risk. And the companies that manage environmental and social risk well tend to be able to manage other complex risks well, so this is really an important element of strengthening our overall risk management process.

Other policy highlights, because we didn't just adopt Equator, that was really sort of the anchor of our policy, includes the adoption of no-go zones. So we believe there are certain places on Earth with cultural and natural values so great that we as a global citizen must take extra precautions to protect them. We thought this was a very important element in our policy. So that being said we will specifically not finance extractive industries or commercial logging in world heritage sites, and also we only will finance light or non-extractive resource use in forests whose high concentration values are endangered. So we sort of set that this is off limits in our policy. We also have policies around sustainable forestry, as well as illegal logging. I'm actually not going to get into that right now because I think David sort of covered some typical things which we now look at too.

So the third element of our policy is climate change. We are not scientists but we believe there's enough scientific evidence out there that climate change is happening, that's enough, and that it's a critical issue and there's potentially very serious implications for both ourselves as well as our clients, and we really want to lean towards real solutions. The second thing on climate change is that we see the business opportunity. Our role as a capital intermediary positions us uniquely to be meaningful partners with our clients in addressing climate change. So we're getting smarter about the problem, we're getting ahead of the issue, and we're thinking more long term which I think is very important, in order to understand these risks and opportunities that our clients are facing so we can help them to reduce their greenhouse gas emissions. So I think also the comment about the sixteen trillion dollars of new energy investments you can see that there's clearly an opportunity to get that directed to a low carbon future.

Some of the things that we're trying to do specifically is we're focusing on really what the most meaningful impact is around climate by leveraging our intellectual capital. So our corporate research is exploring business risks associated with climate change, and the opportunities for greenhouse gas reduction. We're already issued a couple of reports, one on cars and climate change, one on airlines on climate change, and everything you wanted to know about carbon trading. We're actively investing in renewable energy. Our trading desk is also active out of London in the carbon emissions trading. And then we're working with our heavy greenhouse gas emitting clients to better understand their approach to climate change, to encourage them to have a carbon mitigation strategy if they haven't done so already, and to develop financing solutions to better manage their carbon risk, as well as to fund lower carbon emitting technologies for them. And then also touched upon a little bit, for the new power projects we are beginning to quantify the financial costs of those greenhouse gas emissions and incorporating that into our financial analysis of the transaction. So I think that's going to have a big impact once we do that.

But, while we work with our clients to help them reduce their greenhouse gas emissions, this voluntary initiative clearly is not enough. Voluntary reductions can only make so much of an impact. So we believe we need also a public policy that establishes certainty for investors, and allows significant investments in greenhouse gas reductions. We therefore resolve to basically add our capital market expertise and work with policymakers to develop a framework to address direct and indirect greenhouse gas emissions in this country.

The urgency of the issue which we feel pretty strongly, it's the same thing as sort of saving for retirement. It always seems like a silly analogy but it's true, it's that you really can't put it off. I don't know if anybody here has run their numbers to see how much money they have to save for retirement, it's scary and it's daunting and you just feel like forget it, I'm not even going to bother to do it because I can never achieve it. But it's a daunting task, but if you start today we all know it's cheaper and easier if you start today than if you wait for the future.

And finally I want to talk about one of the challenges I see, but it's also an opportunity. There's really this ongoing need of education and raising awareness. I have this belief that there's this parallel universe between Wall Street and sort of the academic, NGO, UN community and government, and that never the twain shall meet. But the reality is that even the really smart people in Wall Street sometimes don't make the connection on important issues. Maybe it's because it's not as prevalent in the business press, I think that's changing right now, but you really need to connect the dots for them. At least that's my experience working internally. And for example, earlier this week a group of our business leaders in London went to a session on the science of climate change and the impacts. And I got a thank you e-mail from my colleague who is really responsible for the carbon trading markets. And he said, “As a product specialist I tend to get a little niched with this subject. We focus a lot on CO2 trading and the impact on power generating companies without looking at he overall big picture, the why we are bothering.” You know, this is the guy following the carbon markets. He then listed a series of really innovative business ideas which we could pursue to help reduce greenhouse gas emissions with our clients. So I really believe the more people on Wall Street understand why we are bothering that the more people will be willing to think creatively towards these issues, and with those little market wins I think we can then show to people that moving towards a sustainable future is achievable, but it's gong to take some time.

So thank you.