2 December 1997

The Tokyo Second Roundtable meeting of the UNEP Insurance Industry Initiative on 2 December 1997 was a highly successful event and another step to gear up awareness in the financial sector on climate change related impacts, in particular on the insurance industry, and to address the need for an environmentally sound and sustainable investment and insuring policy.

The Tokyo Round table was hence not by chance organized in parallel to the Kyoto negotiations on the implementation of the United Nations Framework Convention on Climate Change (UNFCCC) but rather a strong signal to governments and the private sector that climate change is happening and climate change does affect business, development and policy-making today. The outcome of the Kyoto meeting was a firm commitment to curb greenhouse gases, setting reduction targets and timeframes and further develop economic and other implementation tools, enshrined in what became the Kyoto Protocol.

The UNEP Insurance Initiative was able to present a position paper on climate change which received high attention. This deserves respect for a business sector which obviously is at the forefront in taking a stand in the global warming discussions.

The proceedings of the Tokyo meeting which you hold herewith in your hands are giving a good insight with respect to the status of the Initiatives activities in six meeting sessions representatives from the insurance sector presented not only the scientific backgrounds on climate change but also addressed the way how practitioners can take concrete actions now and in future in their daily business operations.

You will also learn about the options to implement efficient and appropriate environmental management systems in the financial services sector, the current status of EMAS and ISO 14000 and the progress made with these instruments applied in Europe. Also the relevance of environmental performance to the corporate value was touched upon and it was felt that this aspect in particular will need higher attention in the future. But how does one rate the environmental information, needed to assess investment options and asset management qualities? Which information is essential, and which of the information available is only generating data of secondary or tertiary relevance?

In another session, participants discussed the environmental risks and liabilities in credit and investment decisions in greater detail, using examples from the North American markets.

The location of the meeting inspired an assessment of environmental issues in the financial services sector in Asia, with particular emphasis on Japanese issues and environmental management in Asia as a whole. The similarities and distinctions to the European and American markets were truly interesting since the identification of driving forces and the diversity of those lead to specific responses in the varying national management systems. This encouraged participants to exchange views and experiences which was only possible under the auspices of the UNEP Insurance Industry Initiative and the common goals the members are aiming for.

Finally an overview on the development of the Initiative since 1995 and the implementation strategy for the future for the Environmental Commitment was presented and new ideas discussed.

Clearly we are experiencing a significant resurgence and development of interest in the Initiative. Members are expecting a significantly higher level of activity and are also expecting to play a greater role in determining and executing the activities of the Initiative.

We hope that these proceedings will find not only the readers' interest in the subject areas but will also encourage them and interested companies to join forces with UNEP in order to reduce the environmental risks we have to face in our daily activities and to work together with us for a safer and truly sustainable future.

  The Editors Geneva, Spring 1998

Summary Mr. Yamashita opened the meeting and welcomed participants. He gave a brief introduction to the UNEP Insurance Initiative. He then briefly addressed the question of why environmental issues are relevant to the insurance industry and their financial activities.

The UNEP Insurance Initiative started in the spring of 1995 with five companies participating Gerling-Global from Germany; Swiss Reinsurance Company from Switzerland; General Accident and NPI from the UK; and Storebrand from Norway. These companies formed the Steering Committee of the initiative and companies in other regions were then invited to join. In Japan, our own company, Sumitomo Marine and Fire Insurance Company, agreed to the basic principles of the initiative and I became a member of the Steering Committee. The initiative was also promoted in the United States but, for a variety of reasons (including political ones), no American companies have joined yet.

So why are environmental issues relevant to the insurance industry? The industry itself does not emit any toxic gases and does not create a great amount of pollution. So, in this sense, it would appear that we only have an indirect relationship with environmental issues. But, the fact that insurance companies sell insurance products, including coverage against abnormal weather and pollution – both of which are environmental issues – gives us a direct stake in the environment.

Insurance operations are based on statistics and objective data, and in analyzing the data on greenhouse gases and global warming (issues currently being discussed at the COP3 conference on environmental issues in Kyoto) we are in a position to inform the public about these environmental changes. So it is with this awareness that we have organized this seminar, which brings together speakers from Europe as well as Japan. We all share a common goal – sustainable development. However, the speed and the extent of the activities of the insurance companies viz a viz environmental issues will vary from region to region. We in Japan totally agree with the directions and policy of UNEP and will take into consideration the pace and trends in the Asia Region in actively trying to take a major part in this initiative.

It is a distinct pleasure to welcome you to this second Conference of the UNEP Insurance Initiative on "Environmental Issues in the Financial Services Sector". Many of you have lent us in the UNEP Secretariat a helping hand in structuring the meeting agenda and in identifying key areas of interest. I would like to take this opportunity to express my thanks to the members of UNEP Insurance Steering Committee for all their efforts and to the "Insurance Industry Initiative for the Environment Association" for co-sponsoring this event.

This morning, we have over 200 participating senior officials from leading insurance companies and financial service institutions from Japan and other countries. This level of interest among insurers demonstrates the key importance your industry places on issues like environmental risk management, green investment and climate change prevention and mitigation.

People often ask." why is the insurance sector increasingly getting active in the environmental arena since this industry is not an active polluter?" Well, there are several answers to this question

Environmental risk is business risk for the insurance industry. The sharp increase of claims related to environmental disasters and extreme weather events has shown that there is a need for the insurance industry to address and find manageable answers to problems ranging from local environmental pollution to global climate change. Lossprevention is more advantageous for insurers than paying out claims that could be avoided. This means better understanding of the environment and helping to develop the regulatory framework for the country is also in the insurers’ interest.

Secondly, as a major investor the insurance industry has a responsibility for managing longterm savings prudently. Possible impacts of climate change and other environmental risks on their pension and life investment portfolios cannot be ignored, as some of the sectors in which they invest are particularly vulnerable to environmental problems. Conversely, the growing trend towards environmental investment offers opportunities for the establishment of specialized "green" pension funds.

Thirdly, insurance companies own huge physical assets, for example. about 500 million square feet of building space in the US alone, which corresponds to an energy bill of about $750 million each year. Here insurers have an opportunity to green their internal operations for example by reducing energy consumption through the use of energyefficient heating and cooling, lighting, and computers systems. Experience means that this is an investment that pays off in a very short period of time. Moreover, such a powerful form of "leadership by example" sends an important signal to the market.

The main objective of today’s meeting -- from UNEP’s perspective -- is to facilitate a dialogue and an exchange of views among insurers from leading companies, especially here in Asia. As you know, a tremendous amount of effort is currently underway in assessing and managing the relationship between the environment and the financial services sector. It includes further work by the insurance and re-insurance sectors in quantifying sectorial and regional risks. It also includes greater targeting of investment funds towards the multi-billion dollar market in green goods and services.

Ladies and Gentlemen,

For over 20 years, UNEP -- which serves as the environmental agency of the United Nations -- has worked closely with industry in developing environmental management strategies. In 1991, we started working with a small group of commercial banks to try to understand and put meat to the industry’s "niche" in the environmental agenda. Almost exactly two years ago the "UNEP Statement of Environmental Commitment by the Insurance Industry" was officially launched in Geneva. In the two years since the launch more than 70 insurance companies from 25 countries have signed this statement and committed themselves to incorporating environmental considerations into their operations and adopting best practices. I believe that this is really a very impressive take off and I hope that you can keep up the speed with which you are introducing and implementing the environmental agenda in your industry.

In the past two years we raised the awareness of and interest in this Initiative to the point that there is broad appeal within the industry itself. The logical step was the formation of the Association of insurers in July this year. This is fortunate given UNEP’s resource constraints, human and financial. It means that it is now the right time to move from a small group of individuals being asked to advise UNEP to an industry-led and driven programme that operates in close collaboration with UNEP. As such UNEP will remain an integral part of the process and naturally provides the environmental dimension, but does not on its own run the initiative.

Ladies and Gentlemen,

Many of the world’s leading insurance companies have concluded that insuring risks and preventing accidents go hand-in-hand with a precautionary approach to the environment. They also recognize that their efforts to protect human life and property and prevent catastrophic events can play a vital role in safeguarding the environment for future generations.

We are aware in UNEP that the insurance industry cannot, and should not, be expected to act as an environmental policeforce, monitoring and enforcing compliance of their customers. However, we do believe that the more you as key economic actors know about environmental risks and opportunities, the better. The more you begin to view the environmental sector as an arena to make money, through new and innovative products, or to prevent losing money, by better managing environmental risks, the better. The more the financial services sector integrates environmental considerations into its everyday practice, the closer we will move towards understanding the economic imperative which underlies sustainable development.

There is now a very clear realization that sustainable development will not, and cannot, be achieved, by governments acting alone. We need the expertise of the private sector and it is in the business self-interests of the private sector to understand and capitalize upon quickly moving national and international environmental agendas.

Ladies and Gentlemen,

Many in the business community are asking just how far the green agenda will be pushed forward. Many on the environmental side continue to say that business remains an obstacle to progress. Instead of confrontation, we need to build partnerships, to find solutions together. That is not a hollow slogan, but a call to you for greater input and participation in shaping the development process and clarifying the rules. We need to hear from you on an on-going basis. I think, the more we talk, the greater our understanding will be of the similarities in our concerns.

One example of how environmentalists and the insurance sector join forces is the debate on climate change. The discussion about global warming is often cast as one between capitalists and idealists. Given the spectre of increased natural disasters in a warming world, you will try to dispel this myth at the climate negotiations in Kyoto which coincide with this meeting.

With annual revenues of over $2 trillion about fourtimes that of the oil industry your concerns are hard to ignore. Natural disasters represent 85% of insured catastrophe losses globally, or $12.4 billion in 1995. These losses are on the rise. For example, average yearly inflationadjusted insured losses from windstorms increased by twentyfold between the 1960s and 1990s. According to the Reinsurance Association of America, nearly 50% of the insured losses from natural catastrophes during the past 40 years have been incurred since 1990.

The increase in such losses is certainly due in part to demographic trends. However, you are increasingly concerned about the possibility of a linkage between climate change and the frequency and intensity of catastrophic windstorm, wildfire, hailstorm, mudslide, flooding and drought events, and rightly so. Your sector is also at risk from climatechange impacts on human health, such as the predicted spread of malaria and other vectorborne diseases, urban heat catastrophes, and food supply disruptions.

Recent news of accidents due to the widespread fires caused by the unfortunate combination of deforestation and drought in Indonesia, and the threat of major weatherrelated disasters due to El Nino are the kinds of events that insurers fear will become more frequent if society continues to emit greenhouse gases into the atmosphere at the current rate.

The first public statements by insurers on the topic of global climate change date back nearly a decade. Munich Re, the world's largest reinsurer, was among the first voices. Swiss Re published a report in 1994 stating that "the phenomenon of climatic change is not some vague threat [...] Human intervention in the natural climatic system could accelerate global climatic change to such an extent that society might no longer be able to adapt quickly enough".

Already last year in Geneva the UNEP Insurance Initiative decided to take a proactive stand with respect to climate change and issued a first position paper on "Insurance and Climate Change" in which you called upon governments to agree on early and substantial reductions of greenhouse gas emissions. This was the first time ever that a leading industry voiced its concerns about the drastic economic impacts global warming can have if we do not succeed in reducing the emissions of greenhouse gases. Later this week you will launch your second position paper at a special workshop in Kyoto.

We at UNEP are convinced that the greening of the financial services sector is of critical importance in building sustainable development. It is imperative that environmental considerations be integrated into how business decisions are made, day in and day out because it makes solid business sense. The UNEP Insurance Initiative is a very good example in proving that a partnership between public and private sector can work together and produce some impressive results.

Ladies and Gentlemen,

We obviously have a very full and tight agenda for today. I am now looking forward to a day of interesting presentations and constructive discussion and I wish to thank you for your attention.

Summary Mr. Kato summarized the activities of the Keidanren (the Japanese Federation of Economic Organizations) in seeking environmental commitments from industries. To date, the financial services sector (with the exception of the non-life insurance industry) has been lagging behind in its environmental efforts, despite some bold statements from top management of several companies. Five suggestions were put forward for insurance companies to contribute to environmental problem solving (i) reducing the environmental load caused by their own operations; (ii) promoting green activities through their lending and investment operations; (iii) undertaking green procurement; (iv) encouraging voluntary activities among employees; and (v) helping promote international cooperation and contribution.

As Ms. Dowdeswell has mentioned, about a decade ago, the global environment emerged as a new agenda for the international community. This was in the context of a rapidly rising world population and sever poverty in many developing nations. Our current capacities in science and technology, coupled with the greed of humankind, has put so much – possibly irreversible - pressure on the global environment and has caused a series of global environmental problems, the most serious one being global warming.

Several pioneering companies in Japan are actively seeking ways to put less pressure on environment, by promoting technological innovation. For instance, hybrid automobiles were recently presented at the motor show here, as examples of environmentally friendly technology. A great deal of effort is being put into the creation of cyclical systems and the ‘zero emission campaign’ being promoted by the United Nations has received a lot of attention in Japan.

My presentation will refer to the financial services sector in general, including both insurance and banking. The development of Japanese financial institutions seems to me to be happening at a rather slow pace. In fact, I am rather concerned about the fact that the Japanese industry is lagging behind, compared to American or European financial institutions. I am also concerned about the fact that, within Japan, the Japanese financial industry, with the exception of the non-life insurance industry, is lagging behind other industrial sectors.

I would like to highlight the major developments taking place within the industry, with the emergence of the global environment. About six years ago, in April 1991, Keidanren (the Japanese Federation of Economic Organizations) issued the Global Environment Charter, incorporating a very lofty philosophy and very practical guidelines. I would like to refer here to the ideals proposed. The preamble of the Charter states that if companies take serious efforts to resolve environmental problems, they will gain credibility and empathy from society and will be able to build a new symbiotic relationship with consumers and society, thereby promoting healthy development of the Japanese economy. The following basic ideals are then outlined. Companies’ existence is deeply intertwined not only with the regional society but also the global environment. Corporate activities must respect humanity and contribute to a futuristic society in which environmental preservation can be achieved. The aim is to realize a society where sustainable development is based on mutual trust between companies and consumers.

Five years later, in July 1996, Keidanren issued an appeal for the environment, which stated that we need to review our consumption of natural resources and look to eco efficiency, environmental ethics, and voluntary efforts to preserve the environment. In September of this year, Keidanren presented a Voluntary Action Plan, for which 37 industries have registered, including the industrial sectors of construction, housing, chemicals, pharmaceuticals, cement, and steel, and several tertiary industries. Service industries are also represented, including department stores, chain stores, and real estate industries. Yet, from the financial sector, only the non-life insurance industry is included, and the banking sector, the life insurance industry, and the securities industry are all absent from this effort. We can interpret this to mean that these sectors are quite inactive with respect to the environment.

Looking briefly at the commitments of other industries, the automotive industry for example aims to reduce their energy consumption in the manufacturing of automobiles, and to reduce the CO2 emissions of vehicles. The disposal of waste is to be reduced to less than 40 per cent of the 1990 level by the year 2000. Certain chemical substances, including trichloroethylene and tetrachloroethylene, are to be completely abolished, with a target date of end 1999.

The electricity and gas industries have also taken measures to counteract global warming and are trying to reduce waste disposal. They have set quantitative targets, and made industry-wide commitments.

So, what kind of efforts are they calling for in the non-life insurance industry? Well, they are trying to decrease the use of paper resources and electric resources, while increasing the amount of waste recycled and decrease the amount of waste disposed.

Now I would like to quote from some of the recent statements made by business leaders here in Japan, as it is still quite rare to hear top management of national institutions talking so enthusiastically about environmental issues.

Firstly, the current Chairman of Keidanren and also the Chairman of Toyota Motors, Mr. Shoichiro Toyota mentioned in the International Electric Car Symposium held in October 1996 in Osaka that the 21st Century would, indeed, become a "Century of Environment". Of course, that type of statement is not a surprise to us, but he went on to say something quite surprising. He said that several types of value will come to dominate the 21st Century, including the conservation of the global environment as a top priority.

Mr. Inamori of Kyocera also made an interesting remark in February this year at one of the commemorative symposiums of Mainichi Shimbun Newspaper Company. He said that if business people are really to become aware of the global environmental crisis, we need to drastically change the economic system that has conventionally praised mass production and mass consumption. Of course, this will bring pain, but that is what this serious challenge means to us, as Japan has become an affluent country. On the basis of the Buddhist type of philosophy of acknowledging what is sufficient, we should re-examine the current economic system from a new perspective of living in harmony with the environment. Rather than the present throwaway economy, we need to develop an economy that respects the environment. This new economy will still be able to support the vital economic activities, even though we will not attain the same level of high economic growth as in the past.

The final quote I would like to cite is one made by Chairman Fujimura of Ebara Company, who has been very active in promoting the ‘Zero Emission Movement’.. He said that we have been living a very affluent lifestyle that has created a heavy burden on the global environment. Twenty per cent of the global population owns 83 per cent of the world income and in this information-oriented era where information can be transmitted instantaneously around the world, the remaining 80 percent of the global population will also be calling for the same type of affluence. However, it seems quite impossible for these people to follow the same economic growth in terms of their consumption of resources and the environment. Mr. Fujimura also stated that developed countries need to establish a sustainable social system.

Despite these positive statements, there is still a lack of awareness of environmental issues among most financial institutions in Japan. The National Environment Research Institute of the Environment Agency commissioned the Sumitomo Life Research Institute to do a survey on the Influence of Consumer Awareness and Behaviour Regarding Global Environmental Issues on Corporate Strategy, and the results of this survey have been publicly announced. I have been involved in the planning and analysis of this survey, which has revealed a great deal of variation between industries in the awareness and behaviour of companies toward global environmental issues. The electric power companies, gas companies, heat supply companies, manufacturers and construction companies, for example, have a high level of awareness about environmental issues and the environmental burden caused by their own activities, and they have been taking measures to counteract these negative impacts.

On the other hand, industries such as the transport, communication, financial, insurance, and real estate service industries are less interested in environmental issues and are more passive in their response to environmental problems.

The financial and insurance sector as a whole has a poor level of awareness and activity with respect to the environment. Forty percent of the financial service companies surveyed think that their company's activities do not place a burden on the environment and a large proportion said that they don't take account of environmental issues since their operations do not lead to environmental problems.

On the other hand, 70 per cent of the financial service companies surveyed said that their companies are participating in environment-related social contributions, and more than 80 per cent said that they carry out energy conservation and recycling activities.

Of course, finance and insurance sector companies do not directly create pollution, and so there is a tendency for them to treat environmental issues quite separately from their own operations. However, their own financing and investment activities do have a great impact on economic trends and corporate activity, and because of this influence they also have great potential to help solve global environmental issues.

If the 21st Century is to be a Century of the Environment, it is now time for the financial sector to become actively involved in global environmental issues. Ms. Dowdeswell said that environmental risk is a business risk, and I think that sums it up.

What then can the financial sector do to contribute to environmental problem solving? I would like to make five suggestions.

The first suggestion is to reduce the environmental load caused by the companies’ own business operations. When it comes to CO2 reduction, for example, all industries must participate, not only the manufacturing industry. Financial institutions can also cut down the energy consumed in their offices. This includes reducing the amount of paper and water resources they use and sorting and reusing waste. I think many companies are already participating in these kinds of programmes, and we expect others to get involved too. In addition, there is the so-called ISO 14000 series, on environment management and environmental auditing systems, which need to be established. Some of you may consider these standards apply only to manufacturers, but local governments are already trying to introduce these environmental auditing systems, and one major trading house here in Japan is also trying to apply for the ISO 14000 Certificate. At the very least, financial service institutions should make an executive level person responsible for environmental issues, or should establish a small environmental management department, and train staff on environmental issues.

The second suggestion is perhaps the most important one and is particularly relevant to the financial sector. It is to promote green activities within the industry through its lending and financing activities. Environmental problems can result in non-performing loans – an issue with which many of you have probably been preoccupied. The amount of damage caused by climate change is one example. For life insurance companies, you may think that your life insurance statistics chart will not change. But this would be a mistake. With the heat stress or the heat pollution caused by global warming, diseases such as malaria that were thought to have been eradicated in Japan may come back. And the increased ultraviolet radiation levels can bring increasing levels of risk.

In the former Soviet region, high levels of pollution in the past have contributed to a rapidly decreasing average age of the population, and the life insurance statistics chart is changing rapidly. The impacts of global warming will also change the insurance statistics, and we cannot underestimate these kinds of trends.

So, the financial sector has an important role to play in sorting out the good quality private sector companies. I think that in the 21st Century companies will be judged partly on the criterion of their environmental efforts, so investing in top performing companies will be reflected in high levels of profitability of the financial sector itself. As an influential sector, the financial sector has this type of social responsibility. We estimate that there are approximately 1,200 trillion yen worth of deposits in the financial institutions, and we can use these resources in a very useful way, that may bring benefits to the environment as well.

The third suggestion concerns the so-called green procurement. Specifically, the paper that is used in your offices should be recycled paper, and the cars used for business purposes should be energy efficient hybrid cars. Company directors should also set an example by using hybrid cars themselves.

The fourth suggestion I would like to make is to encourage the participation of employees in volunteer activities and to support environmental NGOs.

The fifth suggestion is to help promote international contribution. The financial sector is active globally, and Japanese financial institutions have operations in many developed countries. Through these overseas operations, we hope that you will actively seek international cooperation and contribution. Recent issues here in Japan have caused a great deal of mistrust toward financial institutions, and international cooperation may be able to offset this trend.

RESPONSES OF THE INSURANCE INDUSTRY TO THE POSSIBLE IMPACTS OF CLIMATE CHANGE

Summary Mr. Dlugolecki outlined the impacts caused by climate changes in history and the likely impacts of global warming. There are three areas in which the climate change issue is relevant to insurance property damage, risk management, and investment. The insurance industry can respond in four ways to the dramatic increases being seen in the amount of property damage caused by natural catastrophes by limiting the risk; controlling the damage; transferring the risk; and charging the right price. Climate change is going to speed up. Even in the absence of complete information, the insurance industry must follow the precautionary principle to avoid the risk of serious harm.

 From history, we know that climate can change naturally, without any interference from man. Although this makes it difficult for us to know just how quickly we are changing the climate, it also allows us to see what exactly happens when the climate changes. For example, in the last Ice Age, the temperature was only 5 degrees Centigrade cooler around the world, on average, than it is today, so a difference of 5 degrees can make an enormous impact. But we can also see the effect of smaller differences if you look at an area with which I am familiar - Europe. Eight hundred years ago, the temperature was about 1 degree warmer than it is today. At that time, people could farm on the tops of all the hills. It was easy to start a new farm, and the daughters of the farmers would leave the farm to set up their own families at perhaps the age of 14 or 15. The sea was warmer and the Vikings were able to discover America. Then, 400 years ago, the temperature became 1 degree cooler than it is today, and we can see a total reversal of all these patterns. The farms on the hilltops were abandoned. The daughters of the farmers needed to work on the farm until perhaps they were 30 years old, because the productivity of the land was so low. And, as the sea became cooler, all the Viking colonies in America and Greenland perished. For Europe, with its agricultural society, a slight warming was a benefit, but today we are in quite a different situation, and Europe is not a good example for the whole world.

We already know that since 1880 the temperature has increased by 0.6 degrees Centigrade, and the heat-retaining gases have increased by about 50 percent above their natural level.

In 1988, the United Nations became concerned about this and launched an initiative called IPCC, the Intergovernmental Panel on Climate Change. This carried out its work in three groups. The First Group concluded that the effect of the additional gas would be to warm up the atmosphere quite quickly, and to increase the sea level, and that these changes would accelerate. The sea level increase would not happen at a uniform pace but would become faster like a snowball running downhill.

Working Group II concluded that the natural world would be seriously affected, as would agriculture, particularly in coastal zones and in less-developed countries. Working Group III said it was necessary to start to limit the greenhouse gases, plan for the climate changes, carry out a programme of research and education, and that the wealthy countries need to assist the less-developed countries.

The IPCC produced a second report in 1995, and I was very honoured to be asked to lead the Financial Services Chapter, which appeared for the first time. This report concluded that human influence on the global climate could already be observed. It said that atmospheric and oceanic circulation patterns would change, climate zones would shift, and the water cycle of drought and rain would also change. Extreme events such as storms, tornados, and droughts, would become more likely in certain areas. There would be a real risk of dramatically increased property damage, which would have serious implications for property insurers, and the effect would not be uniform. When we talk about global warming, it is important to realize that certain areas will be economically disadvantaged, particularly islands and areas near coasts. So, in some senses, Japan and the UK are areas which need to consider these problems very seriously.

But, the report also went on to say there will be significant indirect effects, too, because, as the politicians act to control greenhouse gases, this will bring about changes in the energy and transport industries, so there will be big opportunities or challenges for investment houses. Hence the importance of planning for the longterm view. Unfortunately, of course, most markets work on a very shortterm view.

So, what is the relevance of climate change to insurance? The answer lies in the following three areas property damage, risk management, and investment Looking first at property damage, some of the risks here will change quite substantially. There will be more drought and, therefore, certain types of soil will be liable to subsidence, as is already happening very frequently in the United Kingdom. Because the rainfall patterns will also change, there will be occasional very strong downpours, causing flash floods. We have already seen many such floods in Europe and, of course, with the current abnormal behaviour of El Nino, we are observing these patterns developing in tropical areas.

Scientists cannot yet be specific about the behaviour of storms, but there is no reason to be complacent. Certainly, as it becomes drier, there will be more forest fires. In the northern areas, we may benefit slightly from the fact that the nights will be warmer and so there will be less freeze events, but we may also be less prepared for the changes and the damage could be very substantial. But the most important issue will be coastal problems because most of the big storms come from the sea, and the sea level is gradually rising.

A recent trend that has caused a great deal of concern in the property insurance industry is the rapid increase in the amount of property damage caused by abnormal weather, in the last twenty years. Much of this damage is uninsured, so the insurance industry is helping to deal with only part of this problem. 1992 was a particularly interesting year as severe damage occurred in the United States as a result of hurricane ‘Andrew’, so in that year much of the damage was insured. But in most years the majority of the costs of property damage are covered by the private individual or the government.

I mentioned coastal problems, and if we look at one particular country, Bangladesh, we can see that enormous areas of this country are at risk, and as the water level rises this risk will be extremely serious. One conclusion that the IPCC report made, was that these kinds of patterns create a risk of large-scale migration.

Insurers are already thinking about the costs that might arise from damage caused by global warming. It is difficult to make comparisons between countries because the systems of insurance are so different, but current models show that in the United States, a major storm could cost 100 billion dollars of damage in 100 hours, about half of which would be insured, i.e. 50 billion dollars. This is an amazing figure that people still do not really understand and are not planning for. To make this figure more real consider that the cost of cleaning up environmental damage in the United States over the last 100 years or so has been roughly 100 billion dollars, allowing for discounting future costs. And so we see that one storm in 100 hours could cost as much as 100 years of industrial misbehaviour.

Why does this kind of thing happen? Why is it so important not to take chances? The insurance industry analyzes storms very carefully to understand their behaviour and their consequences. As the wind speed of a storm increases, the amount (and value) of property damage has been shown to increase at a much faster rate. We know that storms in the tropics can cause damage of 10% to 20% of the value of the buildings. So, for example, if we look at a storm with a windspeed of 200 kilometres per hour, then a 10 percent increase in speed, to 220 kilometres per hour, would increase the damage by 150 percent, to as much as 50% of the property values. This is why the insurance industry feels so strongly that it is important for governments to understand these patterns of behaviour, and for the public and the media to be aware of them also.

How does the insurance industry tackle these problems? Normally, we have four methods. First of all, we may try to limit the risk, for example, by deductibles, or selective underwriting, but we are now finding that governments favour wide coverage. In Florida, for example, the state government did not allow insurers to cancel policies or even to charge what they considered a commercially viable rate. We can also try to improve the risks, but it is very difficult to visit each building or factory to make safety recommendations.

Secondly, after the event, we can try to control the damage. I would say that here the insurance industry has very much improved its performance, and so we now have services available 24 hours per day, and we try to use approved repairers who will finish the work to a good standard.

The third step, that we used to have, was to transfer the risk to a reinsurer, but now they also are aware of the increased risks, and so this step is not so feasible any more. It may be that the capital markets will begin to take an involvement in this area, and this may strengthen the possibility of transferring the risk.

Finally, of course, one can charge the right price, but here we must recognize that we are in a competitive market and companies are reluctant to lose their share of the market. And, there is a very strong tendency for the human race to be optimistic and for example, after two or three years have passed without a major storm, people may feel that similar storms are very unlikely.

Most importantly, we are beginning to understand in the insurance sector that the frequency or ‘return period’ of these events is changing quickly. This is a very important message, not just for the insurance industry but for everyone else involved in activities with long time scales, for example, those responsible for designing buildings, planning roads and, of course, those in the water industry, because engineers traditionally use statistics of the last 30 or 50 years to plan ahead. What we are saying is that this is an inaccurate method which will cost you a lot of money in the future because you are planning for the past, not for the future, and the future will be quite different.

Turning then to risk management, I would simply like to say that the insurance industry provides a package of risk management services, as it has expertise in hazard evaluation, in the transfer of risk and, most importantly, in recovery after the disaster. So, because of these skills, there is tremendous scope for combining the business skills which we have in the insurance sector with public sector skills and resources.

For example, before the catastrophe, the insurance industry is involved in marketing, in assessing and improving the risks, in setting a fair price to reflect the difference in risks, and also in collecting the funds to pay for the damage. After the event, the insurers are good at mobilizing international resources, assessing the cost of the damage, controlling the contractors, communicating with those people who have been disrupted by the catastrophe and, of course, providing the funds to pay for the damage and repair. In general, it is an efficient method because you can use the administration system already in existence. The system is also accustomed to fighting fraud and, certainly, after a catastrophe, there is often much dishonesty. The insurance industry helps to release public resources, and it brings an economic discipline of charging a price to reflect the risk. Interestingly, in the United States they have this kind of system for dealing with flood insurance where the insurers do the administration, but the government pays for the damage.

Moving on to investment, it is expected that there will be major implications for the investment sector. Scientists in the IPCC report point out that there will be crop failures, there will be a need for much more flood defense, and there will, of course, be emission controls. There will also be a need for new energy technologies. Transportation policy will have to change, as will consumer behaviour. In Scotland, for example, perhaps we will not need to wear jerseys any more!

And, so, there will be a shift in economic power. There will be new lifestyles. Even, as I said, with Bangladesh and Egypt and China, there may be population migrations, and because of all this the investment industry will have to adapt to these changes. Obviously, the wise company will be the one that plans ahead.

And, so, now let me turn very briefly to what the insurance industry is trying to do about this. The first important step is that we are assisting research on weather patterns. Scientists and the governments run the computers, but we can provide important economic information on the cost of the damage. Secondly, we help to identify the key hazard areas, which will be subject to flooding, so that the government can start to prepare these areas for the future. Thirdly, we carry out a programme of educating property stakeholders the architects, the engineers, the governments, and also the banks, because the banks lend huge amounts of money for property, without understanding what risks that property may face.

On a practical basis, we wish to co-operate with the government and professionals to improve the physical risks, to provide essential recovery after catastrophes, to build up reserves, and to stop people making the risk worse by developing land in hazardous areas. This is an international problem, and so we felt very strongly that we needed to create an international voice to influence the policymakers in the international negotiations, and this is why we have joined together to form this UNEP Initiative. In particular, we have taken the step, which some people think is quite a bold one, of lobbying about the importance of emission controls. I would like to say a little bit about that.

Some industries and skeptics say that the climate change may not happen. The computer models are not yet refined. They say the current changes are perhaps natural variations. They say there will be benefits as well as damage, and that prevention may cost more than allowing the climate to change. To us as insurers, these seem very risky arguments. For example, the ocean warms extremely slowly. Once it begins to change its temperature, it takes many hundreds of years to reverse the process. The strongest current is the one which travels from the Atlantic, down to Africa, past India, and ends at Japan. The water in that current takes 800 years to complete its journey, and so we are talking about a vast, very slow machine, very difficult to stop. In addition, we do not understand how climate works. It is very surprising to see the behaviour of El Nino just now. In the past, these events happened once every four or five years. Now, we have had one almost every year since 1990. This is a very remarkable change, a very serious change for countries like Indonesia, but we do not understand why it has happened or what will happen next. Also, although human beings can plan for climate change, the natural world cannot do so, and so there could be very major changes to the natural world, which we will not be able to prevent. Finally, even if it were true to say that some benefits will occur, it is important to recognize that there will be some very big losers in some areas, for example, poor countries, small islands, and some species of plants and animals.

And, so, we concluded that it was necessary to try to have an influence on climate policy, and last year in Geneva we presented our position statement, which said that emissions needed to be limited and that insurers had a valid interest and valuable input to this process. Tomorrow we expect to release our updated position statement on climate change, which we will formally present on Friday, but we feel it is important to release it beforehand so that people can read it, understand it, and ask us questions about it.

Our philosophy on climate change is simple. We must follow the precautionary principle to avoid significant risk of serious harm. And so this means, as every businessman knows, that action is necessary even when you are uncertain about the detail. No business ever has 100 percent of the information it requires. Every day in business, we take decisions without full information. Every person takes decisions every day without complete information. The most efficient precaution is obviously to reduce the emissions of greenhouse gases but, at the same time, we must prepare for the damage which will happen, and this will require a common effort from all society through enhanced public discussion and international public agreement.

And so, to summarize the points I have made. Firstly, we can see that weather patterns are changing. Secondly, I have shown you from historical analysis that small changes have very big effects. And, so, if we look forward, what do I predict? Climate change will speed up. We are only just beginning to see the effects. It will have major consequences for insurers, and longterm international effects beyond insurance.

AND THE FINANCIAL SERVICES SECTOR CURRENT STATUS OF EMAS AND ISO 14000 AND THEIR IMPLEMENTATION IN EUROPE

Summary Integrating ecological factors into normal management systems will continue to gain in importance as companies realise they can thereby cut costs, lessen risks and maximise earnings potential. An efficient way to do the right things in the right way is the implementation of an environmental management system according the ISO 14001 certificate or EMAS accreditations guidelines. EMAS set the pace, but ISO 14001 will be soon the standard of worldwide operating organisations.

Environmental management the aim of every environmentallyaware company is to improve its environmental record, achieving the same or higher economic productivity whilst using less energy and fewer resources and reducing emissions. Or, to put it more succinctly good environmental management aims to enhance a company's ecological efficiency.

Environmental management systems a company can continually improve its environmental performance by systematically regulating its structures, working procedures and environmental protection responsibilities. Such a package of measures is known as an environmental management system (EMS).

Norms structural changes can limit the effectiveness of an EMS. Norms are an important way of counteracting such tendencies and thus of ensuring that ecological efficiency does not deteriorate.

By the beginning of October 1997 over 2,300 ISO certificates and European Union EMAS accreditations had been awarded a remarkable success, given that both norms are new.

A breakdown of EMAS accreditations by sector shows the chemicals industry at the front of the field with 165 accreditations, followed by metal production and processing (158) and office machinery and data processing equipment (144). The most surprising fact here is that a number of industries which have a profound environmental impact (e.g. construction, power utilities) are poorly represented.

As far as company size is concerned and here I have only the ISO figures for Switzerland at hand 26% of the accredited firms have more than 250 employees, 43% have between 50 and 250 employees, and 31% are companies with fewer than 50 on the payroll. It is therefore evident that smaller businesses account for an astonishingly high proportion of all accredited companies, contrary to the oftenvoiced fears that the ISO 14001 standard is suitable only for the major league players.

A regional breakdown of the EMAS and ISO figures reveals a northsouth divide, both in Europe as a whole and within Switzerland. A detailed comparison of the EMAS and ISO norms is given below.

For companies operating in increasingly interconnected and global markets, assessing environmental impact can be a fiendishly complex matter. In most cases, the oldstyle piecemeal approach is no longer sufficient when it comes to improving companies' environmental performance. What is needed now is a systematic approach, integrated wherever possible into the firm's general management system.

In practice, the development of an environmental management system is often seen as a necessary evil, something to be 'got out of the way' with as little time, effort and money as possible. Of course, any approach based on such a view will focus primarily on cost considerations, seeing the EMSs actual benefits to the company as minimal. On closer examination, however, an EMS may be seen to bring four main types of benefit.

Legal safeguards A company has a legal duty to comply with all applicable environmental legislation. Such compliance is also a prerequisite of environmental certification. An EMS can be useful in this respect, since it involves the establishment of systematic checking and monitoring procedures designed to ensure that all relevant legal regulations are being observed. The resultant legal protection that the EMS offers is the first benefit for the company.

Risk avoidance The second way in which an EMS yields rewards for the company is in connection with risk avoidance and limitation. The EMS can be used to systematically record all risks associated with the company's business activities and to implement appropriate measures in this respect. One highly beneficial sideeffect of putting an EMS in place is that, in the process, all staff involved are sensitised to the risks attached to certain activities and trained accordingly.

Cost benefits Using resources such as energy, water and hazardous substances as economically as possible not only leads to greater resource efficiency important from an ecological point of view but also brings cost savings in targeted areas. Production processes that generate the minimum emissions and waste are not only less harmful to the environment, but also benefit the bottom line by reducing waste and emissionrelated costs. The range of measures encompassed by an EMS allows such savings to be exploited systematically.

Competitive advantages Nowadays there are many different ways in which ecological factors can affect a company's competitiveness. For instance, legislation may make certain materials or activities (e.g. VOC emissions) more expensive, ban them altogether (e.g. PVC drink packaging) or impose regulatory restrictions (e.g. the obligation to take back used products, recycling quotas, the compulsory sorting of waste for disposal purposes). But there is also evidence of the potential which exists in many markets for image differentiation and profiling one's own products or services by means of a marketing strategy that emphasises ecological awareness. For example, one only has to think of the proliferation of biological products in the food and beverage and textile industries or of biodegradable packaging and chlorinefree cellulose bleaches.

One benefit that can be realised independently of the aforementioned factors comes from the integration of the EMS into other management systems. Largescale synergies can be exploited if the EMS is integrated fully into a company's general management system, enabling sound environmental management practice to be factored into the planning and control of business procedures and into the delineation of corporate responsibilities.

Having established beyond all doubt the advantages of an EMS, this still leaves the question of what benefits accreditation brings.

* Accreditation marks the successful culmination of a lengthy process, a bit like passing an examination at the end of a course of study, and thus constitutes confirmation that the subject matter has been understood and mastered. Often, it is precisely this 'scrutiny' that provides the impetus necessary to achieve optimal environmental management.

* Accreditation is a valuable aid as far as external communications are concerned.

* An environmental audit, whereby the system is periodically reviewed by impartial environmental specialists, can assist the further development of an EMS.

An EMS also offers increasingly important benefits such as lower insurance premiums, easier access to loans, improved market opportunities, enhanced performance, etc

There are a number of national and international standards which set out the criteria for an environmental management system

* ISO 14001

* the EU's EMAS regulation (Ordinance 1836/93)

* British Standard BS 7750

* ICC Business Charter/WICE

* Responsible Care (in the chemicals industry)

The following section deals only with ISO 14001 and EMAS.

EMAS has been in force in the EU member states since 10 April 1995. EMAS is currently limited to specific manufacturing sectors. The ISO 14001 norm has been in effect since September 1996.

Assessment/accreditation                                             Since April 1995                                            Since September 1996

Applicability                                                                    Companies in EU member states             Worldwide

Continuous improvement                                            Reduction in environmental impact    Improvement of environmental management system

Degree of detail                                                            Highly detailed requirements thanks        Requirements and procedures

                                                                                                to comprehensive attachments         set out in general terms

Product inclusion                                                             Subordinated Explicitly included

Scope of accreditation                                                     Location/site                                              Organisation

Eligibility                                                                     Currently, manufacturing firms only.        All organisations

                                                                                            In Austria, some service sector                    (commerce, manufacturing, services)

                                                                                            companies (e.g. banks) also included

                                                                                            thanks to supplementary

                                                                                            national regulations

Environmental reporting                                             Validated public environmental                      Institution of appropriate procedures

                                                                                            statement as core component                 publication of environmental policy

The comprehensive, detailed nature of EMAS tends to be more appropriate to German companies than the more general ISO 14001 norm with its essentially AngloSaxon approach and its emphasis on examining the functional effectiveness of environmental management systems. As far as banks are concerned, there are strong arguments in favour of gearing the EMS to the ISO 14001 standard it has a simpler structure, the scope of the accreditation is better suited to extensive branch networks, and it clearly includes individual products. The fact that ISO 14001 does not provide for compulsory environmental reporting would seem to be a significant flaw in terms of the system's transparency and credibility. In practice, however, this is not really a problem, since all the banks that are known to have been accredited to date have voluntarily published environmental performance evaluations or reports.

The EU's EMAS system allows for supplementary provisions at national level. Austria seized this opportunity back in the autumn of 1996, allowing banks to participate in EMAS. A similar regulation is scheduled to enter into force in Germany next year. In a parallel development, talks are being held on the establishment of a financial environmental management and audit scheme at EU level, and are expected to bear fruit in the year 2000. However, by that time the EMAS and ISO 14001 standards could well have been partly or completely harmonised, since globally active companies are anxious to see internationally valid standards. One option that has already been mooted is to treat EMAS as a kind of 'de luxe ISO'.

The financial service provider's perspective the benefits of having clients with environmental accreditation

When it comes to lending activities, a bank is interested first and foremost in those environmental factors which may give rise to credit risks and, secondarily, in any market opportunities that may arise. At the moment, however, an accredited EMS says precious little about the ways in which environmental management affects a company's balance sheet and profits. In particular, it offers little insight into a company's choice of location and procedures, its legal obligations and liability risks, the degree of insurance cover, job security or the existence of contaminated sites.

Nevertheless, from the bank's point of view a prospective client with an accredited EMS offers several advantages. The essential environmental data has already been collated and the company's management has demonstrated a degree of environmental awareness that enhances its credibility. Particularly in the case of prospective borrowers in sectors where environmental impact is a major factor (and where ecological risks therefore constitute a large proportion of the overall credit risk), an accredited EMS tells the bank that the company is discharging its environmental responsibilities, is aware of the risks it runs and is committed to managing these risks in a professional manner. However, the lending bank's decision will always be determined primarily by its overall policy on risk and business opportunities.

To sum up accreditation facilitates the bank's assessment of the ecological risks associated with a prospective client, but cannot replace that assessment!

As one of the leading global financial service companies, Credit Suisse Group is present in every continent and in all the world's leading financial centres. At the beginning of 1997 in 470 locations worldwide some 35,000 people work for the Group, of whom 24,000 work in 370 locations in Switzerland. Since the beginning of April 1997, these Swiss offices have been operating with an environmental management system which has been certified as conforming with ISO 14001 the first time such a certificate has been granted to a major bank.

In mid of 1997 Credit Suisse Group and Winterthur Insurance merged. As Winterthur will continue to operate as an independent company within the combined Credit Suisse Group, the "merger" of the two existing environmental management systems is not yet decided but discussed.

Note the following comments refer primarily to Credit Suisse Group offices in Switzerland. Since the Group carries out retail banking operations only in Switzerland, only there does a tightknit Credit Suisse branch network exist. This network employs the majority of the Group's workforce and operates its largescale computing centres. Thus, in environmental terms, Credit Suisse Group's Swiss operations present the biggest challenge as well as providing the largest scope for action.

The Credit Suisse environmental management system has been built up and expanded in successive stages

* Credit Suisse's first major energysaving programme ran between 1977 and 1986 as a reaction to a series of oil crises.

* In the 1980s, steep increases in refuse disposal charges prompted Credit Suisse to devise its first waste management strategies. In the same period the first external audits (e.g. of chemicals used by Credit Suisse) were carried out by external specialists.

* Since 1991 the Environment working group has been headed by a Member of the Executive Board.

* Credit Suisse Group's current environmental management system is described in Figure 9. For its Swiss offices the system has been certified as conforming with the environmental management standard ISO 14001.

Initially, action on environmental issues was taken in response to economic factors. In time, however, we have come to recognise the value of a proactive, fully integrated approach.

The ISO 14001 certification represents external confirmation that we are doing the right things in the right way. In particular, it means that we can demonstrate that our environmental performance is continually improving. This in turn makes us more attractive to investors and portfolio managers with 'green' leanings.

If a bank makes sure that its own operations are carried out in an environmentally friendly manner and talks openly about this, then its employees will tend to pick up good habits and carry them beyond the confines of the bank, thereby spreading ecological awareness and acting as ambassadors for environmental improvement.

We do confirm the substantial benefits offered by an accreditation I spoke before

* In the last months before the accreditation audits we really got this 'scrutiny' that provides the impetus necessary to achieve optimal environmental management.

* Accreditation was a valuable aid as far as external communications are concerned in the media and within the discussions with our outsourcing partners what we think about good management practise.

* The reviews by impartial environmental specialists already assisted the further development of our EMS.

SchmidSchönbein, O. presentation to sanu seminar 'Umweltbericht (Environmental report)', Zurich, 2 October 1997.

Dyllick, T. 'Wo stehen wir bezüglich Umweltmanagementsystemen? (Where do we stand with regard to environmental management systems?)', presentation to the annual meeting of the SAQ, Berne, 24 June 1997.

Bieri, E. 'ISO 14001 accreditation benefits, requirements, costs' in UMWELTSCHUTZ 7, August 1997.

Häfliger, B. 'Ergänzung mit UmweltmanagementSystem (Environmental management systems as a management tool)', in Orientierung from CREDIT SUISSE.

EMAS = Environmental Management and Audit Scheme; Council Regulation (EEC) No 1836/93 of 29 June 1993 allowing voluntary participation by companies in the industrial sector in a Community ecomanagement and audit scheme.

ISO 14001 Environmental management systems specifications with guidance for use.

Rauberger, R./Burzler, M. 'Umweltschutz bei Banken (Environmental management in banks)' in UmweltschutzManagement Erg. Lfg 7, December 1996.

Nöthiger, M./Jaeggi, O. 'Der Nutzen von Umweltmanagementsystemen aus Sicht der Bank (The benefits of environmental management systems from the bank's perspective)' in Management & Qualität, 1997.

RELEVANCE OF ENVIRONMENTAL PERFORMANCE TO CORPORATE VALUE

Summary Ms. Tennant highlighted what she saw as the two biggest challenges to the insurance industry in relation to the environment environmental competency (which takes time to build), and competition (which will increase). The performance of green funds depends on the skills of the individual houses involved. NPI Global Care Investments has incorporated environmental issues into its investment analysis process and has seen its funds outperform the market. In assessing possible investments, they look for industries of the future (including companies in pollution control, renewable energies and mass transit), and ‘best of class’ companies Specific eco and social indicators are considered to identify these ‘best of class’ companies. The aim is to identify which companies are taking environmental and social issues seriously.

 I would like to start by explaining a little bit about my company, because it is relevant to the topic. NPI is a mutual company established in 1835, providing pensions and investment products. Assets under management exceed 18 billion U.S. dollars. We are in the business of longterm investment strategies because, as many of you in the pension industry will know, a pension sold today has to delivered payouts, maybe 2030 years on. So we have to have a longterm perspective, and that is why the environment is such a crucial issue for us. NPI Global Care Investments specializes in environmental investment, investment for sustainable development. The company established this specialization in 1991.

I will now highlight what I believe to be the two biggest challenges to insurers in relation to the environment, and particularly in relation to investment management. The first concerns environmental competency. It is not possible to become competent on environmental matters overnight. It is a point that I can stress only too strongly, and it is said from our experience. It has taken us over ten years to perfect the business of environmental investment within our own activities, and even still we have room for improvement. So, I would draw your attention to the fact that it is very important to start building the capability today.

The second point I wish to make touches on a sensitive subject for people in the Japanese financial services industry, and it is in relation to competition. Environmental investment is not immune to competition. It is no different from other areas of investment, and with your pension sector opening up to international competition I can assure you that overseas competitors will start offering green investment products and pensions if you don't, and even if you do. So, start understanding the business and, more importantly, the marketplace. I think that one of the most telling things that we have done at NPI is to research the marketplace, and individuals’ views on investment in the environment, to get a sense of what it is our clients, the public, want.

Turning now to look at what's going on within environmental investment, I would like to draw attention to Mr. Inamori of Kyocera. His book ‘For Profit, For People’ is a picture of social investment in action. I believe that Japan has a very strong cultural ethos from which to build environmental investment strategies, and I have found, in my own research throughout this part of the world, that the first shoots of environmental investment are budding everywhere, even if it is in different ways. So my guess is that within the next ten years, we will have a list of funds coming from the Asia region that matches the ones in America and Europe.

A total of nearly 16 billion US dollars is now invested in social investment funds in the US. If we look at the amount of money that is invested by institutional funds with some environmental specification, this figure amounts to hundreds of billions of US dollars. America is home to the modern day social investment movement - it was there that the first fund was launched, and it is still the largest market.

If we look at continental Europe,(i.e. excluding the UK) the figure is 426 million deutschemarks and, again, the industry is growing very rapidly. This figure is small compared to the UK market where over £1 billion is believed to be invested in listed green funds. There are over 30 funds in the UK alone. Again, these figures of the listed mutual funds do not reflect the amount of money that is managed by institutional funds.

What about performance? Well, green funds, or social investment funds, however you wish to call them, depend as much on the skills and strengths of individual houses, as any other kind of fund does, and so the performance of green funds is varied. I am, therefore, going to point to our own house record with NPI Global Care Unit Trust, which is the oldest unit trust we have, launched in 1991. It has, over the period, outperformed its benchmark quite considerably. The performance has been 120 per cent, compared to just under 84 percent for the market.

NPI Global Care Income Unit Trust, which has different yield requirements has also outperformed the market, 60 percent against just under 45 percent. Our two pension funds have also outperformed their benchmarks since launch. In the last two years, two of our funds have won industry awards for performance. However, one of the things that I think is important to recognize is not just the fact that we have been outperforming the market, but that there is a consistency and stability of performance in relation to the benchmark. It is worth considering why this might be so, and I want to look a little closer at why we see this is so.

One reason is because our investment process helps to ensure that stocks which are inherently volatile because of environmental or health risks are not in the funds. Let us consider a few examples from the UK market. Firstly, a mining company which has seen its relative share price fall very dramatically, primarily because of environmental pressures. Secondly, a tobacco company has seen a very considerable volatility in share price movements, with some of the more dramatic drops in the share price connected to litigation in the tobacco industry in America. Our view is that if you are monitoring environmental and social trends, you become very much more aware of the issues that are going to affect share price and, therefore, the types of companies that are likely to create great volatility in your portfolios. As you can see, environmental risk is integrated into our investment process.

At the risk of helping the competition, I want to briefly summarize our own investment criteria. Firstly, we are looking for industries of the future. Our investment portfolios are very focused on industries that we believe will survive in a sustainable world, so we're looking at companies in, for example, pollution control, renewable energies, process control, mass transit, and telecommunications. The list goes on, and there are some very exciting industries and companies in those categories. Examples of Japanese companies that spring to mind are, of course, Kyocera, and Ebara, and there are many others. I think that in particular your service and electronics industries offer significant and very exciting investment opportunities for our strategy.

Beyond the industries of the future, we are also backing what we call "best of class" companies. Put very simply, we're saying, for instance "well, we don't think insurance is going to go out of business. It's going to be around in the future, but the companies that survive are the ones that have strong capabilities". One example of a ‘best of class’ company is General Accident. We did some detailed research on the UK insurance industry earlier this year, and General Accident came out as a strong candidate for our portfolios.

So, that's the way we look at industry but, then, in terms of what sort of characteristics we're looking for when we look at companies, they fall into three categories. We're looking for management competency to deal with the changes that will be required to survive in a world which is sustainable, and I think most of you will probably have seen the Time Magazine sponsored by Toyota, and the sort of sentiments that Toyota is expressing about this issue of change. Management competency to manage change is absolutely key to what we're doing with our research and how we consider companies.

And, then, at a very specific level, beyond the management indicators we look for eco indicators and at social indicators.

Ladies and gentlemen, I hope I have shown you how environmental analysis can help improve your investment analysis. But, this is not just an investment opportunity, it is also an institutional issue. Revenues from the insurance industry worldwide exceed 2 trillion US dollars. Well, where does that money go? It goes into government instruments, government securities, it goes into property - well, that hasn't been such a good investment recently - and it goes into the stock market. Indeed, as I'm sure many of you are aware, many insurance companies make more money from their investment portfolios than they do from their core insurance business. This is not a secret. Indeed, the international policy community is rapidly turning its attention to the role of capital markets in achieving sustainable development. As a consequence, I would suggest you must come to terms with the fact that the financial services industry will be required to be more accountable for its investment activities. So, if you're not prepared to build your competency for reasons of investment, I suggest you ought to be doing it, at the very least, for defensive reasons.

Becoming involved in the UNEP Insurance Initiative is one of the first, easiest, and most immediately available ways of building your competency on these matters. And through involvement with the initiative, you will benefit from the research that is being shared by the financial institutions who are already members. For example, we at NPI are developing standards on global warming disclosure for companies, which will be a factor that, over time, all of you will want to know about. We are sharing this information with the initiative so, by joining the initiative, you will be able to access what we're doing.

But, as I said at the beginning, this is about competency and understanding the market. I, therefore, recommend three actions for you to take. The first is to recruit an environmental specialist immediately, to begin to build that environmental competency and, as I have already said, it takes time to settle in, so the quicker you do it, the quicker you will be up to speed. The second is to join the UNEP Insurance Initiative so you're on the inside track. And the third recommendation is to start evaluating the environmental sensitivities of your own client base and, in particular, the retail market. I think the public has a much greater awareness than they are given credit for, but there is a communications gap, and the quicker you start to understand that, the quicker you will be able to seize the market opportunity that exists.

Speaker Mr. Dylan Tanner,

Publisher, Asia Environmental Review

Summary Mr. Tanner summarized the results of his research into corporate environmental management in Asia. He distinguished four different groups of Asian countries Japan (highly developed); Korea, Taiwan, Singapore and Malaysia (almost developed); China (special case); and developing countries. These groups have different policies on environmental issues and have different constraints to sustainable development. The driving forces causing their governments to take account of environmental issues are different and include economic issues, public pressure, health risks, science and technology, international pressure, and international treaties and politics. Similarly, the driving forces behind environmental efforts among the business communities in these four groups of countries are also different and include legislation, risk and liability, and green consumerism. Companies that adopt proactive strategies on the environment will be the ones to survive.

I'm a strong believer in preventative environmental policy. In Asia currently, I think market pressure is equally, if not more, important than government regulations in driving environmental change in the business sector. As such, I think the insurance and banking sectors will play an extremely significant role in this part of the world, by enforcing issues such as environmental liability and environmental risk management on industry, in general, in the future.

It is extremely encouraging to see the meeting being held here in Tokyo and to see the world's insurance industry beginning to take a united position on the issue.

In this spirit of upstream preventative planning on the environment, the insurance industry holds a very pivotal and key position in the world's business markets. It has a great deal of leverage in controlling the way downstream business acts, and I congratulate you on your efforts.

I would like to summarize the results of our research over the last two years into corporate environmental management in Asia. We believe very much in placing the environmental issue in the context of other social and economic issues in the region. So, firstly, I would like to give you an overview of the driving forces causing governments in the region to take environmental issues on board. I will then look at a variety of environmental pressures and opportunities facing business in the region and highlight some of the leading companies who are reacting to these changes.

At Asia Environment Review we are monitoring a growing number of leading Asian companies, who are confident enough in their competitive position to adopt longterm sustainable development strategies, strategies which account for a range of external issues which companies traditionally have not concerned themselves with. I'll briefly describe some examples of these companies in Asia, and, finally, I'll make some comments on the environment and the financial sector in Asia.

Firstly, what is Asia? To the Western eye, Asia is often grouped together as a single entity for the purposes of analysis and information gathering. People often like to make generalizations about the whole region. But here, rather than talk about Asiawide trends, which can often be misleading, I would like to divide the region into four groupings for the purpose of analysis. These are generally based on relative economic development levels.

Firstly, Japan is a highly developed nation and, in many ways, has exhibited superb management of its resources and environment recently, although there are still some weak points.

The almost developed nations of Korea, Taiwan, Singapore and, possibly, Malaysia, possess the skills and financing necessary to implement the programs they need to improve their environmental performance. They are now increasingly being driven by various pressures to do so.

China is very large and very complex, and it is big enough to deserve individual treatment. Its traditional strong government may facilitate the necessary long-term environmental planning necessary, but price reforms for water and waste generation to reflect true market cost will be crucial for funding the necessary environmental infrastructure. Currently, these consumer prices are far below the true cost of production and treatment of waste and water.

Some of the developing Asian economies suffer from short-term orientated policies and unstable leadership, which is holding back the development of sound environmental management and long-term investments. Many of these nations, thus, face similar problems.

Looking at, for example, local buying power, GDP per capita varies from more than 20,000 dollars per year in Japan, Singapore, and perhaps Hong Kong, to less than 1,000 per year in Vietnam. Relating this to the environment, it is often quoted, as a rule of thumb, that long-term environmental protection does not attract much public or government attention until GDP per capita exceeds about 10,000 dollars. This is true now in Asia for Japan, Korea, Taiwan, Singapore and Hong Kong, with Malaysia approaching. So it is important to realize that economic development is often holding back any discussion of environmental issues in many other Asian countries.

Another figure to note is the spending on pollution control by the public and private sectors. Levels within OECD countries range from about 1.2 percent to 1.8 percent of GDP, with the U.S. spending about 1.5 to 1.6. Japan is at the high end with 1.8, while Korea, Taiwan and Singapore are also within the OECD range. Most of the rest of Asia, however, is below 0.5 percent of GDP. The goal of the Chinese leadership is to raise their spending from 0.5 percent to 1.5 percent by the year 2000, which will require more than a 300 percent increase in spending in the next couple of years. Japan's dominance of the corporate landscape in Asia can be seen by its share of Global 500 companies. It has more than 85 percent of the total in Asia.

On the issue of ISO 14001 certifications, Japan, Korea and Taiwan have been extremely proactive in their corporate certifications, and they have about half of the world's total between them. Taiwan, in particular, I should note, is probably one of the most proactive countries in the world when compared with its GDP, and it has approximately 50 certifications so far.

To summarize some of the driving forces which cause governments to take action on environmental issues, I think these forces are pretty much the same in the West as they are in Asia, with some variations.

Economic issues are obviously a very major driving force when it comes to environmental issues, including for example, efforts to minimize resource use and waste generation, and to reduce pollution that would affect the productivity of the factory workers.. This relationship is very well known and documented in Japan, and is becoming increasingly apparent to the leaders of mega-cities in Asia, including Shanghai and Bangkok.

Public and NGO pressure has also been an important driving force for the environmental movement in Europe and California in the early 1970s, and it is interesting to look at the relative lack of such pressures in this part of the world.

Another force is the health risks associated with pollution. Most governments find themselves obliged to protect the basic health of their citizens. In Asia's megacities, pollution and health issues are strongly linked.

Science and technology also play a major role. Companies and consumers will take advantage of more economically viable and more environmentally benign products, technological solutions, as they come on stream.

International pressure is becoming increasingly important. Governments in Asia are forced to react to outside pressure relating to crossborder pollution, as the crisis in Indonesia recently dramatically illustrated. International treaties, environmental and trade issues, and green politics can be a powerful driving force. Occasionally we see individual politicians or corporate leaders who take up the environmental issue, for visionary reasons, or because they see the environmental issue as a way of developing a power base. Either way, this driving force from the top is a very important catalyst for change.

I would like to look at how these forces apply to the four regions in Asia. In Japan, investment in environmental protection was initiated, I think, almost entirely as a direct result of the threat to human health from pollution, rather than any kind of public pressure or green politics, which is still relatively weak. In fact, I've lived in Japan for many, many years until recently, and have yet to hear a politician even discuss the environment in any meaningful way. Now, many levels of Japanese business and society see a clear relationship between long-term economic prosperity and environmental protection, and this is probably the key driver at present.

Korea, Taiwan, Singapore and other almost developed nations are, in many ways, similar to Japan in the environmental pressures they face, and so the key environmental factors are also strongly linked to health and money issues. Relatively stable governments of these countries have responded to these needs, rather than public opinion or international pressure. Green politics is also emerging in some places. In Taiwan, for example, a draft bill, currently being discussed in the Taiwanese Parliament, may require an environmental impact assessment to be conducted on new policy measures which affect environmental protection. Also, on the topic of public pressure in Asia, I recently read that a public opinion poll in South Korea rated the environment as the most important political factor amongst over-20s in Seoul. This high rating has probably changed in the light of recent financial problems.

In China, urban planners in Shanghai and other developed cities are finding growth directly threatened by the lack of pollution control and waste infrastructure. China is also aware of the significant international interest being shown in its sustainable development, with aid funding being made readily available to pursue environmental projects. I think about 3 billion dollars a year are offered in environmentally linked projects to China, which realizes that this is a very cheap way to fund the necessary construction of longterm environmental infrastructure.

In the rest of Asia, I think the main driving force at present for changes is coming from external forces. Aid funding and investment linked to environmental protection is providing an incentive to act, as is the presence of multinational companies, green supply chain effects, and political pressure relating to cross-border pollution and international treaties.

Now, I would like to look at what's driving environmental management in corporate Asia, in other words what makes the business community in the region think about environmental protection. I think we can assume that business in Asia is fundamentally no different from Europe and the U.S., and the primary objective behind all corporate activity is geared towards profits and longterm survival.

Based on this, we can look at a number of factors which are driving environmental management in Asia and Asian companies. Legislation historically has been the main driver for companies to adopt environmental protection, as it has in the West. The role legislation plays varies throughout the region.

As far as green consumerism is concerned, this enjoyed a recent boom in the West in the late 1980s and early 1990s, which has since subsided slightly. However, we are now seeing an emerging green consumer movement in Japan, and perhaps Taiwan. For example, environmental issues were the main competitive selling points for the Japanese car manufacturers at the recent Tokyo Motor Show. As you see, global markets and supply chain pressures are very significant for Asia and Asian-based business at present.

Risk and liability is another important driving force, and in the US, liability is perhaps the key environmental concern of business. Given this background, US companies are cautious of their environmental exposure in Asia, both from a financial and a public relations viewpoint. We only have to look at what happened to Union Carbide following their 1984 disaster to understand their concerns.

In the longer term, many companies are finding that a sound environmental reputation is necessary to attract the best employees, people on whom the long-term success of the company will depend. I've frequently heard from large employers how prospective employees ask them about the company's environmental position. The message is clear companies will increasingly need to present a good story on their environmental performance, or face the risk of losing the best potential recruits.

And, finally, what consultants often call the "vision" thing. Many leading companies recognize that severe environmental degradation will jeopardize their growth. For global companies, this means global environmental degradation. Some are willing to stick their necks out and make real investments in the collective future of their customers, suppliers and stakeholders. Although this investment probably works best as a cross-industry effort, it almost always requires one visionary company to take the initiative and make some financial commitments. We are seeing a few Japanese and other Asian companies amongst these.

Now, let's compare and contrast the four regions of Asia based on these driving forces. As in the West, Japanese Government regulations and guidance have been the key driving force for corporate environmental management. Recently, however, many of the Japanese leading companies, as they go global, and rely less and less on government guidance in environmental management, are looking at international best practice, the needs of the global marketplace, and supply chain effects. Additionally, many companies are adopting a global responsibility as they aspire to be global companies.

In the second grouping of newly developed nations, government regulations also play a major role. Industry in Singapore has long been accustomed to strict enforcements. Companies in Taiwan are experiencing a new regulatory system of "polluter pays" at present. However, market factors are now highly significant. Exporting companies in Taiwan, Singapore, Hong Kong and Korea, are increasingly being driven by global environmental requirements for their products. Taiwan’s high level of ISO 14001 certification is almost entirely being driven by the fear of losing corporate competitiveness and export markets.

1996 marked the first real wave of environmental enforcement in China, but it still remains lax especially amongst the large staterun firms, which are politically difficult to reform. Again, a key driver for some of China's larger companies will be external market forces. China recently announced its first batch of companies who will aspire to become China's first global conglomerates, modeled after the Japanese and Korean giants. These will quickly need to adapt best practice in environmental management to compete effectively in global markets. Also, the under-resourced environmental authorities in China are seeing ISO 14001 and other voluntary schemes as a very good way to help them cope with the task of enforcing environmental regulations on China's vast industrial sector.

In developing countries in Asia, we are not seeing anywhere near uniform compliance and enforcement of environmental legislation. However, given the level of multinational investment in countries such as Thailand, Malaysia and the Philippines, the response to the environmental needs of corporate customers will be a key driver. The domestic exporters in the region are also driven by the needs of European and North American marketplaces. For example, in Indonesia, I have heard reports that the forestry sector is taking steps in environmental management in direct response to the European Union's Eco Labeling Program.

To sum up, we found that in Asia there is a relative absence of significant public or NGO pressure on business, compared to the West. Governments of the region lack the resources and skills needed for enforcement, especially given the current economic crisis and the global trend toward smaller government. I think market forces will be at least as important as legislation in driving corporate environmental management throughout the region. Of particular importance will be the protection of investments from environmental liability and risk, especially for the large multinationals.

So, what are some of the corporate strategies being adopted around Asia to respond to these pressures? Most companies in the region – particularly the small and medium enterprises and many of the domestically-oriented companies - really haven't given much consideration to environmental issues at all and, indeed, most are not faced with much pressure to do so, either from financial or regulatory sources. These are mostly reactive companies, and they act only when threatened by regulators, or asked directly to do so by customers.

The business environment in Asia is changing fast, as the events of the last two months have shown. The most successful firms will be those that can react swiftly to these changes. We are seeing environmental issues and mainstream business issues colliding more and more in Asia in recent times. Some examples include the Indonesian forest fires, the debate over sustainable logging throughout Southeast Asia, the issue of trade and environment currently being debated at the World Trade Organization, and the current dioxin scare in Japan, which is changing the economics of waste disposal and incineration.

Proactive companies have developed a well-implemented environmental management system, which can monitor and react to these issues before they affect the business. Proactive companies include most of the large multinationals in the region. They are aware of the shortterm issues and are planning for the medium term. However, they are mostly unwilling to make real investment in environmental protection unless they can see some immediate financial benefits.

The last category, long-term competitive environmental strategy type companies, includes a growing number of global firms who have adopted long-term competitive strategies. These companies have well-developed environmental management systems, have taken steps to encourage the involvement of customers, suppliers, employees, and other stakeholders, have implemented a greening of their product range and a diversification into more environmentally benign products and services, and, most importantly, have visionary leadership.

Companies which remain reactive on the environment will lose share in the long term. By the ‘long term’ I mean in the next five to ten years, so for a lot of companies it is much, much further than they can even think about. The pace at which they will lose this market share depends on the industrial sector and region within Asia in which they operate. For example, small retail companies in Vietnam don't really have anything to worry about in the near future, but a Malaysian supplier of electronics components needs to take some pretty fast action to keep up with its large US or Japanese clients, or it will face loss of business.

Companies with proactive strategies will continue to prosper for the time being. The companies with longterm competitive strategies will use environmental issues as a major tool in the next decade, to gain market share. This will be especially true in industrial sectors, such as electronics, automotive and chemicals and, increasingly, in consumer goods, such as automotive and packaged goods. There are many, many such companies around the world, but I have chosen to look at three in Asia.

Canon Corporation has 80,000 people in 150 countries, and is one of Japan's most global firms. Its Chairman Mr. Kaku has been quoted as saying that he does not think political leaders are up to the task of ensuring global sustainable development, and that this task must be taken up by large corporations who have a stake in the regions where they operate. For ten years ‘kyosei’, or working together, has been the key philosophy driving the company at all levels, led by a very passionate voice from the top. The thinking is that profits will naturally follow from environmental safety and product excellence throughout the company. Canon is now No. 61 in the Global Top 500. It aims to be in the top 10 by the year 2010. This will require extraordinary sales growth driven by strong profits. The company truly believes that its kyosei strategy is the key to this growth.

Sanyo Corporation is another Japanese corporate leader, also in the electronics sector. It is driven by the need to seek growth in new sectors. Its traditional markets for consumer electronics are becoming more competitive, at low margin and low growth. As with other Japanese electronic makers, Sanyo places great emphasis on the EMS development in the last few years and has a well developed system in place which it is implementing in its North American, European and Asian network. It is also taking this a step further and hopes to gain 30 percent or more of its sales in products directly relating to pollution control and improved environmental efficiency. These products include domestic waste systems for use in Japan's crowded cities, and also, hopefully, in Asia's megacities, electric vehicle infrastructure systems, solar energy and technology and other products. Sanyo's challenge will be to identify the market needs for such products and deliver them at a price the customers can pay. The company believes that its range of eco products will help it to continue to be a high growth forwardthinking company.

A third example is from South Korea. Posco, Pohan Iron and Steel is chasing Nippon Steel for the title of the world's largest steel maker. It is strongly investing in production overseas and is fighting the Japanese firms on their home markets with sales to Nissan in Japan. Formed in 1968, it has grown rapidly, based on transferring state of the art production and management methods from around the world. They have recently stressed environmental protection as a matter of sound business. Posco now claims to have a total environmental information system in which all inputs and outputs are closely monitored and controlled by information technology. Posco proved to be a visionary company by advancing its pollution control and resource energy utilization processes almost to a science. It sees this as crucial to its longterm survival in an energy and resource intensive business. The Western press recently praised Posco as the strongest Korean industrial company following the recent economic crisis.

These three companies differ in many ways, but they have one thing in common in that they are adopting a very visionary longterm sustainable development strategy. The first has very visionary leadership from the top, the second is diversifying into environmentally benign products, and Posco has adopted state of the art optimization and production processes. Most companies have a combination of all three.

Finally, a brief word on the environment and the financial industry. Although they have not been subjected to as much environmental pressure as their North American and European counterparts, many Asian financial institutions are now waking up to the threat of liabilities presented by bad environmental practice. Two recent examples come to mind. Firstly, here in Japan, increasing incidences of legal victories by plaintiffs in Japan over environmental damage caused by big business, including such Blue Chip firms as Toyota and Nissan, are causing many large businesses and financial institutions to take note. This could have a domino effect as the landmark awards made in their favour encourage more and more defendants. Financial institutions in Japan may be forced to look more closely at their customers' pollution-related exposure.

Secondly, in the wake of the Chinese Government's crackdown on polluting private sector enterprises last year, the Agriculture Bank of China claims to have lost up to 10 million US dollars in defaulted loans, due to polluting enterprises being shut down by the government. It is now working with the Chinese environmental authorities on an environmental auditing program for future lending purposes. It is not doing this for PR reasons or to comply with any government legislation. Rather, it needs to reduce its exposure to environmentally risky firms in its loan portfolio, especially as the Chinese Government tries to encourage more competition in the banking sector.

Examples such as these will occur more and more in the future. Competitive financial institutions in banking, investment or insurance will be those that understand environmental risk in the region. This will mean a good understanding of local conditions - environmental policy, legislation, pollution, the level of technology development, local waste management capacity, and a range of peripheral issues that affect environmental risk. Local Asian financial institutions will have to gain this expertise if they want to compete with more experienced Western institutions in the coming era of deregulation in the financial markets of Asia.

Perhaps one beneficial outcome of Asia's current crisis in the financial markets is that it will force the financial sector to manage risk better. Environmental risk is sure to be a small but important part of this learning process. Lastly, while ISO 14001 in environmental management systems are, by no means, a guarantee of sound environmental management in a company, a certified environmental management system can indicate that the organization has taken steps to make itself aware of environmental risk. The highly proactive stance taken by Asian business on the issue is a very encouraging sign and one that can be used by the financial sector to evaluate risk.

The discussion session began with a question on how possible it would be for insurers to effect changes in industries’ environmental policies, by offering to invest in them if they became more environmentally aware, or threatening to withdraw their investments if the companies were not respecting environmental issues. It was felt that this kind of situation would be unlikely to occur, but that there is great scope for investment managers to ask companies to account for their environmental impacts.

The contrast between the fact that the US is the largest market for social-ethical funds and the position that the US is taking in the climate change talks was commented on. Additionally, it was noted that the American

social investment community has, until fairly recently, been very focused on the behaviour of companies within America, and it has only been in very recent years that US social investment funds with an international mandate have started to appear on the market.

There was a brief discussion on the trend observed in social investments, for them to move away from being based purely on ethical/social grounds, to include environmental criteria. This was thought to be attributable, at least in part, to the increasing knowledge about how to assess companies’ environmental performance, and the availability of tools to do this.

The question was raised as to the kinds of eco and social criteria used by NPI to assess companies. The eco indicators used include those which relate to management systems (such as ISO 14000), and other more specific ones on, for example, climate change, water use, ozone depletion, and resource intensity. The social indicators used are those which reflect the relations between the company management and the employees. Thus these indicators look at, for example, at profit-sharing schemes, at the level of employee turnover, and at the sort of record that company has on civil disputes, regulatory fines, and instances when it has got in trouble on people management issues. Another social indicator is the extent to which companies are active participants, and the stance that they take, in the public policy arena.

One participant felt that industrialized countries were forcing developing nations to sacrifice living standards to maintain sustainable development, while the industrialized countries themselves had already enjoyed the fruits of economic development. Another participant questioned whether developing countries should seek to follow the western development model, given the environmental and social problems that have been seen to be associated with this kind of economic development.

There was some discussion on the question of whether it is really a good idea for politicians in Japan to get heavily involved in environmental issues. It was noted that in Europe governments are now delegating more and more responsibility to the private sector in, for example, waste management and pollution control monitoring, as they move away from the previous welfare-oriented approach. Several governments in Asia are now being seen to leap-frog over this kind of welfare government control, as they move straight into market-driven mechanisms of environmental protection.

Speaker Mr. Hissho Kitamura

Director and General Manager, Yasuda Fire and Marine Insurance

Summary Mr. Kitamura described the approach adopted by Yasuda in introducing environmental awareness throughout the company. Two key ingredients were critical to the success of these efforts a steady and continuous approach, and the voluntary nature of the activities. In responding to environmental issues, insurance companies in general must adapt to the likely impacts of global warming and strengthen their financial capacities. They have much to offer, including accurate information and advice.

In response to the Environmental Appeal issued by the Keidanren (the Japanese Federation of Economic Organizations), the non-life insurance industry devised its own Action Plan on Environmental Conservation. Forum 21, an environmental NGO, is evaluating the various action plans in terms of the extent to which they meaningfully address energy conservation issues, and this organization rated our initiative as zero, since we didn’t indicate any targets or numerical objectives.

Of course, introducing the action plan itself is a significant step forward. However, we do recognize the insignificance of the action plan as it stands, without any numerical targets. Therefore, in order to improve the contents of the action plan, we are planning to integrate the energy issue into our future work.

Over the last three years, we have been conducting a questionnaire survey of companies in the non-life insurance industry. By repeatedly asking the same questions to the companies in this industry, we can see trends and developments emerging and we then share this information with the various companies, as feedback. Last year, we also set up an Environment Project Team, consisting of about 15 companies in the industry so that we can share information and exchange views to improve our commitment. This team began as a joint initiative of four companies Tokyo Marine, Sumitomo Marine, Mitsui Marine and Yasuda.

I would like to show you an example of the relationship between environmental issues and the non-life insurance industry. We have been promoting eco efficiency (i.e. the efficient use of both economic and environmental resources) by, for example, encouraging the use of recycled parts for automobile repair work. This eliminates waste, thereby reducing the burden on the environment, and at the same time it reduces the size of the insurance payment to the policy holder.

Japanese financial institutions have also been working on environmental issues, but at a rather slower pace. There have however been some encouraging examples of how banks have worked together with local communities on environmental problems. For example, banks supplied information and low-interest loans to small and medium sized enterprises that want to work on environmental conservation of CFC elimination. One such bank is Shiga Regional Bank in Shiga Prefecture, which provided low-interest financing to facilitate water purification efforts in Biwa Lake.

I believe that there are three major areas in which financial service companies can contribute to sustainable development (i) resource conservation; (ii) making a financial contribution to society; and (iii) providing environmentally-sensitive products and services.

In our company, Yasuda, we raised awareness about the environment by motivating and encouraging all employees to be actively involved environmental conservation. The concepts and methods of Environmental Management Systems were introduced first in a computer centre, as this centre was evidently placing a relatively heavy burden on the environment by using large amounts of power and paper. On Friday last week, this computer centre in our company was able to receive accreditation of ISO 14001, thanks to the hard work over the last three years by the staff members involved.

There were two key ingredients in the approach we used in Yasuda to introduce environmental awareness and environmental conservation activities. Firstly, we adopted a ‘steady and continuous’ approach, as opposed to arranging a one-time spectacular event. This, I feel, is particularly important in the treatment of environmental issues, even though it does take more time. The second ingredient was the voluntary nature of the activities. Rather than initiating a series of compulsory activities, we encourage employees to get engaged in environmental activities on a voluntary basis. We do not indicate any target numbers or numerical objectives, and we encourage employees to come up with their own ideas for voluntary activities. We are in the private sector and we do not like regulations or limitations, but prefer to have independence and a voluntary willingness to do things. It takes time to encourage activities in this way, but it provides a more solid foundation for the activities and makes the activities more sustainable.

Now I would like to talk about the challenges that we are all facing in trying to address the environmental issues that have already been mentioned. Firstly, we need to adapt to be able to solve some of the foreseeable environmental problems. For example, global warming is already causing a large number of natural disasters and is resulting in an increase in the amount of insurance payment. In Japan, for instance, there was a strong typhoon in 1991 that caused damage of about 600 billion yen. It resulted in what was the largest ever insurance payment, at that time. Over the previous 100 years we had accumulated reserves and provisions to provide for such major catastrophes, but 50% of that reserve disappeared because of that huge typhoon.

In such cases of large-scale catastrophes, we need to be able to provide insurance payment in a very timely manner. The normal method of insurance payment is not sufficient to handle such a large volume of emergency claims. Therefore, we have established a mechanism whereby people and areas in the company that are not usually directly involved in insurance payment can be mobilized to help. This mechanism covers, for example, organizing a temporary office space and hiring temporary workers to respond to these major disasters.

We also need to strengthen our financial capacities. One way of securing enough capacity to cope with future requirements is by reinsurance (such as the Natural Disaster Bond). In addition, the Pollution Liability Insurance provides another possibility, though this mechanism has not yet been fully introduced. Another mechanism is the Guarantee Function, which is not actually in existence yet in Japan but is being applied in the United States. This can involve, for example, insurance companies conducting evaluations of soil quality and guaranteeing that the land involved in a property transaction is free of contamination.

Insurance companies also have a large amount of data concerning accidents and so, we can give accurate information and advice. For instance, with respect to the safety of roofs in times of typhoons, the current regulation and standard in operation in Japan is that roof tiles should be nailed every four rows of tiles, but this standard is about to be raised to require two nails every two rows. We can provide this type of very specific advice to the parties involved.

Looking in a bit more detail at the process of introducing an Environmental Management System into an insurance company, I would say there are several key requirements. Perhaps the most critical of these is the commitment and direction of top management. Then, to translate their initiative into actual practice, we need to have an organization to promote the ideas throughout the company. In each section we appoint very young people as members of the team, and these young people compete among themselves. Competition in any society is quite effective since, while competing with each other, they promote the importance of environmental activities throughout the organization.

Summary Mr. Jakobi first summarized the ways in which insurance companies can implement environmental commitment. He gave some examples of environmentally-friendly insurance products and looked at the issue of environmentally friendly investment in some detail. He then made some suggestions for managers and politicians and urged insurance companies to join the UNEP initiative.

I would first like to summarize the types of environmentally friendly activities in which insurance companies can engage

Helping to prevent environmental losses through risk management;

Helping to reduce environmental damage, once a loss has occurred, by efficient handling of claims;

Running their offices and processes with care for the environment;

Managing their capital investments to favour companies with a good track record on environmental issues; and

Influencing the public and governmental thinking by using their environmental knowledge and experience.

Environmentally friendly risk management takes different forms depending on what is being insured. In fire insurance, the established approach is to install sprinklers and segment buildings, which helps to reduce the spread of a fire, thereby saving resources and reducing the amount of dioxin produced. In motor insurance, crash tests and repair research can help saving resources. In liability insurance, consulting on production processes helps to reduce air, water and land pollution. In marine insurance, advising on appropriate loading and storage, ship construction and safety outfitting reduces the danger of sea pollution.

Looking now at environmentally-friendly claims handling after a loss, for a fire this can take the form of careful removal of debris and toxic waste, and for a motor accident the use of recycled parts for repair, as Yasuda and other companies do. It is also worth noting that halon gas is a very competent fire fighter, and we would like to be able to use it as a fire extinguisher in all situations. However, halon attacks the ozone layer and so we use it only on a very restricted basis, under very special circumstances, such as on airplanes.

Now, let's turn to some insurance products that we could call environmentally friendly. In motor insurance, the mileage tariff, now being used in the UK and Germany, means that you pay a higher premium if you drive more, because it is evident that the more miles you drive in a year, the more likely you are involved an accident and the more you will pollute. In liability insurance, the Environment Impairment Liability policy (EIL) covers third parties who suffer a loss from pollution that could not have been prevented by risk management. In life insurance, a non-smoker tariff reduces the danger from active and passive smoking, and I would say that this also relates to the environment. Other possible ideas for environmentally-friendly products could include products that improve the use of solar energy, products that help to reduce fuel consumption, products to improve the safety of oil transportation by sea or the road transportation of hazardous goods.

Now, let me summarize a few ideas for environmentally-friendly investments. I start from the basic fact that money always looks for a secure and most profitable harbour. These two parameters will always be of great importance to investment managers. But some changes are happening. Green funds are showing the first signs of success. Banks are saying that eco-inefficient creditors will endanger their business, in the long run. They will lose image, and they will lose markets. We have heard much about ecoaudits, ISO 9000, ISO 14001, and EMAS. I think these developments will support the emergence of environmentally driven investment criteria and standards. Nevertheless, we do face some difficulties in adopting and using environmental criteria, for the time being.

In Germany, at least 55 per cent of all investments of insurance companies go into governmental institutions. We therefore need to ask what the governmental institutions are doing with the money – are they spending it on schools, or roads, or what?

We also face the practical problem that large organizations often have a variety of production methods and a wide product range. Some of these are not dangerous, some are less good. How do we evaluate the organization as a whole? I think that is a very difficult question, as we try to develop standards for environmental friendliness.

Another problem is that insurance companies need to keep the details of their investment strategies secret, yet the development of environmental investment criteria and standards will require an open dialogue between investment managers, environmental specialists, and others. Dialogue is the key. As I understand, in the Japanese community almost all decisions are made in groups. That is the power of Japan, bringing people together. It improves the acceptance of the solutions, and I think that is the attitude we have to adopt with environmental issues too. We have to openly discuss the problems we are facing and then look for solutions.

Insurance companies can support such dialogues, as we talk to our clients and discuss with public institutions and businesses. What I would like to suggest is that we do more lobbying. We should lobby in the sense of being advisors to governmental institutions, political parties, politicians, the public and the media.

Finally, I have a few suggestions to make. Firstly, suggestions to managers. I believe that environmental commitment can only exist when it is driven from the top. The top management has to take a proactive role in developing their environmental position. Environmental commitment requires intensive discussion at all levels in a company, if it is to become part of the corporate culture.

Then some suggestions for politicians. I would suggest that they should listen to what insurers have to say. Insurers can not be regulators, and indeed we don't want to have that role. Politicians have to be the ones to set the regulatory framework and should ensure consistency in the environmental principles applied in the different policies. Governments can also award and subsidize environmental behaviour.

The fact that insured losses account for an increasingly small proportion of all losses due to natural catastrophes can be seen as both a problem and an opportunity. It is an opportunity in the sense that the public and governments will be asking for more support from the insurance industry in this area. Therefore we have to be prepared. I invite you therefore to join the UNEP initiative. This initiative already has 71 companies on board, from 25 different countries. This includes twelve Asian companies, most of them Japanese.

Because we need support from an organization, we have founded an association to do more detailed work and to raise funds so that we can hold conferences such as this one. This association is also open to institutions outside the insurance industry, including for example brokers and asset managers.

The statement basically says that it is necessary to look for sustainable development. It regards risk management as an important duty of insurance companies. The statement requires environmentally sensitive product design, environmentally sensitive asset management, a commitment to reporting one's own actions and standards, and a commitment to dialogue with other parties. So, I think it is a very comprehensive statement, covering the insurance process, product design, risk management, claims handling, and investment.

The initiative has undertaken a number of activities. We have already organized international workshops, first in London in 1996 and then in Zurich earlier this year, and now here in Tokyo. In the Zurich meeting, we established two Standing Working Parties. One is concentrating on climate change and was responsible for drafting the position paper that we will present in Kyoto. The other is concentrating on asset management issues, and I think this group could be the forum where standards are developed and agreed on.

There are two ways in which you can join this initiative. Signing the statement means supporting sustainable development in our business, spreading the idea, and encouraging your management and employees. There is no fee for signing. Joining the association means more explicit work, through participating in workshops, maybe conducting some research, financing workshops and conferences. There is a modest fee for joining the association, only 5000 US dollars per year as a full member.

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The discussion session included a question on the appropriate type of employee participation in the environmental efforts of insurance companies. In the case of Yasuda, all employees were involved in the programme, including part-time workers. The process started with all department heads, and involved teams of workers in each department. Yasuda also created a card outlining the rules on saving resources in the office. The employees were gathered together to jointly review these rules. Yasuda also established a voluntary organization for its employees, called Earth Club. Since the activities of the club relied on consensus among its members, it took quite some time to get started. Management did not intervene in this organization and the DG decided not to join so everyone would feel free to participate.

One participant made an observation about the contrast between the situation in the US where insurance companies are offering green funds to labour unions, and in Japan where such funds are still very rare, even though there is a demand for them among the labour unions. As the US insurance firms will soon be offering their products to the Japanese market too, Japanese companies had better start their own green funds, to remain competitive.

The question was raised as to why there are not yet any American companies in the UNEP initiative. It was felt that this was partly because that by signing the statement they will be committing themselves and may find themselves in very costly legal proceedings. Legal advisors of the American insurance companies are always very cautious, as legal cases in the States are very expensive. However, as environmental issues are taken on board more in the US, it was felt that American companies would also join the initiative.

ANNEXES

Session II Environmental Management Standards and the Financial Services Sector Current Status of EMAS and ISO 14000 and their Implementation in Europe

Discussion Session

Session VI Implementing Environmental Commitment in the Insurance Industry

Mr. Yojiro Yamashita