Sustainablog

This blog will cover some news items related to Sustainability: Corporate Social Responsibility, Stewardship, Environmental management, etc.

27.10.04

Corporate responsibility starting to take hold in Latin America: Unfortunately a deep understanding of corporate impact seemed to be lacking.

A recent conference shows enthusiasm by Latin American companies for
helping the poor.


Corporate responsibility starting to take hold in Latin America
At the recent Inter-American Development Bank?s annual conference on
corporate social responsibility there was no shortage of passion on show
for helping others.

Ethical Corporation?s correspondent spent two days surrounded by Latin
American business executives, mostly from Mexico, who enthused long and
hard about making a difference in their countries and communities via what
they called corporate social responsibility.

Unfortunately a deep understanding of corporate impact seemed to be
lacking.

Human rights, labour monitoring and sophisticated homegrown environmental
techniques were not high on the agenda, even though Hewlett Packard, a
foreign-owned multinational, gave an impressive account of how an
environmental health and safety programme works in practice.

Instead, speakers focused much more on community engagement, often via
donations or financial partnerships with non-governmental organisations in
the region. While some multinationals made the point that philanthropy
does not equal corporate responsibility, the distinction was lacking by
many others.

However this was only to be expected. After all, there have not been the
same pressures on Latin American companies to develop sophisticated
ethical policies as in Europe and the US.

Many of the speakers came from companies that originated as family or
state-owned businesses, leading to a paternalistic attitude towards local
communities and originally establishing philanthropy as their main method
of reaching out to external stakeholders.

At the recent conference, hosted by the Inter-American Development Bank
(IADB) there also seemed to be a high level of cultural reticence to talk
frankly about challenges, shortcomings and mistakes. This is not unusual.
Until recently the situation was the same in Europe. It still it is
outside of the leading companies in corporate responsibility.
In companies, as with people in general, mistakes are often seen as
failures and weakness rather than opportunities to explore new solutions.

A different playing field

We should also remember that Latin American companies face basic
challenges that mostly don?t come into play for US companies unless they
have significant overseas manufacturing operations. Namely, intense
poverty, corruption, lack of government services and lack of provision of
basic needs for local populations.

For business in the region it may be less a matter of ?capturing the
imagination? than dealing with the basic issues of survival; food,
shelter, water and jobs.

And there was some vision on show too at the conference. In the opening
conference session in Mexico, president of the Inter-American Development
Bank, Enrique Iglesias, directly related the future survival of democracy
and a free market system in Latin America to the ability of Latin American
firms to integrate sustainability into their business strategy and
operations.

Adrian Hodges, Americas director of the International Business Leaders
Forum, remarked at the close that the challenges faced by business when it
comes to corporate responsibility in the the region require innovation and
creativity from Latin American firms if they wish to survive and prosper.

Business is wholeheartedly seen as a good thing in Latin America, unlike
in some quarters in the richer industrialised countries. It seems safe to
say that citizens in the region are generally more conservative when it
comes to their expectations from companies on social policies and the
environment.

Your correspondent has spent time speaking to the public and business
people in Brazil, Mexico and Venezuela in the past ten months. In each
country the attitude seems similar. Tobacco, for example, is not reviled
in the same way as it is in Europe and the US. Mainly this seems to be
because, quite naturally, most feel their society has more pressing
issues, as mentioned above, to deal with.

In Brazil the undisguised enthusiasm at a Global Compact conference less
than a year ago was palpable, and the fact that this was echoed at the end
of the September at the conference in Mexico seems to show that the larger
companies genuinely want to have a more positive impact.

Companies from Chile, Peru, Costa Rica, Honduras and many other Latin
nations are keen at regional conferences to promote their corporate social
responsibility credentials, even though they accept it is early days.

This is potentially a problem. If companies believe community donations
and philanthropy are akin to corporate responsibility, this may prevent
them moving much further in their strategic thinking on the issue.

There are signs of leaders emerging though. Cemex, the Mexican cement
company that recently bought UK firm RMC, recently produced its first
corporate responsibility report. While no great shakes, it is a reasonable
start.

And Petrobras, the Brazilian oil company, has introduced ethical criteria
in part to its supplier selection policies.

PDVSA, the cash rich and chaotic Venezuelan state oil firm, now has a $1.5
billion social investment budget and recently flew seven executives to a
London corporate responsibility conference to hear about European business
ethics in practice.

Signs of progress

While the appearances of such firms working pro-actively on strategic
corporate responsibility in the region are still relatively rare, the
signs of buy-in by others is encouraging.

The recent conference in Mexico had more than 700 attendees, and according
to James Austin of the social enterprise knowledge network at Harvard
business school, a speaker at the event, attendance has tripled since the
2002 conference in Miami.

The events in the region are now also beginning to discuss more advanced
issues such as the impact of CSR on national and even regional
competitiveness. And the recent IADB conference in Mexico City tried hard
to focus on the practical, with "deeds not words" as its theme.

Antonio Vives of the Inter-American Development Bank agrees that: ?it is a
long, arduous road to move from philanthropy to ?full CSR? in Latin
America.? But, he points out ?If the most advanced country in the world in
CSR, the UK, were given a 30 from 100 in progress in implementation, the
most advanced countries in Latin America would get a 5, but we are
progressing fast".

The challenge for progressive businesses in the region will be to stay
humble, get their chief executives involved and get reporting on figures
in a meaningful, comparable way while acknowledging the challenges of
sustainability and the hard road ahead.

Great company cock-ups that made history

Great company cock-ups that made history
Mallen Baker
20 Oct 04
Strong internal cultures are essential for business success, but they can
also lead to insularity and an inability to grasp, and respond effectively
to, external events, writes Mallen Baker.
The company has become the dominant institution of the 21st century. This,
in any case, is what you might believe once you have emerged blinking into
the sunlight having watched any of the recent films on the subject,
ranging from ?Super Size Me? to ?The Corporation?.

The company behaves like a psychopath, cares not what bloody wreckage it
leaves in its wake, and serves only the abstract goal of greater return
for shareholders.

The surprising thing is that anyone should think the concept of the large,
over-powerful company is anything new, or that anyone should be seduced
into thinking such entities are even remotely all-conquering.

Rather, as Daniel Litvin argues in his recent book, ?Empires of Profit?,
companies have proven consistently clumsy and incapable of controlling the
political circumstances within which they are forced to operate.

Few commercial organisations today could match the supremacy of the East
India Company, for example. Launched in 1600 on the principle that it
would only engage in peaceful trade, it managed to grow to the point where
it was the principal vehicle for the British Empire in India.

From the point of the military intervention of Clive of India, the
company?s fortunes began to deteriorate as it became embroiled in ever
more costly defence of its territorial operations.

Were the company?s executives evil empire-mongers? Certainly, they were
products of their time. And yet those at headquarters ? to whom messages
from the front line could take weeks, if not months, to arrive ? often
sincerely believed that the mission of the company still typified its
approach, long after the operatives on the ground had embraced the
immediate rewards of individual initiative and adventurism.

Take another historic company. This one operated in Guatamala. During the
course of its operations, it invested in programmes to eradicate malaria,
yellow fever, hookworm and other ailments. It set up clinics and
inoculation schemes, drained swamps and installed sanitation systems. The
incidence of malaria among the company?s workers fell from 22% to 0.3%.

It also established a tropical agriculture school, providing free
education to poor farm workers, and funded ? well, lots of things. An
early example of a model corporate citizen?

Not quite. Like the East India Company, this one ? United Fruit - simply
did not understand the complexities of the society within which it
operated, and it found it could not control them sufficiently to retain
its ?licence to operate?.

Consequently, when a new government showed every sign of being
troublesome, it took part in supporting a CIA-led coup to remove the
president, Jacobo Arbenz. The episode landed Guatamala with a subsequent
miserable period of conflict and instability, but the adventure also
brought little fortune for the company, which quickly found itself losing
support at home and abroad until the firm?s boss, Eli Black, committed
suicide.

According to Litvin, these ? along with numerous other historical examples
? highlight the central dilemma for the modern company. Strong internal
cultures are essential for business success, but they can also lead to
insularity and an inability to grasp, and respond effectively to, external
events. That is why the history of the large company points not to the
institution?s omnipotence, but to its vulnerability.

There are many lessons from all of this for the corporate responsibility
movement, not least the central role that it can have in opening business
up to factors that can make or break the business. In particular,
companies need to focus on developing a real understanding of the complex
environments within which they operate. There is no short cut to achieve
this. Few of the other actors on the corporate responsibility stage
understand these societies either.

The challenge to the film-makers is that their world view of the
motivation of companies does not seem to match the history. The truth is
much more cock-up than conspiracy, and on the occasions when companies
turn their hand to conspiracy, their size and clumsiness usually results
in cock-up.

26.10.04

Imperial Oil releases 2003 corporate citizenship report

Imperial Oil releases 2003 corporate citizenship report
Lisa Roner
22 Oct 04

Imperial Oil, Canada?s largest petroleum company, has released its 2003
corporate citizenship report.
Imperial, which refines and markets petroleum products under the Esso and
Mobil brands, says it has reduced refinery emissions by 10% and invested
$380 million to improve environmental performance.

Projects within the environmental budget included $260 million to complete
a more than $600 million multi-year project allowing its refineries to
produce low-sulphur gasoline and $90 million to fund environmental
remediation projects.

The company also reports construction of two natural gas-powered
cogeneration facilities, $9 million in corporate giving and a number one
safety record.

Imperial says its overall 2003 emissions were higher than in 2001,
although release of substances on Canada?s National Pollutant Release
Inventory has dropped by 10% since 2002. The company says emission of air
pollutants is down 13% since 2002, emission of volatile chemical compounds
dropped 11%, sulphur emissions were down 1% and carbon monoxide emissions
were nearly 50% lower.

Imperial also reports that greenhouse gas emissions from its facilities
held steady from 2002 levels, remaining 20% lower than in 1990. But if
emissions from divested operations are excluded, the company says, its
greenhouse gas emissions were 5% higher than in 1990.

Rory O?Brien, programme coordinator for corporate social responsibility at
Kairos, an ecumenical organisation representing Canada?s major churches
and religious groups, says that although Imperial has made some progress,
particularly in diversifying its workforce, it still has much work to do
in other areas.

O?Brien is disappointed by the small amount of environmental research
Imperial is funding. He says that most of the company?s research budget
goes to extractive technologies with little emphasis on the environment.

?They did put a $100,000 into environmental education in the universities,
but that?s kind of miniscule when you consider that global warming is the
crisis of the last million years or so,? said O?Brien. ?You would think
that oil companies, if they wanted to be socially responsible, would not
only acknowledge that they have a major role to play in reducing GHG
emission, but would actually take steps to invest in research for
renewable technologies, for example.?

O?Brien says he would like to see Imperial employ Global Reporting
Initiative standards and secure third-party verification of emissions
data. He also urges more transparency on lobbying and contributions to
political parties and corporate associations.

Just how rotten? Price-fixing, bid-rigging and undisclosed payments in the insurance industry appear to be rife

Reprehensible
Oct 21st 2004
From The Economist print edition


Price-fixing, bid-rigging and undisclosed payments in the insurance
industry appear to be rife



AP





THE scourge of America's financiers has struck again. Eliot Spitzer, New
York's attorney-general, has built a reputation by uncovering the misdeeds
of mutual-fund managers and investment bankers. Now it is the insurance
industry's turn to cower. Last week, Mr Spitzer sued Marsh & McLennan, the
world's biggest insurance broker, for colluding with insurance companies
to inflate prices and for neglecting its primary responsibility?helping
its clients, corporate buyers of insurance, to get the best coverage for
the lowest premiums. AIG, the world's biggest insurer, and several other
firms are also named as participants in the case (see article).
Mr Spitzer is like the little boy announcing that the emperor has no
clothes. Repeatedly now, in one industry after another, he has exposed
practices as dishonest or even illegal that have long been accepted and
often tolerated by regulators. Even drug firms have attracted his
attention. Last April Mr Spitzer set out to investigate whether brokers
are swayed by extra payments (?contingent commissions?) from insurers for
sending more business their way. What he found, yet again, was conflict of
interest of the gravest sort. Marsh, he says, solicited false quotes from
insurers in order to pretend that the bid process had been competitive,
while simply channelling business to insurers that promised it the biggest
commissions. Two executives from AIG have already pleaded guilty to
abetting bid-rigging. Mr Spitzer has obtained e-mails in which Marsh
executives talk of steering business to insurers ?who pay us the most? and
of punishing those who questioned its system.
The extent of such practices is still unclear, though contingent
commissions are thought to be common. Share prices of insurers and brokers
round the world have plunged as the investigation expands from
property-casualty insurance into the life and health fields. As a first
step, those involved in the worst abuses clearly must be prosecuted. Mr
Spitzer has all but called for the chief executive of Marsh to step down.
He has made it clear that other firms are also in his sights.
European regulators should now launch their own investigations to find out
whether such practices are also occurring on their side of the Atlantic.
Meanwhile America's 50 state-level insurance regulators have much to
answer for. They have known about the potential for conflict of interest
for years but failed to probe the industry's behaviour seriously. Indeed,
AIG said that it had requested a view on contingent commissions from New
York state's insurance commissioner two years ago but never received a
response.
Such complacency among state regulators betokens either capture by the
industry or incompetence. The inability of state regulators to oversee
properly an insurance industry now dominated by big firms adds to the
already-strong case for Congress to create a federal regulator to monitor
the industry nationwide. State regulators are simply too small to regulate
credibly the industry's biggest companies, and they currently spend most
of their time on smaller-scale matters such as claims-processing and
premium rates. Concentrating resources at the national level would not
only eliminate masses of paperwork for insurers (and consumers) who want
to do deals across state borders; it would also free up more resources to
monitor conflicts of interest among the industry's biggest firms.
Nonetheless, federal regulation is no panacea. Mr Spitzer's pursuit of the
mutual-fund industry last year for similarly damaging practices made the
Securities and Exchange Commission, a federal agency, look just as
complacent.

Coming clean
The first step for any regulator of the industry should be to demand more
disclosure. At the moment brokers in America typically reveal the payments
they are receiving only if a client explicitly asks, though even then they
do not have to say anything (in Britain, they must on request). Clearly,
insurance buyers should start asking tougher questions?big firms have been
astonishingly lax about demanding the best deal. But the onus is on
brokers and insurers to be more forthcoming. Marsh has stopped accepting
contingent payments since Mr Spitzer's bombshell, and a shake-up across
the industry looks likely.
This is good news. But it may not be enough. After a wave of consolidation
over the past decade, three big broking firms?Marsh, Aon and
Willis?together account for 61% of brokerage revenue worldwide. Such a
concentrated industry will always be prone to oligopolistic behaviour. An
outright banning of contingent commissions should therefore also be
considered (something that may only be feasible with a single, nationwide
regulator). If brokers want to act as sales agents for insurers, then that
is what they should become. If they are to act as the advisers and
representatives of clients, then they should not be taking payments from
anyone else.
Just how rotten?
Oct 21st 2004 | LONDON, NEW YORK AND PARIS
From The Economist print edition










The insurance industry is the latest financial sector to have its darkest
secrets exposed to the light
FIRST came investment banking; then mutual funds; now the insurance
industry is mired in scandal, the latest target of Eliot Spitzer, New
York's formidable attorney-general. On October 14th he filed civil charges
against Marsh & McLennan, the world's biggest insurance broker, and
announced settlements of criminal charges with two employees at AIG, the
world's biggest insurer, and one at ACE, a big property-casualty insurer.
The charges are part of an ongoing investigation into industry practices
that suggest insurers and brokers have acted collectively (and secretly)
to betray customers. An added twist is that the three main companies so
far involved are led by members of the Greenberg family: Hank Greenberg is
the legendary boss of AIG; his eldest son Jeffrey runs Marsh; and his
younger son Evan is in charge at ACE. A business often thought to lack
personality and drama is now suffering from an abundance of both.
Mr Spitzer's civil complaint against Marsh, filed in New York state's
Supreme Court, alleges much misbehaviour, including fake bids, collusion,
improper steering of business, payments by insurers to avoid solicitation
of competing quotes, and outright threats against those resisting
participation in the fraudulent schemes. Marsh acted, in short, less like
a broker with a fiduciary obligation to its clients than as the linchpin
of a racket. Proof for the existing charges, Mr Spitzer contends, is ?rock
solid?. Given the strength of the evidence and the seriousness of the
infractions, the main legal conundrum he faced was whether he should file
criminal rather than civil charges.
His leniency will be of only marginal solace for the industry. Mr Spitzer
says his investigation into insurance continues to expand, with the only
certainty being that he will bring more charges against more people and
more companies. So far only two segments of the vast insurance industry
have been implicated?the mid-sized sector and so-called excess liability
insurance (ie, the umbrella policies companies buy to top off their core
coverage), both prime territory for brokers.
But that looks certain to change. Mr Spitzer is said to like cases that
champion the average person, and he is going after general insurers too.
Subpoenas from his office demanding information were reported to have been
received this week by Aetna and Cigna (health insurance), MetLife (life
insurance), and UnumProvident (disability). Shortly after the complaint
against Marsh was disclosed, Aon, the second-largest brokerage firm, put
out a statement that only a lawyer could find reassuring: the actions
described in the complaint would have violated its own policies and ?to
the best of our knowledge? were not present at Aon. Mr Spitzer's office
quickly indicated that Aon is being examined with particular interest.
And Mr Spitzer is not the industry's only legal threat. On October 19th
and 20th Connecticut's attorney-general sent out dozens of subpoenas to
insurers operating in the state in the health, auto and employee-benefit
sectors. In May he began investigating claims of widespread price-rigging
and kick-backs. California began its own investigation of insurers and
insurance brokers this spring. John Garamendi, the state's insurance
commissioner, says he will soon bring civil charges against a number of
companies, as well as introducing new rules to improve disclosure.
Meanwhile, a barrage of private lawsuits has been filed in New York's
federal district court, most of them against Marsh for misleading
investors.
The embarrassment felt by the insurance industry is acute. But how did the
problems arise? Few people outside the industry understand either its
structure or how it has evolved in recent years. Essentially brokers are
classic middlemen. They stand between companies that want to buy insurance
and the insurers that sell it, taking a commission for services rendered.
But the broker's job is no longer one of simply finding the lowest price.
These days brokers help companies to prepare complex evaluations of their
insurance needs, often in many different countries. That task requires
knowledge of the insurance providers in each local market, but also a good
understanding of local risks. Companies' proposals and risk assessments
are used by insurers in making their bids; indeed, without the help of a
broker many large companies would be unable to solicit meaningful offers
from the big insurers. In effect, brokers serve as corporate advisers and
form an important distribution channel for insurers. Since the brokers
work for both sides, they have, increasingly, been paid commissions by
both.
In their defence, brokers say these arrangements are disclosed to clients,
and that, with adequate disclosure, the system can work. Yet disclosure is
often vague, at best, and the potential conflicts are glaring. Indeed, Mr
Spitzer has revealed what amounts to gross abuse of the pricing system.
Insurers have been offering incentives to brokers in the form of so-called
?contingent commissions??money paid only if the broker places a certain
amount of business with a particular insurer.

Contingent conflicts







Such commissions are generally calculated by the volume of business sent
by a broker to an insurer?the more the better, regardless of whether it is
in clients' interests. Less commonly, the commissions are based on the
insurer's profits. But that can also harm customers, because a broker
might choose not to push for a legitimate claim that will reduce the
insurer's profits.
In the past some lawsuits have stemmed from these arrangements, notably a
big case against Marsh and Aon in 2000. After a settlement, the testimony,
evidence and disposition were subjected to a strict gag order, a common
outcome in insurance cases. But legal momentum against contingent
commissions has been building. The crucial breakthrough in Mr Spitzer's
investigation appears to have been the emergence during the past month of
telling e-mails. According to the complaint, Marsh threatened to ?kill?
one insurance company if it did not provide sufficient commissions. ACE
was told by Marsh that receiving more business would require the payment
of ?above market? commissions to Marsh (as opposed to lower rates to
Marsh's clients).
Further, Marsh executives were rewarded for moving business to insurers
paying high commissions and penalised when they did not. In one of the
most egregious moves, Marsh reached a deal that linked the size of its
contingent commission to AIG's ability to maintain prices on policy
renewals. ?Marsh is secretly raising the price of insurance for its
clients and putting at least some of the increase into its own pocket,?
says the complaint.
As bad as this may seem, the most damning allegation is that Marsh took
its desire to steer business to insurers one step further and actually
rigged bids. The complaint describes a series of schemes whereby AIG would
submit an uncompetitive ?B Quote? against a rival's bid at a rate
suggested by Marsh. Marsh would then show its customer what were
apparently competing quotes, knowing that invariably the rival's cheaper
quote would be accepted and that it would later pocket a contingent
commission. In return, AIG would be allowed to win business in the future
on similar terms.
Mr Spitzer cites a specific example of ACE making a bid more costly at
Marsh's direction to allow AIG to provide the low offer on renewal of a
policy with Fortune Brands, an American conglomerate. The Hartford,
another American insurance giant, went along with similar schemes,
according to the complaint, ?because Marsh was its biggest broker, and it
felt that Marsh would limit its business opportunities if it refused.?
Munich-American RiskPartners, the American subsidiary of Munich Re, was
asked so frequently by Marsh for a ?live body? to attend client
presentations for the sake of appearing to provide competition that a
manager sent a message to Marsh: ?While you may need ?a live body', we
need a ?live opportunity'.? In an internal memo, a Munich-American manager
characterised quoting artificially high quotes as ?basically dishonest?
and ?awfully close to collusion or price fixing.?
After the charges were announced, shares of ACE and AIG fell by more than
10% and Marsh's by more than one-third (see chart 2). Tellingly, the share
price of every other insurance company and broker fell as well. Marsh's
market value has now halved, while AIG's is lower by $24 billion.








However, it is unlikely that any company will be driven out of business as
a result of the scandal. Even Marsh might not be hit as badly as it may
deserve. Typically, the risk departments of companies begin discussions
about renewing their annual policies on September 1st, in order to allow
for an orderly transfer at the end of the year. It may already be too late
for them to go through the lengthy assessment and solicitation process
with another broker. There is also a scarcity of choice. Consolidation has
boiled down the number of truly global brokers to just three?Marsh, Aon
and Willis. There could be a big shift if one of these were to be given a
clean bill of health. In the meantime, Marsh, unlike an insurance company,
faces no counterparty risk and thus should avoid the kind of fatal spiral
that can hit a leveraged financial firm during a panic.

Marsh's quadruple whammy
Whether Marsh survives in its current form, however, is another question.
Mr Spitzer says Marsh's bosses have not been ?sufficiently forthcoming,
open or honest to persuade me that they are the appropriate leadership if
this is to be a reformed company.? Marsh's Putnam asset-management
division was caught up in the mutual-fund scandal and its Mercer
consulting unit is currently being investigated for its pension
recommendations and also played a controversial role in the huge
compensation package that was awarded to Richard Grasso, former boss of
the New York Stock Exchange who is also being prosecuted by Mr Spitzer.
Presumably Marsh's board is gearing up to make big changes?Mr Spitzer says
he will not settle charges with the current top team. Shrewdly, on October
15th Marsh appointed Michael Cherkasky as the group's new boss. He
recently led Kroll, Marsh's corporate-investigation subsidiary, previously
part-owned by AIG. In the distant past, Mr Cherkasky did a stint
supervising a young Mr Spitzer in the Manhattan district-attorney's
office.
But even if only some of today's top management survives, Marsh is badly
bruised. It has suspended taking any contingent commissions, and revealed
that these amounted to $845m last year, 7% of revenues but, more
tellingly, one-third of its pre-tax profits. It might have to give all of
that back. And anything short of a victory in court will trigger a large
fine.
AIG has also been battered. The scandal comes on top of investigations by
both the Securities and Exchange Commission and the Justice Department for
work it did structuring off-balance-sheet entities for PNC Bank and
possibly other companies as well. In a conference call with analysts, Mr
Greenberg said the loss of contingent commissions would have no business
consequences, but that seems naive coming from one so experienced. Losing
access to a price-rigging cartel can surely only increase competition.
Inevitably, this will affect other insurers, putting structural pressure
on prices just as cyclical factors suggest rates are softening. And still
unclear is what sort of broad resolution Mr Spitzer might seek. In prior
investigations, his style has been to use the threat of litigation to
force through agreements that include lots of money, carefully scripted
non-confessions of guilt, and widely trumpeted vows of reform. The results
have often been disappointing. It is probably no coincidence that
agreements with investment banks and mutual funds have resulted in money
moving to less-regulated areas, namely private equity and hedge funds.
Insurance more than perhaps any other industry is global, so an
inappropriate move by Mr Spitzer would surely send business overseas.

Europe looks on
But might the rot have already spread overseas? For the moment European
insurers are on the periphery of the American scandal. Only Germany's
Munich Re, the world's biggest reinsurer, and Zurich Financial Services, a
Swiss insurer, were mentioned in Mr Spitzer's complaint and neither is
accused of any wrongdoing.
Further, Europe does not have an equivalent of Mr Spitzer, and regulators
in Europe are not currently intending to investigate relations between
insurers and brokers. So only European insurers with a presence in America
risk being directly involved in the scandal for the moment. Swiss Re
writes 40% of its property and casualty business in America, although only
20% of these contracts are done via brokers. A similar portion of Zurich
Financial Services' non-life policies are written in America, mostly
directed through brokers.
All the same, European financial markets reacted nervously, and shares in
Munich Re, Allianz and AXA all fell. The unknown factor is whether
Europeans have also been corrupt. After all, the temptation facing brokers
is the same everywhere. Like their American counterparts, European
insurers pay brokers contingent commissions. Brokers also demand that
insurers provide reinsurance work in exchange for referrals. Criticisms of
these practices used to fall on deaf ears. ?We consider contingency fees
an aberration and we have been asking brokers since 1998 to abolish them,?
says Thierry van Santen, head of the Federation of European Risk
Management Associations in Brussels.
German insurers claim they are not aware of any unsavoury practices at
home. For one thing, the use of intermediaries is less common. In many
cases Allianz, Europe's biggest insurer, and Munich Re deal directly with
clients. Moreover, Lufthansa, Siemens and other big firms have in-house
brokers, which are not conflicted. Even so, American brokers have made
inroads in the German market in recent years. Today the country's biggest
broker is Aon Jauch & Hübener, a subsidiary of Aon. It is followed by
Marsh, which expanded in 1999 when it took over Gradmann & Holler, a
broker in Stuttgart.
German brokers are not regulated by BaFin, the country's financial
regulator, but rely on a consensus-based system of self-regulation. The
VDVM, an association of German insurance brokers, recently developed an
ethics code for its more than 570 members. It now wants to speed up the
implementation of these guidelines.
In France insurers and brokers profess to be shocked by Mr Spitzer's
discoveries. Leading French brokers such as Fimat claim they are more
transparent about their fees than rivals in other countries. They are, at
least in theory, regulated by an agency under the wings of the economics
ministry. According to French insurance legislation, the agency ?can?
oversee brokers. In reality they look after themselves, much like their
German colleagues. In 2001 they agreed their own code of conduct when one
of their main trade unions jointly developed new guidelines with France's
association of risk managers.
But brokers in France and Germany will soon lose some of their
independence. The European Union's Insurance Mediation Directive aims to
bring all parties involved in the sale of insurance under the jurisdiction
of one national regulator. The directive comes into effect next January,
although it is being resisted fiercely by insurance lobbyists, so it will
take even longer than usual for member states to implement the law. One
obvious hurdle is that France and Italy, among others, do not have a
single financial regulator.

A British disease?
Mr Spitzer's charges have raised most alarm in Britain. As in America, the
business there is dominated by a handful of brokers. Aon has 25% of the
British market, and Marsh is also a leading broker. Britain has several
good-sized insurance brokers of its own. Willis is headquartered in
London; others include Jardine Lloyd Thompson (JLT) and Benfield, a
reinsurance broker. Benfield does about 40% of its business in America and
has been contacted by Mr Spitzer, but says it does not accept contingent
commissions. JLT says such commissions account for just 2% of revenue.
Though share prices in both companies dropped in the wake of Mr Spitzer's
announcement, researchers at UBS, an investment bank, say that Marsh's
stumble could mean more business for them. Justin Bates of Numis, an
institutional broker, says Mr Spitzer's charges may stop both firms from
being snapped up by the big three as insurance pricing softens.
Many people expect British regulators to launch their own investigation.
But that will not happen immediately. The General Insurance Standards
Council, the current regulator, says that it has no interest in a ?fishing
expedition? in the absence of a complaint. It is more likely, then, that
the Financial Services Authority (FSA), which takes over the regulation of
insurance brokers next January, will follow up on Mr Spitzer's complaints.
Though the FSA says that it is ?monitoring the situation?, it has taken
its cue from Mr Spitzer before on matters such as market-timing (a sin of
mutual-fund managers) and investment banks' allocating of shares in hot
initial public offerings to preferred clients. On both those counts,
Britain has avoided the worst abuses (though there have been plenty of
other financial-services scandals). The industry is cringing at the notion
of the FSA demanding yet more information on top of the existing deluge of
paperwork. But that might prove a small price to pay if the result is that
it avoids the punishments facing American firms. The insurance industry's
moment in the spotlight is far from over.

Money To Be Made In Carbon Trading

Money To Be Made In Carbon Trading
The Hindu, 17 October 2004 - Capital markets can save the planet from
global warming - and earn billions for financial institutions at the same
time. That, at least, is what a growing army of City of London enthusiasts
say about carbon emissions trading, the new way to make money from
environmental restrictions.
Banks and brokerages are piling in to trade in pollution permits,' an
increasingly prized commodity as regulation tightens. Gas-guzzling
industrial corporations will soon be scrambling to buy these credits. With
the launch of a formal Europe-wide emissions market in the New Year, the
international community of carbon brokers' is about to come of age.
Permits equal to a million tonnes of carbon emissions were bought and sold
in September alone, a 20-fold increase since the beginning of 2004,
according to the consultancy Point Carbon. Russia's recent declaration
that it will ratify the Kyoto Protocol on climate change will boost the
market further, as will alarming headlines last week that suggested that
global warming has begun to accelerate rapidly.
Big idea
Emissions trading is one of those unusual big ideas' that can claim a
measure of support from environmentalists, businessmen and politicians
alike. It follows a series of initiatives, usually led by the European
Union (E.U.), to reduce the amounts of carbon released into the atmosphere
by factories, power plants, steel mills and even commercial office blocks.

The plan is for big companies to be given an allowance' of carbon they can
emit. If a company exceeds its permitted pollution quota, it will face a
fine. If, however, it beats its allotted target, it can sell on the
remainder of its allowance to other firms, which use it to extend theirs.
From a government standpoint, the aim is to control total industrial
emissions while making it as easy as possible for the private sector to
fall in line. Currently, emissions trading is based on swapping carbon
credits at a future date. The E.U. scheme does not take effect until
January 2005 and thousands of companies have not yet even been given their
allocations. But there is little doubt in London's financial district that
emissions trading could be a profitable branch of the commodities market.
London's International Petroleum Exchange is aiming to become the hub of
global trading, on the basis of the City's experience of buying and
selling emissions futures so far. It is also about to start trading in a
range of new carbon derivatives. Russia's decision to move towards the
ratification of the Kyoto Protocol is important because the treaty needed
another big country's support to become legally binding. Controversially,
the U.S. has refused to sign up to the protocol, despite being the world's
largest polluter, responsible for 20 per cent of all carbon emissions.
Britain's plans
Britain plans to cut its emissions by 20 per cent by the end of this
decade as its contribution to both Kyoto and additional E.U. efforts. The
plan imposes particularly big cuts on electricity generators and
coal-fired power stations and will be difficult to implement. The
Confederation of British Industry, naturally, is not happy. It has warned
that the government's targets risk "sacrificing U.K. jobs on the altar of
green credentials."
Some environmentalists fear that tradable permits will actually delay the
day when some of the wealthier smokestack companies finally recognise the
need to clean up their operations. They predict that some will simply
relocate offshore, to countries beyond the reach of E.U. fines.
Alternatively, it is possible that the fines will not be punitive enough.
The current price of carbon futures is equivalent to Euros 10 to15 a tonne
(about Rs. 835 to Rs. 1,250), and it has been rising. Whether that proves
sufficiently expensive to force big polluters to change their behaviour
remains to be seen.
Copyright 2004 Financial Times Information


Global Warming Identified As Greatest Threat To World's Poor

Global Warming Identified As Greatest Threat To World's Poor
The Independent, 21 October 2004 - Britain's development and aid agencies
came together yesterday to recognise formally that climate change is now
the most serious problem facing the poor of the world.
In a new report on the effects of global warming on developing nations, Up
In Smoke, a coalition of 18 aid and green groups, from Oxfam and Action
Aid to Greenpeace and Friends of the Earth, agreed that the warming
climate could wipe out all the hard-won development gains of the past half
century, and that poor countries would suffer worst of all.
It was a significant shift in position for the development movement, parts
of which have in the past seen environmental concerns as a side issue,
compared with the immediate and pressing task of relieving mass poverty in
Africa and other developing regions. But the agencies said yesterday they
could no longer ignore their own evidence that the effects of global
warming are already being directly felt by the world's poorest people and
countries.
Changing rainfall patterns, severer droughts, and in particular, the
increase in extreme weather events are predicted to be one of climate
change's most damaging features. "Food production, water supplies, public
health and people's livelihoods are all being damaged and undermined,"
said the report. "We fear that global warming could threaten the
attainment of the Millennium Development Goals and even reverse human
development achievements.
"The devastation caused by Hurricane Mitch that hit Central American in
1998, or the 2004 floods in Bangladesh and India, shows that an acute
danger now exists for many the slow, hard-won gains in human development
of the last few decades: in places, these could be swept away in hours."
The report called for a global risk assessment of the costs of adaptation
to climate change in developing countries - something that has never been
done - and said that rich nations should put up "commensurate" funds for
measures such as flood defences. It recommended that in future all
development projects should be "climate-proof" and "climate-friendly".
Dr Rajendra Pachauri, chairman of the UN's Intergovernmental Panel on
Climate Change (IPCC), who wrote the foreword to the report, said that
agricultural research for developing nations would have to change
significantly.
Much of it, he said, was still "unfortunately" focused on "green
revolution" type crops - strains that give ever-increasing yields - but
now there would need to be a focus on crops which could resist the changes
that are going to take place, such as drought-resistant and salt-tolerant
varieties.
Yet the most significant thing about the report was that it was being
issued at all, as in the past not a few leading figures in the development
movement - up to ministerial level - have regarded environmental concerns
such as climate change as merely a distraction.
Several developmentalists at the report launch agreed that some of their
number had been slow to accept the significance of global warming, the
science of which has been in the public domain for 15 years.
Andy Atkins, the advocacy director of Tearfund, which operates in 60
countries, said: "We're not scientists, we wait for the evidence that poor
communities are being affected, and we could have predicted that on the
basis of science many years ago, but we weren't yet seeing the evidence.
We are now, and as development agencies we cannot ignore it." Andrew Sims,
of the New Economics Foundation, which co-ordinated the report with the
International Institute for Environment and Development, said: "People
have joined up the dots on climate change and they realise how things are.
I'm celebrating the fact that everybody's here now."
Copyright 2004 Newspaper Publishing PLC