Business Selection and Environmental Advisory
We assess and manage environmental and social risk with the same disciplined approach that the firm uses when managing all business risks.
We seek diverse opinions, escalate relevant issues and hold our people accountable for their judgment and decisions. Our Environmental Policy Framework(“Framework”) and sector-specific due diligence guidelines provide the basis for evaluating business selection decisions and managing environmental risk. The Framework articulates our commitment to ensuring that our people, capital and ideas are used to help find and scale-up effective market-based solutions to address climate change, ecosystem degradation and other critical environmental issues. As part of this commitment, we believe it is important to take the environmental impacts and practices of our clients and potential clients into consideration as we make business selection decisions. Through prudent risk management, we not only protect the firm’s reputation, but also differentiate our advice to our clients and, where feasible, work with them to adopt more sustainable practices.
The Framework is reviewed by our Board and the guidelines are updated for emerging issues. The Corporate Governance, Nominating and Public Responsibilities Committee of the Board reviews Environmental, Social and Governance (ESG) issues affecting the firm, including through the periodic review of the ESG Report.
Selecting Business and Engaging with Clients
We approach the management of environmental, social and governance risks with the same care and discipline as any other business risk. All advisory, financing and principal investing teams conduct ESG research as part of their routine due diligence requirements. As appropriate, market making and asset management teams also conduct reviews. Our Environmental Markets Group (EMG) assists business teams by providing guidance on environmental related matters, doing independent reviews as appropriate, and identifying mitigants and positive engagement opportunities with the client to reduce risk. The Business Intelligence Group (BIG), which is part of our Legal Division and, takes a broad view of risk that includes legal, regulatory, governance and social, works closely with EMG on the transaction review process. In certain cases, Corporate Environmental Management, which is an in house team of environmental consultants with strong technical expertise, will also conduct in-depth due diligence and weigh in on environmental, health and safety (EHS) issues.
Transactions that have significant ESG issues are elevated for discussion and final business selection decision that involve key committees, business leaders, members of the Management Committee and/or the Chairman’s office. See Report of the Business Standards Committee for committee governance structure.
Though we are not a signatory to the Equator Principles as we are not an active participant in project financing or project related corporate loans, we seek to apply the general Equator Principle guidelines to transactions where applicable.
Our Due Diligence Guidelines
In addition to the firm-wide review process, we equip teams in sensitive sectors with due diligence guidelines and training to evaluate new business opportunities effectively. This includes background on current ESG issues and sensitivities in the sector, and potential questions to discuss with a company. We have due diligence guidelines that span eight sectors and six subsectors. The following provides an overview of transactions that were reviewed by EMG in 2013.
We recognize that risk management and business selection decisions are complex and often have to take into account potential trade-offs. When we identify potentially significant ESG issues, we prefer to address the issue by working with the client. Whether it is working with an extractive company in strengthening its commitment to sustainable development or engaging with an emerging market power company in facilitating the adoption of industry best practices, through proactive engagement with our clients we are able to differentiate our advice and create a better outcome for the environment, our clients and our own risk management. Where such engagement is not feasible and the transaction involves potentially material environmental damage, significant social issues or unacceptable risks that directly conflict with the firm’s policy, we will forgo the assignment.
For example, mountaintop removal, a form of surface mining used in the Appalachian region of the United States, remains controversial given the significant impact it has on ecosystems, water quality and local communities. For potential transactions for companies engaged in mountaintop removal, we perform enhanced due diligence before making business selection decisions. Among other factors, we review companies’ environmental, health and safety (EHS) track record, regulatory compliance, litigation and local community issues, remediation methods, and impact on water quality. When there are potential opportunities to raise new capital for a company that has coal production from mountaintop removal, we will work with the client to improve their environmental footprint by looking for opportunities to reduce the portion of the mountaintop removal production over time, enhance remediation methods, and reduce their impact on water quality. Where this has not been feasible and we have not been able to constructively engage with the company on these issues, we have foregone the financing opportunity.
We also continue to monitor emerging issues, regulatory developments, concerns of key stakeholders, as well as best practices relating to the environment. As part of this undertaking, we frequently meet with a number of environmental non-governmental organizations. We will periodically review and update our guidelines for emerging issues and evolving environmental concerns.
For example, hydraulic fracturing has been in use for many decades, but technological advances in its application coupled with horizontal drilling have allowed far greater production and more economic extraction of unconventional oil & gas. This has driven significant production of shale gas and liquids in the U.S., contributing to expansion of domestic energy, greater affordability of energy for consumers and industry, jobs and economic growth. However, with the rapid expansion of hydraulic fracturing, there have been increasing concerns associated with the extraction technique related to the water consumption, impact on water quality, wastewater disposal methods, air emissions and local community impacts. As such, following an in-depth review process which started in 2011, we established a new set of enhanced due diligence guidelines for unconventional oil & gas and hydraulic fracturing, which has been applied across transactions in this sector. The guidelines specify key questions that need to be addressed on these issues, including but not limited to: companies’ care taken on location and site selection; well construction method including integrity of casing and cementing; management of on-going operations including well flow and pressure monitoring; integrated water management including groundwater testing, water withdrawal, wastewater management; fracking fluid usage and disclosure; air emissions management; and engagement with and mitigation of impacts on the local community. These are in addition to normal course EHS related questions, regulatory and legal compliance, and governance requirements.
We train our people in relevant business areas on our ESG due diligence and risk management process and the Framework as new hires. In addition, they participate in ongoing training. Last year, over 600 new employees received ESG training.