Although the financial industry understands the necessity of developing methodologies and tools that examine environmental issues in the investment process, it is still not standard practice, says a new report by International Finance Corp., the United Nations Global Compact and the Swiss government.

The 2008 Who Cares Wins report urges the financial industry to advance efforts to integrate environmental, social, and governance (ESG) issues into mainstream investment decision-making and ownership practices. If they do not, consequences of climate change could fuel another financial crisis.

"Though current turbulence in financial markets may tempt investors and companies to think of environmental and social issues as tomorrow's problem, we believe that urgent and wholehearted action is warranted not in spite of, but precisely because of the market dynamics observed in the past months," said Rachel Kyte, IFC vice president for Business Advisory Services. "The consequences of climate change on the financial markets, for example, could be far more serious than what we've experienced so far and could be substantially countered through immediate action." IFC, the private sector arm of the World Bank Group, is the largest multilateral provider of financing for private enterprise in developing countries.

Scaling up ESG integration will require the investment industry to change the incentives and products they offer. The report recommends to:

Accelerate engagement of asset owners and regulators to create enabling frameworks and increase market demand for ESG-inclusive investments
Increase involvement of top-level leadership to unblock stalled situations and help them agree on how to share the costs and benefits of further market-building efforts
Strengthen public-private partnerships, voluntary initiatives and principles-based approaches like the Principles for Responsible Investment and the Equator Principles

Georg Kell, executive director for the UN Global Compact, said, "ESG integration is about investors and companies taking a longer-term view, acknowledging the full spectrum of future risks and opportunities, and allocating capital as if they themselves were the beneficial owner. There can be no better way to restore public confidence in the markets and build a prosperous economic future."

Ambassador Thomas Greminger, head of the Political Affairs Division IV, Federal Department of Foreign Affairs (Switzerland), said, "Better ESG performance and integration into the management practices requires not only market incentives but standards set by regulation. Governmental responsibilities in this regard call for regulation on environmental and social risk assessments and reporting as well as transparency. Similarly governments should encourage dialogue among different stakeholders about international standards such as human rights and labor standards that play unfortunately a still minor role for investment decisions."