Amy Domini, founder of Domini Social Investments, believes Michelle Chan is taking the lead in socially responsible investing.

Carmel Wroth | Jan/Feb 2009 issue

There’s a framed photo hanging in Michelle Chan’s living room that makes her feel uneasy when she stops to look at it. It shows an old Chinese couple standing in an alley. The man’s eyes are downcast. The woman looks up, into the distance, soft light illuminating her face. Behind them are round, woven baskets leaning against a wall. From the moment Chan bought the picture, she says, it got to her: “I knew the picture was of a scene in a place that doesn’t exist anymore.”
Chan fought for nine years to save that place, but her efforts ultimately failed. Despite the vehement objections of environmental and human-rights organizations, the Chinese government built the Three Gorges Dam on the Yangtze River, completing it in 2008 after more than a decade of construction. The dam displaced an estimated 1.4 million people, flooded 370 miles of farmland, destroyed towns, villages and countless archaeological sites and threatened the river’s fish stock and endangered dolphin species. And of course, it displaced the old man and woman in the picture, whose home and ancestors’ graves are now under 500 feet of water.
Though Chan couldn’t stop the dam, the struggle gave her motivation and direction in her career. In 1995, Chan, just 23 at the time, took on the Three Gorges battle as a campaigner with the environmental organization Friends of the Earth. Instead of protesting against the Chinese government directly, she and fellow campaigners took a new approach: They exposed the Wall Street banks involved in funding the project, a tactic that gradually reshaped public expectations of banking.
It was the first major project in which non-governmental organizations (NGOs) had gone to private-sector banks and asked them to take responsibility for the ethical and environmental impact of the projects they funded. And it was the first time that some commercial banks acknowledged that certain projects were too harmful to merit their involvement.
The term “sustainable” has become commonplace, but it usually refers to consumer products, agricultural practices or energy. Chan’s work has done much to create and push forward the concept of sustainable finance: the idea that banks should evaluate investments based on social, ethical and ecological as well as financial criteria. Organizations such as Friends of the Earth see banks as key to getting corporations to practice corporate responsibility. Thanks in part to pressure from NGOs, more than 60 commercial banks have voluntarily adopted a set of ethical principles for assessing the environmental and social impact of investments in the developing world. Many banks have also begun to implement environmental and social responsibility policies affecting their operations.
With worries over climate change intensifying and a financial system in crisis because of widespread use of risky investing practices, many environmental organizations think the time is right for sustainable finance to become even more far-reaching. “The public—especially the American public, because we’ve paid a lot for the bailout—is ready to see a return to soundness, sustainability and decency in our financial system,” Chan says. “People are hungry to participate in a way that allows their savings and investments to create positive change.”
One afternoon in her office in San Francisco’s financial district, Chan is laughing hard, catching her breath to talk, then losing it again. She has a bottle of Maker’s Mark bourbon in her hand and is about to toast her office mate Adina Matisoff. But the success she’s celebrating is a quiet one. She and Matisoff have just completed a paper analyzing China’s new financial regulations; surprisingly, they include environmental laws, which Chan suggests provide an example to the U.S.
It’s hardly a high-profile stunt, but pushing forward new ideas is Chan’s particular brand of activism. “A lot of what advocacy groups struggle with are power issues,” Chan says. “Part of the job is to shape the debate, to get your ideas out there.”
And Chan is quite skilled at it. “She’s an incredible pioneer,” says Matt Arnold, director of Sustainable Finance Limited, a consulting firm that works with banks on their environmental practices. “She’s been doing this for longer than most people knew it was a ‘thing.’ She’s provided a huge amount of intellectual content for developing these policies at banks.”
Chan knew sustainable finance was the next frontier in the mid-1990s, when she got her start. Back then, the idea of asking Wall Street banks to broaden their definition of corporate responsibility was new. “At the time, big companies thought being environmentally sensitive meant recycling their office paper,” Chan says. “We had to push to redefine what social responsibility meant for these big companies. The way we did it was by talking to them about the environmental impacts of their portfolios.”
One part of banks’ portfolios was particularly vulnerable in discussions of ethical behavior. It was a narrow but important segment of banks’ global business called project finance, the most common lending practice for funding infrastructure and resource extraction in the developing world. It quickly became the lever NGOs used to raise consciousness within the banking sphere. In the early 1990s, the World Bank had changed its policies to encourage more of these investments by commercial banks. NGOs already knew how to lobby the World Bank, which has a mandate to work for the public good; the challenge Chan took on was to develop techniques that would work with private sector banks that think in terms of profit.
The way to do that, she discovered, was to frame ethical conversations in terms of financial risk. Project finance provided the perfect entry point. These loans are typically guaranteed on the basis of the revenues of the project, which leaves the bank no claim to a client’s other assets should the project fail. This means the bank’s bottom line is much more vulnerable to the risks of the project; it’s therefore in the bankers’ interest to assess the negative environmental and human impact that might cost money to fix. “These issues at the project level are very visible, real and occasionally quite tragic, so they scream out for a robust risk-management framework,” says Sustainable Finance Limited’s Arnold.
The work on project finance paid off in 2003 when a group of major U.S. and European banks voluntarily adopted the Equator Principles, a set of ethical standards and operating procedures for managing these kinds of investments. Participating banks agree not to lend money to borrowers who don’t comply with standards of environmental and social responsibility, as defined by the World Bank’s International Finance Corporation, including concern for pollution, biodiversity, fair working conditions, involuntary resettlement and the rights of indigenous peoples.
Chan often uses the phrase “necessary but not sufficient” to talk about her work. “Are things different today than they were yesterday because this bank or group of banks has decided to follow environmental standards?” she wonders. “It’s something I ask myself all the time.” If the roster of financial conglomerates at which Chan has helped shape environmental policies is any guide—Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley and others—it does make a difference.
Shawn Miller, director of environmental and social risk management at Citigroup, says Citi has changed the way it operates as a result of adopting the Equator Principles. For example, a company wanted to borrow money for an oil and gas development in the Middle East that posed harm to a coral reef. Citi hired outside experts to assess the situation and finally required the project developer to alter the plan and protect the reef. Citi now invests more heavily in alternative energy, and recently committed to uphold a set of standards for coal power investments. Called the Carbon Principles, these commit the company to working with coal-fired power clients to encourage lower CO2 emissions and investment in alternative energy options.
“It’s opened up the company’s thinking on broader opportunities, not just from a risk-management perspective,” Miller says. “It helped us start thinking, ‘Okay, we manage our risk appropriately, but we can also make money out of doing good.’”
The crucial question for Chan is: Will banks stick by the principles they espouse, especially during a dire economic downturn when profits may take precedence over principles? In 2004, Chan founded BankTrack to support organizations that were keeping watch on banks both in the U.S. and abroad. BankTrack is a confederation of international environmental and human-rights groups that monitor and lobby the global financial sector. In part, they work to fill in what Chan sees as the biggest missing piece of the Equator Principles: accountability. They track information about “dodgy deals” and make sure the public is aware of banks’ activities.
A few years ago, Chan started paying attention to the influence of another major power player in development: banks of emerging economies. In particular, she looked at China, which was expanding its investments in other countries to feed its growing economy. “What we’ve found is the most lucrative and easy natural-resource extractions have already been taken by Western nations, but you now have emerging market economies competing with us for the same kind of concessions,” Chan says. “Since the world is reaching its ecological limits, the struggle to get the last resources out is going to be pretty nasty.”
For example, China is involved in Indonesia, where forests are being cut down at a rate of almost 5 million acres (2 million hectares) annually, mainly from illegal cutting, according to the World Bank. Chinese banks fund several logging operations there, and environmental groups allege that some companies engage in illegal forestry practices, including logging in endangered tiger and elephant territory. Chan has been to China several times, teaching environmental groups to use some of the same advocacy techniques she put into practice with Wall Street banks. Groups there are protesting a range of companies they say pollute or disregard human rights in China. She’s impressed on them the direct connection between polluting companies and the financial institutions that underwrite them. “If you can follow the money and get conditions put on the money, you can potentially improve the actions of corporations,” she says.
It turns out that environmental organizations have a surprising ally: the Chinese government. Starting in 2007, Beijing has passed a series of laws to restrict major banks from lending to and investing in companies with poor environmental records in their operations within China. For instance, China created a “green credit policy” that blacklists companies with negative environmental records. Another law requires companies seeking initial public offerings to get approval from the Chinese Environmental Ministry. “It’s funny and heretical to rip a page from China’s quasi-socialist playbook,” Chan says. But she adds that China—which recently bailed out its financial sector as well—is in a situation similar to that in the West, and the U.S. could learn from its model. “It’s something that we should consider as we rewrite our financial regulations or consider our economic stimulus package,” she says. “We should consider how this moment can be shaped to create a more sustainable future.”
Chan’s office is decorated with mementos of her travels: strings of glimmering purple fish scales from an indigenous group in the Amazon; a miniature barrel of sweet, light crude oil from the Urucu-Porto Velho pipeline in Brazil; a bright set of trading cards made for the annual Socially Responsible Investing Awards, which include one made in her honor—a young superhero in red tights brandishing a sword, captioned “Michelle Chan: Global Avenger.”
But Chan is hardly the typical fire-breathing radical. She labors quietly and courteously in boardrooms and at conferences, and sees change come in the smallest of increments, as shifts in the definition of corporate responsibility. She fervently hopes this is affecting practice. But measuring success on the ground is still hard. Even after 13 years, she doesn’t know for sure how much improvement has come from her work. Until banks provide greater accountability and transparency, she can’t tell whether their directors are following through on their good intentions. Unless the markets are regulated with the environment in mind, the money trail too often leads to more pollution, more population displacement and more species under threat.
“We do live in an instant gratification world,” says Chan. “But anyone involved in social change realizes these things don’t happen overnight. When you take the longer view, whatever you can achieve in your time on Earth is a contribution. It’s a job to be shared with others, as well as others that come after you.”

“Michelle Chan is an extremely strategic thinker, a hard worker, and a dedicated freedom fighter. When I think about what socially responsible investing can do to make the world a better place, she is one of the first people I think of.”
— Amy Domini, founder and CEO of Domini Social Investments, and author of several books on ethical investing.
Carmel Wroth is Ode’s editorial intern.