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Ethical banks emerging stronger


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Banks with stronger sustainability credentials
have shown greater resilience during the global
financial crisis

Published in: Business, Economy & Finance
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Ethical banks emerging stronger

  1. 1. greater focus on sustainability might A Ethical banks have helped a number of banks to survive the financial crisis, which has seen the industry losing an estimated $3 trillion in write-downs. On the other hand, banks emerging stronger and financial institutions that were not known for commitment to sustainability were among the first victims of the crisis. It appears that in the US, the epicentre of the financial crisis, sustainability was the last thing on the agenda of some of the largest financial institutions in the world. Citigroup is the only US bank making it By Rajesh Chhabara regularly to the Dow Jones Sustainability World Index, which assesses companies on Banks with stronger sustainability credentials rigorous sustainability criteria for annual listing. Bank of America made it to the DJSI have shown greater resilience during the global only once, in 2002 when the index was financial crisis launched.
  2. 2. Financial crisis 21 an honour it has held since 2007. The index has 16 companies in the financial services A bumpy ride – benefits of category; seven are European and only one a sustainable index listing is American. In the insurance sector, 14 firms Lehman Brothers, Bear Sterns, Merrill Lynch, Fannie are listed; all are European. Mae, Freddie Mac, Countrywide Financial and AIG In the US, the government has invested were among the largest US financial services compa- about $200bn over the past year in nies that either failed or were acquired by rivals under hundreds of banks to bail them out. Banks duress or bailed out by the government. Of these, that received the help included iconic Lehman, Countrywide, AIG and Freddie Mac never names such as Citigroup, State Street, Wells found a place on the Dow Jones Sustainability Index Fargo, Bank of America, JP Morgan Chase, while Bear Sterns and Fannie Mae made it on to the Morgan Stanley, Goldman Sachs and Bank index only once and twice respectively. of New York Mellon. The DJSI listing tests include corporate governance, With the exception of Wells Fargo, Citi- risk and crisis management, stakeholder manage- group and Bank of America, the bailed-out ment, environmental reporting, environmental banks have since paid back the government. policy/management system, climate change gover- Observers say these banks returned the nance, corporate citizenship/philanthropy, social money partly because they recouped some reporting, and occupational health and safety. of their losses and partly to escape stringent European and Australian financial firms have conditions attached to the bail-out money dominated the DJSI since its inception. But Britain’s such as restrictions on executive pay. Northern Rock was not one of these. Northern Rock On the corporate responsibility front, was one of the early victims of the financial crisis except for Citigroup and State Street, these in the UK and was eventually taken over by the government. European and Australian Most banks that have regularly featured on the DJSI have shown remarkable resilience in the face of what financial institutions are is dubbed as the worst recession since the Great ahead of their US peers when Depression of 1930s. These include UBS, HSBC, UniCredit, Deutsche Bank, Credit Suisse, BNP it comes to sustainability Paribas, Barclays, Dexia, ANZ, National Australia Bank and Westpac. Many of these also appear on large banks have not presented any FTSE4Good Index, which tracks the performance evidence that they have changed the way of companies meeting international corporate they run their business. Citigroup and State responsibility standards. Street on the other hand maintained their place in the latest DJSI, published in September – evidence that the financial says the Equator Principles helped the bank crisis and the subsequent recession have not to create awareness about sustainability and affected their commitment to sustainability. triggered the development of overall Citigroup’s chief executive, Vikram sustainability policies. Seeing the benefit, Pandit, declared in a testimony before the ING voluntarily decided to extend the envi- State Street, a financial services firm, is US Congress’ financial services committee ronment and social risk framework beyond the only US financial firm other than Citi- in February that he would take a salary of project financing to include all transactions. group that has frequently made it to the only $1 and no bonus until the bank This year, the bank took a leadership DJSI. Both Citigroup and State Street appear returned to profitability, setting a new high position and extended the framework to to be doing well, though Citigroup needed ground for other chief executives. insurance business as well. bail-out money from the US government. “Our environment and social risk frame- Another financial services giant, Merrill Environmental and social risks work is much more than only the Equator Lynch, appeared on the DJSI from 2003 to One of the reasons that banks with a Principles. We have sector policies, human 2007 before losing its place on the index. sustainability focus have done relatively rights policies and environment manage- The DJSI suggests that European and well is that they had put in place more ment policies,” Schreve says. ING has Australian financial institutions are ahead of robust environmental and social risk introduced specific sustainability policies their US peers when it comes to sustain- management. This started with the launch for environmentally and socially sensitive ability. Of the 24 banks listed on the Dow of the Equator Principles in 2003 – environ- sectors such as oil and gas, mining, forestry, Jones Sustainability World Index 2009, 15 ment and social standards for project manufacturing, agriculture, gambling and are European. Australia and Canada each financing. UniCredit, ING, Barclays, Credit defence. has three banks on the list. Citigroup Suisse, ABN Amro, Westpac and Citigroup ING uses its environment and social risk remains the only bank from the US. ANZ of were among the first principles signatories. framework to classify potential clients into Australia leads the pack as the super-sector Leonie Schreve, head of ING Bank’s three categories, based on their environ- leader with the highest sustainability score, environment and social risk management, mental and social performance. “The aim is
  3. 3. 22 Financial crisis Ethical Corporation • November 2009 to focus on those that are best in class, to risks that can turn into financial risks Top banks help those who are average performers and overnight,” says Karen Wendt, vice-presi- not to engage with the worst in class dent for extra-financial risk advisory at Many leading banks are included in the Dow Jones companies,” Schreve says. UniCredit. For example, a major campaign Sustainability World Index 2009. Schreve says the impact of financial crisis by the local community can delay a project, has only increased the importance of these cause budget overruns and create legacy ANZ Banking Group, Australia (sector leader) policies in making business decisions. problems, she adds. UniCredit has included Banca Monte dei Paschi di Siena, Italy Similar practices adopted by several environmental and social risks in its system Banco Bilbao Vizcaya Argentaria, Spain other banks have improved the quality of of rating all transactions for sustainability. Banco Bradesco, Brazil investment by minimising risk. Standard “We have ended up with a better portfolio. Banco Santander, Spain Chartered Bank, which is a signatory of the We have a portfolio which has relatively less Bank of Nova Scotia, Canada Equator Principles and is listed on risk,” Wendt says. Barclays, UK FTSE4Good Index and FTSE4Good Envi- Citigroup took a leadership role in 2003 BNP Paribas, France ronment Index, set a leadership example in by initiating the launch of the Equator Prin- Canadian Imperial Bank of Commerce, Canada March 2009 when it announced position ciples with nine other banks. “For Citigroup, Citigroup, United States statements on 11 sensitive industrial sectors: signing up to the Equator Principles was a Credit Agricole, France forestry and palm oil, mining and metals, oil starting point for establishing a broader Credit Suisse, Switzerland and gas, biofuels, dams, gaming and environment and social responsibility and Deutsche Bank, Germany gambling, transportation of hazardous risk management,” says Shawn Miller, Citi- Dexia, Belgium materials, fossil fuel power generation, ship group’s director of environmental and DnB NOR, Norway breaking, tobacco and nuclear power gener- social risk management. HSBC, UK ation. The bank also announced position Miller says the bank realised it had other Itau Unibanco Holding, Brazil statements on child labour and climate transactions that were outside the scope of Lloyds Banking Group, UK change. the Equator Principles where it could apply National Australia Bank, Australia Yulanda Chung, head of sustainable a similar environment and social risk Nedbank Group, South Africa business at Standard Chartered, says these screening tool. As a result, the bank decided Royal Bank of Canada, Canada statements and guidelines will promote to expand its environment and social risk Royal Bank of Scotland, UK sustainable finance and reduce environ- policy to include transactions such as corpo- UBS, Switzerland mental and social risks for the bank. rate loans, bond underwriting and equity UniCredit, Italy Chung points out that Standard Char- underwriting. “It has really helped us Westpac Banking, Australia tered is the first bank to have a policy on ship manage our risks,” Miller says. breaking, which has a potentially high impact on health and safety and the environ- Climate leadership ment. Most of the ship breaking activity is More recently, banks with creditable now taking place on the Indian sub-conti- sustainability practices have also started nent where Standard Chartered has a major making commitments on climate change. presence. Chung says the bank has financed HSBC was rated number one in the finan- four ship breaking clients in Chittagong, cial sector in the 2009 Carbon Disclosure Bangladesh. Under the ship breaking Project Global 500 while Standard Char- financing guidelines, the bank is going to tered Bank was rated the best in 2008. The conduct an independent third-party audit of Carbon Disclosure Project is a non-profit all four clients. She says the bank will ask initiative to collect and distribute climate them to come up with a corrective action change information about companies, plan if the audits reveal that they are not which produces the Carbon Disclosure meeting the bank’s sector position statement. Leadership Index. This year, the CDLI Standard Chartered is applying the included a number of banks such as ANZ, position statements and the sector guide- Australia National Bank, Commonwealth lines to small local firms and large Bank of Australia, Lloyds Banking Group, multinational clients. Chung says making Westpac Banking and Bank of Montreal. environmental and social risk assessment an In another leadership initiative, integral part of the credit approval process Standard Chartered and HSBC, Swiss Re, has improved the bank’s overall risk Munich Re and Credit Agricol adopted the management. Climate Principles, a voluntary framework UniCredit, one of Europe’s largest banks to guide the finance sector in tackling the and a regular on DSJI and FTSE4Good challenge of climate change. Participating Index, is another bank that says it has bene- banks and financial institutions commit to fited from introducing stringent minimising their operational carbon foot- environmental and social risk management print as well as help their clients to manage policies. “We not only have financial risks in climate change related risks by developing Venerable institutions went to the wall transactions, we also have extra-financial appropriate products and services.
  4. 4. Ethical Corporation • November 2009 Financial crisis 23 Principled institutions The following have adopted the Climate Change Principles: Credit Agricole HSBC Munich Re Standard Chartered Swiss Re Source: The Climate Group are also paying attention to embedding sustainability across their organisations. “We did not want sustainability to be a standalone department doing things that the rest of the bank is not aware of,” says Microfinance punches above its weight Standard Chartered’s Chung. She says a seamless integration of sustainability into While adopting climate policies and farmers offering a one-year loan of up to every aspect of business is a key feature of strategies that address environmental and 50,000 yuan (about £4,500). Standard Chartered’s approach. social risk have helped these banks to Citigroup launched Citigroup Microfi- improve risk management, commitment to nance in 2005 with an aim to provide Committee structure sustainability has led to identifying new financing and other services such as loan This is also reflected in the organisational business opportunities such as microfi- syndication, securitisation, insurance and structure. For example, there is a group nance. savings and remittance to microfinance environment committee that is represented Microfinance has remained recession- institutions. Citigroup Microfinance now by senior executives from key divisions such proof, with the added benefit that it helps works with more than 100 microfinance as wholesale banking, consumer banking, banks to make a positive difference to institutions in 13 countries. In September risk management, technology, operations communities. Standard Chartered Bank, for this year, Citigroup Microfinance signed a and property services. Similarly, the whole- example, made a pledge in 2006 under the deal with the Overseas Private Investment sale banking division has a reputational risk Clinton Global Initiative to give $500m of and responsibility committee that assesses credit to microfinance institutions by 2011. each proposed transaction for potential By mid-2009, the bank had already Microfinance has remained impacts. provided $450m to more than 50 microfi- recession-proof, and helps Standard Chartered has also renamed its nance partners in 14 countries in Asia, Africa banks to make a positive sustainability team as sustainability and and the Middle East. In 2008, it put in place operations. “The operations element implies a technical assistance strategy aimed at difference to communities that we are trying to embed sustainability using the bank’s expertise in governance, into business activity,” Chung says. She risk management and operations to help the Corporation, a US government export credit adds that the sustainability and operations microfinance partners to introduce best agency, to lend $250m to microfinance insti- team is responsible for annual financial practices. tutions around the world. This is an reporting as well as sustainability reporting. In a separate initiative, in 2008 Standard expansion of an earlier deal between Citi- ING’s Schreve says her bank has been Chartered published Managing Environ- group Microfinance and Opic in 2006 that conducting organisation-wide training to mental and Social Risks in Microfinance, a pledged $100m for funding microfinance educate employees on how to implement research paper urging microfinance institutions. Under the deal, Citigroup environmental and social risk framework in partners to embed social, environmental or provides funding while Opic part-shares day-to-day business. ethical impact considerations in their the risk. Embedding sustainability across an lending decisions. These principles are now Deutsche Bank was the first bank to organisation is crucial for the long-term included in the loan agreements signed create a microfinance fund 10 years ago. The success of sustainability programmes. Banks between microfinance partners and bank says it has channelled $170m to more that have realised that their sustainability Standard Chartered. than 100 microfinance institutions in 45 initiatives have helped them manage Learning from microcredit seems to have countries and will continue to expand in the business and reputational risks during the helped Standard Chartered to tap into the sector. recession have all the motivation they need vast economic potential in rural China, As sustainability leaders work towards to integrate sustainability principles having become the first bank to open a delivering their commitment to managing throughout their business. And those that “village bank” in a the remote settlement of environmental and social impacts, microfi- ignored sustainability and pursued greed- Helingeer, Inner Mongolia, in November nance, climate change and other issues such driven profits have had a hard lesson. The 2008. In August this year, the village bank as money-laundering, financial crimes, leaders have learnt that sustainability makes launched an unsecured lending service for governance and workplace practices, they business sense. I