The emergence of sustainable banking efforts as part of leading banks’ offerings — not just those of niche ethical lenders — reflects demands from banks’ broader group of stakeholders in civil society. Calls for more accountability and transparency have led many to pull disparate initiatives in philanthropy, corporate social responsibility (CSR), operational efficiency and clean technology lending together under this umbrella term.
This move dates back to the financial crisis. “Across the industry, the meaning of corporate responsibility has evolved in the last five years. Now it is a much broader and more thoughtful, holistic view,” believes Andrea Sullivan, head of corporate responsibility, EMEA and Latin America at Bank of America Merrill Lynch.
“Some years ago the level of engagement, transparency and performance on environmental and social measures was very low — especially among laggard banks in the US,” adds Sheila Oviedo, senior analyst at Sustainalytics, a consultancy that measures environmental and social performance.
Sustainalytics acknowledges a significant shift over the period. “Banks’ engagement is still not as sophisticated and transparent as other industries’, but they have recognised the need to engage with stakeholders. We have seen a lot of improvements in banks’ behaviour, even if they are still taking baby steps. There was nowhere to go but up for these companies. They can’t go back to their old secretive attitudes.”
Ready to refuse?
Even so, many NGOs and other critics query the depth of banks’ commitment when it conflicts with the prospect of significant profits. “There is still a question: if banks evaluate a project or a deal that is highly sensitive environmentally or socially but may be highly lucrative, do they proceed or not?” Oviedo notes, though she concedes that many would terminate a detrimental transaction.
But Sustainalytics is sceptical about banks’ willingness to consistently refuse deals of this type. “Year after year we see a number of such projects with significant impact — involving coal or big dams, for example.” While these may have development benefits, investors and the public want to understand better the robustness of banks’ engagement with their clients over mitigating the projects’ environmental or social risks, she says.
Transactions that fall short of standards like the Equator Principles (see box) carry significant risk, counters Leonie Schreve, head of sustainable lending at ING Bank. “They are not considered viable since they would expose both the client and the bank to risks that may have a negative financial impact.”
| Giving back | ||
| Two striking examples of banks’ community involvement come from Japan and Sweden. In Japan Daiwa Securities (a component stock of the FTSE4Good benchmark, one of the key sustainability indices, for the past eight years in a row) has responded to the country’s 2012 earthquake with a relief programme to help rebuild infrastructure in the devastated area. The firm is contributing half of its custodian fees from a support fund for the next five years, notes Paul Lyon, executive director and head of communication and marketing. This donation funds grants that reached ¥31m in the programme’s first year. “Such activities are not just a piece of corporate marketing,” Lyon insists. “They involve employees from all areas of the firm on a global level.” One of SEB’s large Stockholm offices is based close to an area of the capital that saw unprecedented rioting this May. While it was already engaged locally, “it was very logical to continue and increase our involvement in schools through mentoring and hands-on careers advice as part of the civil society response to the riots,” notes Cecilia Wideback-West, head of corporate sustainability at SEB. |
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A full-blooded integration of sustainability into all of a bank’s businesses requires it to refuse some deals, adds Cecilia Wideback-West, head of corporate sustainability at SEB. “We have pretty strong ethical considerations when we do business,” she notes, adding that “there might be situations where we don’t fully live up to them as mistakes sometimes are made.”
The bank — which started integrating environmental and social factors into its credit decisions as far back as 1997 — operates six policies defining best practice and minimum standards in different industrial sectors.
Although SEB sometimes gives an outright refusal, it more typically aims to persuade clients to take sustainability into account when they are lacking from a request for financing or other service. “We often find that just raising the issue shows that it is something they need to consider,” she notes.
Moreover, banks’ widespread adoption of sustainability principles creates an expectation that their clients will follow these too. “Once you want access to international finance it would be advisable to meet the standards. It is almost a ‘must’ with 79 Equator banks,” judges ING’s Schreve.
This can deliver very positive outcomes, bankers argue. An example would be encouraging a client to address an environmental issue, where a more resource-efficient solution both saves it operating costs and avoids future costs from polluting permits or fines.
Faulted footprints
Still, notwithstanding these kind of cases and the sector’s initiatives like Equator and the newer Carbon Principles launched by Citi, JP Morgan and Morgan Stanley in 2008, some observers contrast banks’ notable efforts in reducing their own carbon footprints (see Operations box) with their more limited progress on their lending businesses — their borrowers and other clients’ environmental and social impact.
NGOs are particularly agitated by the sector’s continuing role in financing fossil fuel extraction. Several campaigning organisations including Greenpeace have denounced banks’ current participation in an equity placement for Coal India, for example.
“[P]lans to underwrite Coal India’s share offering… show a worrying disregard for biodiversity and basic workers’ rights,” believes Yann Louvel, climate and energy campaign co-ordinator at BankTrack, a Dutch NGO.
Back to bail-outs
Stakeholders are especially demanding more accountability over lending footprints from institutions bailed-out with public money during the financial crisis. “Banks have all of this green energy certification, which is all well and good, but they face bigger, more substantive issues of concern to investors, such as the bail-out issue, which is not closed. Until banks are able to demonstrate that they are not contributing risk to society the intense level of public scrutiny will not go down,” believes Oviedo at Sustainalytics.
US banks have acknowledged in regulatory filings that a loss of public trust is a material risk. However, no significant disinvestment campaigns appear to be under way, while a number of US socially responsible investors remain holders of bank securities in a bid to influence lenders from the inside.
Nonetheless, for some critics banks’ traditional equating of sustainability with environmental initiatives is inadequate. Their demands go much further — to the elimination of ‘too big to fail’ systemic risk, in some cases. “It is about much more than greening your offices. Banks are slowly waking up to this new frontier in sustainability,” Oviedo believes.
Banks counter that they are already working on their institutional sustainability through better risk management and governance. “We want to make sure that we are here for the long term,” affirms BAML’s Sullivan. “Sustainable business practices are embedded in the way that the business looks at opportunities and connects with clients and stakeholders.”
“After what we have been through there’s been a realisation that running institutions for long term sustainability is not just about community work,” comments one banker.
| Acting on Principle | ||
| The ‘Equator Principles’ stand out as a pioneering and highly practical instance of banks incorporating social and environmental factors into deal-making. Based on best practice laid down by the World Bank affiliate the International Finance Corporation, the principles commit signatory banks to assessing the wider impact of their deals — including holding local consultations and obtaining appropriate permits. Signatories now number 79 in 35 countries, and even banks that are not signatories acknowledge their authority. For example, non-EP bank Morgan Stanley applies EP when it leads project finance deals. This June EP banks adopted the latest version of the Principles. EP3 became effective in June, though banks have until January 1, 2014 to adopt its requirements. Moreover, any deal signed before the adoption date is grandfathered from them. The most significant change in EP3 is the extension of the principles to new products and greater requirements for transparent recording, according to Leonie Schreve, head of sustainable lending at ING Bank. ING chairs the EP Association. EP3’s broader scope now encompasses corporate loans and bridge loans where these are related to projects. “This reflects changes in the market. We had seen that other financing structures were also relevant,” notes Schreve. Noting that the EP association has grown from an initial membership of 10 back in 2003 (ING joined in June 2003) to a much larger and broader group, Schreve highlights the “enhanced” reporting requirements that EP3 imposes on signatories. “It is very important that every bank shows stakeholders that the principles are applied in a committed and transparent way and that the association makes sure that all abide by the principles in a consistent way.” She argues further for the signal that accepting EP sends. “It enables banks to show their commitment in a really embedded way, both externally and internally.” She also emphasises the self-regulating nature of EP’s origin in the project finance market. Since virtually every PF deal is syndicated and most participating banks are EP signatories, their approaches are visible to each other. A key question for sustainable finance will be banks’ appetite to extend EP beyond the project finance arena. “Many banks like ING have learned to introduce environmental and social principles more generally,” Schreve notes. “It really makes sense to apply them to other areas of financing — plugging them into normal due diligence has helped clients make the transition to a more sustainable approach and has led to gaining clients. Why shouldn’t we apply similar standards to other activities?” |
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Following fashion?
Accordingly, banks give short shrift to the charge that they are ‘greenwashing’ — insincerely adopting a fashionable sustainability theme in response to public scepticism. “This is not a reaction to external opinions of banks per se. We are very committed to really robust relationships with stakeholders and are mindful of the long-term impact of our business,” affirms Audrey Choi, global head of sustainable finance at Morgan Stanley.
“It goes far beyond charity and reputational issues,” she adds. “We spend a lot of time on the question of what we can do that would truly be the biggest value-add to the community at large. The answer comes down to our natural competitive advantage as a large global capital markets intermediary — our sweet spot as an allocator of capital and wealth advisor.”
This is also reflected in the ‘Investing with Impact’ initiative that Morgan Stanley launched last year — initially as a part of its wealth management operation but increasingly with other business areas too. “We are trying to be catalytic and identify gaps that clients are seeking to fill,” comments Hilary Irby, executive director.
Serving self-interest
While rejecting the ‘greenwashing’ charge, banks recognise some self-interest in promoting sustainability themes. Several use the term ‘shared value’ to describe activity that has social value while also delivering value back to the company. Rachael Barber, head of community development, EMEA, at Citigroup describes this as “a win-win situation”.
This approach can also provide a competitive benefit. “Clients mostly think it is positive that we care about these issues since they do too. We can gain a business advantage from that,” notes Wideback-West at SEB.
Although the bottom-line impact is hard to measure, “we recognise there are probably brand and employee engagement benefits” from these activities, Barber says. They enhance its reputation and stakeholders’ trust in the organisation, she argues.
An example is the bank’s financing of micro and small enterprises through its local commercial bank businesses, like a recent $40m facility in Morocco. Supporting this sector also emphasises what Barber terms the “immense value to society” of making local funding available in capital-constrained markets.
Talking responsibility
“Being seen to be responsible is important for brand reputation. But it has to be backed up with metrics that matter. We must actually ‘be’ responsible to be truly successful,” judges Sullivan at BAML.
A lead from banks’ senior management is also key for embedding a more responsible approach, she believes. “Our executives understand how important it is to take a long term view, have systematic and focused decision-making, and put the right people, processes and culture in place.”
Operating responsibly also has significant benefits for attracting and retaining employees, she adds. “We want to be an institution that people are proud of and where they want to stay. Initiatives like our environment ambassadors and SME mentoring have brought another aspect to the work/life relationship.”
Globally, the firm achieved 1.5m hours of volunteering in 2012. It is aiming for 2m this year.
Citi’s Barber too sees ‘responsible finance’ as the key to sustainability. “People should examine and measure our sincerity based on what we do every day in our core business-making decisions that are right for clients and right for society generally.”
Wideback-West at SEB agrees. “We work with sustainability issues because we think long-term and take responsibility for how we run our business,” she says. “If we don’t do that, it wouldn’t help if we are out every day volunteering. The biggest impact is in having the everyday operations run well, making sure payments are efficient and financing productive things.”
Even so, she also acknowledges that the bank benefits from operating in healthier environments, which its philanthropic work can support. “When the communities where we work are flourishing it is easier for us to be in good shape.”
The bank focuses its community efforts on future generations by supporting entrepreneurship and financial literacy initiatives. Its mentoring and advice programme has already yielded a number of start-up clients.
| Operating systemically | ||
| An institution that consumes as much energy as entire countries (Nicaragua and Senegal are two comparables), Citigroup has an indisputably hefty environmental footprint. But the response from the US megabank — which operates offices, branches, data centres and ATMs in 12,000 locations across 160 nations, with over 65m square feet of real estate — demonstrates the scope for banks’ own operations to raise their performance substantially. Having met its first target for improved performance early (a 10% reduction in CO2 emissions by the end of 2011, verified by KPMG), “the organisation said ‘to be a leader in environmental management we need to do more’,” notes Sam Pilcher, environmental manager, realty services, EMEA. Accordingly, it set a broader set of targets to be achieved by the end of 2015. These cover CO2 (-25%), energy (-20%), waste to landfill (-40%) and water (-20%). The bank was one of the first blue-chips to set a target on its water consumption. The targets are “challenging but achievable”, Pilcher believes. They will again be subject to independent checking. “It is important that the targets are externally verified to a set of internationally agreed standards,” argues John Killey, head of commercial real estate services, EMEA and APAC. “As part of our overall sustainability initiative and effort to be towards the leading edge of the industry, the reductions are something we have to do and be seen to do.” Although Citi emphasises its support for external initiatives like the US Environmental Protection Agency (especially its ‘Energy Star’ programme) and the US Green Building Council’s Leadership in Environmental & Energy Design (LEED), it derived and set its targets alone. Now the bank is beginning to prepare a new set of post-2015 targets. These could be extended further to include a sustainable supply chain, though this is particularly difficult to measure, and LEED certification. Although clean technologies are becoming cheaper over time as they become more mainstream, Citi’s savings from sustainability initiatives are now mostly in less visible costs. “We’ve gone past the easy and very obvious things and are working behind the scenes, especially in technology,” Killey reports. Accounting for 20% of the bank’s electricity consumption, its data centres are by far its biggest consumer and greatest opportunity for savings. Other banks too are making clear progress in their own operations. For example, Sweden’s SEB set itself some of the sector’s most challenging targets. It committed to lower emissions by 45% between 2008 and 2015, while reducing electricity consumption and sourcing as much renewable energy as possible. By the end of last year its CO2 cuts had reached 36%, while its renewable use was at 87%, notes Cecilia Wideback-West, head of corporate sustainability. |
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Impacting communities
For banks’ philanthropic efforts, the question of impact (and its measurement) is increasingly key. “How can we have the greatest impact with the resources available at Citi?” says Barber. “It’s great to give money, but what else can we contribute?”
Increasingly, the answer from many banks to this question of maximising impact is their professional expertise. Citi too “is very focused on skills-based volunteering,” notes Barber soon after the bank’s “Global Community Day”, which involved 66,000 employees.
Her own corporate affairs team contributed their skills to smaller charities via the UK’s Media Trust.
She points to the megabank’s “very consistent and holistic” support for some charities over more than 10 years — a period that saw Citi teeter on the brink during the financial crisis. “Citi continued to invest in communities and pursue a citizenship agenda before, during and after the crisis.”
One example is the Career Academies Foundation. The bank helped introduce this youth employment charity to the UK. Its offices are in the Citi tower in London, close to one of the disadvantaged areas it targets.
Citi is also helping build capacity in non-bank financial services from credit unions and CDFIs.
BAML too emphasises the continuing importance of its philanthropy. The bank has pledged $2bn over 10 years to charities, NGOs and community programmes around the world.
Choi at Morgan Stanley points to the firm’s “flagship” ‘Strategic Challenge’ — an internal competition among its “brightest and best” to work on strategy with leading non-profit organisations like Feeding America (a network of food banks) and New York Cares (a clearing-house for volunteers). Winners, who may end up putting in 20 hours a week during the assignment, work pro bono for several months with no lightening of their professional workload.
The firm has supported over 50 non-profits in this way since launching the initiative five years ago. It calculates the value of the hours its volunteers have dedicated to at over $1m.
“It is important to us that our commitment is not superficial — we are trying to combine financial support with time and talent, things that might help non-profits even more than monetary contributions,” Choi argues.
| Financing the future | ||
| A strikingly optimistic outlook for renewable/clean energy — one of the key pillars of banks’ efforts in sustainable banking — is provided by Michael Eckhart, global head of environmental finance and sustainability at Citigroup and a former president of the American Council on Renewable Energy. A $10bn sector as recently as 2000 (global volume of investment projects and capital transactions, according to Bloomberg New Energy Finance), it has already boomed to an annual $250bn. But this is only the beginning, he argues. “We are still in the early stages of a major change in how we generate energy. We are going to see continuing high rates of growth through 2030 and they are accelerating, not slowing.” One important source will be the binding global agreements on combating climate change that are likely to finally come into force during the 2020s, he anticipates. Once these are adopted countries will begin taking action that should further stimulate investment and development in new energy technologies. Recent growth has come despite the absence of such agreements. Indeed, the Kyoto protocol — a non-binding undertaking among 83 countries — expired last year. Another important driver will be the commitment of some European countries to sourcing as much of 80% of their energy demand from renewables by 2050. Growth will also be driven by shifts in fuelling transport as well as in generation, with clean electricity, biofuels and natural gas each offering attractive new sources of powering vehicles, boats, trains and planes. “All the alternatives are attractive with oil at $100 a barrel,” notes Eckhart. “We’re going to see a new era across the board in electricity and transportation.” Moreover, while natural gas is now a mature product in the US it still has much scope to grow in China.
Inevitable trend The biggest risk to the bullish case is the discovery of a massive source of ultra-cheap oil, according to Eckhart. However, he sees the threat from fracking as limited. “Shale gas is a US phenomenon, not a global one.” The scope for Opec countries to reduce the oil price is very limited too. This is because most have welfare and infrastructure commitments predicated on the price staying high. The nearer-term growth path is likely to be bumpy, however — as it has been for years as new sources of energy battle old and policy ebbs and flows in its support for the transition. But the longer-term trajectory is clear, according to environmental finance bankers. “The basic trend from a fuel-based economy to a technology-based one is inevitable. The cost trends are there,” Eckhart observes.
Strictly commercial Eckhart emphasises the commercial basis of banks’ activity in environmental finance (which is typically led by teams as small as five dedicated bankers, though 10 times this number can be involved from time to time — as when a generalist banker to industrial companies works on a wind turbine financing, for example). “We are involved in this because clients have retained us to do so. They are out there developing projects. We are a provider of capital to their ideas,” Eckhart notes. |
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