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

 

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

A greater focus on sustainability might 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 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 regularly to the Dow Jones Sustainability World Index, which assesses companies on rigorous sustainability criteria for annual listing. Bank of America made it to the DJSI only once, in 2002 when the index was launched.

State Street, a financial services firm, is the only US financial firm other than Citigroup that has frequently made it to the DJSI. Both Citigroup and State Street appear to be doing well, though Citigroup needed bail-out money from the US government. Another financial services giant, Merrill Lynch, appeared on the DJSI from 2003 to 2007 before losing its place on the index.

The DJSI suggests that European and Australian financial institutions are ahead of their US peers when it comes to sustainability. Of the 24 banks listed on the Dow Jones Sustainability World Index 2009, 15 are European. Australia and Canada each has three banks on the list. Citigroup remains the only bank from the US. ANZ of Australia leads the pack as the super-sector leader with the highest sustainability score, an honour it has held since 2007. The index has 16 companies in the financial services category; seven are European and only one is American. In the insurance sector, 14 firms are listed; all are European.

In the US, the government has invested about $200bn over the past year in hundreds of banks to bail them out. Banks that received the help included iconic names such as Citigroup, State Street, Wells Fargo, Bank of America, JP Morgan Chase, Morgan Stanley, Goldman Sachs and Bank of New York Mellon.

With the exception of Wells Fargo, Citigroup and Bank of America, the bailed-out banks have since paid back the government. Observers say these banks returned the money partly because they recouped some of their losses and partly to escape stringent conditions attached to the bail-out money such as restrictions on executive pay.

On the corporate responsibility front, except for Citigroup and State Street, these large banks have not presented any evidence that they have changed the way they run their business. Citigroup and State Street on the other hand maintained their place in the latest DJSI, published in September – evidence that the financial crisis and the subsequent recession have not affected their commitment to sustainability.

Citigroup’s chief executive, Vikram Pandit, declared in a testimony before the US Congress’ financial services committee in February that he would take a salary of only $1 and no bonus until the bank returned to profitability, setting a new high ground for other chief executives.

Environmental and social risks

One of the reasons that banks with a sustainability focus have done relatively well is that they had put in place more robust environmental and social risk management. This started with the launch of the Equator Principles in 2003 – environment and social standards for project financing. UniCredit, ING, Barclays, Credit Suisse, ABN Amro, Westpac and Citigroup were among the first principles signatories.

Leonie Schreve, head of ING Bank’s environment and social risk management, says the Equator Principles helped the bank to create awareness about sustainability and triggered the development of overall sustainability policies. Seeing the benefit, ING voluntarily decided to extend the environment and social risk framework beyond project financing to include all transactions. This year, the bank took a leadership position and extended the framework to insurance business as well.

“Our environment and social risk framework is much more than only the Equator Principles. We have sector policies, human rights policies and environment management policies,” Schreve says. ING has introduced specific sustainability policies for environmentally and socially sensitive sectors such as oil and gas, mining, forestry, manufacturing, agriculture, gambling and defence.

ING uses its environment and social risk framework to classify potential clients into three categories, based on their environmental and social performance. “The aim is to focus on those that are best in class, to help those who are average performers and not to engage with the worst in class companies,” Schreve says.

Schreve says the impact of financial crisis has only increased the importance of these policies in making business decisions.

Similar practices adopted by several other banks have improved the quality of investment by minimising risk. Standard Chartered Bank, which is a signatory of the Equator Principles and is listed on FTSE4Good Index and FTSE4Good Environment Index, set a leadership example in March 2009 when it announced position statements on 11 sensitive industrial sectors: forestry and palm oil, mining and metals, oil and gas, biofuels, dams, gaming and gambling, transportation of hazardous materials, fossil fuel power generation, ship breaking, tobacco and nuclear power generation. The bank also announced position statements on child labour and climate change.

Yulanda Chung, head of sustainable business at Standard Chartered, says these statements and guidelines will promote sustainable finance and reduce environmental and social risks for the bank.

Chung points out that Standard Chartered is the first bank to have a policy on ship breaking, which has a potentially high impact on health and safety and the environment. Most of the ship breaking activity is now taking place on the Indian sub-continent where Standard Chartered has a major presence. Chung says the bank has financed four ship breaking clients in Chittagong, Bangladesh. Under the ship breaking financing guidelines, the bank is going to conduct an independent third-party audit of all four clients. She says the bank will ask them to come up with a corrective action plan if the audits reveal that they are not meeting the bank’s sector position statement.

Standard Chartered is applying the position statements and the sector guidelines to small local firms and large multinational clients. Chung says making environmental and social risk assessment an integral part of the credit approval process has improved the bank’s overall risk management.

UniCredit, one of Europe’s largest banks and a regular on DSJI and FTSE4Good Index, is another bank that says it has benefited from introducing stringent environmental and social risk management policies. “We not only have financial risks in transactions, we also have extra-financial risks that can turn into financial risks overnight,” says Karen Wendt, vice-president for extra-financial risk advisory at UniCredit. For example, a major campaign by the local community can delay a project, cause budget overruns and create legacy problems, she adds. UniCredit has included environmental and social risks in its system of rating all transactions for sustainability. “We have ended up with a better portfolio. We have a portfolio which has relatively less risk,” Wendt says.

Citigroup took a leadership role in 2003 by initiating the launch of the Equator Principles with nine other banks. “For Citigroup, signing up to the Equator Principles was a starting point for establishing a broader environment and social responsibility and risk management,” says Shawn Miller, Citigroup’s director of environmental and social risk management.

Miller says the bank realised it had other transactions that were outside the scope of the Equator Principles where it could apply a similar environment and social risk screening tool. As a result, the bank decided to expand its environment and social risk policy to include transactions such as corporate loans, bond underwriting and equity underwriting. “It has really helped us manage our risks,” Miller says.

Climate leadership

More recently, banks with creditable sustainability practices have also started making commitments on climate change. HSBC was rated number one in the financial sector in the 2009 Carbon Disclosure Project Global 500 while Standard Chartered Bank was rated the best in 2008. The Carbon Disclosure Project is a non-profit initiative to collect and distribute climate change information about companies, which produces the Carbon Disclosure Leadership Index. This year, the CDLI included a number of banks such as ANZ, Australia National Bank, Commonwealth Bank of Australia, Lloyds Banking Group, Westpac Banking and Bank of Montreal.

In another leadership initiative, Standard Chartered and HSBC, Swiss Re, Munich Re and Credit Agricol adopted the Climate Principles, a voluntary framework to guide the finance sector in tackling the challenge of climate change. Participating banks and financial institutions commit to minimising their operational carbon footprint as well as help their clients to manage climate change related risks by developing appropriate products and services.

While adopting climate policies and strategies that address environmental and social risk have helped these banks to improve risk management, commitment to sustainability has led to identifying new business opportunities such as microfinance.

Microfinance has remained recession-proof, with the added benefit that it helps banks to make a positive difference to communities. Standard Chartered Bank, for example, made a pledge in 2006 under the Clinton Global Initiative to give $500m of credit to microfinance institutions by 2011. By mid-2009, the bank had already provided $450m to more than 50 microfinance partners in 14 countries in Asia, Africa and the Middle East. In 2008, it put in place a technical assistance strategy aimed at using the bank’s expertise in governance, risk management and operations to help the microfinance partners to introduce best practices.

In a separate initiative, in 2008 Standard Chartered published Managing Environmental and Social Risks in Microfinance, a research paper urging microfinance partners to embed social, environmental or ethical impact considerations in their lending decisions. These principles are now included in the loan agreements signed between microfinance partners and Standard Chartered.

Learning from microcredit seems to have helped Standard Chartered to tap into the vast economic potential in rural China, having become the first bank to open a “village bank” in a the remote settlement of Helingeer, Inner Mongolia, in November 2008. In August this year, the village bank launched an unsecured lending service for farmers offering a one-year loan of up to 50,000 yuan (about £4,500).

Citigroup launched Citigroup Microfinance in 2005 with an aim to provide financing and other services such as loan syndication, securitisation, insurance and savings and remittance to microfinance institutions. Citigroup Microfinance now works with more than 100 microfinance institutions in 13 countries. In September this year, Citigroup Microfinance signed a deal with the Overseas Private Investment Corporation, a US government export credit agency, to lend $250m to microfinance institutions around the world. This is an expansion of an earlier deal between Citigroup Microfinance and Opic in 2006 that pledged $100m for funding microfinance institutions. Under the deal, Citigroup provides funding while Opic part-shares the risk.

Deutsche Bank was the first bank to create a microfinance fund 10 years ago. The bank says it has channelled $170m to more than 100 microfinance institutions in 45 countries and will continue to expand in the sector.

As sustainability leaders work towards delivering their commitment to managing environmental and social impacts, microfinance, climate change and other issues such as money-laundering, financial crimes, governance and workplace practices, they 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 Standard Chartered’s Chung. She says a seamless integration of sustainability into every aspect of business is a key feature of Standard Chartered’s approach.

Committee structure

This is also reflected in the organisational structure. For example, there is a group environment committee that is represented by senior executives from key divisions such as wholesale banking, consumer banking, risk management, technology, operations and property services. Similarly, the wholesale banking division has a reputational risk and responsibility committee that assesses each proposed transaction for potential impacts.

Standard Chartered has also renamed its sustainability team as sustainability and operations. “The operations element implies that we are trying to embed sustainability into business activity,” Chung says. She adds that the sustainability and operations team is responsible for annual financial reporting as well as sustainability reporting.

ING’s Schreve says her bank has been conducting organisation-wide training to educate employees on how to implement environmental and social risk framework in day-to-day business.

Embedding sustainability across an organisation is crucial for the long-term success of sustainability programmes. Banks that have realised that their sustainability initiatives have helped them manage business and reputational risks during the recession have all the motivation they need to integrate sustainability principles throughout their business. And those that ignored sustainability and pursued greed-driven profits have had a hard lesson. The leaders have learnt that sustainability makes business sense.

A bumpy ride – benefits of a sustainable index listing

Lehman Brothers, Bear Sterns, Merrill Lynch, Fannie Mae, Freddie Mac, Countrywide Financial and AIG were among the largest US financial services companies that either failed or were acquired by rivals under duress or bailed out by the government. Of these, Lehman, Countrywide, AIG and Freddie Mac never found a place on the Dow Jones Sustainability Index while Bear Sterns and Fannie Mae made it on to the index only once and twice respectively.

The DJSI listing tests include corporate governance, risk and crisis management, stakeholder management, environmental reporting, environmental policy/management system, climate change governance, corporate citizenship/philanthropy, social reporting, and occupational health and safety.

European and Australian financial firms have dominated the DJSI since its inception. But Britain’s Northern Rock was not one of these. Northern Rock was one of the early victims of the financial crisis in the UK and was eventually taken over by the government.

Most banks that have regularly featured on the DJSI have shown remarkable resilience in the face of what is dubbed as the worst recession since the Great Depression of 1930s. These include UBS, HSBC, UniCredit, Deutsche Bank, Credit Suisse, BNP Paribas, Barclays, Dexia, ANZ, National Australia Bank and Westpac. Many of these also appear on FTSE4Good Index, which tracks the performance of companies meeting international corporate responsibility standards.

Principled institutions

The following have adopted the Climate Change Principles.

• Credit Agricole
• HSBC
• Munich Re
• Standard Chartered
• Swiss Re

Source: The Climate Group

Top banks

Many leading banks are included in the Dow Jones Sustainability World Index 2009.

• ANZ Banking Group, Australia (sector leader)
• Banca Monte dei Paschi di Siena, Italy
• Banco Bilbao Vizcaya Argentaria, Spain
• Banco Bradesco, Brazil
• Banco Santander, Spain
• Bank of Nova Scotia, Canada
• Barclays, UK
• BNP Paribas, France
• Canadian Imperial Bank of Commerce, Canada
• Citigroup, United States
• Credit Agricole, France
• Credit Suisse, Switzerland
• Deutsche Bank, Germany
• Dexia, Belgium
• DnB NOR, Norway
• HSBC, UK
• Itau Unibanco Holding, Brazil
• Lloyds Banking Group, UK
• National Australia Bank, Australia
• Nedbank Group, South Africa
• Royal Bank of Canada, Canada
• Royal Bank of Scotland, UK
• UBS, Switzerland
• UniCredit, Italy
• Westpac Banking, Australia