Banking in the days ahead

Stacy Shapiro provides an insight into the world of banking and how sustainable ethics, which are one of the worlds buzz words right now, are finding their way into the banking arena
Just imagine a world where banks and financial institutions decide to support only projects and investments which improve rather than harm our planet. Life as we know it might be more difficult, but we would all feel good about it knowing that our role in climate change had been reduced. But that’s the kind of world that many banks and financial institutions now claim they are trying to aspire to when investing in new projects.Often known as “sustainable banking,” most of the world’s largest banks are now enthusiastically embracing this concept, according to the Financial Times. Once the preserve of a few enthusiasts, now mainstream organisations have taken on the cause.That’s why the FT and the International Finance Corporation are carrying out for the third year the 2008 Sustainable Banking Awards which will be announced in June. Last year, the awards attracted more than 100 banks from 51 countries including many from Asia, Africa and Latin America.The move toward sustainable banking also is evident by the number of banks who have signed up to ‘The Equator Principles,’ designed in 2002 and updated in 2006 as a financial industry benchmark for determining, assessing and managing social and environmental risk in project financing.More than 60 banks from all over the world are now signed up to the Equator Principles, including Bank of America and Citibank, ABN Amro, Barclays, Royal Bank of Scotland, and Westpac. Those that have just joined this year include KfW Ipex in Germany, and Financial B.C. in Togo. The State Environment Protection Administration in China also recently signed a deal with the International Finance Corporation in Beijing to introduce the Equator Principles in China.Equator principlesLloyds TSB in the UK also signed up to the Equator Principles in January to use as a benchmark for assessing and managing social and environmental risks in project finance.The principles promote socially responsible conduct and sound environmental practices in relation to all new project finance initiatives above $10m and seek to provide a framework against which lending can be assessed, Lloyds TSB noted.“We introduced environmental assessment, a standard feature of all business lending, back in 1996 and were acknowledged as one of the pioneers in respect of environmental reporting,” stated Truett Tate, Lloyds TSB’s Group Executive Director, Wholesale & International Banking. “Adopting the Equator Principles is another step in our commitment to environmental sustainability. We believe that by lending responsibly and by understanding the environment in which we and our customers operate in, we are committed to doing business in the right way”.Another bank which is a long-time advocate of the Equator Principles is the HSBC Group, the winner of the 2006 FT Sustainable Bank of the Year, which refers to the movement in its institution as “corporate sustainability.”“For us this means finding the right balance between social, economic and environmental decisions to ensure long-term business success,” said an HSBC spokesman. “At HSBC, it is about managing the environmental footprint of our business, working with our customers to do the same, seeking out 'sustainable' business opportunities (like investing in clean technologies) and also supporting the communities in which we operate (by financing or supporting education or environmental projects). For a personal customer, this may mean making banking decisions (including where they choose to bank) considerate of society, the economy and/or the environment.”HSBC takes its responsibility to the environment seriously, and as a business, it takes steps to mitigate its own direct environmental impacts as well as the impact the bank has on the environment through its lending and investments. “Sustainability is a key part of our risk assessment process when reviewing all potential lending and investment projects,” said an HSBC spokeswoman. “We have strict standards and policies on potentially high risk sectors including chemicals, energy, forestry, freshwater and mining and metals.”Other InitiativesThere are many other initiatives within the finance industry today to improve the environment and stem the tide of climate change –all as a part of sustainable banking.For example, all of the FTSE 350 banks are part of the Carbon Disclosure Project, according to a spokesman for the British Bankers Assn. The CDP is an independent not-for-profit organisation aiming to create a lasting relationship between shareholders and corporations regarding the implications for shareholder value and commercial operations presented by climate change. The CDP’s goal, according to its website, is to “facilitate a dialogue, supported by quality information, from which a rational response to climate change will emerge.”CDP provides a coordinating secretariat for institutional investors with a combined $57trn of assets under management. Over eight years CDP says it has become the gold standard for carbon disclosure methodology and process. The CDP website (www.cdproject.net) is the largest repository of corporate greenhouse gas emissions data in the world.British banks also are members of The Forge Group which was set up to help identify, understand, manage and report on environmental impacts, risks and opportunities. The Forge Group has formed and issued a set of guidelines on environmental management and reporting for the financial services sector which is available at www.abi.org.uk/forge.“The Guidelines highlight why environmental management and reporting is an important part of corporate governance,” the Forge website states. “They also identify the business activities that create key environmental management and reporting issues and provide guidance for developing management processes that avoid environmental risk, meet governance standards, and realise business opportunities.”The Forge Group is an organisation of a number of banks which looks at how key corporate functions and business lines can effectively meet the challenges of climate change, added the spokesman from the British Bankers Assn. “They produce documents which are effectively practical actions for people in banks looking at their business levels and how they can secure their own functions in order to secure climate change.”Banks and financial institutions also have their own financial initiatives to improve the planet. For example, in September 2007, HSBC launched its Global Climate Change Benchmark Index which reflects and tracks the stock market performance of companies set to benefit from addressing climate change.There is also the HSBC Climate Partnership, which is a $100m project to combat the threats of climate change by inspiring action by individuals (including employees). Partners in this project are The Climate Group, Earthwatch Institute, Smithsonian Tropical Research Institute and the WorldWide Fund.Meanwhile, a few banks like the Co-Operative Bank in the UK have taken sustainable banking one step further and set up ‘ethical banking’ whereby they refuse to invest in companies which extract or expel fossil fuels; or in companies which use animals to test cosmetics or are involved in certain genetic modification.The futureIt could be tempting at this point in time, with the credit crunch biting hard on financial institutions’ bottom lines, to take the eye off the ball of environmental risks when considering investments.However, noted the British Bankers’ Assn. spokesman, “Banks consider risk over a longer term than many other businesses because they have money lying in long-term mortgages and other kinds of borrowing. They look toward the horizon of 25 years hence and therefore climate change remains a sizeable concern for their business as far as risk is concerned.”Yes, there are immediate risks, the BBA spokesman admitted, such as the risk of a recession in the US economy, and the risk of a credit crunch across other countries. “But climate change is one of a number of pressures that banks will be looking at the moment. Their attitude towards investment risk over the last five or 10 years has changed so radically that climate change is now an embedded part of their business. They’re not going to be dumping (this idea) quickly. It’s there for good.”The question now is what retail customers think about it, said the BBA spokesman. “If they think a credit crunch is likely, what are they going to do about their investments. Are they going to go into conventional funds rather than ethically branded products? That’s the next question, I guess, and something we’ll have to watch and wait on to see if there is the public appetite for doing something about climate change matched by what the banks are doing as an integral part of their business.”