Back to business as usual?

The financial crisis has transformed the banking landscape. But where has it left the pursuit of ‘sustainable banking’? Jess McCabe reports

Before last year’s financial meltdown engulfed the banking sector, sustainable banking seemed on an inexorable march. Banks competed with each other to commit ever larger sums towards climate change or renewable energy investments. They pledged to better assess environmental, social and governance (ESG) risks in their portfolios. And they enthusiastically embraced environmental markets, such as carbon trading.

But, as we approach the first anniversary of the collapse of Lehman Brothers – and the wholesale reordering of the financial landscape that it precipitated, including widespread national ownership of the commanding heights of the banking system, where does this leave sustainable finance?

The party line from leading banks in this area is clear – it’s business as usual.

“There has been no fundamental change to our approach to sustainability because of global economic instability,” says a spokeswoman for Australia’s ANZ bank, in a typical response.

“We took the issue seriously before the credit crunch and we take it seriously now,” says Shawn Miller, New York-based global director of environmental and social risk management at Citi. “Environmental and sus tainability issues are centre of the plate issues now, they’re frankly core to our doing our business.”

By most accounts, those banks that survived the crisis have not cut staff in their sustainability departments.At a time when public trust in banks is already low, “the banks that have sustainability programmes have an incentive to keep them there,” points out Michelle Chan, San Francisco-based green investments programme director at Friends of the Earth.

But Peter Zollinger, senior vice-president at SustainAbility, says: “The ground is still shaking … the landscape has dramatically changed. Most of the players don’t exist anymore in the form they did.” This has inevitably had a major impact on the sustainability agenda at banks, just like it has every other aspect of banking, he believes.

In many respects, assessing the impact of the financial crisis on sustainable banking is difficult post-crunch for the same reasons it was pre-crunch – divining which claims are greenwashing, and which represent a substantive change in the way a bank does business, can be difficult.

Zurich-based Andreas Missbach, on the steering committee of NGO BankTrack, warns that banks’ lack of transparency means that “a decrease of commitment would be hard to find out”.

When markets tumble, can sustainable banking survive?

However, most observers agree that the crunch has helped wash away some of the more superficial sustainability initiatives, driven by PR departments, or, as Zollinger describes it, “clearing out things that weren’t real anyway”.

And other changes have been inevitable, as banks have changed hands and some have ceased to exist. As banks struggle to survive, can integration of environmental and social sustainability and risk analysis really progress uninterrupted? As Standard Chartered’s head of sustainable business Yulanda Chung puts it, “Banks have other priorities that they have to take care of immediately.”

Mergers and acquisitions also muddy the waters, as new institutions attempt to integrate often very different approaches to sustainability. The ones to watch, observers told Environmental Finance, include JPMorgan’s buyout of Bear Stearns; Grupo Santander’s acquisition of Banco Real in Brazil – last year’s winner at the Financial Times sustainable banking awards; and Wells Fargo’s acquisition of Wachovia. “The culture of the acquirer is probably going to be what you end up with, on average,” says Matt Arnold, Washington, DC-based partner in PricewaterhouseCoopers’ sustainability and climate change business.

Moreover, some banks have entirely repositioned themselves post-credit crunch, necessitating a rethinking of their ESG management. For example, RBS has gone through significant upheaval since the credit crunch. In October 2007, the Scottish banking group acquired the investment banking business of Dutch bank ABN Amro. This led, says Andrew Cave, Edinburgh-based head of corporate sustainability at RBS, to an initial burst of activity as RBS considered how to approach the sustainability issues of its expanded portfolio, with a higher exposure to emerging markets and higher risk.

“Before that acquisition, RBS … had a huge amount of risk exposure, but it was very much concentrated in mature, developed, well-regulated economies,” says Greg Larkin, senior analyst at Innovest, the environmental and social investment research firm recently acquired by RiskMetrics. “They had a very lean due-diligence structure. I don’t think it had a lot of authority and it really was not active outside of project finance.”

But, by October 2008, the bank was in trouble and was bailed out by the UK’s Treasury, with the government taking a 58% stake. In January this year, the government interceded again, bringing its stake to 70% and effectively nationalising the bank – and it has all-new leadership.

As a consequence, the bank has scaled down its project finance business. On the one hand, this might please some of RBS’s more vocal critics, as it steps back from financing resource- intensive, high-impact projects. But, on the other hand, it has retreated from a leading position in financing renewable power projects.

RBS has refocused on its developed market operation, Cave explains – and much of the emerging market business that propelled Cave’s team into action is “under review” and observers believe is likely to be sold off. Earlier this year, RBS sold its 4.3% stake in Bank of China for around a reported £1.7 billion ($2.7 billion), and media reports suggest that ANZ is preparing to bid $3 billion for the bank’s remaining assets in Asia – mostly acquired from ABN. However, Cave stresses that the effort has not been wasted – it will apply the lessons on ESG management across its remaining businesses.

“We took the issue seriously before the credit crunch and we take it seriously now” Shawn Miller, Citi

Another effect of banks being chopped and restructured is a number of former bankers willing to talk candidly about how effectively sustainability was managed at their former institutions. For example, Richard Burrett, formerly head of sustainability at ABN Amro, now at Cambridge University’s programme for sustainable leadership, told Environmental Finance that “we had not really understood some of the issues we were running” at ABN, even though “we were considered to be a leader in this field”.

Inevitably, some business lines have been cut and staff lost as banks slashed thousands of jobs and exited or scaled back activity in new markets – whether green or traditional. For example, Credit Suisse has made redundancies from its carbon trading desk, as part of a “de-emphasising” of that business, while Citi made redundant two out of three of its awardwinning environmental and social equity research team. JPMorgan also shed staff in SRI equity analysis.

“Where banks have chosen to really integrate ESG analysis into their risk process, there is a better chance that their staff will remain,” Chan from Friends of the Earth notes.

And certainly there have been no recent announcements of billion-dollar commitments to finance sustainable development such as those made in 2007, when Citi committed to invest $50 billion, Bank of America $20 billion, Morgan Stanley $3 billion and Goldman Sachs $1 billion.

Indeed, the launch last December of the Climate Principles – guidelines to help financial institutions deal with the risks and opportunities posed by climate change – fell victim to the financial crisis. While banks Crédit Agricole, HSBC and Standard Chartered, and reinsurers Swiss Re and Munich Re signed up, the principles’ convenors, NGO the Climate Group, conceded that take-up was disappointing and blamed the crisis.

One exception to this trend is Standard Chartered. The London- and Hong Kong-headquartered bank launched 13 environmental and social position statements in March. The timing of the announcement was incidental, says Standard Chartered’s Chung, pointing out the policies were the culmination of two years’ work.

Broadly welcomed by environmental NGOs, the bank promised not to invest in some ‘no-go areas’, including some biofuels and projects on recently deforested land. But the general approach is one of positive engagement and working with clients to meet a number of standards, including those of the International Finance Corporation.

Greg Larkin, Innovest: danger that “banks will make the same mistake again” on subprime lending

Notably, Standard Chartered makes 90% of its profits from emerging markets in Asia, Africa and the Middle East. “ESG [issues] are material to the bank’s business,” Chung adds. This is often especially the case for banks working in emerging economies, where less government regulation often means environmental and social due diligence makes straightforward financial sense.

In December last year, when Itaú BBA in Brazil took over as chair of the Equator Principles’ financial institutions steering committee, the bank’s head of credit and socio-economic risk management spoke of “the need for emerging markets financial institutions to adopt best international practice to analyse the socio-environmental impact of their activities”.

And in China, there is widespread anticipation that the government’s green credit policy, introduced in 2007 and mandating that banks consider environmental factors in their lending decisions, will result in changes in the country’s banking sector. Innovest has recently upgraded three out of six Chinese banks it analyses – Industrial and Commercial Bank of China (ICBC), China Construction Bank and China Merchants Bank. “They are still rated below BBB (with the exception of China Merchants Bank) since a lot of risk remains, but the upgrades signal that there is improvement potential and that these are banks to watch,” says Laura Nishikawa, research analyst at Innovest’s parent, RiskMetrics Group.

Friends of the Earth has also praised ICBC, particularly for instituting a “nine-category environmental information labelling system which categorises borrowers on the basis of their environmental profile”.

Some environmentalists – including, notably, former US vice-president Al Gore – had high hopes that, as banks radically restructured to survive, often with significant government assistance, the institutions that prevailed could be realigned to put environmental and social sustainability at the heart of their operations, alongside financial sustainability.

During the first bail-out at RBS, and its subsidiary Natwest, UK NGOs including People & Planet called for the government to set environmental conditions on the bail-out. “We own RBS-NatWest – they owe us a secure climate!” is still one of its slogans. Although some governance issues such as executive pay were forced into the foreground, campaigners have been largely disappointed.

Chan at Friends of the Earth says that hope is still high that the widely-expected second round of government bail-outs in the US may be pegged to increased regulation of the sector, and it is unlikely that the “blank cheque bailouts” of 2008 will be repeated. And it can be done – Chan notes that when the Chinese government was forced to bail out the country’s banking sector in the 1990s, albeit for very different reasons, the aid came with strings attached in the form of greater environmental scrutiny.

And the US government has proved willing to impose environmental conditions on other deals – at the time of writing, the administration had said it is to use the proposed bail-out of General Motors to push for the automaker to producer smaller, more efficient cars.

But Arnold characterises this as “a hopeful idea among stakeholders”. Instead, he says, “I get the sense that the government as a shareholder is less progressive than the banks would be on their own… I don’t think [the US treasury] knows what ESG is.”

Many are worried that banks won’t learn from their mistakes – even when it comes to the sustainability issue at the heart of the credit crunch, overloading especially poorer people in the US with debt they couldn’t afford. Larkin is downbeat: “Those systems still remain very undeveloped and, if and when that market resuscitates, banks will make the same mistake again,” he warns.

“There’s a huge community, there are billions of people probably, in both developed and emerging market economies, who earn wages [and] hold assets [who] have historically been treated as untouchables from a consumer credit perspective. It will be very profitable to develop a sustainable business model” to serve these potential customers, Larkin says. But, instead of restructuring and making changes, banks have shut divisions and pulled out of markets.

In conclusion, observers see a mixed picture. “We’re seeing a mixed response across the banks,” says André Abadie from Sustainable Finance. “We’re seeing some banks have certainly retreated in terms of the more philanthropic, CSR [corporate social responsibility] stuff,” he adds, while in still other cases the impact is not yet clear. But, for others, he agrees it’s “business as usual”.