Agreater focus on sustainability mighthave helped a number of banks to

survive the financial crisis, which has seenthe industry losing an estimated $3 trillionin write-downs. On the other hand, banksand financial institutions that were notknown for commitment to sustainabilitywere among the first victims of the crisis.

It appears that in the US, the epicentre ofthe financial crisis, sustainability was thelast thing on the agenda of some of thelargest financial institutions in the world.Citigroup is the only US bank making itregularly to the Dow Jones SustainabilityWorld Index, which assesses companies onrigorous sustainability criteria for annuallisting. Bank of America made it to the DJSIonly once, in 2002 when the index waslaunched.

Ethical banksemerging stronger

By Rajesh ChhabaraBanks with stronger sustainability credentialshave shown greater resilience during the globalfinancial crisis

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State Street, a financial services firm, isthe only US financial firm other than Citi-group that has frequently made it to theDJSI. Both Citigroup and State Street appearto be doing well, though Citigroup neededbail-out money from the US government.Another financial services giant, MerrillLynch, appeared on the DJSI from 2003 to2007 before losing its place on the index.

The DJSI suggests that European andAustralian financial institutions are ahead oftheir US peers when it comes to sustain-ability. Of the 24 banks listed on the DowJones Sustainability World Index 2009, 15are European. Australia and Canada eachhas three banks on the list. Citigroupremains the only bank from the US. ANZ ofAustralia leads the pack as the super-sectorleader with the highest sustainability score,

an honour it has held since 2007. The indexhas 16 companies in the financial servicescategory; seven are European and only oneis American. In the insurance sector, 14 firmsare listed; all are European.

In the US, the government has investedabout $200bn over the past year inhundreds of banks to bail them out. Banksthat received the help included iconicnames such as Citigroup, State Street, WellsFargo, Bank of America, JP Morgan Chase,Morgan Stanley, Goldman Sachs and Bankof New York Mellon.

With the exception of Wells Fargo, Citi-group and Bank of America, the bailed-outbanks have since paid back the government.Observers say these banks returned themoney partly because they recouped someof their losses and partly to escape stringentconditions attached to the bail-out moneysuch as restrictions on executive pay.

On the corporate responsibility front,except for Citigroup and State Street, these

large banks have not presented anyevidence that they have changed the waythey run their business. Citigroup and StateStreet on the other hand maintained theirplace in the latest DJSI, published inSeptember – evidence that the financialcrisis and the subsequent recession have notaffected their commitment to sustainability.

Citigroup’s chief executive, VikramPandit, declared in a testimony before theUS Congress’ financial services committeein February that he would take a salary ofonly $1 and no bonus until the bankreturned to profitability, setting a new highground for other chief executives.

Environmental and social risksOne of the reasons that banks with asustainability focus have done relativelywell is that they had put in place morerobust environmental and social riskmanagement. This started with the launchof the Equator Principles in 2003 – environ-ment and social standards for projectfinancing. UniCredit, ING, Barclays, CreditSuisse, ABN Amro, Westpac and Citigroupwere among the first principles signatories.

Leonie Schreve, head of ING Bank’senvironment and social risk management,

says the Equator Principles helped the bankto create awareness about sustainability andtriggered the development of overallsustainability policies. Seeing the benefit,ING voluntarily decided to extend the envi-ronment and social risk framework beyondproject financing to include all transactions.This year, the bank took a leadershipposition and extended the framework toinsurance business as well.

“Our environment and social risk frame-work is much more than only the EquatorPrinciples. We have sector policies, humanrights policies and environment manage-ment policies,” Schreve says. ING hasintroduced specific sustainability policiesfor environmentally and socially sensitivesectors such as oil and gas, mining, forestry,manufacturing, agriculture, gambling anddefence.

ING uses its environment and social riskframework to classify potential clients intothree categories, based on their environ-mental and social performance. “The aim is

Financial crisis 21

European and Australianfinancial institutions areahead of their US peers whenit comes to sustainability

A bumpy ride – benefits ofa sustainable index listing

Lehman Brothers, Bear Sterns, Merrill Lynch, FannieMae, Freddie Mac, Countrywide Financial and AIGwere among the largest US financial services compa-nies that either failed or were acquired by rivals underduress or bailed out by the government. Of these,Lehman, Countrywide, AIG and Freddie Mac neverfound a place on the Dow Jones Sustainability Indexwhile Bear Sterns and Fannie Mae made it on to theindex only once and twice respectively.

The DJSI listing tests include corporate governance,risk and crisis management, stakeholder manage-ment, environmental reporting, environmentalpolicy/management system, climate change gover-nance, corporate citizenship/philanthropy, socialreporting, and occupational health and safety.

European and Australian financial firms havedominated the DJSI since its inception. But Britain’sNorthern Rock was not one of these. Northern Rockwas one of the early victims of the financial crisisin the UK and was eventually taken over by thegovernment.

Most banks that have regularly featured on the DJSIhave shown remarkable resilience in the face of whatis dubbed as the worst recession since the GreatDepression of 1930s. These include UBS, HSBC,UniCredit, Deutsche Bank, Credit Suisse, BNPParibas, Barclays, Dexia, ANZ, National AustraliaBank and Westpac. Many of these also appear onFTSE4Good Index, which tracks the performanceof companies meeting international corporateresponsibility standards.

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Top banks

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

ANZ Banking Group, Australia (sector leader)Banca Monte dei Paschi di Siena, ItalyBanco Bilbao Vizcaya Argentaria, SpainBanco Bradesco, BrazilBanco Santander, SpainBank of Nova Scotia, CanadaBarclays, UKBNP Paribas, FranceCanadian Imperial Bank of Commerce, CanadaCitigroup, United StatesCredit Agricole, FranceCredit Suisse, SwitzerlandDeutsche Bank, GermanyDexia, BelgiumDnB NOR, NorwayHSBC, UKItau Unibanco Holding, BrazilLloyds Banking Group, UKNational Australia Bank, AustraliaNedbank Group, South AfricaRoyal Bank of Canada, CanadaRoyal Bank of Scotland, UKUBS, SwitzerlandUniCredit, ItalyWestpac Banking, Australia

risks that can turn into financial risksovernight,” says Karen Wendt, vice-presi-dent for extra-financial risk advisory atUniCredit. For example, a major campaignby the local community can delay a project,cause budget overruns and create legacyproblems, she adds. UniCredit has includedenvironmental and social risks in its systemof rating all transactions for sustainability.“We have ended up with a better portfolio.We have a portfolio which has relatively lessrisk,” Wendt says.

Citigroup took a leadership role in 2003by initiating the launch of the Equator Prin-ciples with nine other banks. “For Citigroup,signing up to the Equator Principles was astarting point for establishing a broaderenvironment and social responsibility andrisk management,” says Shawn Miller, Citi-group’s director of environmental andsocial risk management.

Miller says the bank realised it had othertransactions that were outside the scope ofthe Equator Principles where it could applya similar environment and social riskscreening tool. As a result, the bank decidedto expand its environment and social riskpolicy to include transactions such as corpo-rate loans, bond underwriting and equityunderwriting. “It has really helped usmanage our risks,” Miller says.

Climate leadershipMore recently, banks with creditablesustainability practices have also startedmaking commitments on climate change.HSBC was rated number one in the finan-cial sector in the 2009 Carbon DisclosureProject Global 500 while Standard Char-tered Bank was rated the best in 2008. TheCarbon Disclosure Project is a non-profitinitiative to collect and distribute climatechange information about companies,which produces the Carbon DisclosureLeadership Index. This year, the CDLIincluded a number of banks such as ANZ,Australia National Bank, CommonwealthBank 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 theClimate Principles, a voluntary frameworkto guide the finance sector in tackling thechallenge of climate change. Participatingbanks and financial institutions commit tominimising their operational carbon foot-print as well as help their clients to manageclimate change related risks by developingappropriate products and services.

Financial crisis22 Ethical Corporation • November 2009

to focus on those that are best in class, tohelp those who are average performers andnot to engage with the worst in classcompanies,” Schreve says.

Schreve says the impact of financial crisishas only increased the importance of thesepolicies in making business decisions.

Similar practices adopted by severalother banks have improved the quality ofinvestment by minimising risk. StandardChartered Bank, which is a signatory of theEquator Principles and is listed onFTSE4Good Index and FTSE4Good Envi-ronment Index, set a leadership example inMarch 2009 when it announced positionstatements on 11 sensitive industrial sectors:forestry and palm oil, mining andmetals, oiland gas, biofuels, dams, gaming andgambling, transportation of hazardousmaterials, fossil fuel power generation, shipbreaking, tobacco and nuclear power gener-ation. The bank also announced positionstatements on child labour and climatechange.

Yulanda Chung, head of sustainablebusiness at Standard Chartered, says thesestatements and guidelines will promotesustainable finance and reduce environ-mental and social risks for the bank.

Chung points out that Standard Char-tered is the first bank to have a policy on shipbreaking, which has a potentially highimpact on health and safety and the environ-ment. Most of the ship breaking activity isnow taking place on the Indian sub-conti-nent where Standard Chartered has a majorpresence. Chung says the bank has financedfour ship breaking clients in Chittagong,Bangladesh. Under the ship breakingfinancing guidelines, the bank is going toconduct an independent third-party audit ofall four clients. She says the bank will askthem to come up with a corrective actionplan if the audits reveal that they are notmeeting the bank’s sector position statement.

Standard Chartered is applying theposition statements and the sector guide-lines to small local firms and largemultinational clients. Chung says makingenvironmental and social risk assessment anintegral part of the credit approval processhas improved the bank’s overall riskmanagement.

UniCredit, one of Europe’s largest banksand a regular on DSJI and FTSE4GoodIndex, is another bank that says it has bene-fited from introducing stringentenvironmental and social risk managementpolicies. “We not only have financial risks intransactions, we also have extra-financialVenerable institutions went to the wall

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While adopting climate policies andstrategies that address environmental andsocial risk have helped these banks toimprove risk management, commitment tosustainability has led to identifying newbusiness opportunities such as microfi-nance.

Microfinance has remained recession-proof, with the added benefit that it helpsbanks to make a positive difference tocommunities. Standard Chartered Bank, forexample, made a pledge in 2006 under theClinton Global Initiative to give $500m ofcredit to microfinance institutions by 2011.By mid-2009, the bank had alreadyprovided $450m to more than 50 microfi-nance partners in 14 countries in Asia, Africaand the Middle East. In 2008, it put in placea technical assistance strategy aimed atusing the bank’s expertise in governance,risk management and operations to help themicrofinance partners to introduce bestpractices.

In a separate initiative, in 2008 StandardChartered published Managing Environ-mental and Social Risks in Microfinance, aresearch paper urging microfinancepartners to embed social, environmental orethical impact considerations in theirlending decisions. These principles are nowincluded in the loan agreements signedbetween microfinance partners andStandard Chartered.

Learning frommicrocredit seems to havehelped Standard Chartered to tap into thevast economic potential in rural China,having become the first bank to open a“village bank” in a the remote settlement ofHelingeer, Inner Mongolia, in November2008. In August this year, the village banklaunched an unsecured lending service for

farmers offering a one-year loan of up to50,000 yuan (about £4,500).

Citigroup launched Citigroup Microfi-nance in 2005 with an aim to providefinancing and other services such as loansyndication, securitisation, insurance andsavings and remittance to microfinanceinstitutions. Citigroup Microfinance nowworks with more than 100 microfinanceinstitutions in 13 countries. In Septemberthis year, Citigroup Microfinance signed adeal with the Overseas Private Investment

Corporation, a US government export creditagency, to lend $250m to microfinance insti-tutions around the world. This is anexpansion of an earlier deal between Citi-group Microfinance and Opic in 2006 thatpledged $100m for funding microfinanceinstitutions. Under the deal, Citigroupprovides funding while Opic part-sharesthe risk.

Deutsche Bank was the first bank tocreate a microfinance fund 10 years ago. Thebank says it has channelled $170m to morethan 100 microfinance institutions in 45countries and will continue to expand in thesector.

As sustainability leaders work towardsdelivering their commitment to managingenvironmental and social impacts, microfi-nance, climate change and other issues suchas money-laundering, financial crimes,governance and workplace practices, they

are also paying attention to embeddingsustainability across their organisations.“We did not want sustainability to be astandalone department doing things thatthe rest of the bank is not aware of,” saysStandard Chartered’s Chung. She says aseamless integration of sustainability intoevery aspect of business is a key feature ofStandard Chartered’s approach.

Committee structureThis is also reflected in the organisationalstructure. For example, there is a groupenvironment committee that is representedby senior executives from key divisions suchas wholesale banking, consumer banking,risk management, technology, operationsand property services. Similarly, the whole-sale banking division has a reputational riskand responsibility committee that assesseseach proposed transaction for potentialimpacts.

Standard Chartered has also renamed itssustainability team as sustainability andoperations. “The operations element impliesthat we are trying to embed sustainabilityinto business activity,” Chung says. Sheadds that the sustainability and operationsteam is responsible for annual financialreporting as well as sustainability reporting.

ING’s Schreve says her bank has beenconducting organisation-wide training toeducate employees on how to implementenvironmental and social risk framework inday-to-day business.

Embedding sustainability across anorganisation is crucial for the long-termsuccess of sustainability programmes. Banksthat have realised that their sustainabilityinitiatives have helped them managebusiness and reputational risks during therecession have all the motivation they needto integrate sustainability principlesthroughout their business. And those thatignored sustainability and pursued greed-driven profits have had a hard lesson. Theleaders have learnt that sustainability makesbusiness sense. �

Principled institutions

The following have adopted the Climate ChangePrinciples:

Credit AgricoleHSBCMunich ReStandard CharteredSwiss Re

Source: The Climate Group

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Microfinance has remainedrecession-proof, and helpsbanks to make a positivedifference to communities

Ethical Corporation • November 2009

Microfinance punches above its weight

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