Banking on sustainable development - core issues

By GIFT

If the world’s banks believe they can earn their “sustainability wings” through “green” investments alone they are mistaken. The flurry of press surrounding environmental issues in China and climate change may have drawn their focus away from the fundamentals of what one of the most important issues facing the world means for their industry.

This opinion and other observations were expressed by Chandran Nair, founder and chief executive of the Global Institute For Tomorrow, at the World Economic Forum’s China Business Summit 2006.

The summit, with the theme of “Sustainable Growth through Innovation: China’s Creative Imperative”, was held in Beijing on 10-11 September. Mr Nair was on a special interests panel on sustainable banking, which ran on the first day of events.

Mr Nair’s comments were centered on the importance of bankers understanding what sustainability actually means and therefore if they embrace it what it will take to operationalise it. His observations are described below:

  • The banking industry needs to decide what it means to embrace “sustainability”. Many confuse matters of ethics, corporate social responsibility, and the environment with sustainable development. They are related but for business as a whole, how they are linked differs according to sectors, regulatory regimes, the global dimension of their business, and in how their own policies are implemented. A critically important issue to be sure, sustainability has fallen victim to fashion, heading the bill at almost every conference – most financial institutions have latched on to the issues associated with climate change.
  • But few people in most industries – banking included – have taken the time to understand how the principles of sustainable development relate directly to their business operations: this is not the domain of corporate affairs – involvement in sustainable development as good for business or reputation is not the issue. Nor have they studied the core principles, accepted and applied them to their business. They still need to understand how they make decisions in exercising these principles, and reconcile the inherent contradictions between sustainability and their industry.

 

What are the core principles of sustainable development that the bankers must understand?

  • Balancing of economic interests with communities’ social aspirations and minimising environmental impacts
  • It is not just the environment, neither it is just about the economics. It is about the trade-offs, the political objectives, and there are no absolutes. Therein lie the really difficult business decisions and the challenge of transparency.
  • Inter-generational equity, which requires that decisions taken today do not compromise the options for future generations. A very difficult issue but one that has to be central to any serious commitment to sustainability.

 

Mr Nair suggested that in-house competencies were of critical importance – and while they had the best intentions, many banking sector signatories to environmental policies like the Equator Principles lack these to ensure their own compliance. Unless these competencies are built, sustainable development policies will become a quagmire of complexities for banks. This in turn allows critics of the banking sector to have a field day picking holes in supposed commitments to sustainability.

Mr Nair observed that banks seem to be exercising an “at arm’s-length” policy: while they seem to attach some importance to informing investors about sustainability, there is little of the same diligence applied internally. Hence, while investors may be “living” sustainability, the banks themselves have made little or no attempt to understand the impacts of their industry and what they must in turn do to mitigate these impacts.

To resolve this,

  •  The banks must decide what sustainable development means for their business. This is a critical starting point and must be taken very seriously so that there is no confusion with just environmental compliance and good PR. They must understand the sustainability impacts that their business has and bring intellectual rigour and honesty to their understanding.
  •  More important than just having lofty motives for taking actions and flimsy policies is the need to move beyond rhetoric: they must state their case, outline robust policies, and detail how they intend to implement them. They should be bold and explain contradictions and be willing to defend some of these given the imperfect world we live in. But being vague and shallow is not an option for global players with global brands.
  •  Organisations that are serious about sustainable development must put principles at the heart of decision making. This includes fundamental points, like how deals are done, loans are made, and in searching proactively for opportunities, and even in establishing and adhering to frameworks that deliberately preclude their involvement in certain investments.
  •  Bankers need to be clear in their own minds that there are some issues to do with sustainable development that they may not be able to deal with. But they must not package their response to these issues in a way that offloads all actions to others and washes their hands of it: banks cannot forever outsource the externalities debate, which is at the core of sustainable development commitments.
  •  The 800-pound gorillas of the capitalist economy have a big impact, and on sustainable development it can be a positive one – if they can accept what it means and put in place meaningful policies. It however requires a bold and fundamental shift in the industry.
  •  In the sustainable future 800-pound gorillas cannot deny their direct environmental and social impacts. Their traditional defence will be invalid – that they are there only to make money and advise others. This persona is unhelpful and may be responsible for a reluctance to express the desire to do well for the world.
  •  Within 10 years civil society in general and in particular non-governmental organisations, and regulators will begin to appreciate fully just how powerful a role banks can play in sustainable development. They will show the connections between the decisions banks take, the profits they make, and the trickle-down effects on communities, resources, the biosphere and landscapes across the globe. The forensic approach will get much more sophisticated and the “hands-off” approach will need to give way to “hands-on” and “finger-printed”.
  •  It is clear that things are about to change. Banks have a choice: maintain the attitude that current power and influence will allow them to fend off scrutiny; or start getting on top of the issues and look for opportunities in sustainable development, rather than stumble on them and claim sustainability credentials for PR reasons.
  •  Such opportunities are being highlighted by sustainable banking awards, but even these appear to be wanting: the Financial Times Sustainable Banking Awards, in their second year, are to be encouraged, but should set the bar much higher and withhold accolades if necessary. Sustainability is too important to be made into a beauty contest where the costume is more important than the content or adherence to the principles. Bending over to grant awards to undeserving institutions does a disservice to everyone.
  •  Mr Nair said the current financial system within which banks operate also imposes a “tyranny of short-term results” that works against sustainable development. This is being complicated by perverse incentives that hobble sustainable development policies shaping decisions. He suggested it is unrealistic to expect ethical decisions from a 30-year-old banker with an MBA being paid a USD250,000 salary, and with a potential bonus of USD500,000. That being the case, sustainable development decisions are “very unlikely”.

 

Mr Nair stated that oversight by regulators may be the only way to ensure that banks understand, instill, and practise sustainable development.

Sustainability check box for bank chief executives

Questions bank chief executives should ask themselves.

  • What is your understanding of sustainability? How do you see it being relevant to your bank?

 [It is hoped they will not respond with: ethics, the environment, and the usual neatly pigeonholed issues, that it is all the responsibility of governments and those who move huge sums of capital around are not shaping the direction of global development.]

  • Why is the bank concerned about sustainability issues from the view point of its core business objectives?
  • What, then, are you doing, and – without in-house knowledge – who is advising you?
  • Do you have a sustainable development policy?
  • How has it been made practicable for operations – who monitors the policy, how is the reporting, how are investment decisions taken in light of the policy?
  •  Does the responsible person have any power and access to you, the chief executive?
  •  Are you able to talk through the process of a specific business decision?
  •  Can you cite a decision to reject a project because it conflicted with your policy? or an investment decision taken on sustainability grounds that changed the original nature of the investment?
  •  Do the sustainability principles you have adopted have any links to your bank's governance rules and the board's view?

 

Weapons makers have sustainability in their sights

Green munitions? Armies with sustainability policies? Could it be that the concept of sustainability is being taken to the edge of parody?

One of the world’s biggest arms makers, British firm BAE Systems, is designing a new generation of weaponry to be safe for the environment and users.

And at the same time, the U.S. Army has a policy – and a website – dedicated to sustainability.

BAE’s new weapons are to be lead-free (bullets), quieter (warheads), produce less smoke (grenades), and less toxic (rockets). It wants to make weapons “as safe for the user as possible”, “limit the collateral damage” and “impact as little as possible on the environment”.

It is being supported by the British Ministry of Defence, which, in an official leaflet, describes how “a concept of ‘green munitions’ is not a contradiction in terms”.

A “green munitions” concept “aims to tackle many issues such as design for re-use, design for recycling, design for training, green energetic materials etc.", the ministry leaflet says.

However, anti-arms groups say this is – among other things – a smokescreen. “BAE is determined to make itself look ethical, but they make weapons to kill people and it’s utterly ridiculous to suggest they are environmentally friendly,” the spokesman for London-based Campaign Against Arms Trade is quoted in The Times as saying.