The advice (and the example) coming from many of the leading international banks and financial institutions is that companies must take very seriously their current and future policies towards sustainability if they are to become a viable and attractive business partner in the eyes of their financial backers, the banks.
Gone are the quips: sustainable banking, whatever next, if the banking business is not sustainable, then we're all in trouble!
Now we move from the last buzz phrase - corporate social responsibility - up to the next echelon: sustainability. It is argued that the corporate ethos that embraces sustainability as a policy must now be seen to be embracing a much wider social responsibility, one that affects not only society (ergo businesses and finances), but planet earth itself. We now see 'climate change' high on the agenda in boardrooms across the EU and elsewhere, as executives scramble to be seen to be acting responsibly as they look up definitions of 'carbon footprint' and puzzle over how to calculate their 'carbon disclosure'.
Not especially known for their benign patronage to lesser mortals, we learn with some surprise that it is the international banking fraternity that is leading the way in terms of sustainability by showing how and why it should be done.
Why this should be is the fact that banks, quite rightly, are reputation obsessed. And not only with their own reputations, but also with the reputations of their clients - for instance, whether or not most banks will grant a loan to a company is based on that company's credit record (and the assessment as to whether or not the company will be able to pay the money back!).
Therefore banks are putting their own houses in order which, in turn, empowers them to put their own clients under scrutiny when assessing risk in terms of: how will the climate change we know is happening affect this business or industry sector over the next 10 years?
RISKS
David Galt of First State Investments says emphatically that banks must see climate change as one of the risk criteria upon which they assess com-panies' risk levels. This is being far-sighted, he believes: 'If companies want to attract long-term investors, they need to stop seeing short-term risks.' Despite what the doubters say, Galt is of the opinion that climate is changing fast and its impact on businesses is faster than we had previously thought.
So how are banks, and the company clients they deal with, to reduce their carbon footprint in real terms, and become a shining example of sustainable banking and sustainable business? Chris Tuppen of BT is one of those trying to help companies reduce their carbon footprint, and he makes three points on the road to achieving this:
Less electricity consumption ('electricity is the lifeblood of industry');
Carbon audit practice to help customers realise their carbon footprints;
Travel: BT is attempting to persuade their customers to use their video conference equipment, rather than travelling thousands of miles across the globe to get to conferences.
Logical and sensible, although one wonders if BT sees a new business opportunity in point 3.
RESPONSIBILITY
There are also those who call on banks to take more responsibility for their deals: rather than simply giving out loans to any company that will clearly be able to repay the loan on good terms, they must also work sustainability into their loan matrix. So if, for instance, a company in a certain geographical region requests a loan, the bank must not only check out the credit risk of the company but banks must also check out the geographical region, as well as the society or community that will be affected by this loan injection to the company. There is also a debate which questions that if banks give loans to carbon-producing businesses, such as a gas/power plant, and these businesses are then, via increased productivity, also increasing their carbon output - shouldn't banks take some responsibility? The banks say no! But both Chris Tuppen and David Galt argue that banks must be more responsible for their loans: banks supply power plants with the money, therefore they are responsible for the bad effects as well as the good.
PASSIONATE
Herman Mulder is a former senior vice president, Group Risk, ABN AMRO Bank, working with the Dutch government to direct billions of euros to environmental businesses. He believes that the key to banks themselves becoming more sustainable is that the people who make the deals must be passionate about sustainability. It sounds obvious, so how can this happen?
Currently, says Mulder, the people who make the deals in banks are not rewarded for exactly how environmentally friendly or sustainable their deals are: they are rewarded for how big they are, and how many they make. Therefore, there is currently no incentive for banks to become sustainable. And banks, he admits, are, first and foremost, about making profit and that will never change.
One of Mulder's concepts to enable banks to address this problem is to take on companies as clients even if they are not sustainable or environmentally friendly, because, as the powerful bank, you may be able to change their ways via the terms of the deal. But although an argument says that most companies wouldn't want a bank dictating their business policy in this way, and would look to another bank, Mulder's point is that if all banks start to prioritise sustainability, companies will have to accept that this is the way banking is going.
TOGETHER
And Fabio Barbosa, CEO of Banco Real in Brazil, agrees with Herman Mulder's point, saying that: 'the most important thing is "all of us together" rather than "us versus them".
'You can't do well in a society that is not doing well itself,' he says, 'therefore in developing markets like Brazil, banks must put something good back into society (or, rather, not put something bad back into society) before they can prosper.' Barbosa hopes that one day we will no longer refer to 'sustainable banking' but simply to 'banking'; this, he says, should be the aim of all banks.
Barbosa's argument to bankers is that while sustainability policies/requirements may lose them some clients, it will also gain banks new clients, too. What sort of clients might be gained? The kind of clients that sign with Banco Real, largely due to their reputation as a sustainable bank, are from the following sectors: Wholesale; Biodiesel; Wind Power.
And to prove his point, Barbosa adds: 'at Banco Real, employee pride/satisfaction is up, as is client satisfaction, and they are still making money; Banko Real is the second most successful bank in Brazil.'
A setback that remains, however, is that in fledgling markets such as Brazil and Africa, governments don't yet have climate change as a top priority, as do developed markets. Indeed, many emerging markets have other urgent social priorities, which it would be hard to argue are less important than climate change and sustainability: poverty and health issues, to name just two.
REWARDED
For the banking sector, there is now even an annual Sustainable Bank Award, given by the Financial Times, with entries coming from many of the world's largest banks such as Citigroup, HSBC, Deutsche Bank, ABN Amro, Goldman Sachs, Barclays and JP Morgan. Smaller institutions included DFCU of Uganda, Bank Sarasin, the Swiss private bank, Industrial Bank of China and Center-Invest Bank from Russia. This year's winner was ABN Amro, the Dutch bank, in recognition of its leadership in environmental and social risk management over many years.
'We've seen a rapid evolution in sustainable banking,' says Lars Thunell, head of the IFC and co-chairman of the FT's panel of judges. 'Risk management and brand defence still motivate banks to integrate environmental and social considerations into their operations. But increasingly we're seeing banks differentiate themselves and compete by creating new sustainable financial products, for example, in energy efficiency and carbon. This is especially powerful for emerging-market banks looking to diversify their products and client pool.'
Perhaps more than anything, adherence to the cause of sustainability calls for cultural changes through business practice (hand in hand with positive changes of attitude within society itself). But there is clearly a pain barrier to be passed through which may include, in the short term, some loss of profitability while policies and practices are adjusted to more environmentally friendly terms. In the long term, commentators are saying that this is both necessary and worthwhile in order to take business and financial planning beyond profitability alone. The fact remains, financiers hold the key to the future.
