challenging the banks on their lending policiesJanuary 2002
Commercial and investment banks need to broaden the range of risks they consider when assessing asset finance deals, says Alan Banks
We all know that, despite the general positive influence of moral suasion brought by governments, NGOs and consumers, the only way really to influence corporates is to impact their share price or their cost of capital.
This was partly recognized by the 1992 Rio Resolution on Social Investment which sought to encourage financial institutions to integrate ethical considerations into their investment analysis, and echoed in the July 2000 amendments of the UK’s Pensions Act which required pension funds to disclose the extent to which they take environmental, ethical and social issues into account in their investment decisions. This theme has been picked up recently by the think tank the London Principles on Sustainable Finance, backed by the Department for Environment, Food and Rural Affairs, which is trying to get broad agreement among financial institutions as part of the UK’s submission for the Johannesburg Earth Summit on sustainable development later this year.
Among financial institutions, asset managers have led the way with clear investment policies and increasing shareholder activism. But what about the commercial and investment banks? Sure, they have wonderful statements of their own principles and direct investment policies – enough to earn them ‘ethical’ status in most portfolios. However, there is scant evidence that they have carried this higher purpose through into their business practices.
Given the critical role of banks in the intermediation of capital flows – through their underwriting, leasing and long-term lending activities – this lack of follow-through just isn’t good enough. After all, what is the difference between BP underwriting the equity issue for PetroChina (for which it has been properly criticized) and Morgan Stanley – both directly and through its 37 per cent holding in China International Capital Corporation – being the principal arranger of finance for the Three Gorges Project?
Where asset managers are engaging with companies for change, banks are engaging for maximum profit. We need to try to look beyond the apple pie statements in corporate reports to the assets financed by banks. Banks which engage in unethical lending not only risk collateral damage to their reputations, but also their shareholders’ capital, if environmental or other liabilities impact the cash flows and residual value calculations on long-term asset finance.
There is the beginning of change; the Co-operative Bank in the UK and Triodos in the Netherlands have 100 per cent ethical lending policies. But many more banks should be developing ethical screens for their financing activities – for their moral and financial profit.
Alan Banks is chief executive of Global Risk Management Services
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