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
