SUSTAINABLE BANKING&FINANCEmedia.ft.com › cms › 7a7616c8-96fd-11e0-aed7-00144feab49a.pdf ·...
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SUSTAINABLE BANKING & FINANCE FINANCIAL TIMES SPECIAL REPORT | Thursday June 16 2011 www.ft.com/sustainable-banking-2011 | twitter.com/ftreports Strong principles foster growth Banks are falling over themselves to trumpet new- found ethical credentials as they attempt to rebuild their battered reputations following the fierce cus- tomer backlash sparked by the financial crisis. Some of the biggest lend- ers in markets that have been propped up with bil- lions of pounds of taxpay- ers’ money have run adver- tising campaigns position- ing themselves as the most “helpful” bank or promising to be “here for good”. Meanwhile, new entrants have sprung up, particu- larly in the UK, where the banking industry has borne some of the deepest scars, claiming they will revolu- tionise customer service. However, analysts say the pool of genuinely ethical financial services providers remains small. Only a hand- ful, including Triodos, the Dutch bank, the UK’s mem- ber-owned Co-operative Financial Services (CFS), Germany’s GLS Bank and Italy’s Banca Popolare Etica, stick rigidly to a policy of responsible invest- ment. These tend to take in money from savers and lend it to socially responsi- ble businesses and organi- sations, such as renewable energy and social housing providers. Some, including Triodos and Banca Etica, inform savers where their money goes and invite them to visit groups they fund. These organisations also try to adopt fairer policies for staff. Triodos, for exam- ple, ensures that its highest paid executive does not earn more than 7.5 times the salary of its lowest. They also aim to offer fairer products. The Co-op, one of a small number of self-styled ethical banks to offer a full range of retail services, has launched schemes including a motor insurance policy that moni- tors drivers’ behaviour using a tracking device and alters the price they pay accordingly. It also offers a credit card that rewards ethical product purchases. Many ethical organisa- tions have enjoyed a boost in demand for their services since the crisis. Lending at Triodos’s UK arm, grew 20 per cent last year and by almost the same amount again in the first four months of 2011. Meanwhile, the Co-op has increased the size of its cor- porate loan book by 40 per cent in 2010 and saw 80 per cent more retail customers switch their current account to the bank than in the previous year. Ethical lenders say cus- tomers have become more aware of alternative approaches to banking and are frustrated with their existing providers. Neville Richardson, chief executive of CFS, says: “Some people have been feeling angry with their banks. They went with a big provider, as they thought it would be there long-term and they feel let down.” One downside is that these organisations tend not to offer a full range of banking services. Triodos does not yet offer UK cur- rent accounts or mortgages, for example, while few could provide the kinds of sophisticated risk and debt management services larger companies require. Some analysts warn that some socially-minded busi- nesses, which tend not to prioritise profit growth as aggressively as others, could be deemed higher risk. However, Charles Middleton, managing direc- tor of Triodos UK, says there is no shortage of ethi- cal businesses that “stack up well commercially”. But with regulatory pres- sures hitting profit margins and banks finding it more challenging to raise funds, some ethical lenders are taking bold steps to sustain and expand their busi- nesses. The Co-op, for exam- ple, merged with Britannia Building Society in 2009 to form an institution with more than 300 branches and 9m customers. Ethical lenders are deter- mined that financial pres- sures will not force them to compromise their values. Mr Richardson says the Co-op and Britannia had similar beliefs that are now embedded across the group. Mr Middleton expects competition to increase in the ethical arena as the economy recovers. “I’m quite surprised it hasn’t already,” he says. “I think, once banks recover, they will see opportunities to get more involved in sus- tainability. But there is a long way to go. Some are more about managing the reputation of their brand than genuinely engaging.” Ethical banking Consumers are seeking alternatives, says Sharlene Goff Charles Middleton: expecting competition in the ethical arena Crisis and disasters boost zeal for reform I t was not just the excesses of the credit boom that made the world think twice. There has been a run of bad environmental news stories in the past year, from the BP oil spill in the US Gulf to the Fuku- shima nuclear disaster in Japan. Meanwhile, there has been contin- ued rapid growth in emerging econo- mies’ need to back small businesses. And financial regulators have contin- ued to build a banking system that steers towards longer-term gains. All this has given the concept of sustainable finance momentum over the past year. The values of sustaina- bility – a longer-term horizon and a greater focus on the counterparties with which banks do business – are becoming mainstream. A minority in the banking world has long specialised in “ethical” behaviour, restricting investments to a “whitelist” of companies deemed to act responsibly. But the environmen- tal disasters in particular have been a spur to such institutions, says Joachim Straehle, chief executive of Bank Sarasin, whose predecessors turned the Swiss institution into a “sustainable bank” after a domestic chemical disaster 25 years ago. “We have a sustainable matrix sys- tem that allows us to invest in high- impact sectors like oil only if the com- pany is exceptionally sustainable,” Mr Straehle says. The bank’s only such investment is in Statoil of Norway, because of its renewables focus. Sarasin has even blacklisted US government bonds because some states use the death penalty. “But it doesn’t mean you have to be green,” he says somewhat sheepishly. “You can still drive a Fer- rari and you don’t have to wear san- dals. It’s about making money but in a socially responsible way.” Even big blue-chip banks showed a knee-jerk aversion to nuclear energy financing in the aftermath of the Jap- anese earthquake, with a “green rush” by some, such as BNP and Deutsche Bank, away from a high- profile Indian nuclear project that was set to be built in the Jaitapur earth- quake zone. It remains to be seen how perma- nent that caution is, but the political shift away from nuclear in Europe, particularly in Germany, could restrain European banks from fund- ing such projects further afield. This may just be current pragma- tism, but it reflects homegrown changes in business strategies by banks with international reach. For example, in recent months mainstream British banks have been drawn, sometimes screaming, into doing more to assist the broader soci- ety. The so-called Project Merlin agreement between the big UK banks was centred on government lending targets, but it also bound the banks into several other do-good projects that are more ambitious in their scope than standard government-sponsored financing initiatives. The biggest idea is the creation of a £2.5bn ($4.1bn) private equity-style Business Growth Fund to kick-start small business investment, while a further £200m has been committed to the Big Society Bank, a project con- ceived by David Cameron, UK prime minister, to support regional develop- ment ventures. There is a theoretical promise of commercial returns for the banks, but few expect them to be generous. Project Merlin also covers the vexed issue of bankers’ pay, though the substance of the deal – a pledge that total bonuses for 2010 would be lower than the previous year – was easy enough to adhere to, given that profits were substantially down. But there have been genuine reforms to pay structures at a regula- tory level, particularly in Europe, that push banks to structure bonuses over longer time frames and introduce “clawback” measures that reclaim money in the event of a blow-up. Under new European Union rules, enforceable by national regulators, senior executives’ cash bonuses are limited to 20 per cent of total pay, with the rest deferred for as much as five years. The structures – echoed by similar, but less punitive guidelines in the US – are designed to motivate bankers to prioritise longer-term prof- itability over short-term gains that may backfire. At the same time, in the usual spirit of a clean-up era, tax authorities worldwide, but particularly in the US, have been on a mission to put a stop to the more egregious ways in which banks have helped citizens and com- panies avoid tax. Swiss banks, notably UBS, have seen their schemes exposed by the authorities, and the institutions’ repu- tations have been hurt. Switzerland is now trying to reinvent its image as a banking location that remains big on reliability, but is no longer the home of “bank secrecy”. Other areas of regulatory reform – particularly rules on bank capital enshrined in the so-called Basel III rule book – do even more to encour- age sustainable practices. Over the eight years to 2019, the world’s banks must adopt a series of measures designed to make sure their activities are backed by sufficient reserves – high-risk trading, for exam- ple, is now much more costly in an effort to ensure banks are not derailed by outsized risks. The volume of liquid assets banks must hold will also rise to protect them from short-term runs on their funds by nervous investors. More stable foundations should foster a more sustainable financial system, the thinking goes. Profitability will be lower, with most banks having trimmed return on equity goals to less than 15 per cent, compared with 20 or 25 per cent in pre-crisis years. This should help avoid the huge swings into the red every few years. Even now, before implementation of the rules has really begun, there are dissenting voices – and not just from banks eager to mitigate the impact of costly changes. Specialist firms have sprung up alongside the traditional restructuring experts from investment banks to help banks arbitrage their regulatory capital costs. At the same time, regulators have woken up to the fact that clamping down hard on the core banking indus- try could simply push problem areas, particularly trading risk, into less supervised “shadow banks”, such as hedge funds, money market funds and energy companies. Perhaps, critics argue, the financial market is actually being made more unstable rather than more sustainable. But ultimately it is the growing body of willing reformers, rather than the regulated recalcitrants, that really define the spirit of sustainable bank- ing. Mergers, such as the combination of the UK’s Co-operative Bank with Britannia building society, are help- ing to enlarge the ethical market. Microfinanciers, some of whom were hard hit by the financial crisis, are bouncing back to help small busi- nesses in emerging markets. And in those fast-growing regions, some specialist sustainable banks are now very much part of the mainstream. Vasily Vysokov, chairman of Russia’s Center-Invest, says the crisis was an important lesson in sustaina- bility. “In 2008, we didn’t increase credit costs as other banks did,” he explains. “We allowed clients to finish their investment programmes. What’s more important, to keep profits or to keep clients? So in 2008-09, we broke even. But now we’re being rewarded with bigger profits.” The financial collapse and a run of environmental disasters are among the issues driving change, writes Patrick Jenkins Sustainable Bank of 2011 award nominees ●Africa/Middle East Access Bank, Lagos, Nigeria; Exim Bank, Dar- es-Salaam, Tanzania; National Bank of Abu Dhabi, United Arab Emirates ●Asia-Pacific Bank BNI, Jakarta, Indonesia; Bank of the Philippine Islands; YES Bank, India ●Europe Co-operative Financial Services, Manchester, UK; GLS Bank, Germany; TSKB (Industrial Bank of Turkey), Istanbul ●Americas Banco de Galicia y Buenos Aires, Argentina; Grupo Financiero Banorte, Mexico; Itaú- Unibanco Holding, Brazil ●Cross-regional Bank of America, Charlotte NC, USA; Bank Sarasin, Basel, Switzerland; Sumitomo Mitsui Banking Corporation, Japan; Citigroup, New York, USA; Japan Bank for International Cooperation (JBIC), Tokyo For more details and for nominees in other categories, see Page 2 Japanese medical personnel check a mother and son for radiation exposure in Kawamata village, Fukushima prefecture Asahi Shimbun
Transcript of SUSTAINABLE BANKING&FINANCEmedia.ft.com › cms › 7a7616c8-96fd-11e0-aed7-00144feab49a.pdf ·...
SUSTAINABLEBANKING & FINANCEFINANCIAL TIMES SPECIAL REPORT | Thursday June 16 2011
www.ft.com/sustainablebanking2011 | twitter.com/ftreports
Strong principles foster growth
Banks are falling overthemselves to trumpet new-found ethical credentials asthey attempt to rebuildtheir battered reputationsfollowing the fierce cus-tomer backlash sparked bythe financial crisis.
Some of the biggest lend-ers in markets that havebeen propped up with bil-lions of pounds of taxpay-ers’ money have run adver-tising campaigns position-ing themselves as the most“helpful” bank or promisingto be “here for good”.
Meanwhile, new entrantshave sprung up, particu-larly in the UK, where thebanking industry has bornesome of the deepest scars,claiming they will revolu-tionise customer service.
However, analysts say thepool of genuinely ethicalfinancial services providersremains small. Only a hand-ful, including Triodos, theDutch bank, the UK’s mem-ber-owned Co-operativeFinancial Services (CFS),Germany’s GLS Bank andItaly’s Banca PopolareEtica, stick rigidly to a
policy of responsible invest-ment.
These tend to take inmoney from savers andlend it to socially responsi-ble businesses and organi-sations, such as renewableenergy and social housingproviders. Some, includingTriodos and Banca Etica,inform savers where theirmoney goes and invite themto visit groups they fund.
These organisations alsotry to adopt fairer policiesfor staff. Triodos, for exam-ple, ensures that its highestpaid executive does notearn more than 7.5 timesthe salary of its lowest.
They also aim to offerfairer products. The Co-op,one of a small number ofself-styled ethical banks tooffer a full range of retailservices, has launchedschemes including a motorinsurance policy that moni-tors drivers’ behaviourusing a tracking device andalters the price they payaccordingly. It also offers acredit card that rewardsethical product purchases.
Many ethical organisa-tions have enjoyed a boostin demand for their servicessince the crisis. Lending atTriodos’s UK arm, grew 20per cent last year and byalmost the same amountagain in the first fourmonths of 2011.
Meanwhile, the Co-op has
increased the size of its cor-porate loan book by 40 percent in 2010 and saw 80 percent more retail customersswitch their currentaccount to the bank than inthe previous year.
Ethical lenders say cus-tomers have become moreaware of alternativeapproaches to banking andare frustrated with theirexisting providers.
Neville Richardson, chiefexecutive of CFS, says:“Some people have beenfeeling angry with their
banks. They went with abig provider, as theythought it would be therelong-term and they feel letdown.”
One downside is thatthese organisations tendnot to offer a full range ofbanking services. Triodosdoes not yet offer UK cur-rent accounts or mortgages,for example, while fewcould provide the kinds ofsophisticated risk and debtmanagement services largercompanies require.
Some analysts warn thatsome socially-minded busi-nesses, which tend not to
prioritise profit growth asaggressively as others,could be deemed higherrisk. However, CharlesMiddleton, managing direc-tor of Triodos UK, saysthere is no shortage of ethi-cal businesses that “stackup well commercially”.
But with regulatory pres-sures hitting profit marginsand banks finding it morechallenging to raise funds,some ethical lenders aretaking bold steps to sustainand expand their busi-nesses. The Co-op, for exam-ple, merged with BritanniaBuilding Society in 2009 toform an institution withmore than 300 branches and9m customers.
Ethical lenders are deter-mined that financial pres-sures will not force them tocompromise their values.
Mr Richardson says theCo-op and Britannia hadsimilar beliefs that are nowembedded across the group.
Mr Middleton expectscompetition to increase inthe ethical arena as theeconomy recovers.
“I’m quite surprised ithasn’t already,” he says. “Ithink, once banks recover,they will see opportunitiesto get more involved in sus-tainability. But there is along way to go. Some aremore about managing thereputation of their brandthan genuinely engaging.”
Ethical bankingConsumers areseeking alternatives,says Sharlene Goff
CharlesMiddleton:expectingcompetitionin the ethicalarena
Crisis anddisastersboost zealfor reform
It was not just the excesses of thecredit boom that made the worldthink twice. There has been arun of bad environmental news
stories in the past year, from the BPoil spill in the US Gulf to the Fuku-shima nuclear disaster in Japan.
Meanwhile, there has been contin-ued rapid growth in emerging econo-mies’ need to back small businesses.And financial regulators have contin-ued to build a banking system thatsteers towards longer-term gains.
All this has given the concept ofsustainable finance momentum overthe past year. The values of sustaina-bility – a longer-term horizon and agreater focus on the counterpartieswith which banks do business – arebecoming mainstream.
A minority in the banking worldhas long specialised in “ethical”behaviour, restricting investments toa “whitelist” of companies deemed toact responsibly. But the environmen-tal disasters in particular have been aspur to such institutions, saysJoachim Straehle, chief executive ofBank Sarasin, whose predecessorsturned the Swiss institution into a“sustainable bank” after a domesticchemical disaster 25 years ago.
“We have a sustainable matrix sys-tem that allows us to invest in high-impact sectors like oil only if the com-pany is exceptionally sustainable,” MrStraehle says.
The bank’s only such investment isin Statoil of Norway, because of itsrenewables focus. Sarasin has evenblacklisted US government bondsbecause some states use the deathpenalty. “But it doesn’t mean youhave to be green,” he says somewhatsheepishly. “You can still drive a Fer-rari and you don’t have to wear san-dals. It’s about making money but ina socially responsible way.”
Even big blue-chip banks showed aknee-jerk aversion to nuclear energyfinancing in the aftermath of the Jap-anese earthquake, with a “greenrush” by some, such as BNP andDeutsche Bank, away from a high-profile Indian nuclear project that wasset to be built in the Jaitapur earth-quake zone.
It remains to be seen how perma-nent that caution is, but the politicalshift away from nuclear in Europe,particularly in Germany, could
restrain European banks from fund-ing such projects further afield.
This may just be current pragma-tism, but it reflects homegrownchanges in business strategies bybanks with international reach.
For example, in recent monthsmainstream British banks have beendrawn, sometimes screaming, intodoing more to assist the broader soci-ety. The so-called Project Merlinagreement between the big UK bankswas centred on government lendingtargets, but it also bound the banksinto several other do-good projectsthat are more ambitious in their scopethan standard government-sponsoredfinancing initiatives.
The biggest idea is the creation of a£2.5bn ($4.1bn) private equity-styleBusiness Growth Fund to kick-startsmall business investment, while afurther £200m has been committed tothe Big Society Bank, a project con-ceived by David Cameron, UK primeminister, to support regional develop-ment ventures.
There is a theoretical promise ofcommercial returns for the banks, butfew expect them to be generous.
Project Merlin also covers thevexed issue of bankers’ pay, thoughthe substance of the deal – a pledgethat total bonuses for 2010 would belower than the previous year – waseasy enough to adhere to, given that
profits were substantially down.But there have been genuine
reforms to pay structures at a regula-tory level, particularly in Europe, thatpush banks to structure bonuses overlonger time frames and introduce“clawback” measures that reclaimmoney in the event of a blow-up.
Under new European Union rules,enforceable by national regulators,senior executives’ cash bonuses arelimited to 20 per cent of total pay,with the rest deferred for as much asfive years. The structures – echoed bysimilar, but less punitive guidelines inthe US – are designed to motivatebankers to prioritise longer-term prof-itability over short-term gains thatmay backfire.
At the same time, in the usual spiritof a clean-up era, tax authoritiesworldwide, but particularly in the US,have been on a mission to put a stopto the more egregious ways in whichbanks have helped citizens and com-panies avoid tax.
Swiss banks, notably UBS, haveseen their schemes exposed by theauthorities, and the institutions’ repu-tations have been hurt. Switzerland isnow trying to reinvent its image as abanking location that remains big onreliability, but is no longer the homeof “bank secrecy”.
Other areas of regulatory reform –particularly rules on bank capitalenshrined in the so-called Basel IIIrule book – do even more to encour-age sustainable practices.
Over the eight years to 2019, theworld’s banks must adopt a series ofmeasures designed to make sure theiractivities are backed by sufficientreserves – high-risk trading, for exam-ple, is now much more costly in aneffort to ensure banks are not derailedby outsized risks.
The volume of liquid assets banksmust hold will also rise to protectthem from short-term runs on theirfunds by nervous investors. Morestable foundations should foster a
more sustainable financial system,the thinking goes.
Profitability will be lower, withmost banks having trimmed return onequity goals to less than 15 per cent,compared with 20 or 25 per cent inpre-crisis years. This should helpavoid the huge swings into the redevery few years.
Even now, before implementation ofthe rules has really begun, there aredissenting voices – and not just frombanks eager to mitigate the impact ofcostly changes. Specialist firms havesprung up alongside the traditionalrestructuring experts from investmentbanks to help banks arbitrage theirregulatory capital costs.
At the same time, regulators have
woken up to the fact that clampingdown hard on the core banking indus-try could simply push problem areas,particularly trading risk, into lesssupervised “shadow banks”, such ashedge funds, money market funds andenergy companies.
Perhaps, critics argue, the financialmarket is actually being mademore unstable rather than moresustainable.
But ultimately it is the growingbody of willing reformers, rather thanthe regulated recalcitrants, that reallydefine the spirit of sustainable bank-ing. Mergers, such as the combinationof the UK’s Co-operative Bank withBritannia building society, are help-ing to enlarge the ethical market.
Microfinanciers, some of whomwere hard hit by the financial crisis,are bouncing back to help small busi-nesses in emerging markets. And inthose fast-growing regions, somespecialist sustainable banks are nowvery much part of the mainstream.
Vasily Vysokov, chairman ofRussia’s Center-Invest, says the crisiswas an important lesson in sustaina-bility. “In 2008, we didn’t increasecredit costs as other banks did,” heexplains.
“We allowed clients to finish theirinvestment programmes. What’s moreimportant, to keep profits or to keepclients? So in 2008-09, we broke even.But now we’re being rewarded withbigger profits.”
The financial collapse anda run of environmentaldisasters are among theissues driving change,writes Patrick Jenkins
Sustainable Bank of2011 award nominees●Africa/Middle East AccessBank, Lagos, Nigeria; Exim Bank, DaresSalaam, Tanzania; National Bankof Abu Dhabi, United Arab Emirates
●AsiaPacific Bank BNI, Jakarta,Indonesia; Bank of the PhilippineIslands; YES Bank, India
●Europe Cooperative FinancialServices, Manchester, UK; GLS Bank,Germany; TSKB (Industrial Bank ofTurkey), Istanbul
●Americas Banco de Galicia yBuenos Aires, Argentina; GrupoFinanciero Banorte, Mexico; ItaúUnibanco Holding, Brazil
●Crossregional Bank of America,Charlotte NC, USA; Bank Sarasin,Basel, Switzerland; Sumitomo MitsuiBanking Corporation, Japan;Citigroup, New York, USA; JapanBank for International Cooperation(JBIC), Tokyo
For more details and for nominees inother categories, see Page 2
Japanese medical personnel check a mother and son for radiation exposure in Kawamata village, Fukushima prefecture Asahi Shimbun
2 ★ † FINANCIAL TIMES THURSDAY JUNE 16 2011
Sustainable Banking & Finance
Nominees on the Bank of the Year shortlistThese descriptions of institutionsnominated for the FT/IFC SustainableFinance Awards are based oninformation provided by them aheadof tonight’s awards dinner in London.The 2011 Sustainable Bank of theYear award recognises the bank thathas shown excellence in creatingenvironmental, social and financialvalue across its operations. Thiscategory is open to bankinginstitutions in developed andemerging economies and there is oneoverall global award and prizes forregional leadership in Africa/MiddleEast; Asia Pacific; Europe; and theAmericas. There is also be a prize forCross-Regional Sustainable Bank ofthe Year.
Africa/Middle East
Access Bank, Lagos, NigeriaAccess was the first Nigerian bankto adopt the Equator Principles, is asignatory to many internationalsustainability initiatives and hasintroduced mainstreamenvironmental, social andgovernance principles across itsoperations. Initiatives include aprogramme to encourage femaleentrepreneurs, finance for renewableenergy projects and the convening ofsustainability events to inspire otherNigerian financial institutions.Exim Bank, DaresSalaam,TanzaniaExim Bank’s slogan is “Innovation isLife”, and it is constantly searchingfor products and services to meet itssustainability objectives. Examplesinclude the encouragement ofrenewables in financing energy
projects, the innovative Faidasavings account aimed at the base ofthe pyramid, Tanzania’s first womenentrepreneurs finance programmeand its Selfina microfinance scheme,also aimed at women.National Bank of Abu Dhabi,United Arab EmiratesNational Bank of Abu Dhabi firstcreated a sustainability strategy in2009. It is committed to signing up tothe Equator Principles in 2011 and isproviding services for those withoutaccounts with its Ratibi card for low-paid labourers. It has also launchedthe simplified Dow Jones OneShareexchange traded fund to encourageinvestment.
AsiaPacific
Bank BNI, Jakarta, IndonesiaBNI signed up to the UNEnvironment Program FinancialInitiative in 2005. It now providesmicrocredit for farmers and villages,has introduced a green mortgage forenvironmentally friendly propertydevelopment, financed geothermaland hydropower generation,supported sustainable palm oilproduction, and invested in projectsto cut greenhouse emissions.Bank of the Philippine IslandsIn 2008, BPI became the first bank inthe Philippines to publish a reportreviewing progress on itssustainability framework, includingreducing its environmental footprint.It funds energy efficiency andrenewable energy projects via itssustainable energy financingprogramme, the first of its kind inthe Philippines. And it is expanding
financial access to underservedgroups through its BPI Globe BanKOmobile microfinance arm.YES Bank, IndiaWhen YES Bank was nominated asAsian Sustainable Bank of the Yearin 2008, it was commended for itstransformational vision and urged todeliver real results. Three years laterthere is much to report, with thelaunch of a sustainable investmentbank to fund environmental andsocial businesses and a privateequity arm sponsoring a cleanenergy fund.
Europe
Cooperative Financial Services,Manchester, UKNamed Sustainable Bank of the Yearin 2010, CFS has devised an ethicaloperating plan that integratessustainability targets into its three-year business plan. It includesemissions reductions of 35 per cent, anew head office that is part of a£800m sustainable regenerationproject and £1bn funding for cleanenergy solutions.GLS Bank, GermanyEstablished in 1974, GLS Bank callsitself the first social and ecologicaluniversal bank, offering the fullrange of sustainable bankingproducts from current accounts tocorporate finance and investment. Itfinances only ecologically,economically and socially sustainableprojects.TSKB (Industrial Bank ofTurkey), IstanbulNamed Sustainable Bank of the Yearin the eastern Europe Emerging
Markets category in 2007, 2008 and2009, TSKB has continued to financerenewable energy projects, addedenergy efficiency projects to the mixand become the first Turkishfinancial institution to publish asustainability report. The onlycarbon-neutral bank in Turkey, ithas the second highest corporategovernance rating in the IstanbulStock Exchange’s index.
Americas
Banco de Galicia y Buenos Aires,ArgentinaThis medium-sized bank is the onlyArgentine bank to have adopted theEquator Principles and hasincorporated sustainability into itscore business. It seeks to reduce itsown environmental impact and toopen its doors to as many people aspossible. But it also seeks toinfluence its corporate clients –many in agriculture – to adoptsustainable practices.Grupo Financiero Banorte,MexicoBanorte is Mexico’s third largestfinancial institution and the onlylarge bank controlled by Mexicanshareholders. A leader in providingfinancial services to underservedgroups, it is incorporating social,environmental and ethicaldimensions into its business. Itssustainability framework has fourpillars: equality and governance,community commitment, andenvironmental responsibility.ItaúUnibanco Holding, BrazilTwo years after the merger of Itaúand Unibanco, the institution in
February 2010 announced its visionto be the leading bank in sustainableperformance and customersatisfaction. The only large localbank to withhold support for a largehydropower project in the Amazon, itseeks by 2013 to have 80 per cent ofassets under active strategymanagement compliant withenvironmental, social andgovernance criteria.
Crossregional
Bank of America, CharlotteNC, USABank of America has invested morethan $11.6bn to address climatechange since 2007 through lending,investments, capital markets activity,philanthropy and its own efforts,which are part of a 10-year, $20bncommitment. It is the first large USbank to make a public commitmenton climate change, it has financedforest conservation, wind farms andaffordable green housing and helpedraise capital for companiesaddressing climate change.Bank Sarasin, Basel, SwitzerlandWith its claim of “Sustainable SwissPrivate Banking since 1841”,Sarasin restructured its strategy in2010 to define its sustainabilityobjectives through five keyindicators. All of its private clientmandates in Switzerland aremanaged on a sustainable basis, asbenchmarked on its proprietary two-dimensional sustainability matrixdeveloped over 20 years. In 2010, itadded sustainable US and emergingmarket equity funds to its stable ofsustainable funds.
Sumitomo Mitsui BankingCorporation, JapanThe goals of SMBC’s sustainabilitystrategy include reducing its ownenvironmental impact, managingenvironmental risk in lending andpromoting environmental businesses.Its global operations finance greeninfrastructure, carbon trading,renewable energy generation andeco-product development.It promotes environmentalbusinesses by co-ordinatingdifferent activities to provideclients with one-stop sustainablesolutions.Citigroup, New York, USAIn 2010, Citigroup built on its long-standing sustainability strategy witha responsible finance framework indealing with customers, the financialsystem and the broader community.It focuses on two areas: financialinclusion, through microfinancewhich has already funded 900,000borrowers, 92 per cent of themwomen, through bond issues,equity raising and securitisations;and environmental innovation,working with clients to reduceimpacts and financing greenbusinesses.Japan Bank for InternationalCooperation (JBIC), TokyoA Japanese government institution,JBIC focuses on globalenvironmental and socialsustainability issues. With partners,it supports developing countries intackling climate change, invests inclean energy, energy efficiency,water infrastructure, urbantransport, and finances greenhousegas emissions reduction projects.
Contenders line upfor the top prizein other categoriesSustainable Asset Ownerof the YearThis award highlightsachievement in the area ofsustainable investment,recognising the institution thathas shown innovation orleadership in creatingenvironmental, social andfinancial value. Nominees are:Caixa de Previdência dosFuncionários do Banco doBrasil (PREVI), Rio deJaneiro, BrazilAll PREVI’s plans employsocio-environmental criteria asdefined in its sustainabilitypolicy and codes of bestcorporate governance practicein line with the UN Principlesfor Responsible Investment,which it helped develop.Environment Agency,Bristol, UKOne of the world’s leadingenvironmental organisations,the Environment Agency hasreduced the environmentalfootprint of its activelymanaged equities by 30 percent in its $2.4bn pension fundin the past five years.London Pensions FundAuthority, UKThe LPFA aims to be aresponsible long-term investorthat encourages bestenvironmental, social andgovernance practice in thecompanies in its $5.3bnportfolio. In 2009 it began todevelop a responsibleinvestment strategy on issuessuch as voting, monitoringfund managers and regularreporting to fund members.National Pension Service,Seoul, South KoreaThe National Pension Service,which with $284bn in assets isthe world’s fourth-largestpension fund, believessustainability affects long-terminvestment performance. A
signatory of the UN Principlesfor Responsible Investment, itorganised a summit of Koreanasset managers to promotegreen leadership and isexpanding its investments intogreen technologies.Storebrand, Lysaker, NorwayAs a leading Nordic insuranceand pensions provider,Storebrand – with assets undermanagement of $73bn – had apioneering role in sustainableinvestments in Europe, withgroup-wide policies on negativescreening and engagement.
Sustainable Asset Managerof the YearThis award highlightsgroundbreaking achievement inthe area of sustainable fundmanagement, recognising themanagement firm that hasshown innovation or leadershipin integrating environmental,social and governance factorsinto its investment philosophyand approach. Nominees are:Aloe Group, UKAloe is a private equity firmthat promotes the creation andgrowth of environmental andsocially sustainable companiesglobally, focusing on recycling,clean energy and eco-processestackling pollution in Asia.Dragon Capital Group, HoChi Minh City, VietnamDragon Capital is an integratedinvestment group focusing onVietnam, investing $450mannually in listed and pre-IPOcompanies with attractivegrowth prospects, goodcorporate governance andalignment with the country’sgrowth drivers.F&C Management, London,UKWithin its ESG business, F&Coffers clients a range ofresponsible investments,including ethical growth andincome funds, globalsustainability themed fundsand its proprietary real estateopportunity business,Responsible EngagementOverlay, which engages almost7,000 companies in 60 marketsand covers £80bn in assets.Pictet Asset Management,Geneva, SwitzerlandPart of one of Europe’s largestprivate banks, Pictet AssetManagement offers sustainablecore equity portfolios to meetclients’ environmental, socialand governance objectiveswhile delivering superior risk-related returnsRabo Equity Advisors, NewDelhi, IndiaRabo’s India Agri BusinessFund invests growth capitalaveraging $5m-$12m in Indianfood and agribusinesscompanies in return forsignificant minority stakes. Ithas made six investments inthe past two years, including inSri Biotech, which producescrop protection andimprovement products derivedfrom microbial organisms andplants that leave no residues inthe farm or the produce.SAM (Sustainable AssetManagement), Zurich,SwitzerlandA pure play investment
boutique focused exclusively onsustainability investing, SAM’soffering is asset management,sustainability indices andcleantech private equity. Itoffers two sustainability corestrategies, seven sustainabilitytheme strategies and the DowJones Sustainability Indexes –as well as heavyweightpublications from its in-houseresearch department.Stratus Group, SãoPaulo, BrazilIn 2010, Brazilian private equityfirm Stratus invested inUnnafibras, which converts 1bnpolyethylene terephthalatebottles annually into a rawmaterial for the textileindustry. Unnafibras, whichcollects the bottles via 4,000 ofthe poorest people in Brazil,raised $60m to double itscapacity and is working withStratus to identify acquisitionsahead of an initial publicoffering in 2012/13.
Achievement in BasicNeeds FinancingThis award recognisestransactions, programmes andinitiatives that use the power offinance to address the scarcityof essential goods (includingfood, water, housing andenergy) across society.Nominees are:AlAmal Microfinance Bank(AMB), Sana'a, YemenYemen is a country wherethree-quarters of the populationare under 25 and only one ineight young people have accessto financial products. Al-AmalMicrofinance Bank providescurrent accounts, savings,loans and insurance to morethan 15,000 young people, withspecial products to attractyoung women.Financiera Educativa deMexico (FINEM)The largest provider of studentloans in Mexico, FINEM hasgranted more than 10,000 long-term loans in more than fiveyears to help students whocannot afford higher education.FINEM’s approach is “wefinance students but get paidby professionals”, which isachieved by insisting students’grades must never fall belowseven on a 10-point scale.ItaúUnibanco Holding, SãoPaulo, BrazilBarely one in seven youngBrazilians go to university. ItaúUniversity Credit providesfinance to more than 7,000students, mostly women, fromlow-income homes whoseparents have mostly neverattended university.One Acre Fund,Bungoma, KenyaOne Acre Fund targets the 75per cent of the world’s poorliving in rural areas, and whoare beyond the reach oftraditional microfinance, byproviding seed and fertiliser oncredit. It also trains farmersand helps them to market.YellowPepper, Digicel,ScotiabankTchoTcho Mobile is a mobilewallet in Haiti, where just 5per cent of economically activepeople have bank accounts.
YellowPepper provides thepayment technology,Scotiabank the bankingservices and Digicel the mobilenetwork. The service allowsnon-governmental organisationsto pay cash-for-work recipientswho live in tent cities.Mahindra Rural HousingFinance, Mumbai, IndiaVillagers often lack legaldocuments and credit historiesto access home loans. Thiscompany has lent $80m to morethan 20,000 rural dwellers,using its own credit evaluationmetrics based on cash flowrather than income, which isoften not documented.Social Finance,London, UKSocial Finance launched a £5msocial impact bond in 2010 tofinance services that reducereoffending by prisonersserving sentences of under 12months in Peterborough jail.Reoffending rates within oneyear are more than 60 per cent,and the government pays ifreconviction rates fall at least10 per cent, using money savedfrom the prison budget.
Achievement in Financingat the Base of the PyramidThis award recognises financialtransactions and initiatives that
address the Base of thePyramid, the more than 4bnpeople who live on less than $2a day. Nominees are:AlAmal Microfinance Bank(AMB), Sana'a, YemenIn a country where only one ineight young people have accessto finance, Al-AmalMicrofinance Bank has createda Youth Fund in partnershipwith Silatech of Qatar toprovide loans averaging $250 toentrepreneurs under the age of30, especially women. It hasfinanced 10,000 businesses,including 1,346 start-ups andhas a 100 per cent repaymentrate for these loans.Au Financiers (India) PrivateLimited (Jaipur, Rajasthan)Two-thirds of Indians live inthe countryside, and a third oftheir agricultural productionrots due to lack of transportand storage. Au Financiersprovides rural customers withloans for vehicles from three-wheelers to trucks for publicand commercial transport,encouraging them to use CNGand LPG vehicles.Bank of America MerrillLynch, London, UKIn return for options on carboncredits, Bank of AmericaMerrill Lynch finances theprovision of affordable and
clean LED lighting in sub-Saharan Africa throughentrepreneurs who buy a pedalgenerator to recharge them.The local people who buy thelights recoup the $5 cost in just22 days through savings onkerosene, which swallows 10-40per cent of their income.JPMorgan’s Social FinanceUnit, New York, USAJPMorgan’s Social Finance Unitmakes social-impactinvestments and providescapital-market services to socialenterprises, funds, foundations,non-profits, developmentfinance institutions and othersserving the base of thepyramid. A business unitrather than a foundation, itaims to attract clients andinfluence asset allocation byshowing that investing forsocial good and financial returnis viable.The Jordan Micro CreditCompany (Tamweelcom),Amman, JordanTamweelcom provides loans ona commercial basis for smallbusiness projects in poorcommunities, while offeringtraining, market support andcommunity programmes as partof its social responsibilityremit. It has disbursed morethan 193,000 loans worth $120m
ContributorsPatrick JenkinsFT Banking Editor
Sarah MurrayFT Contributing Editor
Brooke MastersFT Chief RegulationCorrespondent
Amy KazminFT New Delhi Correspondent
Sharlene GoffFT Retail BankingCorrespondent
Mark WembridgeFT Companies Reporter
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Andy MearsPicture Editor
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since 1999, almost all to womenwho produce embroideries,mosaics, baskets, pots and thelike – or who supply thematerials.MicroEnsure,Cheltenham, UKMicroEnsure provides funeralinsurance in Ghana, wherepeople spend a higherpercentage of average percapita income on funeralsthan any other nation. Thepolicies have very lowpremiums, because theyare sold through mobilenetwork operators, with littleneed for agents or paperwork –and the coverage is growing at30,000 customers every 20days.Tameer Microfinance Bank,Karachi, PakistanPakistan has 64 per centmobile phone penetration, butmore than 80 per cent of itspeople are unbanked.Pakistan’s second-largestmobile operator Telenor andTameer have createdEasypaisa, which provides afull range of financial servicesto those underserved by theexisting system with acombination of mobilebanking and more than 16,000merchant outlets, which actas branches.
FINANCIAL TIMES THURSDAY JUNE 16 2011 ★ 3
Sustainable Banking & Finance
Signatoriesconsider awider useof rules
An oil pipeline projectpromising everything fromemployment to ecosystemdegradation is the kind ofdevelopment that, since2003, has been covered byEquator Principles, thevoluntary set of social andenvironmental standardsgoverning project financelending.
But while campaignersclaim the principles havenot yet halted damagingprojects, others argue thatthey have promoted sus-tainability in the bankingsector and could influenceother types of lending.
Developed by ABN Amro,Barclays, Citigroup andWest LB with the Interna-tional Finance Corporation(IFC), the World Bank’s pri-vate-sector lending arm, theprinciples emerged inresponse to growing aware-ness of the risks of sociallyand environmentally irre-sponsible investing.
However, while manyacknowledge the role theyhave played in reducingthese risks, they have notshielded banks from criti-cism. In 2010, almost 100civil society organisationssent an open letter to Equa-tor Principles signatoriescalling for financial institu-tions to implement greatertransparency, accountabil-ity and stricter compliancewith the principles.
Those behind the princi-ples have responded to thiskind of criticism. “We’verecently introduced ruleswhere financial institutionsthat don’t report and arenot transparent will getkicked out of Equator,”says John Laidlow, headof sustainability risk atHSBC and a member of theEquator Principles steeringcommittee. “So we haveheard what external stake-holders have said to us andwe’ve introduced somemore robust rules aroundthat.”
Of course, workingagainst transparency whenit comes to financing dealsare banks’ duties of confi-dentiality to clients andcompetition between insti-tutions. However, Mr Laid-low argues it is possible forbanks to be more openabout what they do.
At HSBC, he says, PwCmonitors whether the bankis implementing the Equa-tor Principles effectivelyand this assessment is pub-lished in the bank’s annualsustainability report.
As well as the need forincreased transparency,recent debates on the Equa-tor Principles have focusedon whether or not they canbe applied to other formsof lending and financialproducts.
“The success of Equatorhas been based on the factthat this has been a tight,clear product that allowsEquator banks to effectivelyassess and manage riskswithin project finance dealsin partnership withour clients,”says ShawnMiller, glo-bal manag-ing directorof environ-mental andsocial riskm a n a g e -ment at Citi.
“However,
a lot of other financingproducts are similar innature when raising capitalfor large infrastructure,”adds Mr Miller, who alsochairs the Equator Princi-ples Association (EPA). “Werecognise that some ques-tion why Equator doesn’tapply to those products.”
This is something theassociation is investigating.Because of the extensiveassessment and monitoringthey call for, some loansand other financial prod-ucts do not lend themselvesto the application of theprinciples, which governlong-term projects forwhich total capital costsexceed $10m.
In project finance deals,standards on social andenvironmental performancecan be covenanted into aproject’s loan documenta-tion.
However, for equityunderwriting or initial pub-lic offerings, banks do nothave access to covenants.
“As a financial institutionyou can undertake a socialand environmental riskreview [for these deals]but you don’t have thelong-term hooks thatproject finance has, includ-ing the covenants and long-term independent monitor-ing,” says Mr Miller. “Sothey are very different ani-mals.”
Even so, among the itemson the agenda of a strategicreview completed by theEPA in May is the questionof where, beyond projectfinance, banks could applythe principles.
Some are already startingto use them more broadly.Standard Chartered appliesthe principles to all projectfinance deals, even to trans-actions of less than $10m,while many Equator banksuse the principles’ risk cate-gorisation system and theIFC standards for a range ofdeals.
Meanwhile, HSBC hasextended the Equator Prin-ciples to corporate loansand export credit loans incases – such as the sale oflarge pieces of equipment –where the funds are beingused for projects whoseenvironmental and socialperformance can be meas-ured over a long period oftime.
Even in cases where theEquator Principles them-selves cannot be applied,many argue that theenvironmental and socialstandards they promotecan inform all lendingdecisions. “Equator is reallythe backbone and ithas provided good guidancein terms of informing man-agement of risk in othertypes of finance,” says MrMiller.
Moreover, banks oftensupplement the principleswith policies on environ-mental and social risk man-agement. Since 2009, forexample, Standard Char-tered Bank has applied posi-tion statements on socialand environmental perform-ance across the company’swholesale banking busi-ness.
The principles provide aglobal benchmark for theindustry, argues Gill James,head of sustainability atStandard Chartered. “Andfor a bank like StandardChartered, where our focusis Asia, Africa and MiddleEast, we’re dealing withcountries where legislationand awareness of social andenvironmental issues is atdifferent levels,” she says.“So having a global bench-mark is useful.”
Like many of the Equatorsignatories, Standard Char-
tered sees the princi-ples as part of abroader approach tomanaging environ-mental and socialrisk.
“They form oneelement for us,”
says Ms James.“But they’re not theonly thing we focus
on.”
Equator PrinciplesSupporters say theguidelines promoteresponsible lending,says Sarah Murray
Shawn Miller:principles are aneffective tool
Interview IFC’s Lars Thunell on standards and expansion
When in 2006, the International FinanceCorporation devised a set of social andenvironmental standards to govern itslending activities, some said these wouldlimit the IFC’s capacity to expand. With arecord $18bn in new investments in 2010,these people “have been proved completelywrong”, says Lars Thunell, the institution’sSwedishborn executive vicepresident andchief executive.
“The standards have allowed us to domore business because they provide us witha risk management tool,” he says.
The IFC, part of the World Bank Group,invests in emerging markets and uses itsadvisory services and lending resources tohelp private enterprises expand theiractivities in local economies.
The standards, says Mr Thunell, allow theIFC to look at such activities through asocial and environmental lens. “As adevelopment institution, we have torecognise that companies in many of thecountries we work in have practices that arenot where they should be,” he says. “Butthey could be willing to work with us ingetting their standards up to a better level.”
As a result of a recent review, thesestandards have been updated to incorporaterequirements for greater disclosure andtransparency about projects, includingrequests for prior consent from indigenouspeoples and lower emissions levels.
Some have called for stronger humanrights protections to be built in to thestandards. However, the IFC argues that,rather than introducing a performancestandard in this area, human rights arebetter addressed by being “fullymainstreamed” throughout the standards.
For Mr Thunell, a link between social andenvironmental and financial performance isemerging. “We see clearly that, for thecompanies that are not focusing onenvironmental and social standards, we havehigh credit losses and significantly lowerreturn on our equity investments,” he says.
And he points out that, because they arelikely to be adopted by signatory banks tothe Equator Principles, as well as by exportcredit agencies and international financeinstitutions, the revised performancestandards will have an effect beyond theinstitution’s own activities. “There will be awave of adjustments based on the changeswe have made,” says Mr Thunell.
However, as well as promotingsustainability standards in investments thatalso foster development, Mr Thunell sees theIFC playing a critical role in tackling bigglobal problems such as food security andwater stress. When it comes to shoring upthe world’s food supplies, the IFC worksacross the supply chain, from smallholderfarmers to the companies that process,package and deliver food.
In addition to loans for small farmers, theIFC has developed financial products such asweather insurance policies and products thathelp them reduce the uncertainty associatedwith commodity price swings.
And given that the missing factor in thefood chain is often infrastructure – withabout 40 per cent of food produced indeveloping countries perishing on its way toconsumers – this is also a focus for the IFC,which is working to promote cold chains.
Closely related to food security is theissue of water scarcity, something to whichthe IFC has given close attention in recent
years. “We can close [the water] gap but ithas to be not only on the supply side,” saysMr Thunell. “The issue of water efficiency isalso extremely important.”
For this reason, the IFC not only providesexpertise to governments, but supports theexpansion of privatesector companies, suchas India’s Jain Irrigation, in promoting waterefficiency.
Mr Thunell believes that, with budgetsstretched, more multilateral agencies andnongovernmental organisations will embracethis approach. “A lot of aid agencies arelooking at how to give more support to theprivate sector,” he says. “And that’s adramatic shift that’s taken place over thepast two or three years.”
Sarah Murray
Lars Thunell: ‘The standards have allowed us to do more business’ Getty
‘We’re dealing withcountries whereawareness of socialand environmentalissues is atdifferent levels’
4 ★ FINANCIAL TIMES THURSDAY JUNE 16 2011
Sustainable Banking & Finance
Push for greater integritymay help sector’s image
Three years after the 2008crisis, governments aroundthe world are busily churn-ing out dozens, and poten-tially hundreds, of rulesand regulations designed tomake banks and thebroader financial systemsafer and more stable.
Regulators and politiciansfervently hope tough stand-ards will help push theindustry towards a moresustainable business model.And some bankers arguethe industry must workwith them to reassure soci-ety that the industry hasthe greater good in mind.
“The sustainability of thebusiness itself has beencalled into question by sen-ior people in governmentcircles, as well as society atlarge,” says Wilson Ervin, aformer chief risk officer andnow a senior adviser atCredit Suisse. “We are liv-ing in a world where peopleare afraid of the downsidesof banking. We have toaddress these concerns sub-stantively and proactively.”
But the question remainswhether rules for capital,liquid assets, derivatives,clearing and even pay areenough to break thedecades-long cycle of boomand bust.
“Regulation is certainly anecessary part of the solu-tion, and it will take us along way, but whether it’ssufficient is less clear,” saysDavid Strachan, a formerUK regulator who is nowco-head of Deloitte’s Centrefor Regulatory Strategy. “Itneeds to be supported bystable monetary and fiscalpolicies, and by broadlyconsistent internationalimplementation.”
Mr Strachan and many inthe industry worry reform-ers will lose interest andbankers will feel pressurefrom investors seekingshort-term results. Thatcould lead the industryback into the kinds of regu-latory arbitrage thatsparked the last crisis.
“Despite all the initialgood intentions, past experi-ences show us that as theeconomy picks up, supervi-sors will become more lax,rules will be flouted andmore risks will be taken,that is until the next bubblebursts,” warns Jacqui Hat-field, partner at ReedSmith.
Regulators and bankersagree that the definition ofsustainable banking has
changed dramatically in thepast five years. Where onceit was shorthand for think-ing about governance andthe effects of projects onenvironment and people,now the term refers to abanking business modelthat provides essential serv-ices to the broader economyand can be counted on notto destabilise the financialsystem.
“To be sustainable inbanking today means beingfully compliant with all reg-ulations while maintainingan acceptable risk-adjustedprofitability spread over thecost of equity,” saysOrlando Hanselman, pro-grammes director at theconsultancy Fiserv.
Much of the public discus-sion on sustainable bankinghas taken place in placeswhere banking plays anoutsized role in the econ-omy. In the UK, where theeconomic cost of the finan-cial crisis has forced painful
public service cuts, the topregulator has said some pre-crisis financial productswere “socially useless” andthe country is discussingwhether to force banks toringfence their retail arms.
In Switzerland, where thebalance sheets of the twobiggest banks dwarf thecountry’s gross domesticproduct, the parliament isdebating tougher capitalrequirements and rules thatwould force bank bondhold-ers to share in the pain ofany further collapse.
“Prudential regulation,conduct of business andsystemic risk monitoringcould all be said to point inthe direction of improvedprospects for sustainablebanking. But maybe theemphasis has to be on achange of culture and a rec-ognition by investors of theworth of better enterpriserisk management,” saysRichard Reid, director ofresearch at the Interna-tional Centre for FinancialRegulation. “The trick, asever, is to construct anenvironment which keepsgood enterprise risk man-agement as a rewardedbusiness practice in the‘normal’ times,” he says.
In one positive sign, con-cern about sustainability isalso starting to permeateareas that survived thefinancial crisis relativelyunscathed.
Leah Jin, climate changeand sustainability partnerat KPMG China, says: “We
are now seeing a clear trendin shifting the focus fromprofitability to sustainabledevelopment. Externallythis is being driven by regu-lators and internally by thedesire to modernise corpo-rate governance and riskmanagement. For example,guidelines have been issuedby regulatory bodiesencouraging financial insti-tutions to fulfil economic,social and environmentalresponsibilities.”
Globally, the FinancialStability Board, a group oftop regulators and centralbankers, is studying waysto make the very biggestglobal banks safer and eas-ier to shut down in a crisis.But the solutions, whichinclude forcing banks tohold more capital againstpotential losses and sim-plify their legal structures,may have unintended con-sequences.
“Balance sheets are likelyto be significantly more liq-uid, with shorter assetdurations, increasinglyfunded by higher cost coredeposits. Such a balancesheet structure may impedeboth the nature and volumeof lending and invest-ments,” says Fiserv’s MrHanselman.
Competition could sufferas well. “As a result of thereforms we are likely to seemore concentration ratherthan competition, as thesmaller banks will probablybe swallowed up by the bet-ter-prepared, larger banks,”says Ms Hatfield.
But Credit Suisse’s MrErvin remains optimistic.“This is eminently solvableif politicians, regulators andbankers work together andfocus on implementing thelessons of the last crisis.”
RegulationCan tougher rulesend the boom andbust cycle? BrookeMasters reports
JacquiHatfield: ‘Asthe economypicks up,supervisorsbecome lax’
Making a profit from loans to poor carries risks
In August 2010, SKS Micro-finance, a Hyderabad-basedenterprise making tinyloans to poor women,
raised $350m in an initial publicoffering that valued the firm at$1.5bn. The stunning marketdebut seemed to affirm thatmicrofinance – lending moneyto those too poor and withoutsufficient collateral, to accessnormal bank loans – could bemade profitable and attractiveenough to attract investors.
Other fast-growing Indianmicrolenders were expected tofollow SKS’s profitable path tomarket. But instead, the IPO –only the second listing of anymicrolender after Mexico’s Com-partamos went public in 2007 –precipitated an unexpectedcrisis.
Officials in Andhra Pradeshstate, where Indian microlend-ers had concentrated much oftheir portfolios, accused firms ofseeking “hyper profits” andusing “coercive” collectiontactics, and banned all outstand-ing microdebts collection andnew lending.
The edict, which continues toparalyse microlenders’ opera-tions in the state, sent shock-waves through the global micro-finance community, includinglenders, investors and micro-finance advocates.
It also served as a powerfulwarning about the politicalrisks confronting commercialmicrofinance companies if theyare too aggressive in pursuing
growth to satisfy profit-seekingshareholders at the expense oftheir impoverished borrowers.
“We must not create, in thecase of credit, unfettered accessto financial services that carryharmful potential, else we riskthe next subprime-type crisis,”Tilman Ehrbeck, chief executiveof the Consultative Group toAssist the Poor, recently toldMicrofinance Voices in the wakeof the crisis.
“It would be distressing if wehelped expand access to formalfinancial services, but thoseservices were no fairer or saferthan the informal alternativesthey were meant to replace,” MrEhrbeck said. “We need to offersomething better, or we willhave failed in our mission.”
The business of microfinanceis providing small loans to poorwomen, so they can reduce theirreliance on usurious informallocal moneylenders and startmicroenterprises to lift their
families out of poverty.Initially, microfinance pro-
grammes were mainly under-taken by social organisationsand charities, funded by West-ern development aid, and some-times also mobilising the sav-ings of the poor themselves. Butmicrofinance has undergone adramatic transformation, asprivate companies, backed byprivate, profit-seeking capital,began to be involved.
Supporters of commercialmicrofinance argue that busi-ness models generating profitsand returns to shareholders canovercome the reliance on scarcedonor money, long a constraintto making microloans morewidely available to a greaternumber of poor people.
However, critic Milford Bate-man, author of the book WhyDoesn’t Microfinance Work? saysthe Indian crisis is “the almostinevitable outgrowth” of com-mercial microfinance, whose
benefits mainly accrue to lend-ers’ highly paid executives andshareholders, through “spectac-ular salaries, bonuses, divi-dends, and eventually the wind-fall profits arising from anIPO ... As microfinance wasincreasingly commercialisedfrom the mid-1990s onwards,‘best practice’ for a MFI was
simply to pump out as muchmicrocredit as possible, in orderto grow fast, grab market share,hike up profits, and so groweven faster,” Mr Bateman wroterecently.
Advocates of commercialmicrofinance acknowledge thatmany Indian lenders had lost
sight of microfinance’s socialmission of poverty alleviation.
“People went for speed, num-bers and efficiency, and whatgot dropped out were the closerelationship with clients andother things,” says Sam Daley-Harris, director of the Micro-credit Summit Campaign, whichlobbies for greater funding formicrocredit programs.
Yet he and other advocatesinsist that commercialisedmicrofinance is not inherentlyincompatible with poverty alle-viation, as long as social goalsare given sufficient priority in acompany’s structure. Within themicrofinance community, thereis now intense debate on justhow lenders can retain theirsocial orientation, while stillgenerating sufficient profits soas to be financially sustainable.
The Microcredit Summit Cam-paign is advocating a new “sealof excellence” system, recognis-ing microlenders based on how
well they deliver on the “trans-formational dimension in thelives of clients and their fami-lies”, by lifting people out ofpoverty.
The highest endorsementwould be awarded to microlend-ers with third-party certificationof clients moving out ofpoverty. Lenders that adoptsocial protection principles, ormove beyond provision of purecredit to support for health oreducation would also be recog-nised.
“The bottom line is that thefield and the public and theinvestors are desperately inneed of clarity of what consti-tutes top-quality microfinance,”says Mr Daley-Harris. “You’vegot to manage for social per-formance, not just measure it.”
Elisabeth Rhyne, of the Cen-tre for Financial Inclusion,argues commercial microlendersalso require more robust clientprotection systems than once
operated in social organisationsor charities.
One of the centre’s campaignsis urging microlenders to adoptsix key client protection princi-ples: taking reasonable steps toavoid over-indebtedness; trans-parent pricing; ensuring appro-priate, non-abusive collectionspractices; ensuring ethical staffbehaviour; creating well-func-tioning grievance mechanisms;and protecting privacy ofcustomer data.
“When we first started talkingto microlenders about consumerprotection, they said, ‘what areyou talking about? We are asocially motivated organisa-tion’,” she says. “People havenever focused on this particularset of issues – overindebtedness,collections practices, what to dowhen clients have problems.
“When they were small, theycould handle client problems ona case-by-case basis. Butwhen it’s big, they need systemsto do it.”
Indian lenders, already grap-pling with their frozen AndhraPradesh portfolios and a sharpslowdown in bank lending, areconfronting these issues. Theynow face new central bankrules, including caps on interestrates and margins, as well asconsumer protection require-ments for the sector.
Vishal Mehta, co-founder andmanaging director of specialisedprivate equity firm Lok Capital,says firms are still struggling toadapt. “I don’t think they have agood sense of what operationalchanges they still need to maketo their business models to com-ply with the changes in theirregulations,” he says. “That issomething still to be seen.”
MicrofinanceBalancing financialgain with society’sneeds is tricky,reports Amy Kazmin
An Indian farmer tends hiscauliflower patch near CalcuttaAFP/Getty Images
‘We need to offersomething betteror we will havefailed in our mission’
Online
Reports shine lighton companiesCorporate citizenship andsocial responsibility reportshave become an importanttool for companies tobolster their reputationamong the widercommunity, but howeffective are they andwhat do they tellinvestors?www.ft.com/sustainablebanking2011
