Month: November 2020

Activist investors do not always have a great reputation for their support for broader societal goals. But that is starting to change as some of them are now also focusing on climate change as an area needing more attention. A recent effort by The Children’s Investment Fund Foundation (CIFF) has contacted several asset managers requesting that they “highlight the need to ensure companies publish climate transition action plans and put these to an annual shareholder vote.”  The announcement goes on to note that “it is essential for companies to publish a credible action plan to show how they will survive and prosper during this transition.”

There is a bit of personal interest in this effort as CIFF was a key player in the eventual breakup of the ABN AMRO where I worked for more than 25 years. And ABN AMRO was a bank that actively pursued sustainability issues including taking a leading role in the development of the Equator Principles. One wonders if Sir Christopher Hohn of CIFF sees any irony between his current demands and his support for the ending of the ABN AMRO?

In the last days of any US presidency, the potential for efforts to limit the flexibility of the following administration exists. So it is not surprising that the Office of the Comptroller of the Currency (OCC) is busy proposing a new rule that would make it difficult for banks to stop supporting fossil fuel activities. The proposal reads rather straightforward in the language announcing the proposal.  It states “that banks should provide access to services, capital, and credit based on the risk assessment of individual customers, rather than broad-based decisions affecting whole categories or classes of customers.” But as always the devil is in the details.

Going to the more detailed release in the Federal Register, gives much more insight into the special pleading (from swamp creatures perhaps) that is behind the proposal. As noted in this more detailed announcement: “over the course of 2019 and 2020, . . . banks had decided to cease providing financial services to one or more major energy industry categories, including coal mining, coal-fired electricity generation, and/or oil exploration in the Arctic region.” It goes on to note: “)i)t is one thing for a bank not to lend to oil companies because it lacks the expertise to value or manage the associated collateral rights; it is another for a bank to make that decision because it believes the United States should abide by the standards set in an international climate treaty.”

Therefore it is a clear aim of this rule to prohibit banks from taking decisions on providing banking services consistent with achieving the goals of the Paris Climate Accord. There is clearly a dilemma for both banks and the OCC in the balance between providing banking services on a non-discriminatory basis and meeting demands from stakeholders including large investors for banks to be responsible relative to climate change which will create substantial economic disruption. But it seems to me that the key issue in the proposal is an attempt by the OCC to force banks to continue to lend into the carbon economy forcing private banks to support a policy that is self destructive.

The proposal is in a comment period until 4 January. Will it survive and be approved prior to the change in administration on 20 January? Clearly an area needing attention from all concerned about climate change.

The increased use of technology for banking will continue to threaten traditional banks – especially in payment processing. Several articles over the last few weeks highlight the need for banks to think strategically and smartly over their digital strategies. And with whom they might consider partnering for the future. There are no easy or obvious choices making it a difficult time for bank management.

In the US there are increasing numbers of digital entities that are securing banking licenses allowing them to take deposits. The Financial Times reported early this month about the first digital entity that has received a national banking license. Varo received this license whilst others such as Chime have chosen a route that partners with existing banks. As reported this week in the Financial Times, it appears that Google will follow the partner route. But as with all digital companies, the question should always be how long will they continue to want to be just a partner and not own the client relationship. Or will they find a way to only pick off the profitable elements of the client relationship and leave the rest with the partner bank. In any case all banks need to think clearly about the threats and opportunities in digital banking and their approach to investing in this area.

Meanwhile in Europe there continues to be significant merger and acquisition activity in the payment processing space. This area has been perhaps too quickly abandoned by traditional banks as reported yesterday in the Financial Times. Over the last several years payment processing companies originally owned by banks have been spun off and subsequently purchased by private equity investors. These investors are now involved in rolling up these investments into larger entities that can benefit from economies of scale. Most likely banks should be as afraid of private equity as they should be of technology companies.

Meanwhile in Europe the impact of COVID-19 has impacted the client relationship process for many banks. Europe has been somewhat slower about reducing branches but the impact of the virus has created change. As reported in the Financial Times, older clients that have been hesitant to take on digital delivery of banking services including advice via video conferencing are now much more willing to speak virtually with their bank to reduce health risks. This change comes with the risk that communities will lose the value of bank branch personnel that know the local economy as well as leaving behind the portion of the older population that does not or can not adjust to the new technology.

On almost a daily basis the demand from investors for information on the climate impact of companies continues to grow. Whilst much of this demand is focused on non-financial institutions, it is increasingly clear that financial institutions and especially banks will also be expected to increase their reporting in this area. For banks it is no longer enough to report their own operational climate impact footprint but also the impact of their portfolios and clients whom they support with capital markets transactions.

As it becomes increasingly likely that there will be a new Biden administration, the current split in approach between Europe and the US on required reporting of climate impact as well as broader ESG reporting is likely to shrink. As noted by Gillian Tett in the Financial Times, there could be substantial shift in portfolio allocations (and hence share prices) “as more US investors are forced to contemplate the degree to which tough climate change regulation could reduce the value of assets like fossil fuel stocks.”

Asset managers are seeking to increase reporting in this area as well. Again the Financial Times reported that “(a)sset managers are not providing enough information about climate risks at the companies they invest in to enable clients to make informed choices, a regulatory task force has warned.” This article goes on further to note that there is an increasing disconnect between what companies (and banks) say they want to do to combat climate change and what details they are reporting. This disconnect is not likely to be sustainable for these companies leading to change in their reporting – most likely in the near future.

This pressure was highlighted by a recent demand from investors that “(m)ore than 30 of Europe’s largest companies (should) include climate change risks in their financial statements as concerns grow that corporate accounts no longer reflect the longer-term outlook.” As reported in the Financial Times, investors with more than USD 9 trillion under management have co-signed  a letter to audit committee chairs requesting more information in this area. Of interest would be of course how many of the financial institutions who are these investors are doing the same for their own activities.

In any case the demand for greater and more consistent disclosure continues to grow. Any bank should be already starting, if not making concrete progress, on addressing their ESG and climate impact reporting shortcomings. The beat goes on for increased information and it will need to be provided.

A reminder that I will be delivering a course on Values-based Banking for RedMoney Events. It will be 9 and 10 December for 3 hours each day. It will provide an overview of how to be a values-based banker – and why. It will be delivered virtually so no travel or need for special social distancing. You can see a short clip over the course here. And you can register from this link.

I was honoured to be asked by Megan Hryndza to participate in her 21 Questions blog. Megan with Sophia Wagner started Mighty, a website to provide information for consumers to use in selecting a bank or credit union in the US using publicly available information. In the words of Mighty: “We’re bringing people and banks together to support a more transparent banking system that is representative of, and accountable and responsive to, the diverse and varied communities that fund it. ”

And if you are interested in my answers to Megan’s 21 questions, you can find them here.

Bankers often wonder why they have a poor reputation. Perhaps they need to look no further than events surrounding Goldman Sachs and its banking activities in Malaysia. These events show how banks totally miss out on the potential for development of people and society through a focus on earning money on money – for the bankers and their clients but not for society.

Over the last few weeks several stories have been published that make it possible to better see the full scope of what occurred after Goldman helped underwrite and place bonds totalling about USD 6.5 billion for 1Malaysia Development Berhad. For this effort Goldman reportedly earned USD 650 million in fees – 10% of the funds raised.

However, it soon became clear that this transaction was not about raising funds for development in Malaysia. According to the Financial Times on 21 October, up to USD 4.5 billion of the funds raised were looted by a variety of connected individuals and used to finance their rather expensive lifestyles.

Goldman has since entered into a variety of agreements in multiple countries to address legal and compliance shortcomings in this transaction. The Financial Times reported in July that Goldman will repay USD 2.5 billion to Malaysia as well as guarantee that Malaysia will receive USD 1.4 billion from the sale of assets that were financed with stolen funds and which have since been seized by various legal authorities. Hong Kong regulators fined Goldman USD 350 million as reported by The Star on 22 October. And morst recently US authorities fined Goldman USD 2.3 billion as reported in The New York Times. So it appears that on a transaction totalling USD 6.5 bilion for a fee of USD 650 million, Goldman will be paying over USD 5.1 billion in fines – not a very winning business model for any bank.

As a banker I have often worked with very large numbers and therefore lose touch with reality and the impact on the average person. So I decided to look at these numbers in the context of the average Malaysian household. Per Malaysian government statistics, the average household of 4 people had a median income of 5,873 Malaysian ringgit (USD 1,400 at current exchange rates). If Goldman would have donated its USD 5.1 billion in fines to Malaysians, the average household would have received about USD 660 per household – a windfall of nearly 45% of their annual income. I suspect that this one time payment would have had a much greater impact on development in Malaysia than raising money to be looted by a select few.