Month: January 2021

The ongoing shift to a focus on sustainable investing and getting banks to focus on climate change reflects a significant change. As always progress is not always only in one direction and there was a meaningful effort in the US at the end of 2020 to take a big step backwards. The US Comptroller of the Currency issued a rule that in essence required banks to continue to lend for fossil fuel projects and companies. As reported in Axios, this rule was finalised just before the change of administration despite opposition from many including the editorial board of the Financial Times. It is interesting that with General Motors now stating that they will stop selling fossil fuel powered cars by 2035 why there should be a bank rule requiring banks to lend for a product that will increasingly no longer be needed. The image of buggy whips comes to mind.

But despite this backward movement by the US Comptroller of the Currency, there are numerous examples of increased focus by banks, investors, regulators and governments on the need to address climate change. The year began with Christine Lagarde positioning the European Central Bank as a leader in addressing climate change as outlined in a survey by the Financial Times of a large group of economist.

And pressure on specific banks and initiatives by varied banks continue to move the banking industry towards a focus on financing that addresses climate change. HSBC will face pressure from its owners at its April shareholders meeting as reported in the Financial Times. Clearly other banks are feeling similar pressure as they try to demonstrate their commitment to addressing climate change. The Financial Times provided a very good summary of these efforts in an article in early January.

On the regulatory front the European Union continues its efforts to standardise reporting on sustainable finance as noted in the Financial Times. The Financial Times further noted the political pressure arising from this effort but it is clear that the ultimately there will be standard reporting that will allow investors to make informed choices relative to climate change action. In the US there was also a call for the Securities Exchange Commission to start requiring climate change reporting as noted in an opinion article in Slate. Given the many remarks from President Biden on the importance of addressing climate change, it is likely that this call will be answered.

So whilst it is not a purely positive picture, the pressure to put climate change as a priority for investors, companies and banks will surely be a key theme in 2021.

As noted in my review of 2020, bankers behaving badly is a significant theme. And the beat goes on in 2021 with stories reflecting this unfortunate trend. It is my opinion that until banks create cultures that value and celebrate ethical behaviour, this trend will not stop. Unfortunately for far too many banks the only culture they seem to create is one focused on making money regardless of the behaviours used to do so.

As in the past Deutsche Bank continues to be a leader in this area. On 8 January the Financial Times reported that Deutsche Bank would be paying yet more fines – this time $125 million.  The underlying issue for most of the fine was the use of “business consultants” who were paid fees that were used to conceal the payment of bribes to acquire business. And on 25 January the Financial Times reported that Deutsche Bank had started an internal probe to look at the potential mis-selling of products to clients with the potential that some of the profits realised by Deutsche Bank were shared with co-workers of the clients. This time Deutsche Bank was taking the lead in the investigation and keeping its regulators informed but nevertheless the culture of the bank becomes a question. What a shame that the energy and knowledge of the bankers involved were not focused on helping clients rather than looking for easy (albeit illegal) ways for the bank and its employees to make money.

On a different front we learned through the Financial Times on 24 January that MasterCard has seen fit to increase fees for transactions that due to Brexit are now seen as crossing legal boundaries. Whilst one could say that this action was an appropriate response to the decision of the United Kingdom to leave the European Union, it is an example of financial organisations looking constantly for ways to increase revenues. It is unclear that the costs of clearing transactions for MasterCard increased due to Brexit but they did increase the costs by nearly 500% with that increase going to the banks that process the transactions. Once again clients being forced to pay for bank profitability without receiving a substantially better service.

But I think it is useful to see that it is not only banks and bankers that have a culture issue. In a late 2020 article the accounting profession was also brought to account for its behaviour. The Financial Times noted that KPMG was being investigated for its role relative to the efforts by a buyout fund to avoid responsibility for the pension liabilities of an acquisition. As with banking there are many opportunities to “legally” take steps to increase profits but what about the morality of reducing the pensions of the c0-workers of the company involved in this transaction. The need for a higher standard of conduct by well paid individuals seems to apply not just to bankers but also to professional services firms.

And finally a bit of cheer on this subject. Today the Financial Times reported that Goldman Sachs has reduced the compensation of its CEO, David Solomon, by $10 million to a “mere” $17.5 million. Goldman noted that Solomon was not “involved in or aware of the firm’s participation in any illicit activity at the time . . . the board views the 1MDB matter as an institutional failure, inconsistent with the high expectations it has for the firm”. A step in the right direction of holding senior management responsible for what happens on their watch.

Now that we are almost halfway through January, I realised it would be good to look back at the themes of Boomer Banker in its first year. And what a year to begin a blog. I suspect many will regard 2020 as a historic year of events ranking up there with 1968 and 1848. In looking at my posts, I realised that there were three large themes throughout the year – themes we are likely to continue to see in 2021. These are:

• A visible shift among investors to focus on more than short term financial returns,
• A clear consensus that climate change is real and banks must do their part to address it, and
• Bankers behaving badly – when will banking culture lead to better banker behaviour

Relative to the investor focus I think my post on 13 December provides the best summary of the change. This post focused on the essays published by the Booth School and edited by Luis Zingales. Clearly a milestone in investor thinking when the home of Milton Friedman takes on a nuanced challenge to his thinking. My very first post (actually in December 2019) covered research sponsored by Deloitte, European Investment Bank and the Global Alliance for Banking on Values that shows banks with a more sustainable approach provided better financial returns. This conclusion was further covered in my post of 7 December that referred to a useful opinion piece in the Financial Times noting financial returns are not everything.

Climate change has generally moved up in importance for setting bank strategies albeit with some retrograde actions from US regulators. A book on the little ice age provided me with some new insights on climate change as noted in a post in February. Finance Watch came with specific actions banks could take as covered in a June post. And development of standards moved forward as noted in September. But along with this progress on making climate change a key issue for banks, there were two actions by US regulators covered in August and November that are intended to make it more difficult for banks to be activists in addressing climate change.

Bankers behaving badly kept surfacing throughout the year. The year began with a post on how banks use clever legal structures to effectively steal taxes from governments. Throughout the year there were posts on questionable banking practices at Wells Fargo, Deutsche Bank and Goldman among others. In September I posted on the importance of culture to address these issues – spending more on compliance will never solve the problems of bad behaviour.

But perhaps the most personally important post was not about bankers behaving badly but rather about how the banking system can be a source of positive change. Noting the passing of Sir Fazle Abed in January was meaningful to me as I had the honour of working with him and learning from him whilst at the Global Alliance for Banking on Values. He represents what bankers, and individuals, should be.

So a year has passed and 2021 started with ongoing stress from COVID-19, economic turmoil and political unrest. And the climate keeps getting warmer. I am sure there will be no end of topics to cover this year as well.