A recent publication from McKinsey provides a useful road map for bankers focused on risk from climate change. This publication not only provides a solid overview of the scientific facts supporting the view that climate change is real but goes further to highlight the many risks arising from climate change that can impact the risks of loans and investments made by banks. The questions remains which banks are focusing on identifying and mitigating these risks? And which regulators are incorporating these risks in their stress tests?#ban
Investors are coming for you – is your bank ready???
The pressure on banks to be responsible in their lending relative to climate impact is growing. ShareAction has led a group of investors in filing the first climate related shareholder resolution in Europe. This resolution to be taken up at the Barclays annual meeting is likely to be only the beginning of pressure from investors for banks to be proactive in ensuring that their lending and related financing activities are supportive of the Paris goals. This action is consistent with the comments from Huw Steenis in today’s Financial Times that further highlights the future demands on banks. But how many banks are prepared to respond to this pressure? Or do most banks hope this issue will just go away?
#bankingonvalues
Heads I win, tails you lose
A recent paper from Goodhart and Lastra focuses on the danger posed by limited liability for bank management. They “advocate moving towards a two-tier equity system, primarily for banks, with insiders, senior managers and others with influence over corporate decisions, becoming subject to multiple liability” to address these dangers. As noted by Jonathan Ford in the Financial Times, “by making insiders financially accountable for their actions, it would rebalance the calculus of fear versus greed.” Clearly the lack of accountability for the financial crisis for nearly all bank managers is an issue that needs to be addressed. But are the banks ready to make this change or do they prefer (as managers) to be immune from the consequences of their actions.
Remembering Sir Fazle Abed
As we enter a new decade I would like to remember Sir Fazle Abed who I had the good fortune to meet and learn from whilst at the Global Alliance for Banking on Values. His holistic commitment to addressing the challenges facing society – economic, social and environmental – was a great lesson for me. He provides a role model for many but especially for bankers seeking to move their business models to a focus on addressing the needs of society.
His story was captured well by the New York Times in an obituary published 1 January. His impact and values were captured even better by my colleague and friend, Laurie Spengler, who worked directly with him for many years in a LinkedIn post. And the impact he made on a personal level can be seen in this video.
What’s so wrong with utility returns?
Patrick Jenkins in the Financial Times provided useful insight into the potential for banks to provide utility like returns whilst noting the risks of that strategy for investors. His comments on the risks are valid but at the same time I believe banks should be looking at business models that have less risk and provide steady returns linked to the economies that their business models support. The real question is whether the banks have simplified their models or merely decided to market a “utility” income stream whilst continuing to take risks that should result in higher returns (and more volatility). #bankingonvalues
Lessons for bank lenders from investors
The push from investors to increase insight into climate risks continues. In the Financial Times Mercy Investment Services (the investment services arm of the Sisters of Mercy in North America) were reportedfiling a motion with Black Rock noting among other issues that “(p)roxy voting practices that ignore climate change seem to ignore significant company-specific and economy-wide risks associated with negative impacts of climate change.” In the same issue of the FT a recent study by Bank of America was cited noting that “(q)uarrels involving environmental, social and governance issues have wiped more than $500bn off the value of large US companies over the past five year.” Further support for including ESG issues comes from the recent study from the GABV cited in my featured article. For bank lenders these issues are also relevant as they should be part of the risk assessment process. But how many banks are actually assessing the risk of ESG issues when the make underwriting decisions?
The times they are a changing – but not fast enough
The Financial Times noted today that many large investors are now looking for companies to detail their carbon emissions. This trend got attention earlier in the month when Chris Hohn/TCI noted opposition to re-election of directors for companies not fully disclosing their carbon emissions. However, the impact of this change is limited by the large number of institutional assets (we are talking about our pension funds amongst others) that invest via passive index funds. Reuters has reported that the large index providers (MSCI, S&P Dow Jones, FTSE Russell) are looking at ways to accelerate the inclusion of Aramco in their indexes. This means that trillions of dollars of assets will be shifted into an oil giant. Clearly there is an issue to be addressed for making passive investments based on index providers socially and environmentally responsible. How can we as investors directly or through our pension funds address this issue?
(p.s. Thanks to my friend Jan for alerting me to the Reuters article)
Banking Opportunities – Who will seize them?
The opportunity to support companies developing storage of renewable energy could be a growth area for banks. The EU has announce a program to encourage this development as highlighted in this article from the Financial Times. And the development of new technology continues as reported by The Economist. What bankers will grab the opportunity to be the go to bank for renewable energy storage?
Value creation through a focus on ESG
McKinsey has just published Five ways that ESG creates value in its quarterly. Of interest is their estimate that 50% to 60% of banking profits are at stake from good ESG practices. As noted in the report: “getting (ESG) wrong can result in massive value destruction.”