Author: David Korslund

A series of articles and opinions in the Financial Times at the end of January and beginning of February are indicative of how much has changed vis-a-vis sustainability.  Gillian Tett started this chain off on 28 January with practical insight on the need to think “olive.”  Whilst this focus on achievable change may not meet the demands of serious environmental activists and may not be enough to avoid climate change disaster, it does provide a route for many companies to start to make the needed change. It may well be that after taking initial and inadequate actions to address their carbon footprint, companies may discover they can and must move even faster and more fundamentally.

Ms. Tett followed up a few days later in an overview of how climate change is now seen as a profit opportunity – especially for Wall Street firms. She focuses on how Larry Fink of BlackRock realised in his personal experiences that climate change was real and a real threat to the economy. She goes on to highlight the challenge the environmental movement has had working with Wall Street and major corporations but notes a mindset change beginning around 2018. She now predicts that “2021 is likely to be the year that green meets Wall Street greed and fear. Finance sometimes moves in strange lines.”

But there can be roadblocks to this shift if boards are not adequately prepared to address the issues of climate change. Pilita Clark in the Financial Times at the end of January notes the lack of expertise at the board level. Corporate boards have long had a focus on diversity but it is clear from her discussion with someone knowledgeable about board composition, that this diversity push has not focused on the need for experience on environmental issues. I suspect boards are going to regret this lack of diversity in the very near future as they face increased demands to be environmentally positive.

Finally the Financial Times editorial board took up the critical issue of climate reporting standards at the beginning of February. Whilst covering the myriad efforts to create standards, they go on to note that “accounting standards that accurately reflect what risks companies are taking have a vital role to play in speeding up the transition to cleaner energy.” Clearly this reporting will be sorted out and investors and society will be able to judge on a standardised basis who is helping to address the climate risks we face and who is harming.

So 2021 begins with hope for a future in which money is channeled to address climate change risks. But hope tempered with the fear that it may be too little, too late.

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.

Kleptopia, a new book by Tom Burgis was reviewed in the Financial Times of 14 November. The review provides a good summary of the book which uses real stories to show how autocrats have used the financial system to effectively steal money from their clients and move it to accounts primarily in Europe and North America. Whilst covering a variety of stories, as noted by the Financial Times they are ultimately “a similar tale of political and moral corruption, violence, weak regulation and complicity within the international financial system where money is quickly anonymised.”

And then reported the Financial Times on 17 December that Credit Suisse is being charged with money laundering for Bulgarian clients. Although this money laundering was related to crime including cocaine trafficking, it notes again how individuals within large banks work around policies to prevent money laundering. Both Credit Suisse and the individual are claiming innocence so it may well be that nothing wrong was done but only time will tell.

With both of these stories, it was therefore heartening to read about the official launch of an initiative in The Netherlands. Five of the largest Dutch banks have set up Transactie Monitoring Nederland. Under the interim leadership of Jeroen Rijpkema (a former colleague of mine with experience in private banking), TMN is a “collective initiative (to) enable the banks to improve their detection of these complex criminal money flows and networks and thereby help to improve the protection of the financial system.” As noted by TMN, only through seeing a full spectrum of transactions is it possible to identify those that are related to money laundering and criminal activity. Perhaps other large international banks should be considering a similar approach to address the issues raised in Kleptopia.

Just a week ago I wrote about the inability of Gary Cohn from Goldman to take responsibility for paying back his bonuses to Goldman as a result of losses Goldman incurred related to the IMDB funding scandal in Malaysia. His inability to accept responsibility is unfortunately consistent with the actions of far too many senior bankers for whom the misdeeds of their banks are never the responsibility of senior managers. This problem can be seen in banks besides Goldman.

Wells Fargo is a bank that has had a long history of issues in its dealing with clients. I provided some background on Wells Fargo in a post in March of this year. But the challenges there are laid out in great detail in a recent Slate article that is a version of a podcast Slate has produced. As noted many low level employees lost their jobs over their actions but one could question whether the senior managers responsible for the culture and policies that led to the mistreatment of clients paid an appropriate price for what happened.

Now it is the turn of Ralph Hamers, the former CEO of ING in the Netherlands, to be held to account. ING has had substantial issues related to money laundering. As a result the bank has paid substantial fines (nearly €800 million) in 2018. As part of that settlement, it was agreed that the board and management would not be subject to criminal charges. But as outlined in a Financial Times opinion column of John Plender as well as in other news stories, this immunity from prosecution has been challenged in the Dutch court system and may not be valid. As noted in the column: “The Hague court of appeal said it believed grounds were, in fact, sufficient for a successful prosecution of Mr Hamers ‘as the de facto supervisor of the criminal offences committed by ING.’ It added: ‘The facts are serious, no settlement has been reached with the director himself, nor has he taken public responsibility for his actions.'”

This column goes on to note that for far too many issues of banking malpractice, junior employees take the brunt of the pain whilst managers at the top are rarely held accountable in a meaningful way. Plender goes on to note that after the S&L crisis in the US in the ’80’s, there were many senior managers held accountable and some even went to jail. However, those held accountable were from smaller institutions and not from the largest banks in the world. It is possible that this lack of accountability for the senior managers of the largest banks in the world is one reason why the politics of today have a particular anti-elite tone. It would seem that if you can go to the World Economic Forum in Davos, you have a get out of jail card for any other responsibilities you have. The elite truly live by other rules than the rest of us.

The Bank of England under Mark Carney has been a leader in regulatory action regarding climate change. In June 2019 they published a report, The Future of Finance, by Huw Steenis. In addition the Bank of England provided a response to this report. Both highlight the importance for banks to take climate change seriously in their decision processes.

My good friend and colleague, Paul Malyon, has alerted me to the opportunity to hear directly from Mark Carney through his Reith Lectures. As noted on the BBC site that provides these lectures to be followed on line: “(T)he BBC each year invites a leading figure to deliver a series of lectures on radio. The aim is to advance public understanding and debate about significant issues of contemporary interest.”

The Carney lectures began on 2 December with the final episode airing on 23 December. They could be great listening over the holiday season as we all celebrate quietly due to COVID-19 restrictions.

Martin Wolf in the Financial Times alerted me to a very interesting and important e-book made available through ProMarket, a publication of the Stigler Center at Booth Business School (disclosure – I received an MBA from Booth in 1977). This book compiles 28 essays, including one from Martin Wolf, that comment on Milton Friedman’s essay of 50 years ago in the New York Times that stated: “a corporation’s only social responsibility was to increase its profits.” The book contains a variety of views and makes for very interesting reading, especially for those of us who believe corporations should look beyond pure profitability in their actions.

I found the most interesting essay to be that of Luis Zingales who is currently at Booth. He was the one of the editors of the book and his essay is the final one included. His essay was a nuanced and important criticism and refinement of the original Friedman views. Key quotes from that essay include the following:

This summary provides good insight into the critical views of Zingales but the final words of his essay provide very useful and nuanced perspective

I have previously written about the IMDB scandal in Malaysia involving Goldman Sachs. But that story just continues to show how bankers do not take responsibility as reported this week in the Financial Times. At the time that Goldman reached several settlements, it announced that it would also claw back bonuses paid to individuals either directly involved in the IMDB transaction or in senior positions of responsibility at Goldman when the transaction occurred. As noted in the Financial Times, Gary Cohn “is holding out on the bank’s request for him to return millions of dollars of his pay.”

I suspect his decision is not due to lack of the ability to repay. In the Goldman Proxy Statement of 2015 (he resigned to work for the Trump administration in 2016), it was noted that from 2013 to 2015 Mr. Cohn earned just under $60 million. A rather tidy sum. To put it in perspective, Mr. Cohn’s earnings over those years were equal to the average income of about 30,000 households in Malaysia. Those are the households whose taxes will be used to pay in part for the missing billions.

So as noted in the Lex column in the Financial Times on 3 December, “Sometimes a polite request is not enough.” What will it take for Mr. Cohn not to continue to do the wrong thing? I suspect 30,000 Malaysian households would want to know.

The business case for ESG investing is a strong one based upon financial returns as shown in research by George Serafeim from Harvard Business School. I worked on a research project regarding banks using his approach with the Global Alliance for Banking on Values along with Deloitte and the European Investment Bank. This research showed a better ESG focus delivered better financial returns (see report here).

However, it is possible that a focus on financial returns dilutes the real mission and goal of impact investing, delivering positive impact on society. Whilst it is a “nice to have” if financial returns are better, those returns should not overshadow the core reason for values-based investing which is improving society relative to economic prosperity, social empowerment and environmental regeneration.

This dilemma and challenge was very helpfully discussed in an opinion piece in the Financial Times. Jonathan Ford, the author, correctly notes: “‘(i)mpact’ investment only has real meaning if it means funding activities that would not otherwise happen.” He provides several examples of “greenwashing” in his comments. But most importantly he reminds us of the basic fact – impact investing should not be primarily about financial returns but about delivering impact. As he notes: “. . . why does everyone want decarbonisation, fair wages or the encouragement of diversity on boards? Not because they raise returns but because they are the right thing to do.”

Balancing the mix of impact, return and risk is a challenge but one we should embrace with all its complexity and ambiguity.