Author: David Korslund

This week I came across two articles that reminded me that investors and regulators can be two of the key drivers of a more sustainable and equitable financial system. On 11 October Gene Ludwig provided insightful commentary in the Financial Times on the role regulators can play to ensure that communities un(der)served by banking institutions the more attention they need. Ludwig focuses on how the Community Reinvestment Act (CRA) provides a framework for ensuring that banks serve the communities that serve the banks by providing them with deposits. Importantly Ludwig notes the need to go beyond the traditional CRA approach focusing on physical branches as banks move increasingly to on-line platforms to meet client needs. He also notes that this requirement needs to be extended beyond banks to cover a wide variety of other financial institutions. Finally he notes the important role played by Community Development Financial Institutions (CDFIs) in meeting the needs of local communities – especially as they deal with the impact of COVID-19.

The role of CDFIs can only be provided if they have sufficient capital – real equity capital. This need is real as CDFIs can not grow their impact without equity to support the risks they assume in their banking practices. George Surgeon and Laurie Spengler highlight this need in an article in ImpactAlpha published on 23 September. Most importantly they note that a focus on only providing deposits to CDFIs is not sufficient . Furthermore the amounts that would make a difference for the capital strength of CDFIs is minimal when compared to the financial resources of the large corporations that have stated their desire to take action to create a more just and equitable society.

Southern Bancorp provides a case study in what these two articles are preaching. In an article from July in Next City, Darrin Wiliams (CEO of Southern) provides a clear statement of what is needed to be an “anti-racist” bank. The steps are not so difficult but there are very few banks showing the leadership of Southern in this area. Time for more banks to learn how they can make a difference – and how regulators and investors can support and drive the needed change.

In the last week there was a number of articles related to pressure for financial institutions relative to a variety of sustainability goals. The greatest step back was the decision by the EU to delay its deadline to implement anti-greenwashing rules for investment managers. This delay was sought by fund managers that did not feel they could comply with the rule given some of its complexity. As reported in the Financial Times, the framework would still be in place from March 2021 but there would be a delay in the reporting requirements. So maybe it was only a half step back but nevertheless not going in the right direction.

On the other hand there were numerous stories (five of which I came across) that suggest the pressure on all financial institutions and other companies to be more sustainable is only growing. Of interest is that these are increasingly focused on the financing provided to companies and projects that are not addressing issues of climate change.

• The Financial Times reported that several investors were pressuring Samsung’s insurance units regarding their financing of climate change negative projects and companies.
• Then the new head of the Norwegian oil fund noted also in the Financial Times that they would be carefully looking at ESG criteria when making investments.
• Perhaps reacting to pressure on the disconnect between their practices and the words of their CEO, BlackRock is requesting at the annual general meeting that AGL (an Australian power company) speed up closing its coal-fired power plants.
• Next up was an opinion piece in the New York Times from heirs to the Rockefeller fortune (made in oil and gas I would note) stating that “JPMorgan Chase and other big banks should use their lending power to force cuts in greenhouse gas emissions.”
• And finally came HSBC with a commitment to be fully carbon neutral in its financing activities by 2050 as reported in the Financial Times.

So whilst the news is not always about progress and the timing could be considered too slow (looking at you HSBC), the trend is clear. ESG and climate change are topics where financial institution and companies will be pressured by investors to improve their work.

Operational risk continues to cost banks a lot of money. Just this week it was the turn of Citibank to pay a substantial fine ($400 million) for internal operational issues As reported in the New York Times, Citibank is paying this amount to the Comptroller of the Currency for failure to fix problems that have been identified over several years.  Coincidentally (or not) the fine is being paid just “(t)wo months after one of its bankers accidentally sent nearly $1 billion to the wrong people.” A mistake which Citibank is trying to correct but where the recipients of the money are not agreeing to return it. The New York Times article goes on to note several other operational mistakes that have been reported. One can only speculate about the mistakes that have not surfaced publicly.

One of the key principles behind ESG investing is the element of strong Governance. Among the key elements of Governance is strong operational controls that minimise mistakes. Clearly in the case of Citibank there are issues in this area that lead not only to direct losses such as may occur with the mistake in transferring funds but also in the costs of the fine to be paid for internal operational issues. The appointment of a new independent committee of the board to focus on these issues is a good start. But that begs the question as to what the board was doing in the past.

Earlier this year BlackRock’s CEO Larry Fink noted the risk of climate change. More information on BlackRock’s approach can be found on their website. However, as noted yesterday in the Financial Times, this commitment has not extended to how they have voted their ownership positions in major companies. In fact BlackRock “supported just 6 per cent of environmental proposals filed by shareholders globally in the 12 months to June, down from 8 per cent in the previous year.”  There is appropriate scepticism among environmental activists about the difference between what is said and what is done. And so BlackRock would seem to be another example of not walking the talk. Further evidence that greenwashing remains a serious issue.

Like many others, I frequently receive e-mails that are all about phishing for my personal data so someone can defraud me of money from my bank accounts. But it appears that banks have also been active with fraudulent activity – not through phishing but through spoofing. And their spoofing activities are proving to be costly as JP Morgan paid a fine of nearly $1 billion as announced last week in the Financial Times. This is yet another example of how banks create financial costs from inappropriate behaviour and culture. And if you were an investor in JP Morgan the appropriate next question would be how much of that fine was recovered from bonuses paid to the individuals involved. I suspect not one red cent.

In a further article in the Financial Times it was noted: “US authorities criticised JPMorgan for failing to fully co-operate at the outset of their inquiries. The Department of Justice noted that the bank began suspending suspected traders on its metals desk only after a second person had pleaded guilty.”  This article noted that the issue is not only for JP Morgan but has also impacted Deutsche Bank where two traders were found guilty of similar behaviour and are facing up to 30 years in jail. And so just a banks want us to be cautious about phishing, it seems like it is also time for them to be cautious about their own spoofing.

In September there were increasing signs of risk in the financial markets. Early in the month the Financial Times reported on worry about real estate lending in the US. There was a 42% increase in loans under stress according to this article. As noted: “The financial consequences of shutting swaths of the US economy to deal with coronavirus are still just becoming clear, as many hotels remain empty, shopping mall traffic is subdued and office workers remain at home. ” But one could argue that this is only the tip of the iceberg as the world adjusts to a post-COVID-19 world. Whilst the article refers to “shutting,” it is more likely the case that individuals are also taking actions to work from home, shop by internet, and travel and eat out less frequently. Many of these patterns are only going to continue or get stronger suggesting that the historic valuations for commercial real estate may not be sustainable.

Later in September, Gillian Tett (also in the Financial Times) noted that “(f)ears of a credit crunch have already hit business confidence and worried banks.” She goes on to provide other evidence from a variety of sources regarding stress in the economy. She notes: “the key point is that chronic stress can be very economically debilitating.” I do not think there is anyone who would dispute that we are in a period of “chronic stress” not only from the impact of COVID-19 but also from political uncertainty and the challenges of societies dealing with embedded systemic racism. Clearly a time to be cautious.

I am honoured to be asked to deliver 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.

One of the frequent criticisms of ESG (environmental, social and governance) standards is the lack of consistency. Whilst this criticism has validity, it has often been used by critics to suggest that ESG is not an important issue for investors. Those same critics generally do not go further to suggest ways in which consistency could be created but rather stop with the criticism. And for too long there have been far too many competing initiatives to deliver consistent ESG reporting.

However, investors and financial institutions are realising that empty criticism and lack of standards are not sustainable. This topic was discussed at the the World Economic Forum based on a white paper published in January 2020. After a comment period, a new paper has been published last week: Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.

This paper had significant input from the large accountancies with their experience of setting standards for financial reporting. In addition the many initiatives that have been underway to drive consistent reporting in ESG areas have been supporting this effort. As noted in the paper, “the five leading voluntary framework- and standard-setters – CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) – have for the first time committed to work towards a joint vision.”

Perhaps the most important conclusion from this report supported by the largest companies in the world is as follows:

(T)hose corporations that align their goals to the long-term goals of society, as articulated in the SDGs, are the most likely to create long-term sustainable value, while driving positive outcomes for business, the economy, society and the planet. This is the true definition of stakeholder capitalism.

It would appear that banks have not only a problem with institutional racism but also with institutional stupidity. This week Reuters reported that the CEO of Wells Fargo, Charles Scharf, wrote a memo to employees noting that “(w)hile it might sound like an excuse, the unfortunate reality is that there is a very limited pool of black talent to recruit from.” This memo was then followed up with similar remarks in a company Zoom meeting. The meeting was seen by some attendees as positive but not all. As the Reuters article further noted: “Senior corporate executives and recruiters said the notion of a shallow minority talent pool is frequently cited as a hurdle to improving diversity but probably reflects insular professional and social networks.” It is indeed likely that those informal networks are why banking has a dearth of diversity in management at all levels – diversity of race, gender and socio-economic backgound.

These remarks led to a very passionate response in an essay in The Washington Post. The writer, Karen Attiah, is a life long Wells Fargo client. After citing the cost of many fines paid by Wells Fargo, she notes: “(i)magine if all this money and effort had instead gone not only into recruiting and hiring Black people, but also toward helping Black people build wealth. Racism is not just a hell of a hard-to-kick drug, it’s an expensive one to boot.” These thoughts echo an issue not only for Wells Fargo but many other US banks.

In the last few weeks two European banks have announced bank branch closures. As noted in the Financial Times, Handelsbanken which has traditionally had a very strong branch based strategy, will be closing nearly half of their existing branches. This strategic change was championed by Lex in the Financial Times who noted it “will make the Swedish bank a stronger institution.” Then this week Deutsche Bank was reported (also by the Financial Times) to be planning to close about 20% of their branches. In both cases it appears that the impact of COVID-19 was part of the motivation for these choices.

Whilst the issue of bank branches is an important one for banking profitability, too often the discussion ignores the real challenges these closings have on many people. Most readers of the Financial Times and other business press are like me very tech savvy and have multiple devices that allow them to access bank services without ever setting foot in a bank branch. But just as we are seeing with remote virtual education for children and young adults, this access is not available for all. Furthermore there are any number of older people who may lack the tech savvy and experience to use the digital alternatives.

Strategies focused on eliminating bank branches are therefore likely to only further exacerbate the issue of access to financial services for the poor, elderly and already disenfranchised bank clients who need banking services to fully participate in the modern economy. Who will speak for them? Or will they be forgotten?