Boomer Banker

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.

Investment bankers are renowned for their ability to be paid large sums of money. But perhaps the tide is turning against a culture that puts the investment banking bonus pools ahead of all other stakeholders in a bank’s profits. This week the Financial Times reported that for several large universal banks with large investment banking operations there will be pressure to be conservative in the payment of bonuses, even if portions of the investment bank have made record profits.

Universal banks provide a strong balance sheet, reputation and client access to support the work of their investment banks. But that strength comes in part from the build up of capital in these banks. And the shareholders as well as other stakeholders for these large banks also have expectations. As noted in the article, one “bank (is trying) to balance paying people for results with their need to be “good citizens”. This is in an environment where regulators and politicians have curbed shareholder payouts so they will have a cushion for potential loan losses.”

It could indeed be a sign of the end of the “heads I win/tails you lose” culture that has predominated within the investment banks of the large banks. A culture where losses are always absorbed by the bank and not by the individuals and teams that may have been responsible for them. It is not clear that this positive development will be realised but the fact that it is being discussed is clearly a very first step in the right direction.

Building wealth and prosperity is a goal for nearly everyone. But not all have the same chance to do so.

Historically home ownership and small business ownership have been two very important routes in the US to build wealth. It is well known that home ownership for minorities, especially Black people was limited by the practice of red-lining – arbitrary lines drawn in red around neighbourhoods where no mortgage loans were made. Or maybe the lines were not so arbitrary as those neighbourhoods were predominantly populated by Black people.

A recent article published by the Portland Business Journal highlights how red-lining also appears in small business lending. As noted “(a) July SBA Office of Advocacy study, which used Federal Reserve data and adjusted for credit risk, showed Black-owned businesses faced “the biggest challenges in obtaining their desired financing.” The study cited nine academic papers that came to the same basic conclusion.” The article also noted “(e)conomic experts say the trends exacerbate racial disparities in wealth generation, homeownership rates, educational attainment and other vital rungs on the American dream’s financial ladder.”

This pattern illustrates just another way in which racism is embedded in the US banking system. And that embedded racism has real consequences for the wealth creation needed by all communities.

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.