Sustainable banking: The environmental dimension

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In recent weeks, I've posted a series of articles about sustainable banking. The posts are related to a whitepaper I co-wrote with Michael Imeson. There are three main dimensions of sustainability: economic, social and environmental. This third component deals primarily with the topic of climate change. So, banks with a sustainability focus will work to ensure that their activities have minimal or no negative impact on the environment.

A bank's approach to climate change can be split into three categories. They'll try to be:

  • Climate proof - not locating facilities in areas prone to serious flooding or bush fires, having robust disaster recovery plans in place to cope with extreme weather events or other catastrophes associated with climate change, and taking out business interruption insurance.
  • Climate-friendly - reducing energy use to minimize emissions of carbon dioxide and other greenhouse gases.
  • Climate-profitable - exploiting climate change-related commercial opportunities, including lending to, and investing in: renewable energy and low-carbon energy producers; manufacturers of energy-saving equipment and materials; waste, water and pollution control companies; and traditional carbon-intensive industries and projects.

Banks are taking action on many other environmental issues, too. They have recycling programs to reduce waste paper and plastic in offices; energy saving initiatives that reduce their premises’ fossil fuel usage, thereby conserving natural resources and reducing pollution as well as cutting back on carbon emissions; and strict lending principles that consider the impact a potential project may have on wildlife or the landscape.

John Varley, Group Chief Executive of Barclays, neatly summed up the bank’s efforts to protect the environment in its Sustainability Review 2008. "In 2008, we made our UK and European operations carbon neutral by offsetting operational emissions and we reduced energy use per employee by 2.1%,"  he wrote.  "We are on track to make our global banking operations carbon neutral by the end of 2009.” In this year’s latest report, 2009 Responsible Banking Review, Barclays reports achieving its target to become carbon neutral by year-end 2009.

Facing the lion
Banks are faced with a powerful challenge; to protect the economy and society, they must lend. But the environmental and social risks of lending and investing in power, manufacturing, mining and other major industries can be quite high. This conundrum led banks to implement environmental and social risk management policies and units to assess the risks and provide advice for mitigating those risks – including, if necessary, rejecting certain deals. Many banks also work to reverse damage already caused. Their sustainability policies may also extend to taking steps to protect the environment from others, for example, by refusing to lend to businesses whose actions cause unacceptable harm to the environment, or by insisting that key suppliers adhere to prescribed sustainability standards.

Some banks commission specialist audit and assurance firms to provide independent verification of their sustainability reporting. Barclays used a company called Corporate Citizenship to check its most recent sustainability claims, and another firm, SGS, to verify its global emissions data.

There are also a number of indexes that monitor organizations in this area and provide a rating system that is accessible to the casual investor. The Dow Jones Sustainability Indexes, for example, track the financial performance of the world's leading sustainability-driven companies using a set of criteria and weightings to assess the opportunities and risks they face from their activities in the economic, social and environmental arenas. The companies are then given sustainability scores of up to 100 percent.

Despite these risks, when all is said and done, acting sustainably will actually improve overall risk management and business performance. As the Dutch financial conglomerate ING notes in its latest Corporate Responsibility Report: "We believe that acting responsibly results in better and more comprehensive risk management, a higher degree of employee pride, a greater attraction of ING for talented people and new business opportunities."

Don't forget to download the white paper, Sustainable Banking.

What steps is your bank taking to increase its score on the Dow Jones Sustainability Index? Do you see a tie between reputational risk and sustainability?

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