Banking & Capital Markets

The Colour of Money

It's not just the credit crunch that might make borrowing harder.
Christopher WattsNovember 4, 2008

Money lenders have scrutinised borrowers for thousands of years. Today, though, in an era of volatile market conditions, uncertain risk outlook and spectacular bank implosions, it’s more critical than ever that financial institutions make thorough assessments of their clients’ and other counterparties’ creditworthiness. As if that weren’t enough, shareholders, customers, staff and non-governmental organisations of various stripes are putting pressure on banks to lead the way in sustainability practices.

Just one example is the Rainforest Action Network in the US. The organisation is spearheading a campaign against Citigroup and Bank of America, institutions that it says are contributing to carbon dioxide emissions by financing investments in new coal-fired power plants. And BankTrack, in the Netherlands, regularly casts a critical eye over the lending and investment practices of 50 or so of the world’s largest financial institutions.

Most banks appear unfazed. They say they know their clients and can price products unfavourably to head off prospective clients whose custom could spell trouble. And not surprisingly, many financiers don’t feel qualified to assess clients’ sustainability practices formally. “Banks should not become the ayatollahs of sustainability,” says one European banking CFO. “It’s not their role.”

Some banks, however, are going the extra mile in efforts to minimise their environmental impact. Rabobank of the Netherlands is one. It aims to be among the world’s top three squeaky-clean financial institutions. Already, in 2007, it eliminated its own direct carbon footprint and remains carbon neutral. Now, management is wondering what to do about its indirect footprint. Here, Bart Jan Krouwel, head of corporate social responsibility (CSR) at Rabobank, speaks about the bank’s sustainability practices and the pros and cons of getting involved with clients’ CSR.

Why is Rabobank interested in its clients’ sustainability practices?

Regulatory changes will make it critical for companies to take into account the consequences of climate change. There’s also a reputational risk and a host of other potential hazards for companies that are not proactive about sustainability. Taken to the extreme, a company that isn’t compliant with regulations might even be forced to cease business. We have to be a good adviser to our clients and warn them about the consequences if they are not listening.

What are you doing in practical terms?

Our relationship managers check the sustainability practices of every loan applicant. We’ll ask about an applicant’s approach to animal welfare, biodiversity, human rights and child labour. Summaries of the answers go to the credit committee, which then gives an impression of an applicant. If the section of the application form that deals with CSR issues is not filled in, the loan application will not be considered by the credit committee.

How green must prospective clients be to fit with your standards?

There’s not an exact point where we can draw the line. If we have doubts — as with sensitive issues such as the palm oil, soy and weapons industries — we turn to our ethics committee. It then advises the commercial manager, providing an opinion about whether we should be involved or not in this deal.

Do you offer favourable lending terms to finance sustainable practices?

We offer favourable green loans for environmentally friendly projects within the Green Financing Scheme of the Dutch government. Conversely, though, we don’t punish a client with unfavourable conditions if they are not following best sustainability practices; if we consider it too bad, we just don’t finance at all.

You recently assessed clients’ carbon emissions and decided not to take action against any of them. Why?

2007 was the first year that we were 100% carbon neutral for our direct footprint. Now we are discussing with our executive committee what to do about our indirect footprint. We know a little bit about the footprint of our clients but it is a question of how to approach them to discuss it? Is it our job to ask clients to become carbon neutral? We are already in discussions with some about how they operate, and whether or not they are willing to change. But we are not taking any concrete action yet and we are not forcing our clients to become carbon neutral.

What are the potential pitfalls of getting involved with clients’ carbon dioxide emissions?

One point is this: From a commercial point of view, can we ask the client to change the way it does business, when it is the client that will bear the costs of changing? Another point: There is no legal or regulatory basis for this kind of thing. Some clients say, “If we’re operating according to the law, and we’re complying with our contract with Rabobank, why should Rabobank force me to do things another way?” We need to look at the legal position of the bank, and whether there is the possibility to demand things of our clients that are not yet required by law.

You have had to defend a few client relationships to your stakeholders. If there are doubts about a client, why don’t you just end the relationship?

We are not these clients’ only banker. If we are the only bank to be strict and end the relationship, nothing will change. It is much better to find a way to have a discussion with the client, and in some cases with others — for example NGOs or business alliances.

Have you ever ended a relationship with a client for these reasons?

Yes, there are examples. It happens a few times a year. Of course, we never mention names of clients. If the client is not willing to do anything, of course there comes a moment when you have to say goodbye. But that is not the way to achieve change.

Christopher Watts is a freelance journalist.