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.