Greenwashing.. banks and bankers

(Notes from panel hosted by Standard Chartered bank, Singapore, 2nd Nov 2021)

Should we be happy that we have flipped from a world of green-ignoring, to one where green-washing is the subject of mainstream debate? When exactly did this flip occur?

My own ‘threshold moment’ was in January 2020. At a conference that month, with the pandemic just a few days away from the international radar, I felt that speaking notes had switched from “ESG is not our primary focus” to “We’ve always been doing ESG anyway”. With one or two exceptions and variable degrees of authenticity, corporations were falling over each other to pledge allegiance to stakeholder capitalism.

I’d written two commentaries, one at the start and one at the end of that week.

• In the first, I warned that tokenism and virtue-signaling might be contaminating the barrel for the good guys and suggested voluntary safeguards to avoid them.
• In the second, I underlined the central role that rank-and-file employees in financial services firms should play in charting progress. Harnessing the traditional core competencies of these organizations to do ‘the purpose thing’ correctly – not a marketing/comms drive led by external consultants - is key.

Since then, I wrote two other pieces that fleshed out the context that we’re in.

• First, Covid-19 has helped overturn several taboos around policy and business management. We’re less beholden or attached to the way we have always done things.
• Secondly, the macroeconomic and monetary backdrop for investments has further shifted to a state where companies need new sources of revenue, and investors need new sources of returns. Inclusion and sustainability have simply become strategic imperatives.

So, what is or should be top of mind today if you are an employee or client of a globally-active bank? I am grateful for the opportunity to provide an outsider’s view on this:

Tone and ‘body language’ at the Top:

Inauthentic soundbites, instagrammables and buzzword bingos without material follow-through get caught out easily by all stakeholders – employees, clients, shareholders. (For examples of these, send me a DM ??).

By contrast, it helps to have a sustainability report (such as this one from 2020) which lays out a coherent philosophy, focus on a dominant lever (‘sustainable finance’) and provides trackable indicators of progress. For example, clients with dependence on thermal coal should expect to be offloaded on a sliding scale over five years. At least half of all the investment products offered by the private bank will go through a sustainability lens by 2025 – a five-fold increase from today’s levels.

Virtually all of the metrics can be related to by the average employee, in their day-to-day jobs. What also lends credibility is the transparency with which underperformance against certain targets is presented.

Finally, beyond the metrics, the narrative discourse shows that disparate actions converge towards a holistic framework. It also shows progression over time: for example, climate risk moved from the category of “emerging” to “material” risk in recent years.

Capitalize on core competencies, Compete on climate finance:

Capitalizing on one’s comparative advantage makes sense for both individuals and companies. Start with what you are already good at. Banks that are used to competing for “global firsts” or “derivatives house of the year” awards should be deploying their structuring talent towards creating innovative, sustainability-enhancing solutions. Apart from originating, facilitating, underwriting, distributing green or impact bonds, loans and swaps that offer attractive rates conditional on ESG outcomes are welcome additions to the toolkit. ????

If a bank’s sustainability drive can be closely linked to its core purpose and strategy – in a manner that excites employees, helps forge their professional identities, and boosts their value-add for clients – it is more likely to stick.??

For a multinational bank that straddles emerging and developed markets and has a seat at multiple tables, there is also an opportunity to act as interlocuter as ‘global’ standards are being set. Ivory tower standards need to be road-tested in various local contexts before they can be called 'global'. Your ability to convene, curate, translate (in both directions), and educate on the technicalities involved can be a key strength.

The next few years of transition will be messy and non-linear. There will be trade-offs. Choices in sequencing that will invite conflict, criticism, confusion, perhaps even cynicism. The temptation to take extreme, uni-dimensional positions on issues such as carbon offsets or divestments will be strong. The process of adjustment that banks will go through – leading in some areas, following in some other areas – will require artful communication.

There are parallels with the way banks and their clients had to adjust to new regulations after the global financial crisis.

At that time, client relationships were re-assessed by banks based on balance sheet intensity; today, they may be re-assessed based on carbon intensity. Banks had to optimize over several variables – RWA and total leverage for example – in the same way that emission offsets should only be considered within a clear transition plan. As the sustainability report engulfs much of the traditional annual report, entire business divisions might have to be restructured in the same way that they were once CVA/DVA became a thing. ??????

Greenwashing:

So how do we – as investors and risk managers – deal with the phenomenon of Greenwashing? What is greenwashing? As has been noted elsewhere, there are five factors to bear in mind:

1. Materiality: Would this activity have meaningful impact?
2. Proportionality: Is the size of this activity significant in the total portfolio of activities that this enterprise undertakes?
3. Additionality: Would this activity have taken place as BAU anyway?
4. Intentionality: Was this the objective from the start or did we slap it on as a marketing label after the fact?
5. Optionality: Are they consistently executing on and accounting for an overall plan or are they hopping around from quarter to quarter?

Not all of these five factors will be relevant in all situations. Nor should the pitchforks come out if an enterprise falls short on some of them.

In fact, a major concern for investors right now is the possibility of inadvertent green washing.

As it is, looking ahead, new regulations, new markets, new technologies and new standards of disclosure will result in de-ratings and impairment of financial assets. We simply don’t know which financial assets will turn out to be stranded, sitting on top of stranded real assets. (For a forceful argument on how unfolding new information about climate change and related policies could translate into excess returns, see my conversation with Nobel Laureate Robert Engle here). ??

Inadvertent or unintended green washing could occur if a financial product that is rolled out in good faith as “green” today ends up being disqualified by the enhanced standards of tomorrow. This is why standards and methodologies need to be thrashed out and harmonized as quickly as possible. Investors with funds committed to climate finance are unable to deploy for fear of reputation risk materializing in future*.

In any case, reductionist measures such as the Sharpe ratio or ratings on their own will be even less relevant for financial analysis which will require more systems-thinking. At the same time, stewardship and active engagement as an expression of universal ownership will become more important than arms-length asset allocation decisions. ??

For years, banks have struggled to define its “Big Why”. Why do we come to and stay engaged at work? What do we achieve by fostering the flow of funds and helping clients mitigate financial risk? The required response to this climate emergency may well provide that elusive purpose – for those that choose to see it that way.

---

*As pointed out in this KPMG report, some $2 trillion of assets (previously labeled as sustainable) disappeared after the EU asked for tighter labelling.