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March 14, 2006
US Banks Sink to the Bottom of the Barrel on Latest Sustainability Ratings from Oekom
    by Bill Baue

Most US banks fail to disclose enough information on their social and environmental performance to qualify for analysis, and only four of 21 analyzed earned above D-level grades.

The top-performers and the bottom of the barrel share the spotlight in the latest report from oekom research on the sustainability performance of global banks. Oekom is a Munich-based socially responsible investment (SRI) rating firm. Coming in first with a B grade is Australia-based Westpac (ticker: WBC.AX), followed by five banks earning a B-: UK-based Northern Rock (NRK.L) and Lloyds TSB Group (LLOY.L), Switzerland-based UBS (UBS),Germany-based HVB Group (HVMGY.PK), and National Australia Bank (NAB).

"Of the 77 banks and financial service providers we looked at, the leading institutions have seen which way the wind is blowing, and we can recommend these to people looking for an investment based on environmental and social criteria," said Dietrich Wild, the oekom analyst that authored the study. "We still see a great need for improvement in the US companies, which, in a worldwide comparison of responses to sustainability issues, in this rating once again occupied the bottom slots."

Of the 17 banks earning F grades because they did not even disclose enough information to qualify for oekom's in-depth analysis, 11 are based in the US. This number includes supposed sustainability leaders such as Goldman Sachs (GS), which trumpeted its new environmental policy, Merrill Lynch (MER), which issued a report on climate change in the auto sector, and Wells Fargo (WFC), which recently reported on alternative energy.

Over half (six of 11) of the banks earning grades in the D range are US-based. Only four of the 49 banks earning C-level or higher grades are based in the US: Fannie Mae (FNM), Citigroup (C), and State Street (STT), which earned flats Cs, and JPMorgan Chase (JPM), which earned a C-.

To burnish their corporate social responsibility (CSR) images, many banks have enlisted in voluntary sustainability initiatives such as the Equator Principles (EPs), a set of standards for project finance based on International Finance Corporation (IFC) guidelines.

"However, the adoption of the Principles has not prevented several Equator Banks from financing some of the most environmentally and socially risky projects that have sought support from international project finance markets in recent years," states Mr. Wild in the report. "Prominent examples are the Baku-Tbilisi-Ceyhan (BTC) pipeline and the Nam Theun II dam in Laos."

"Consequently, observers have concluded that the Equator Principles are an insufficient response to the challenge of sustainable finance," he adds. "Therefore, sector-specific guidelines for project finance in substantive areas such as forestry and paper, dams and hydropower, resource extraction and related infrastructure, as well as agriculture and fisheries were included in the study."

The report points out that only a few companies--such as ABN AMRO (ABN), HSBC (HBC), Citigroup, Bank of America (BAC), and JPMorgan Chase have implemented sector-specific guidelines. However, even these are not necessarily being implemented comprehensively. For example, the environmental policies recently adopted by JPMorgan Chase and Bank of America address forestry and biodiversity issues in detail, according to the report, but oekom could find no information on the companies' positions on resource extraction and hydropower.

On the positive side, oekom noted strong performance from Westpac on helping to shatter the glass ceiling, as the proportion of women in management positions there has increased from 14 per cent to 42 per cent over the last ten years. However, when looking at the sector as a whole, oekom found mixed results on equal opportunity.

"Most of the companies have established a policy covering non-discrimination in recent years, but executive boards are still places clearly dominated by men (with some rare exceptions such as Lloyds TSB and FöreningsSparbanken)," states Mr. Wild in the report.

The report also identifies some other positive trends.

"In terms of its customer and product responsibility, the sector is piloting initiatives in the areas of discrimination-free access to financial services, management of customer over-indebtedness and transparency in the voting behavior of investment funds," states Mr. Wild. "Furthermore, some banks are playing an increased role in microcredit programs by providing equity and loan capital to specialist microcredit organizations."

Counterbalancing these are some troubling trends identified in the report.

"However, the sector is still exposed to criticism because of the frequent lack of transparency in its product and contract design as well as the lack of care in its customer relations," Mr. Wild continued. "This is also reflected in the numerous controversies, for example the late-trading and market-timing activities of many investment funds, which have allowed professional investors to secure profits, almost risk-free and with the acquiescence of the fund management companies, at the expense of ordinary savers."


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