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December 06, 2006
How to Do Sustainble Banking
    by Bill Baue

BankTrack, a coalition of nongovernmental organizations promoting social and environmental responsibility in the finance sector, issues a guide to best practices in sustainable banking.


Sustainable banking has swiftly moved forward since 2003, when nongovernmental organizations(NGOs) introduced the Collevecchio Declaration and banks launched the Equator Principles. Now, Sustainable Banking Awards are given by the Financial Times. While sustainable banking has resulted in significant improvements in banks' social and environmental policies and practices, there remains plenty of room for improvement.

Just this week, Vancouver-based socially responsible investing (SRI) firm Ethical Funds filed a shareowner resolution asking Bank of Montreal (ticker: BMO) to benchmark its activities on climate change to financial sector best practices such as the Bank of America (BAC) Climate Change Policy. Ethical Funds has been discussing sustainability issues with all five major banks in Canada, and last year withdrew similar resolutions at Royal Bank of Canada (RY) and Toronto-Dominion (TD) due to such dialogue, according to Jen McCaffrey, Ethical Funds' senior sustainability analyst.

"At this time we are seeing progress among most of Canada's five major banks on the issues of lending policy enhancements to address climate change, and the related issues of forest conservation and biodiversity protection and indigenous peoples' rights," Ms. McCaffrey told SocialFunds.com.

And last week BankTrack, a Netherlands-based coalition of NGOs seeking to hold banks accountable for their social and environmental responsibility, issued a guide to best practices entitled The Do's and Don'ts of Sustainable Banking. An Implementation Guide accompanied the Collevechio Declaration upon its introduction, and the BankTrack manual updates these original recommendations to keep abreast of developments in sustainable banking since then.

"Sustainability for the banking sector requires a lot more than cutting down on your paper consumption or even signing up to the Equator Principles," said Johan Frijns, BankTrack coordinator. "It involves making hard choices and a willingness to forego business opportunities that run counter to your sustainability mission."

"Contrary to popular belief there is not always a business case for sustainability; there may simply be pressing moral or social reasons to not get involved in a otherwise financially lucrative deal," he added.

The manual structures its recommendations under the six sections of the Collevechio Declaration (which was named after the Italian village where it was conceived). These sections include commitments to sustainability, to "do no harm,", to responsibility, to accountability, to transparency, and sustainable markets and governance. Each section includes multiple discrete recommendations, often summarized with "do's" and "don'ts."

In the commitment to sustainability section, for example, the guide urges banks to redefine their strategy.

"Don't treat sustainability as a niche market," the manual implores. "Do recognize that sustainability is already at the core of all your business activities, as most activities financed by your bank have social and environmental impacts, be they positive or negative."

"The challenge is to recognize these impacts and shift their balance in a positive direction," it adds.

The commitment to do no harm section contains the heart of the guidance--a 14-point recommendation on setting minimum standards through an environmental and social risk management system, which encompasses many of the suggestions in different sections.

"Develop procedures and tools to enable a sophisticated exchange of knowledge and information on (possible) clients with NGOs, other banks, governments and sustainable rating agencies," point number nine suggests. "This information exchange helps to structure and improve your due diligence procedures."

The manual recommends ensuring the right of indigenous people and affected communities to free, prior, and informed consent (FPIC) before proceeding with financing of development projects with significant social and environmental impacts. Many financial institutions claiming sustainable banking fall short of this best practice as it shifts power from them to external stakeholders, beyond their control.

The recommendations extend to cover banks' investment practices, urging their analysts to develop expertise on environmental, social, and governance (ESG) issues and integrate these considerations into their stock reports.

"Don't recommend to investors the shares and bonds of companies which do not meet the minimum standards set by your bank," the report urges. "Do include social and environmental issues prominently in stock analyses and prospectuses."

The manual concludes by suggesting that its recommendations may not be optional, but rather adoption of them inevitable.

"As you may have concluded from the above, sustainable banking is not for the weak; it involves creating a profound change in your business," it stated. "While it may still seem as though this is a choice open to individual banks (or corporations in general) to either follow or ignore, the trends in the financial world and expectations within society unmistakably point toward an obligation to take up this challenge."

BankTrack presented the guide at Ethical Corporations’ Sustainable Finance Summit in London late last month, during the panel on “Emerging NGO visions of Sustainable Banking.”

 

 
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