And the winner is .
On Monday, TheFinancial Times, in association with the International Finance Corporation (the private-sector arm of the World Bank), announced its 2006 Sustainable Banking Awards. Category winners included:
- The U.K.'s HSBC (NYSE:HBC) for Sustainable Bank.
- Banco ABN Amro Real of Brazil for Emerging Markets Sustainable Bank.
- Germany's West LB for Sustainable Bankers of the Year.
- Citigroup's (NYSE:C) Mexican subsidiary Banamex, together with Mexican microfinance provider Financiera Compartamos, for Sustainable Deal.
- Credit Suisse (NYSE:CSR) for Sustainable Energy Finance Deal.
Congratulations to all! But wait . does this mean that the venerable pink lady of financial news and the IFC don't believe that other banks can continue to thrive? Not exactly; these awards celebrate a different kind of sustainability.
What is sustainable banking?
Sustainable banking incorporates social, environmental, and corporate-governance objectives into a bank's operations, all based off the concept of sustainable development. In 1987, the World Commission on Environment and Development declared that development was sustainable when it "meets the needs of the present without compromising the ability of future generations to meet their own needs."
It's more common to hear financial institutions emphasize their philanthropic contributions in the name of the environment, rather than their direct acknowledgement of the effects which their business operations may have. But the financial sector increasingly recognizes that it affects social and environmental quality, whether through its own operations, or through those of the companies it finances.
The Equator Principles
First adopted in 2003 and based on IFC standards, these voluntary environmental and social-screening criteria provide a framework by which banks can measure the sustainability of the projects they finance. The standards apply to development projects with a capital cost of at least $50 million in all industry sectors. So far, the IFC reports that 41 financial institutions have adopted the Equator Principles, representing more than 80% of the global-project loan syndication market.
When institutions adopt the Equator Principles, they use a common set of terms to measure a project's environmental and social risk. Borrowers must meet applicable safeguard policies set forth by the IFC and World Bank. For high- and medium-risk projects, borrowers must also sign covenants requiring compliance with all required environmental and social-management plans.
None of that sounds unreasonable, and critics actually contend that the Equator Principles don't go far enough. Groups such as BankTrack, a European-based non-governmental organization, complain that the principles are limited to project financing only, and that they're difficult to account for or enforce. Institutions which have adopted the Equator Principles reviewed their doctrine this past spring, with plans to establish a revised version July 6.
Citigroup's role
Citigroup helped found the Equator Principles after many of its large global development projects earned the bank notoriety in the late 1990s. Its adversaries included the Rainforest Action Network, which ran a public relations campaign against the bank in 2000. Now, Citigroup cites the organization as an ally.
In its 2005 Citizenship Report, the company proudly points to its leadership role with the Equator Principles. To emphasize its corporate responsibility, the bank has a report available on its website detailing how it adheres to the principles in analyzing project finance proposals.
The Financial Times honored Citigroup for the role of its Mexican bank in the first peso-denominated investment-grade bond issued to finance loans for poor entrepreneurs, mainly rural women. The bank was also commended in the Bankers of the Year category for leadership in integrating social and environmental policies throughout its global operations.
Still, Citigroup can't rest on its laurels. Its Shareholder Dialogue Group, comprised of representatives of socially responsible investment firms, listed additional challenges in the 2005 Citizenship Report, such as the unspecified use of proceeds in bond underwriting and the need for a refined risk assessment in high-impact resource extraction projects.
Smart, sustainable banking business
The Financial Times hopes that the sustainable banking awards "will not only acknowledge leadership and innovation in sustainable banking, but also stimulate debate over how banks can create social and environmental values without sacrificing profitability." There's room for improvement here, especially among U.S. institutions. Besides Citigroup, only three other U.S. banks have adopted the Equator Principles so far: Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), and Wells Fargo (NYSE:WFC).
Let's raise a glass to this year's award winners, and add a toast that perhaps next year, we'll find more award-winning financiers here in the U.S. If not, let's hope we at least hear more informed discussion on the topic.
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Fool contributor S.J. Caplan does not own any pinstriped attire, or shares of any companies mentioned in this article. The Fool has a disclosure policy.
