A recently-released Commerzbank report entitled Five drivers of Sustainable Trade found that the banking sector probably has more impact on the uptake of sustainable business practices and strategies than most other sectors. Rüdiger Senft, Head of Corporate Responsibility at Commerzbank, looks at the key role that banks have to play in driving forward sustainable trade.
By Rüdiger Senft | 29 April 2015
Global use of material resources has increased ten-fold since the start of the 20th century and is set to double again by 2030. Worryingly, this escalating demand may jeopardise access to some essential resources, threatening the future viability of trade and economic development.
As such, in a world of finite natural resources, sustainability issues are rising up the agenda for both corporate companies and banks, with the majority agreeing that addressing sustainable trade questions now makes good business sense.
However, while there is growing consensus on the importance of sustainability, it has not yet translated into global agreement on what exactly constitutes sustainable trade or practices. Such lack of clarity is likely to constrain corporate action and commitment. Moreover, in an increasingly global and competitive market, the pursuit of short-term profitability is likely to prevail over long-term strategy.
Acting in a sustainable way only if it makes short-term business sense should not be the main driver of corporate sustainability, however. Companies have to take more responsibility for their impact and operations, and banks – as key components of the global economy – have an even greater responsibility to encourage them on a sustainable path.
Sustainable banking gathering momentum
Banks have supported sustainable initiatives on the part of their corporate clients for a long time – for example, by getting involved in commercial project finance of sustainable energy projects. However, more recently, banks have been taking an even more proactive role on sustainability issues. Significantly, trade finance has started to focus increasingly on how goods and services are produced and delivered.
But what is driving this sustainable banking push? Here, four main factors can help explain this trend. First, is the need to address or anticipate new regulatory expectations. While many financial institutions in OECD countries now adhere voluntarily to sustainability schemes – such as the UN Principles for Responsible Investment – in countries such as Brazil, for example, the move towards mainstreaming sustainability issues has already moved from ‘guidance’ to being manifested in policy and regulatory frameworks.
The second factor concerns reputational risk. Particularly, following the 2008 financial crisis, the banking industry is keen to enhance its credibility on sustainability issues. Failure in this respect can lead to accusations of malpractice or have incredibly costly repercussions.
Risk management is the third and perhaps most important factor. Banks now realise that poor sustainable practices on the part of their clients can threaten their own business success. As such, environmental, social and ethical risks relating to the products or industry sector being financed, or location of the financing activity, therefore, have to be taken into consideration.
The final factor propelling banks to be more proactive on sustainable issues is the prospect of new opportunities to develop products and services that create or respond to new needs among corporate borrowers. The role of banks in establishing new markets for offsetting carbon is one clear example.
Of course, banking practices will remain largely driven by commercial considerations around risk and opportunity calculations, but the good news is that sustainability issues are increasingly influencing these assessments.
Taking sustainability to the next level
Certainly, banks – as the entities that finance corporate activity – probably have more impact on the uptake of sustainable business practices and strategies than many other sectors.
In this respect, banks can encourage further implementation of sustainable business practices both by financing sustainable projects and technologies, but also by applying sustainable criteria for lending. This reflects a newer role for banks, whereby they increasingly incorporate consideration of non-financial factors into their decision-making and lending criteria.
At Commerzbank, for example, we have had a sustainable lending criteria in place for many years and our Environmental, Social and Governance (ESG) Risk Management department cooperates closely with other business units to check every trade-related transaction we receive for environmental, social and ethical risks. Last year alone our business departments conducted in-depth and extensive checks on 5000 transactions. In extreme cases where our sustainability criteria are not met, our checks may lead to the rejection of a transaction or termination of a business relationship.
Take the case of palm oil contracts, for example. Palm oil is an important product, particularly in the food, cosmetics and energy industries. However, potential environmental and social issues can arise from the impact of oil palm farming, such as deforestation, loss of biodiversity and human rights breaches.
As such, as a rule we always request a certificate of sustainable production from our corporate clients and require all parties involved in a transaction to be a member of the Roundtable on Sustainable Palm Oil (RSPO). Any transactions which breach these conditions will be declined outright. By putting in place this lending criteria, we take an active role in driving sustainable trade forward.
Ultimately, for the sustainability drive to really accelerate, some banks will have to become more selective about the transactions they finance, even if that is to the detriment of their short-term profit. For this to happen, more collaboration will be necessary, both among banks, as well as corporations, governments, policy makers, non-governmental organizations and the academic world, in order to establish and fulfill basic sustainability standards.
Rüdiger Senft is Head of Corporate Responsibility at Commerzbank. He has extensive experience in ESG-and reputational risk management within the banking industry and is responsible for all matters concerning corporate sustainability.