CSR Awards 2008 - Corporate Social Responsibility

But banks that loaned substantial sums of money to subprime borrowers irresponsibly, or focused on short-term profitability in structured instruments to the detriment of their stakeholders, have seen their profits plummet, staff lose their jobs and missed opportunities.

Corporate Responsibility (CR) is about managing risk carefully enough to avoid too many pitfalls but with enough boldness to deliver profits on a sustainable basis.

Or, as our partners Innovest Strategic Value Advisors, ranked number one by Thomson Extel for the provision of extra-financial research to the investment community, put it, the long-term competitiveness of a bank increasingly depends on its ability to navigate this new risk landscape, including mega-trends such as energy security and the emergence of poor people as a bankable retail demographic.

This shows up in stock performance. In the chart below we can see that as soon as the credit crunch began to materialise in March 2007, Innovest’s top-rated banks surged ahead of the bottom-rated stocks and are now ahead by 34%.

Tracking system

Ratings based on CR seem to be a good way to track which banks are best prepared for an economic downturn. CR is about much more than switching the air-conditioning off. In February, we published the first ranking of global banks in this sector; in this issue, we publish our first 10 CR Awards, with a breakdown by sectors that we believe are important, judged by a panel of five ­(see below).

There is one very large caveat to these awards. CR is developing. None of the banks are there yet, and in some categories – such as Stakeholder Engagement or Banking the Unbanked – there is much work to be done. But progress, not perfection, is what The Banker/Innovest CR Awards are about.

THE JUDGES The five members of The Banker/Innovest Corporate Responsibility Awards are:

THE JUDGING PROCEDURE Our judges were given shortlists for each category. These were drawn up by Innovest in association with The Banker. We did not accept submissions from banks. In the Innovest rating model, there are five overarching themes, and within these, banks are given scores according to 40 different indicators. Below is a breakdown of the general percentages used:

CR Risk Exposure (30%)

Innovest has developed its Capital Allocation Benchmarking Analysis (CABA) model, which examines the CR performance of the companies, sectors and also companies that banks have financed. This provides a glimpse into the CR impact of a bank’s loans, investments and capital markets activities.

CR Due Diligence (30%)

All banks say they do this, but when it comes to closing deals, many leave it by the wayside. Innovest looks at issues, such as whether the group risk function ‘owns’ CR due diligence, rather than the public affairs department, and whether senior management understands and is committed to CR, which may involve unpopular decisions about forgoing short-term profits in the name of prudent long-term risk management.

Strategic Profit Opportunities (15%)

Banks that invest more and with better returns in new markets such as clean tech, renewable energy and microfinance.

Stakeholder Capital (15%)

We look for banks that build partnerships that enhance their ability to forecast and price new generation CR risks. All banks have joined stakeholder groups that address CR risk but these memberships rarely have any impact on a bank’s performance on the ground.

Human Capital (10%)

It is critical for CR performance but almost impossible to measure. There are good metrics, such as HR consultancy Hewitt’s survey, which measures staff engagements, but this score is not available for all banks, so we take into account staff satisfaction surveys, inflows/outflows of executive traffic and staff turnover.

For more info, see link:www.Innovestgroup.com/TheBanker/InnovestCRCommendations

BEST OVERALL BANKStandard Chartered At a time when evidence has come to light of the many global banks involved in subprime lending in the US – in many respects the biggest sustainability crisis to rock the finance sector in a generation – Standard Chartered stands out for having managed to make its profits in a sustainable way in emerging markets, which are ironically perceived as riskier. Corporate responsibility is a well-established, core component of Standard Chartered’s commitment consideration process. Bankers on the ground and executives in the risk management division and at the group level are all trained to forecast and manage environmental, social and governance risk. Standard Chartered has played a critical role in introducing innovative environmental and social profit opportunities to emerging market economies. It was one of the first banks to finance clean tech, microfinance and renewable energy projects in emerging markets.

Last year, Standard Chartered invested $170m in financial inclusion. The bank has pledged to invest a further $500m in microfinance during the next five years. As is best practice in the sector, Standard Chartered’s microfinance positions are managed through its wholesale banking division rather than its charitable foundation. As well as microfinance, Standard ­Chartered has arranged a $500m Islamic project finance deal in the UAE.

Standard Chartered’s investments in renewable energy and clean tech include an $800m renewable energy fund, a $25m South Korean wind farm and a €50m ­carbon fund.

Peter Sands, group chief executive of Standard Chartered Plc, said: “The award is a huge tribute to the hard work and commitment of our staff in driving the sustainability agenda forward. Sustainable practices are woven into the fabric of how we work at Standard Chartered and we are determined to lead the way within the markets in which we operate.”

BEST EMERGING MARKET BANKBradesco

Bradesco is managing to strike the delicate balance of an emerging market bank by providing capital to the demographics and industries that need it most, while not ­jeopardising sustainable development for ­­fut­ure generations.

In 2006, Bradesco evaluated 11 projects valued at BRL3bn ($1.8bn) as established by the Equator Principles. Beyond project finance, the commercial bank credit analysts also assess social and environmental risks as part of their wider credit ­evaluation. The recently formed Social-­Environmental Responsibility Executive Committee incl­udes executive officers and representatives of 10 departments of Fundação Bradesco. Approximately 100 employees and 23 departments, ­co-ordinated by the board of executive officers and external consulting firms, are involved in the process of carrying out the committee’s corporate responsibility strategy.

The bank has a large list of products geared towards addressing social needs, including loans to finance education, ­conversion of vehicles to cleaner fuels, ­microentrepreneurship, sustainable forest man­­­­age­ment, fighting soil erosion, sanitation infrastructure, etc. The BRL2.1bn portfolio of these products represent 2.2% of the group’s total assets in 2006.

Rural services are one of the customer segments on which Bradesco focuses. It reports that, in 30% of Brazilian cities, Bradesco is the only bank serving the city. The bank launched a programme to open banks in post offices, which reduced the number of cities with no banking access from 2351 to 574 and made bank services accessible to an additional 16.1 million people. Bradesco has been active in enc­ouraging clean development mechanism (CDM) projects. Its previous work with three projects is estimated to reduce 1.5 million tonnes of CO2 in 10 years. The bank is analysing 15 potential CDM projects.

Márcio Cypriano, president of Bradesco, says: “We regard the recognition by The Banker magazine as an honour, which will encourage us to continue along this business path Bradesco embarked on when it was founded 65 years ago. Our belief is that business is only of any value when it can add value to the shareholders and bring a return to all the public groups with which we interact. We believe that clients, employees, communities and the environment, for example, should be the objectives of the business achievements. This is the only way sustainability can be assured. For this reason, Bradesco has been structured since its beginnings to serve all social classes and promote banking inclusion, access to credit and means of savings.”

BEST CR TURNAROUNDHSBC

HSBC has an enviable track record in managing corporate responsibility in its key emerging markets. It has also made much of its green credentials. But the fact that CR in its wider sense was not embedded in the bank became evident when it suffered $17bn of subprime losses in the US via a unit that used third-party brokers to make second-lien, non-verified income ­mortgages.

In the past year, HSBC has begun to phase out this subprime platform. If it is successful, then it will be left with only HSBC Consumer Finance in the US, a responsible subprime unit which makes fixed-rate loans, verifies incomes, has loan-to-value ratios in the serviceable mid-60% range and helps borrowers refinance due to unforeseen emergencies. Delinquencies in this unit have been resiliently low in the midst of the subprime meltdown, evidence that lending to this market can be done in a CR way.

As the first bank to signal the subprime meltdown in its books, it looks likely to be the first to come out of it without abandoning the demographic group. “Our US business is actively engaging with our customers, who are facing difficulties as a result of the downturn of the housing market there. It has contacted more than 41,000 customers with adjustable-rate mortgages and modified more than 11,900 loans through one home preservation programme to help people stay in their homes. This recognition for my colleagues’ efforts is well deserved, and underlines that we will not walk away from our responsibility to our customers,” said Simon Martin, head of HSBC Group ­Corporate ­Sustainability.

BEST INVESTMENT BANKGoldman Sachs

As being ‘green’ has become a new branding fad, Goldman has resisted the temptation to set ESG priorities by broadcastability. The firm has instead focused on the environmental risks that pose a threat or an opportunity to its core business of forecasting earnings, managing risk and structuring deals. Goldman’s environmental strategy team is run by Tracy Wolstencroft, who reports directly to the chairman’s office. He is head of public sector and infrastructure banking as well as head of Goldman Sachs’ Centre for Environmental Markets. This seniority enables Goldman’s ESG risk team to have a significant impact on due diligence in the commitment process.

Through its advisory role in the buyout of TXU, a Texas-based energy company, Goldman demonstrated its ability to provide carbon risk management solutions through its advisory business – a service that few other investment banks can provide and which will have a growing impact on opportunities that will help to drive growth.

This is reinforced by Goldman’s scores in our benchmarking study. In this study, we examined each bank’s ability to turn around weak environmental performers. To measure this, we looked at the weak environmental companies that each bank financed in 2006 and tracked their environmental performance since the deal closed. Goldman’s score along this metric was far better than any other bank (including global banks), 25% of the weak companies that Goldman advised have improved and 15% have got worse, the remainder showed no change. This difference of 10% is, by far, the strongest in the finance sector.

Mr Wolstencroft said: “In working with our clients, Goldman Sachs seeks to be an advisor, financier and investor. We urge our clients to take the environment into consideration when pursuing or financing transactions, and commit our capital to investments that make both economic and environmental sense.”

BEST ASSET MANAGEMENTHenderson

Henderson is one of the leaders in the sector with regard to adopting corporate responsibility risk analysis in its mainstream valuation process, as well as using it for its CR-based investment management, unlike many other fund managers who see CR investment management as simply a new category that can bring extra business.

The company has a dedicated team focusing on CR research, plus its standing Responsible Investment Committee, which aims to ensure that corporate governance, CR and investment issues are considered in an integrated ­manner.

Overall, the company has about £900m ($1676m) in dedicated CR funds, which is about 1.5% of the company’s total assets under management. The company’s strategic focus on global environmental and social trends as a source of opportunity within CR funds, property investment and its own facilities management, can serve as a key competitive advantage against many of its competitors that are less active in this area.

The company has disclosed a detailed engagement strategy. In addition, it provides examples of its engagement with some of its investees through the “Henderson Investing in the Future” publications. In 2006, the company stated that it has successfully engaged with 70 companies, although it has not defined the criteria by which the companies it engages with are chosen from its portfolio. Overall, the company’s activities in this area are superior to most of the firms in the sector. This can help the investors through improved returns, which can result from improved investees’ ESG performance. George Latham, head of sustainable and responsible investment (SRI) funds at ­Henderson Global Investors said: “Henderson has a long track-record in sustainable and responsible investment management, dating back to 1977. We understand the benefits that CR can bring to an investment portfolio and our Responsible Investment Committee provides support to all of our fund managers, not just those managing SRI mandates. We’re delighted to have been awarded this citation from The Banker in recognition of our work in this area.”

BEST CORPORATE FINANCEStandard Chartered

While many global banks are still learning to navigate corporate responsibility risk in emerging markets, Standard Chartered is an established expert in the field. Because more than 93% of Standard Chartered’s revenue is generated from emerging market economies, the company has had to develop an advanced strategy for forecasting and anticipating social, political and environmental risk in opaque markets. Bankers on the ground and executives in the risk management division, and at the group level are all trained to forecast and manage CR risk. However, with 54% of Standard Chartered’s wholesale loan book going to borrowers in high environmental intensity sectors, in high-risk emerging market economies – companies on which data is sparse – we cannot actually prove the bank’s due diligence procedures are robust enough to mitigate the risks. We rely on the bank’s strong track record of entering high-risk sectors in high-risk markets and avoiding the mis-steps that trip up other banks, as well as its well-embedded commitment to CR.

Standard Chartered was one of the first banks to finance clean tech, microfinance and renewable energy projects in emerging markets.

Another caveat is that Standard ­Chartered seeks to leverage its long-standing position in Africa and China to finance growing Sino-African trade, an area in which it has a clear advantage over its rivals, but one where it is not yet known whether it has enough leverage to play a constructive role in implementing CR due diligence in projects.

Mike Rees, CEO, wholesale banking, Standard Chartered, said: “We are delighted to receive this award. Acting as a force for good in our markets is part of our strategy to build a sustainable business. Our project and export finance team has developed and implemented unique policies and procedures to assess and manage projects according to the Equator Principles. The award is a testament to the excellent progress we are making in building a sustainable corporate finance business.”

BEST ENERGY FINANCINGGoldman Sachs

Goldman’s skill at turning around weak energy companies is unrivalled. When we tracked the performance of Goldman’s energy deals in 2006, some 60% of the companies improved after the deal closed, and 18% got worse. No other bank’s turnaround performance in the energy sector comes close. The bank claims this is a product of its own deliberate strategy to embrace corporate responsibility risk and use its leverage to change behaviour. It therefore finances a higher proportion of weak CR energy companies than the majority of its competitors. This skill became ­public when Goldman negotiated the env­­iron­mental restructuring of energy giant TXU as part of its buy-out.

Goldman’s environmental strategy team is run by Tracy Wolstencroft, who is both head of public sector and infrastructure banking as well as head of Goldman Sachs’ Centre for Environmental Markets. This seniority enables Goldman’s ESG risk team to have a significant impact on due diligence in the commitment process. In addition, the head of energy and power at Goldman works very closely with the environmental risk team.

Tim Kingston, Goldman Sachs’ head of power and renewable energy investment banking, says: “Goldman Sachs, together with our private equity partners KKR and TPG, recognised that TXU represented a unique investment opportunity and facilitated the transaction with our advisory, financing and commodity hedging expertise. The purchasing consortium also realised it made both environmental and economic sense to scale back plans for new coal-fired plant construction.”

BEST RENEWABLE ENERGY FINANCINGGoldman Sachs

Renewable energy is still in its infancy. Although there has been huge improvements, few technologies can compete with fossil fuels in cost or in scale. Few renewable companies are profitable and the regulatory environment is uncertain. The sector needs to be helped towards maturity, by using its venture capital/private equity arm to buy promising (but unprofitable) fledgling companies and later taking these (now profitable, well-capitalised) companies public through their equity capital markets division. Goldman Sachs stands out as the reigning champion in this category.

This year, Goldman sold Horizon Wind Energy to Energias de Portugal. In doing so, the bank became one of the first major financial firms to bring a renewable energy private equity investment full circle and sell it for a profit.

According to New Energy Finance’s 2007 league tables, Goldman did a total of $443m in venture capital/private equity deals, $1.25bn in initial public offerings, and $2.74bn in merger and acquisition advisory, for a total of $4.43bn in renewable energy financing. This total volume is more than any other financial institution. Goldman has also been a pioneer in the carbon trading market, yet like all banks, does not rel­ease figures for total carbon volume traded.

Ken Pontarelli, a managing director in Goldman Sachs Capital Partners, said of the Horizon venture: “We are proud of our experience with Horizon. We identified a company that had great potential, invested in the business and provided commodity risk management, allowing Horizon to grow into one of the premier wind developers in the US. With the sale to EDP, Horizon remains in the hands of a company committed to growing its wind presence in the US.”

BANKING THE UNBANKEDStandard Chartered

Over the past five years, the microfinance sector has shifted from being a charitable, philanthropic endeavour to an investment-grade asset class. This is a trend that needs to continue, in order for the sector to grow and to bring poor people out of poverty. Financial institutions, which are adding liquidity to the underbanked financial sector by connecting these microlending institutions to the capital markets, are those that can make a difference – banks which put real money into their access to finance initiatives and run it as part of their core business rather than through their charitable foundation. If banks do not turn a sustainable, socially responsible profit in underbanked communities then they will not expand there.

Standard Chartered operates its microfinance portfolio in 13 countries in conjunction with 41 community-based partners. It has a microfinance portfolio of $170m. The bank has pledged to invest a further $500m in microfinance in the next five years.

The bank’s microfinance positions are managed through its retail banking division rather than its charitable foundation. Additionally, Standard Chartered provides a critical facility to the subprime value chain (despite the crisis this is a valid activity) as a “warehouse” for subprime loans that are waiting to be securitised – for the unbanked are not only present in emerging markets.

Mike Rees, CEO, wholesale banking, Standard Chartered Plc, said: “We are pleased that our commitment to empowering people by improving access to financial services has been recognised with this award. We have partnered with 41 micro­finance institutions, providing them access to local currency funding, transaction banking services and financial markets products, as well as working with micro­finance experts to invest in technical assistance and capacity building for the microfinance sector in multiple countries. Since September 2006, the bank has disbursed $277m to more than 14 countries, and we are well on track to deliver on our Clinton Global Initiative commitment to originate and distribute $500m by 2011.”

BEST STAKEHOLDER ENGAGEMENTHSBC

HSBC has been a pioneer of stakeholder engagement. The bank worked closely with the Forestry Stewardship Council to develop lending guidelines, predominantly on paper and forestry. When this initiative was launched in 2004 it was the first of its kind. Since then, the bank has launched the HSBC Climate partnership in conjunction with the World Wildlife Fund, The Climate Group, Smithsonian Tropical Research Institute and Earthwatch. HSBC was also a founding member of the UN Environmental Programmes Finance Initiative, as well as the UN Principles for Responsible Investment. Overall, HSBC stands out because of its pioneering and broad network of stakeholder partnerships, although it needs to really leverage these partnerships to improve corporate responsibility risk management and prove its commitment.

Simon Martin, head of HSBC Group’s corporate sustainability, said: “The expertise and challenging opinions of external stakeholders are instrumental in helping shape our thinking on sustainability and the drafting of our policies. We are pleased to receive this recognition and would like to share it with our external partners who have made such recognition possible.”