By Bob Souster

All over the world, large banks, and many smaller ones, have embraced strategies and policies consistent with the need to reduce the impact of climate change. There is some debate as to whether this should be an ethical obligation of organisations, or merely supererogatory, or in plain English, something they will be applauded for but are not obliged to do.

At a webcast by Bangor University on 23 February 2022, Alex Sanchez, CEO of the Florida Bankers Association in the USA, warned that bankers should not be expected to be the ‘climate police’. The essence of his argument was that if governments are committed to sustainable environmental goals, they should enact legislation that will direct banks to put policies in place that are consistent with this. Ultimately, if legislators want banks to stop lending to fossil fuel companies or any other industries that desecrate the environment, it is up to them to put the necessary laws in place. Otherwise, said Sanchez, the fiduciary duty of bankers is to serve their customers as the trusted advisers that they are expected to be. He has a point.

The detrimental effects of climate change are generally accepted and there have been many supranational and national efforts to mobilise commercial organisations to contribute to the reduction of the potentially devastating effects on future generations. Few would disagree with the noble aspirations of the sustainable development goals agreed by the United Nations and ASEAN, which if achieved should ensure a better quality of life for our children, their children and subsequent generations.

Yet, there are many arguments suggesting that banks, and indeed any commercial business enterprise, should not rush into hastily formulated environmentally friendly policies. An example is the commitment of many countries to replace road vehicles driven by internal combustion engines with electric vehicles (EVs). At face value, this might appear to be a logical step, supported by visions of congested cities and towns with many thousands of cars and trucks spewing out pollution every day. However, the analysis is thin and the human costs have not been analysed thoroughly at all. EV batteries have a projected life of 10 years, which in practice suggests that the market value of a second-hand EV will plummet after about five years. In addition, there is a human cost in terms of disposal of spent batteries as well as the misery caused by child labour in many countries that mine the cobalt necessary to manufacture them.

When faced with the proposition that banks should not do business with conventional car manufacturers and shift their credit facilities in favour of those who make purportedly ‘cleaner’ vehicles, the jury is still out. The reality is that bankers cannot be expected to be experts on this or other complex environmental arguments. Promises that the ‘technology will improve’ are just that, and are not definitive. At best, many such commitments are platitudes of politicians eager to mount the environmental bandwagon.

Banks may be influenced by changes in markets. Many companies involved in ‘dirty’ industries have sought to divest some of their businesses associated with environmental harm. However, many such businesses are highly profitable: In a free market, where there is a seller, there will also be a buyer, so many of these assets have been taken up by private equity firms. The result is that the ‘dirty’ industries do not go away at all, but instead fall into the hands of new owners. They continue to operate, but under the radar of scrutiny afforded to large public companies.

There is also the issue of ‘greenwashing’, which is the practice of promoting socio-environmental credentials which do not actually exist. In an article published on 22 May 2021, The Economist produced evidence that the commitment of many so-called companies committed to ESG (environmental, social, governance) objectives was questionable:

“On average, each of them (the 20 biggest ESG funds) holds investments in 17 fossil-fuel producers. Six have invested in ExxonMobil, America’s biggest oil firm. Two own stakes in Saudi Aramco, the world’s biggest oil producer. One fund holds a Chinese coal-mining company. ESG investing is hardly a champion of social virtue either. The funds we looked at invest in gambling, booze and tobacco.”

We all want to do our best and contribute to creating a better world for future generations. However, this may cause many practical difficulties for bankers going about their everyday work and doing the best they can for their clients. There are many towns and villages in Malaysia and elsewhere that rely on one (or just a few) businesses that are involved in productive activities that bring harm to the environment. It is an easy decision to deny them credit for working capital or expansion on the grounds that they will harm the great-great-great grandchildren who they will never meet or know. It is harder to sell this to people who have to feed their families now. If the company closes down due to denial of the funds necessary to continue, this may deprive families of their livelihoods for the foreseeable future.

Perhaps the views of Alex Sanchez have a powerful point to make, and to some extent the difficult decisions of banks are being made for them. In the Companies Act 2006 in the UK, it is already a statutory duty of all company directors to promote the success of the company while paying due regard to the interests of stakeholders, including customers, shareholders, suppliers, the community and the environment. Enforcing this is another matter of course.

It is unreasonable to expect bankers to be the ‘climate police’. Many investment decisions are not clear cut, as even the most admirable initiatives to enhance the future quality of life may be accompanied by negative externalities. Examples include hydroelectric power and nuclear energy, both of which have now been controversial for over 50 years.

On the positive side, we can all be aware of the power and ability of banks to promote good social and environmental outcomes. We can promote clean energy, eco-friendly homes, organic farming and other initiatives that will champion a better world. It does not mean that bankers have to completely abandon those in traditional enterprises that are seen by many as causing damage to mankind, but instead to help them in the incremental transition to new ways of living our lives.

Robert (Bob) Souster is a Partner in Spruce Lodge Training, a consultancy firm based in Northampton, England. He lectures on economics, corporate and business law, management, corporate governance and ethics. He is the Module Director for ‘Professional Ethics and Regulation’, a core module of the Chartered Banker MBA programme at Bangor University, Wales.