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Banks play a fundamental role in allocating financial resources – by providing credit and re-investing deposits. Too often, however, banks do not adequately assess the sustainability risks - potential environmental and social impacts - of their financial products, as well as the businesses they finance. For example :
- Many European banks provided loans and other services to TEPCO, the Tokyo Electric Power Company that runs the damaged nuclear power plant in Fukushima, Japan (1). Such investments were considered safe as the chance of a large scale nuclear accident was wished away. With the crisis in Japan unfolding, TEPCOs shares drop by dozens of percentage points, with investors standing to loose billions. Nevertheless, BBVA, BNP Paribas, Crédit Agricole, Santander and Société Générale are planning to finance another dangerously obsolete nuclear reactor : The Angra 3 reactor in Brazil is a typical example of a nuclear ’hang-over’ project, where construction started decades ago but which was never completed (2).
- In April 2010, an explosion on the oil rig Deepwater Horizon, operated by BP in the Gulf of Mexico, not only killed a dozen workers and caused a devastating oil spill. It also resulted in multi-billion dollar losses among BP’s banks and shareholders, including many British pension funds (3). If the banks and investors involved had better assessed the environmental risks of the operation, well documented before the event, they might have reconsidered their investments or requested BP to overhaul its safety measures.
In 2011, the European Union (EU) began implementing the revised international rules for banking, known as Basel III, into EU legislation. Basel III intends to improve banks’ resilience to financial crises. It deals with advancing the quality and quantity of capital buffers of banks in order for them to better cope with stress and crisis situations.
Friends of the Earth Europe), BankTrack), CRBM) and the Berne Declaration) call upon the European Commission to include sustainability criteria in the new law – to ensure banks integrate sustainability criteria in their lending, financing and investment decision making processes (4). It would encourage them to reconsider unsustainable and dangerous investments and to invest in more responsible and sustainable businesses – such as renewable energy producers and social entrepreneurs.
* Large banks that assess their credit risks internally should differentiate risk weighting factors for their various categories of borrowers according to their level of sustainability. As sustainable borrowers have a lower probability of default, their risk weighting factor should be lower. Non-sustainable categories with a higher probability of default should have higher risk weighting factors. Credit rating agencies, which provide credit risk assessments to all other banks, should integrate sustainability criteria in their credit ratings and in determining their risk weighting factors. This proposal would not affect the overall capital reserve level. Thus, it would advantage banks focussing primarily on sustainable borrowers. * Specific and penal capital requirements should be considered for banks providing credit to companies grossly violating environmental and human rights standards, as well as for banks financing other investors that invest in such companies, such as private equity funds.
Read our full reports :
Report : Why to integrate sustainability criteria in banking regulation ? (March 2011))
Report : How to integrate sustainability criteria in banking regulation ? (March 2011))
- BNP Paribas issued € 436,16 mln in bonds and granted € 73,1 mln corporate loans ; more bonds were issued by Barclays : € 24,6 mln, Crédit Agricole : € 17,6 mln, Deutsche Bank : € 30,6 mln, ING Group € 15,18 mln, HSBC € 17,6 mln, Natixis 17,6 mln, Société Générale 17,6 mln, WestLB : € 29,7 mln. Source : Nuclear Banks - No Thanks ! campaign).
- Sources : Sources : BankTrack, Greenpeace International).
- Later, BP’s investors accused the company of lying about its commitments to safety Source : Bloomberg, Feb 15, 2011). However, warnings about safety deficiencies had been reported and well documented before the blowout (See i.e. MSNBC).
- Source : Friends of the Earth Europe, Sustainable Finance campaign)