UK-based Standard Chartered Bank, which does much of its business in Asia, Africa and the Middle East, is focusing on improving shareholder returns following profit reversals at some of its global units during the past two years. The bank, which has built environmental, social and governance standards into its client risk assessment procedures, says recent reversals haven’t detracted it from the focus on sustainability.
For over a decade, Standard Chartered Bank outpaced many competitors who were bogged down by the global financial crisis. During these growth years, its board took steps to limit the bank’s exposure to industries and companies polluting the environment and causing social harm. For long-term profitability, the bank realised it must satisfy growing consumer demand for companies
to be responsible.
The Dow Jones Sustainability Index in the US and FTSE4Good Index Series in the UK measure the performance of global companies demonstrating strong environmental, social and governance (ESG) practices at the core of their businesses. Standard Chartered is on the FTSE4Good UK Index. The bank, which has assets topping $725 billion, is ranked 42nd in the world. In 2009, the bank made public positions on 13 industries like oil and gas, coal, tobacco, gambling, and nuclear energy. Companies in these sectors must undergo an environmental and social risk assessment before Standard Chartered can do any business with them. Each year, internal auditors check if these assessments have been carried out by staff with the same diligence expected in credit risk and regulatory compliance.
But doing good is not enough. If companies lose money, shareholders could easily turn on the board; this is true of Standard Chartered. Today, the bank is under pressure to improve shareholder returns quickly following two years of reversals. During the global financial crisis, Peter Sands was Chief Executive of UK-headquartered Standard Chartered Bank, when it set revenue and profit records for 10 consecutive years. The bank’s success was driven by its expansion in its core markets in Asia, Africa and the Middle East, which now generate 88% of revenue.
The party ended in 2012. Before Sands stepped down, along with four other board members, in June 2015, he told shareholders the bank was hit by a ‘perfect storm’. Profits fell 30% to $4 billion in 2014. A lending scam in China, South Korean borrowers driving up the bank’s bad debt costs by over 30% and a $340 million regulatory fine for breaking US money laundering rules exposed the bank’s weaknesses. Slowdowns in India and China, and ISIS terror in the Middle East made matters worse. The bank has since shed staff and unprofitable businesses across the globe.
[pullquote]We have a lens by which we look at a new client or a new deal, and must first satisfy our social and environmental standards. We call this Environmental Social Risk Assessing[/pullquote]
Bill Winters who replaced Sands as chief executive has since halved shareholder dividends after profits declined a further 36% to $2 billion for the first six months of 2015. In 2012, the bank made a $6 billion profit.It reported a loss for the first time since the 90s during the September 2015 quarter.
In a sober note to shareholders, Winters said he was on a mission to rescue the bank from “a legacy of focusing on growth at the expense of risk discipline and returns”. He criticised the bank’s lack of commercial attitude, and poor pricing of products and services.
The bank is making returns below its cost of capital, he said. “Our primary focus is on improving returns, and returns will take primacy over growth.”
Now under intense pressure to deliver returns and fast, will the bank’s sustainability strategy end up in the backburner?
The bank has a dedicated office based in Hong Kong developing environmental and social standards, and incorporating these standards into its core functions. Echelon spoke to Global Head of Sustainability and Corporate Affairs Mark Devadasan about the bank’s ESG strategy, and why it is still very important to the bank.
What does sustainability mean for the bank?
A: I have been with the bank for around 30 years, and heading global sustainability for the last five. My background in the bank is in corporate and private banking. I have been a risk manager, the global head of training, and the bank’s chief executive in Japan and Thailand for over seven years. As a corporate banker, I started thinking a lot about how the bank should manage in the long term and focus on sustainability, not just profits. I started talking about this and attended many forums on sustainability. When the role of global head for sustainability was created, I stepped up and said ‘I would love to do that’.
For Standard Chartered, sustainability is built around our brand promise ‘Here for Good’, a unifying theme for staff and customers that this is something they can expect of the bank. Sustainability for us rests on three pillars. One, contributing to sustainable economic growth in the markets we serve. The second is being a responsible corporate citizen, and third is investing in communities where we operate.
By creating access to financial services, and managing environmental and social risks, we enforce the first pillar of contributing to sustainable economic growth. Being a responsible company (the second pillar) involves governance, caring for the environment, people and values. The third pillar (investing in communities) is about volunteering staff and implementing community programmes such as the ‘Seeing is Believing’ programme where the bank partnered the International Agency for the Prevention of Blindness and other agencies to improve access to eye care across our markets.
How does sustainability fit into the business of banking?
A: As a bank, our role is to disperse our balance sheet, and sell our products and services to sustain economic growth. There are in-built processes and procedures around what we can and what we cannot do in the banking business. We have developed our own ESG process for the bank. ESG is a relatively new idea that requires businesses to deliver profits while keeping an eye on the impact they make on society and the environment. Standard Chartered has a list of 20 positions on industries that potentially harm the environment and society – for example, sectors like palm oil, oil and gas, metals and mining, ship breaking, nuclear power, and tobacco. We have taken up various positions on these sectors, and these dictate how we do our business. For example, we don’t lend to companies that have any exposure to the shark fin trade, and palm oil companies must be RSPOcertified to say that they do not harm virgin forests and conserve water if we are to deal with them.
We have a lens by which we look at a new client or a new deal, and must first satisfy our social and environmental standards. We call this Environmental Social Risk Assessing. This is a process we insist on even before we look at credit risk or profitability. This is in-built in all the processes and procedures across the bank. My team is responsible for the policies, but the entire business takes ownership in implementation. This is what sustainability is all about.
How serious is the bank about sustainability? Do you have to report on performance?
A: The bank is required to report on ESG, and can be held accountable for how it delivers results. Clients, stakeholders and non-government organisations like Greenpeace can always monitor the bank. Our 20 positions are available online, so we can be questioned if, for example, we are lending to clients polluting the environment.
Two years ago, there were 13 positions; we did a review, and now we have 20. We have a new position on water, child rights and human rights. My division is about eight years old, and we have seven to eight professionals in London and Singapore. They support the business, and help the frontline evaluate new clients and deals. If there is something they are not sure about, it goes to a committee nominated by the board, which is headed by the group deputy chief executive.
But there are challenges. When we tell palm oil companies that we will not bank them unless they are RSPO certified, they go to another bank. We bank seafood which everyone loves, but when it comes to shark fins, the bank is zero tolerant: we had to tell three of our clients that we would stop doing business with them. Happily, all of them asked for time to divest from shark fins, to which we agreed. We are making a change. We actually start or end business ventures based on ESG, and this is an important thing.
[pullquote]Investors are still looking at profits first, and most of them with a short-term view. However, an important change is taking place…[/pullquote]
Look at what’s happening now. The oil and gas industry is a contentious industry because there are developing social views about what is right and wrong. It is the same for the coal industry. But the world still depends on these energy sources. Opposition is mounting in some parts of the world, and organisations like Greenpeace lobby hard for banks not to finance new coal ventures. We are in the process of reviewing our own strategy and it is very likely that we will no longer bank new coal ventures, but we will fund conglomerates that are still exposed to coal. We still have certain requirements that would have to be met. The coal must be clean and feed good-quality power plants.
The world is now turning towards banks, and with the Paris Climate Talks, Standard Chartered is also looking at aligning itself with these growing expectations. We will soon see more concessions to renewable energy and penalties for fossil fuels. The world is changing, and the bank is contently fine-tuning its sustainability model. We are reviewing our positions on what we can and what we cannot fund as a result of Paris and our own thinking about the future of energy and sustainability. This is a change we will see in the next six months. We also look at our own energy consumption and constantly set targets on consumption of paper, power and water. Many of our buildings have very high standards. Paper, power and water usage is monitored across the bank anywhere in the word, and we even have standards broken down for temperate and non-temperate countries. In sub-Saharan Africa, power is not reliable, so we need to depend on generators, which is not very efficient, but we have to make sure that everything else we do lends to efficiency.
With nuclear, we have a very restricted view, which is basically nothing. With regard to tobacco and gambling, they are also very restrictive. The issue with ESG is that every company needs to look at its own businesses, and thenadapt and set their own standards. Standard Chartered is strong in Asia, Africa and the Middle East, so we looked at the industries that we may be asked to fund, and we want to make sure our frontline bankers know what to do. My team’s job is to keep the entire banking group on top of our ESG. We constantly train and update our staff. For this, we’ve partnered with Londonbased Cambridge Institute of Sustainable Leadership of the Cambridge University where Prince Charles in the patron. ESG is more than a procedure, it is a philosophy. Our job is to teach our frontline staff to understand people, the planet, profit, the principle of sustainability and why we can make a big difference.
How have shareholders reacted to all this? How has Standard Chartered dealt with the trade-off between short-term profits and doing ‘good’?
A: Investors are still looking at profits first, and most of them with a short-term view. However, an important change is taking place and, increasingly, a large number of companies are beginning to discover their social purpose—doing business for profit, and doing what is right for society and the environment. These companies are reaping rewards. For example, insurance companies are pricing their policies lower for companies that are responsible, while companies like tobacco firms will have higher premiums to pay. They are also showing better profitability. This is a fascinating development. I would say our shareholders understand what the bank is trying to achieve and there is no pressure against sustainability.
When CEO Bill Winters came last June, one of the first things he said was that he believed strongly in the bank’s brand promise ‘Here for Good’, and delivering on this promise will differentiate us from our competitors.
There is no pressure to lower our standards on ESG, and shareholders understand that we take this very seriously. They will continue looking for short-term returns, but the bank is clear
that we can no longer look at taking short-term views in the markets we are exposed to, which are largely emerging. There are many opportunities for us in this part of the world. With governments increasingly looking at renewable energy, we have been able to close some fascinating deals in this area.
The bank’s profitability has been poor over the past two years because of problems in the Middle East and the slowdown in Asia, led by China and India. This is temporary. But during the global financial crisis, we did really well. From 2003 to 2013, we have seen 10 years of record profits. So ESG has helped the bank in terms of financial performance. There is increasing evidence around social purpose. An Edelman annual trust barometer report shows that if all things are equal – if the price and quality of competing products are the same – the buyer will look at the level of goodness of a company; this is the number one differentiator. This does not mean that companies have to run charities. It means that doing good is good business. It is potentially a draw-card. Of course our mortgages and credit cards have to be competitive. Customers and talented employees make decisions about what to buy or where to work based on goodness, particularly after the global financial crisis with people more cynical about business.
Does Standard Chartered’s internal audit pay as much attention to ESG as it would to the credit or treasury functions?
A: If a deal or client does not meet our standards, it does not become a bankable proposition in the first place. When the credit department is audited, they check whether the initial step of ESG was followed. So it is a part of the normal audit. It is a part of frontline procedures. We have also commissioned audits on the palm oil industry in Malaysia and Indonesia; we do audits on ship breaking in Bangladesh to check whether they comply with social and environmental standards. As a result, we have decided to pull back from a client or an industry. We are moving into integrated reporting. Earlier, we produced a separate sustainability report. Last year, for the first time, we integrated this into the financial report. This is the big trend now.
We are also looking at the 17 goals of the UN Sustainable Development agenda. We are looking at these goals for opportunities, and the bank will soon realign its strategy to support this initiative. Our community programmes on preventable blindness and HIV have been around for about 15 years. They were deliberately launched to coincide with the launch of the Millennium Development Goals.