Australia needs a responsible and well-regulated banking sector to fund large-scale renewable infrastructure projects. That said, we don’t excuse the failings of any bank – and that includes Westpac’s latest AUSTRAC reporting breaches as well as scrutiny of NAB at the recent Royal Commission. On balance, we believe Westpac and NAB are having a positive impact on society and we currently remain invested in both companies.
We apply a rigorous ethical screening process to all our investments, including the banks. We actively seek out companies that positively impact the planet, people and animals. And on the flipside, we avoid investments that cause unnecessary harm.
Can banks be good for society?
Assessing the finance sector against our Ethical Charter can be challenging. Bank bashing is a national sport, and with good reason. The banks do deserve criticism on many fronts, including for far-too-frequent incidents of irresponsible lending, unconscionable fees, poor financial advice and transaction reporting failures. Banks also lend to high-emissions companies and projects that contribute to climate change.
But despite their shortcomings, responsible and well-regulated banks can do good. They make loans to individuals to help them pursue their goals and they fund commercial activity which meets individual and societal needs. They help individuals and organisations save, invest and manage risk. Without them we’d be back to a barter system for the exchange of goods, services and capital.
We invest in both small and large banks provided they are assessed to align with our charter.
We need big banks to fund renewables
On the climate front, large banks are needed to support the massive shifts of capital needed to combat climate change. To limit warming to two degrees Celsius (2°C) as part of the Paris Agreement, more than US$1 trillion needs to be invested in clean energy every year through to 2050 (according to a 2014 report by the International Energy Agency). Smaller Australian banks simply aren’t able to fund large-scale clean energy infrastructure. They just don’t have the capacity to make loans for big projects – whether climate friendly or not. Investment in clean energy totalled more than $19 billion for large scale renewable projects underway in Australia in 2019, equating to 13,725 jobs across the country.
Westpac has been the largest financier to greenfield renewable energy projects in Australia over the past two years, committing $9.3 billion to climate change solutions and progressing towards its target of $25 billion by 2030. More than 71% of Westpac’s lending to the electricity sector goes to renewable projects (up from 59% three years ago) and for NAB the figure is 69% (up from 43% in 2015).
We currently assess that Westpac and NAB are implementing their commitment to lend in line with the economic transition our society needs to limit warming to 2°C. This assessment can be a bit complicated because of the scale and diversity of lending by large banks. We use a climate scorecard which assesses lending to:
- The fossil fuel sector, including the type of fuel and its emissions intensity;
- Renewable energy and energy storage; and
- Technologies and activities which reduce energy usage or store carbon (eg, green buildings, low-emissions transport and reforestation).
We also look at the way banks facilitate financing by others. For example, we look at how a bank might help companies raise financing for environmentally friendly initiatives, including through what are known as green bonds. For each of the climate scorecard categories above we look at a bank’s current lending, historical trends and lending targets. It’s also worth noting that smaller banks haven’t built the capital markets capacity to help their clients with the issue of green and social bonds.
There are also ‘no-go projects’. We do not, and will not, invest in any bank which lends to the Adani Carmichael coal mine. We also consider the banks’ support for government climate policy aligned with the Paris Agreement – both directly and indirectly through participation in industry associations. Largely as a result of this assessment, we currently exclude ANZ and CBA for ethical reasons – but we invest in Westpac and NAB.
Why haven't we excluded Westpac and NAB?
In November 2019, it was announced that Westpac had commited serious breaches of anti-money laundering and counter-terrorism finance (AML/CTF) regulations. The regulator, AUSTRAC, found Westpac also breached its general responsibility to safeguard against customer misuse of its products and services to facilitate criminal activity. Westpac failed to report over 20 million suspicious transactions and, in the most serious breaches, failed to identify and promptly respond to transactions that raise customer involvement in child abuse.
As a result of the breaches we immediately put our Westpac investment under ethical review. Under our Banking Framework and Ethical Charter we will exclude investment where serious misconduct is ‘systemic’, which means that the misconduct is encouraged by the general culture, systems and practices of the bank. Following this review and without in any way excusing Westpac’s failures, we have concluded that despite revealing significant failures of Westpac’s compliance and risk management, the information currently available about the AUSTRAC breaches does not point to systemic misconduct and we will remain invested. Unlike AMP, which we divested from in May 2018, there is no evidence (to date) that senior Westpac leaders were either involved in the compliance breaches or ignored staff concerns about them. Nor were senior Westpac staff deliberately ignoring requests by the regulator, as was the case with IOOF (which we divested from in January 2019). It is hard to assess whether there is a systemically unethical culture at Westpac, so we will await the outcome of Westpac’s independent review to reveal more information. It is worth noting that 90% of Westpac staff surveyed in 2018 said they valued risk management and compliance requirements.
In early 2019 we put NAB under review following the release of the final report of the Royal Commission into banking misconduct. Royal Commissioner Kenneth Hayne was unsure whether NAB properly understood the seriousness of the bank’s misconduct and the action needed to stop it happening again. Those concerns were founded in large part on the Royal Commission’s analysis of:
- The approach taken by NAB to compensate customers who were wrongly charged for financial advice; and
- The testimony of the NAB Chair and CEO.
We shared the Royal Commission’s concerns. However, we did not consider that the Royal Commission’s findings showed the misconduct by NAB was condoned by senior leaders or by the overall culture of the bank. Neither the NAB Chair nor the CEO denied wrongdoing at the bank before the Royal Commission. And although NAB should have acted much more quickly to remediate customers, we did not believe there was evidence they intended to withhold compensation from customers. As a result of the review, we remain invested in NAB.
But that doesn’t mean either Westpac or NAB is off the hook. The latest AUSTRAC breaches, along with other adverse fundings by the Royal Commission and regulators, make it clear that Westpac and other financial institutions can and need to do more. As part of our ethical review we have resolved to promote greater bank transparency, accountability and innovation through a targeted engagement with Westpac and other banks. The information we obtain from this engagement will feed into our ongoing ethical screening of the banking sector. We will continue to update our ethical assessment to take into account new material information as it emerges.
Investments named are current as of the publication date of this article but may change over time. We list our investments on our Companies we invest in page.