We believe it is possible for big banks and super funds to be key drivers of positive change. However, the Royal Commission has made it clear the financial services sector is far from perfect. After considering the Commission’s findings we have divested from AMP and IOOF but we remain invested in NAB and Westpac. Here’s why.
At Australian Ethical, 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.
Assessing the finance sector against our Ethical Charter can be challenging. Bank bashing is a national sport, with good reason. The banks do deserve criticism on many fronts, including for far-too-frequent incidents of irresponsible lending, unconscionable fees and poor financial advice. They also lend to high-emissions companies and projects that contribute to climate change.
Can banks be good for society?
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.
Australian Ethical invests in both small and large banks provided they are assessed to align with our charter.
Reassessing the banks post-Royal Commission
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry delivered its final report on 1 February 2019. You can read about our CEO Phil Vernon’s response to the final report here. The Royal Commission had plenty of harsh words for the financial services industry as a whole, but AMP, IOOF, NAB and CBA were singled out with ‘adverse findings’ which means they could face criminal charges. We divested from both AMP and IOOF for ethical reasons in the year leading up to the publication of the Royal Commission’s final report, but we have decided to remain invested in NAB. As for the other big banks, we will continue to invest in Westpac (which was less criticised by the Royal Commission) and we will remain uninvested in CBA and ANZ (in part due to their lending to the fossil fuel sector).
Why haven't we excluded NAB?
Things go wrong in all organisations. Misconduct which is limited to particular staff or business units won’t automatically result in exclusion from Australian Ethical’s investment portfolios. However, we will exclude banks where serious misconduct is deemed to be ‘systemic’, meaning that the misconduct is a product of the overall culture, systems and practices of the organisation. This was the case with AMP. When it comes to NAB, 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
- the testimony of the NAB Chair and CEO
We share the Royal Commission’s concerns. However we do not consider that the Royal Commission’s findings show the misconduct by NAB was condoned by senior leaders or by the overall culture of the bank. We note that the NAB Chair and CEO did not deny wrongdoing at the bank before the Royal Commission. And although NAB should have acted much more quickly to remediate customers, we do not believe there is evidence they intended to withhold compensation from customers. The misconduct identified by the Royal Commission needs to be assessed in the context of the overall operations of the bank and the positive impact of its products and services when responsibly provided.
NAB’s misconduct was not, we believe, comparable to that of AMP and IOOF. We divested from AMP because senior leaders within their advice business made a decision to continue to charge fees to clients without an adviser, in breach of the law and AMP policy and in the face of staff efforts to end the practice. We divested from IOOF because it failed over a period of years to put in place governance arrangements acceptable to APRA to manage conflicts of interest and safeguard the interests of superannuation members. NAB, on the other hand, is in line with its peers on a bank scorecard that assesses ESG integration, treatment of its customers, controversies and complaints. We also take into account the following factors:
- the leadership role that NAB has played in various areas of responsible finance, including the exclusion of new thermal coal lending (this includes Adani)
- the support of micro-finance through its partnership with Good Shepherd Microfinance
- NAB’s partnership with CSIRO to establish the Australian National Outlook Project, a science-based project to identify the crucial future-shaping choices faced by Australian businesses, governments and citizens
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 Climate 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 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 $11 billion for large scale renewable projects underway in Australia in 2018, and NAB and Westpac are major funders of renewables.
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
- 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 Climate Agreement – both directly and indirectly through participation in industry associations.
How we invest and protest for a better future
As we invest selectively in banks, we also advocate that they can and should do better. And our climate investment expertise, perspective and public voice does make a difference. When we put pressure on banks, we’ve seen positive competition between the large Australian banks to improve the sustainability of their lending and other activities.
At Westpac’s 2016 AGM, Australian Ethical asked the Chairman to rule out support for the proposed Adani Carmichael mine in order to clearly and publicly demonstrate the integrity of the bank’s climate commitments. In 2017, Westpac released its 2020 climate action plan which effectively ruled out lending to the Carmichael mine. In 2018 Westpac reported its achievement of $9.1 billion in lending to climate change solutions, moving towards its target of $10 billion by 2020.
For its part, NAB has ruled out future financing of thermal coal or oil tar sands extraction projects, or oil and gas projects impacting Antarctic wildlife refuge areas.
We welcome these initiatives, and we’ll continue to scrutinise and influence the banks to do even more to restrict climate change to 1.5°C (as urged by the latest IPCC report) and to restore trust in the banking sector.
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.