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Why we invest in banks

At face value, well run banks have a positive role to play in society. They help individuals and businesses invest, borrow, save and manage risk. Though scandals in recent years have highlighted some very bad practices in the sector, we still believe banks have a critical role to play in the transition to a Net Zero future.  


8 April 2022   |   7 min read



Though Australia has a love-hate relationship with the banking sector, responsible and well-regulated banks can be beneficial to society. They make loans to individuals to help them pursue their goals and they fund commercial activity which meets individual and societal needs. Indeed without them we’d be likely back to a barter system for the exchange of goods, services and capital.

However as numerous investigations by regulators like AUSTRAC and findings from the Banking Royal Commission1 have revealed only too clearly, the banks deserve scrutiny and criticism for a range of irresponsible practices and reporting failures. Though the Royal Commission had harsh words for the financial services industry as a whole, AMP, IOOF, NAB and CBA were singled out with the highest censure of ‘adverse findings’. We had been invested in AMP and IOOF but divested from both for ethical reasons ahead of the Royal Commission’s final report. We haven’t to date invested in CBA (or indeed ANZ) due to factors including misconduct issues and levels of lending to the fossil fuel sector.
 

Why do we currently invest in NAB and Westpac?

We will exclude banks where serious misconduct is deemed to be ‘systemic’, however misconduct that is limited to particular staff or business units won’t automatically result in exclusion from our investment portfolios. That said, we don't excuse the failings of any bank – and that includes Westpac’s AUSTRAC reporting breaches, as well as the failures of NAB outlined at the Royal Commission during 2018-19. These breaches didn’t trigger us to divest at the time, as we assessed them as continuing to meet our banking criteria and as having, on balance, a positive impact on society. We are currently (April 2022) reviewing all the major banks based on their most recent reporting and track record. This includes the November 2021 ASIC actions against Westpac for breaches across its business. These breaches have raised serious concerns whether Westpac continues to demonstrate a credible commitment to establishing and maintaining governance, culture, systems and practices to fulfil its responsible banking obligations.

Our continued investment in any bank doesn’t mean they are “off the hook”. On the contrary, we are focused on driving greater bank transparency, accountability and innovation through more targeted engagement. The information we obtain from this engagement feeds into our ongoing ethical screening of the banking sector.


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We need the big banks to fund renewables 

We do not invest in fossil fuel companies, but we leverage our investment in the finance sector, particularly the big banks, to campaign against the funding of unsustainable fossil fuel expansion and to encourage the financing of renewables.

When it comes to the big banks we have another agenda. The fossil fuel sector has been a prime target of our investor advocacy for decades. 

 
According to the IEA’s 2021 Net Zero Roadmap, to achieve net zero by 2050, annual clean energy investment needs to grow to US$4 trillion by 2030. Alongside funding more renewable energy from wind and solar, investment is needed to expand our electricity grid, battery storage and green hydrogen and EV charging infrastructure. The big banks must be part of this journey. Though a number of smaller Australian banks may have good climate intentions, they simply do not have the capacity to make loans for large-scale clean energy infrastructure.

Climate scorecard

A key aspect of our ethical assessment of banks therefore focuses on their demonstrated climate actions. Our climate assessment considers their 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 (e.g. green buildings, low-emissions transport and reforestation).

We also look at the way banks facilitate financing by others. That is, how a bank might help companies raise financing for environmentally friendly initiatives, including through instruments such as green bonds.

There are also ‘no-go’ projects. We will never invest in any bank which lends to the mine formerly known as the Adani Carmichael coal mine.

We currently assess that Westpac and NAB have credible commitments to lend in line with the economic transition our society needs to meet the objectives of the Paris Climate Agreement. Both banks are major financiers of greenfield renewable energy projects in Australia and overseas. They continue to strengthen their restrictions and expectations for fossil fuel customers. But we recognise more is needed and we will continue to pressure them to do more


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Restricting access to capital for fossil fuel companies 

Scrutiny of lending to support a Net Zero future is more critical now than ever. There are companies divesting their fossil fuel activities or restructuring to create separate ‘green’ and ‘brown’ entities. This means fossil fuel reserves, mining, and electricity generation are becoming concentrated in companies which likely have no intention of aligning their activities to the Paris Agreement and may be indifferent to direct climate engagement. But these companies will still need to access capital to pursue their harmful activities. And the big banks have the power to say ‘no’.

By investing in and influencing the finance sector, we seek to turn off sources of funding that enable fossil fuel development to continue, see page 22 of our 2021 Sustainability Report for the full story.


1 The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (2017-2019)


If you would like to know more about our range of funds, or even how to get started with responsible investing, please get in touch with a member of our Business Development Manager team.

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