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March 29, 2022

Ukraine: Responsible banking pledges found wanting

The war in Ukraine has triggered questions over whether existing responsible banking frameworks are fit for purpose.

By Virginia Furness

Ukraine: responsible banking
In the spotlight: responsible banking pledges are under scrutiny after Russia’s invasion of Ukraine reveals limitations. (Photo by Bob Bosewell via Getty Images)
  • Banks are under pressure to make ethical decisions on Russia operations.
  • The campaign group Bank on our Future finds 15 of the top 20 financiers of Russia’s fossil fuel industry are signatories of the UN’s Principles of Responsible Banking.
  • But the UN framework does not mandate a particular response to the crisis, leaving some to ask what the point of it is.

The pressure on banks to lay out their sustainable values and purpose has been building for some time. The Ukraine war has added a new level of urgency to who the banking industry supports and how a sector, built on relationships, is able to “do the right thing”.

In the month that has passed since Russia invaded Ukraine, over 450 global companies have exited or scaled back exposure to the former Soviet nation. While asset owners and managers have withdrawn billions of dollars of investments, banks, understandably, have been slower to act. J.P. Morgan, BNP Paribas and Deutsche Bank lead the handful of institutions that have made clear their intentions to unwind Russia operations.

The war has initiated intensifying calls, especially from non-governmental organisations (NGOs), for banks to act ethically. A coalition of more than 30 NGOs sent an open letter this month calling on the CEOs of international commercial banks to cease financing Russian fossil fuels and suspend banking operations in the country. Responses will be published on a public forum hosted by the campaigning organisation BankTrack.

Earlier this month, German lender Triodos, a values-based bank that puts sustainable outcomes at the heart of its business activities, called on financial market players to “take responsibility” and condemned “all direct and indirect funding in this war of aggression”.

Triodos, which issued the joint statement on behalf of Germany’s Christian establishment as well as other financial institutions, says the “responsibility of financial market players does not end with the implementation of the sanctions” and calls on German banks to “influence their parent companies to end business relationships, even if no sanctions have been imposed”.

But for banks like Societe Generale, which has €18.6bn exposure to Russia and a local unit, Rosbank, which counts over five million individuals and 9,000 large corporates as customers, unbundling complex banking relationships and leaving behind colleagues and customers is not an easy, or clear-cut, ethical decision.

Identity crisis

The situation raises doubts as to whether the responsible banking credentials touted by banks are worth much. In 2019, the UN Environment Programme Finance Initiative (UNEP FI) launched the Principles of Responsible Banking (PRB) to guide banks towards creating a positive impact and aligning their business models with the aims of the Paris Agreement and the Sustainable Development Goals (SDGs).

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Around 275 banks covering $72trn of assets have signed up and pledged to adhere to the PRB’s six guiding principles, which include a focus on increasing positive and reducing negative impact, target setting, and transparency and accountability.

To critics, supporting an autocratic regime like Putin’s Russia is a clear violation of what it means to be a responsible bank. Bank on our Future, a campaigning network, accuses Western banks of “indirectly propping up Putin’s war machine”.

Sam Theodore, senior consultant at Scope Ratings, says banks’ exposure to Russia undermines not only their judgements on risk, but also their commitment to the ‘S’ – social – in ESG.

“It is the ‘S’ which is in question: a Western bank anchored in a free-market democracy is not expected to carry on blithely operating in a country that has illegally turned into a violent international aggressor. Fighting for climate change should remain a priority for financial institutions, but so should be aiming for the social red line of human rights and human life,” he wrote in a report on 9 March.

Indeed, research by Bank on our Future shows that PRB signatories make up 15 of the top 20 banks the NGO names in its Putin100 campaign, a list of the 100 top financiers of the Russian fossil fuel industry, raising questions about the usefulness of a voluntary framework that allows signatories to make pledges that many seem then unable to keep.

For Beau O’Sullivan, spokesperson for the Sunrise Project, a climate campaigning NGO that supports Bank on our Future, the fact that so many PRB signatories are simultaneously the largest backers of Putin’s Russia raises questions over the integrity of the framework.

“What is the point of the PRB,” he says. “We have so many of these initiatives – none have the teeth they need. What purpose do they provide? They are so vague as to be completely meaningless.”

High level, low bar

The UNEP FI did not respond directly to this criticism, but spokesperson Cara Wilson did provide Capital Monitor with an explanation of how the PRB works.  

The PRB sets out a high-level framework to help banks to shift their business models towards a just ESG transition, as well as requiring them to set “robust time-bound” targets on the two largest areas of ESG impact, be that positive or negative. Banks may be delisted if they do not meet this commitment to the PRB, although it is unclear what material impact that would have should it happen.

The PRB does not issue specific guidance on distinct disaster events, whether it be geopolitical conflicts, natural disasters, pandemics, man-made environmental disasters, or humanitarian crises, Wilson says.

Wilson adds that the PRB encourages banks to use the principles and SDGs to guide their decision-making, “including SDG 16 to promote peace, justice and strong institutions”, but there is no penalty for banks that do not do so.  

“The PRB is not designed to be prescriptive on how each individual bank implements the principles – rather it provides an operating framework that banks can use to take their own, responsible decisions,” she says. “Banks must take these decisions within their own political, geographic and regulatory frameworks, which – in this instance – may include sanctions.”

She says Ukraine is “very much top of mind”, reiterating the position of the UN secretary general, and that the UNEP FI recognises the financial system can “play an important role in supporting humanitarian efforts”. As such it has asked “member institutions to share how their organisations are supporting communities affected by the current conflict”.

A failure of risk management?

But this is too little too late, says James Vaccaro, who helped set up the Principles of Responsible Banking as a member of the banking board and runs environmental consultancy RePattern.

In remaining invested in Russia, banks have not fully assessed the ESG risks affecting their businesses and are now in a position where writing down loan payments or getting out of the country are essentially handing money back to the Russian state, he says. This is the complete opposite of responsible banking, in his opinion.

“The time to act responsibly was when they were first being approached. Did they turn a blind eye to a few things, did they really dig into things?” he says.

Responsible banking is more than compliance and keeping the bank safe from immediate risk – it’s fundamentally about preventing negative impacts and systemic risks, whether clamping down on financial crime, facilitating tax avoidance or contributing to climate change, he says.

The crisis has shown that bank know-your-customer (KYC) processes “fundamentally don’t work at the moment”, Vaccaro says. He believes that when it comes to deciding whether to do business in places like Russia, sound moral judgement and good ethical behaviour might be a nice add-on, but it is as much about informed financial judgement and good risk management.

“Banks have to get much further down the food chain and understand the situation on the ground and manage those systemic risks.”

Vaccaro draws parallels with the way banks are approaching the climate crisis. “We fundamentally need to get ahead of all of this and act in precautionary, forward-thinking way. We need to build the right responsible infrastructure to meet all those things and steer away from the stuff which is clearly bad and can be stranded very quickly.”

Indeed. We also need to ask whether existing frameworks such as the PRB are doing enough to support or spur banks into taking this much-needed step.

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