financial sector responsibility - andrew...

Equator Principles and BankTrackSpontaneous global regulation at workPAGE 14 and 34

Banking on ChinaTrading influencePAGE 22

After SpitzerRegulating the financial behemothPAGE 32

Hedge funds and private equityFinally, ownership in more than name?PAGE 38

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Contents

4 ForewordReputations at risk

6 Ethical financeNo turning back

10 Change agentsAn inside job

12 Interview: Henry PaulsonOn taking Goldman Sachs green

14 Equator PrinciplesRegulating in the dark

16 Islamic financeFrom prohibitions to public interest

18 TimelineMilestones in ethical finance

22 Foreign banks in ChinaGreening the dragon

25 Consumer credit in ChinaOn the road to mislending

26 Data file: Foreign investment inChinese banksInvestments and CSR commitments

28 Human rightsThe next activist frontier

30 Workplace discriminationBoys will be boys

32 RegulationKeeping up with the mighty Joneses

34 Interview: Pamela Flaherty, CitigroupEquator Principles explained

36 Public pensionsTaking a stand

38 Hedge fundsDangerous, or misunderstood?

42 LobbyingTime for openness

Special report: Finance • Ethical Corporation Contents 3

On the cover: Big financial institutions have respondedpositively in many ways to the sustainability agenda

About the authorThis supplement has been researchedand written by Andrew Newton, withcontributions from other Ethical Corpo-ration writers. Andrew studied law atNottingham University and was calledto the bar in 1991. He spent his city

career in compliance roles, lastly as Head of Compliance,HSBC Private Banking EMEA. During that time he obtainedan MBA from London Business School and wrote “TheHandbook of Compliance – Making Ethics Work in Finan-cial Services” (Financial Times Prentice Hall, 1998).

Now Andrew is an independent writer, researcherand adviser on issues relating to corporate responsibility.He writes regularly for Ethical Corporation magazine and isour Finance Editor.

[email protected]

ForewordWelcome to Ethical Corporation's special reporton global finance and corporate responsibility.Written by our finance editor, Andrew Newton,and other journalists, the special report isdesigned to offer the reader insights into howmajor institutions are responding to thesustainable development agenda. Also coveredare increased expectations on business trans-parency and the role of regulators. This is thethird in a now regular series of special reportsfrom Ethical Corporation since 2004, the firstbeing technology and the second education.Later in 2006 Ethical Corporation will publish afurther report on how technology is changingthe face of corporate responsibility.

Tobias WebbEditor, Ethical CorporationFor more information or to submit suggestions or comments,please contact [email protected]

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Reputation and financial services

Regaining trust throughtransparency

Managing reputational risk remains a major challenge forfinancial institutions, argue Shami Nissan and Phil Case ofPricewaterhouseCoopers

Protecting a firm’s reputation is both the most important andmost challenging task facing senior executives today, according

to a recent report by the Economist Intelligence Unit. Furthermore, there is broad agreement that reputation risk has

increased significantly over the last five years for several reasons,including a string of high-profile market failures as well as tight-ening regulatory pressure.

Despite this, companies continue to struggle to manage thisasset proactively and effectively. The financial services industry isno exception and, indeed, is notable for lagging behind others interms of strength of reputation and levels of trust it currentlycommands in the marketplace.

The retail banking industry, for instance, has suffered reputationdamage over recent years due to a variety of issues, ranging fromaccusations of lending too much (encouraging over-indebtedness),refusing to sell (financial exclusion) to mis-selling.

Building trustA growing number of financial services organisations are nowpaying unprecedented attention to this particular risk, as they tran-sition to a more proactive and systematic approach to reputationrisk management in order to build and safe-guard a lasting reputation.

Why have financial services companiescontinued to struggle with this risk? Thereare difficulties inherent in defining andquantifying reputation risk, confusion overownership, and a lack of tried and testedframeworks and approaches to reputationmanagement. Moreover, financial services companies are perhapsmore vulnerable due to threats arising from their own clients’ repu-tations, as well as myriad other sources. These include compliancefailures, unethical practices and failure to deliver minimum stan-dards of service and product quality.

Compliance challenges will continue, as regulatory pressure looksset to intensify. For example, Pillar 2 of Basel II sets out requirementsfor demonstration of capital reserves adequacy, or managementcompetency, to manage a range of risks, one of which is reputation.This further underlines the need for a proactive approach in order toprevent threats of non-compliance and further loss of trust.

Efforts to effectively manage reputation risk have also beenhampered by definitional and management challenges. Many financialservices companies have taken a disaggregated approach to reputationrisk management – viewing reputation risk as a consequence of failureto manage another type of risk, and then mitigating fallout through crisis

management frameworks. Such an approach fails to take a systematicview of underlying causes of reputation risk, and is inherently reactive.

The steps requiredSo what does an effective reputation risk management system looklike? It should take into account the following:

• Reputation is in the eye of the stakeholder. Stakeholder experiencesand expectations determine reputation capital, and thus are thedeparture point for defining the constituent parts of a company’sreputation. Stakeholder engagement must be proactive and must beundertaken on an ongoing basis – reputation changes dynamically.

• Transparency is key to re-establishing trust. Building reputationcapital is not about presenting the “good news” stories but rathercommunicating all aspects of performance, inclusive of how andwhy things go awry and, critically, how the company responds inthe aftermath to such an event.

• Ownership of the issue must come from the top. The CEO isperceived as responsible for safeguarding the company’s reputa-

tion, for setting the ethical and cultural toneof the organisation, and driving the code ofconduct throughout the organisation. Thechief risk officer ’s role complements thisthrough policing of codes and standards,prioritising risks and coordinating responses.

• A discrete reputation risk management framework should beconsidered. The framework takes a systematic and proactiveapproach to identifying and managing reputation risk throughoutthe organisation. It includes an early warning system and addressesissue management in pre-crisis phases, and may also consider theorganisation’s approach to risk quantification if appropriate.

A solid reputation can help a company weather a storm; incontrast, a company without such reputational equity may fare farworse when confronted with similarly challenging circumstances.Given that financial services companies are in an unforgivingmarket at present, those which are able to build and safeguard solidreputations greatly increase their chances of emerging unscathedand ahead of the competition. n

Shami Nissan and Phil Case work in Sustainable Business Solutions atPricewaterhouseCoopers. See www.pwc.com/sustainability.

Ethical Corporation • Special report: FinanceSponsor’s Foreword4

Stakeholder experiences and expectations determine

reputation capital

Funding these has some investors concerned

The pace at which firms in the financial sectorhave begun integrating stakeholder concerns

into their core business activities is startling.It is not that corporate responsibility was

unknown to financial firms ten years ago. Then,major financial centres had regulations to protectthe interests of market participants and consumersof financial services. For decades, employment lawhas tried to protect their workers from discrimina-tion on the grounds of gender or race, and ethicalfunds and faith-based investors have been cuttingthe path towards responsible investment.

Nevertheless, financial firms embarked on theresponsibility trail from a low base. SustainableAsset Management’s 2005 annual review of the DowJones Sustainability Index found the financial sectorstill below average on all generic criteria, andbottom of the heap on environmental and labourpractices.

A surge in public interest in the sector’s impactsover the last ten years has prompted a broadeningand a deepening of responsibility approaches. Thelast three years in particular have transformed theresponsibility landscape beyond recognition.

The earlier, piecemeal approach is evolving into amore holistic one based around stakeholder groups,overseen by specialised corporate responsibilitydepartments integrated into the corporate gover-nance framework.

The recognition of the sector ’s substantialindirect impacts has arguably placed financial firmsin loco parentis to the rest of the globalised commer-cial world, propelling the addition of multipleself-regulatory and voluntary initiatives to thecorpus of legal and regulatory obligations.

The pace of adoption is breathtaking: theEquator Principles launched just three years ago tobring social and environmental concerns into theheart of project finance have been adopted by over80% of global commercial lending capacity.

Since their launch in April this year, the UN’sPrinciples for Responsible Investment haveattracted signatories representing $5 trillion inassets under management. Since Ethical Corpora-tion last reviewed finance sector transparency onstakeholder concerns some two years ago, thenumber of financial firms using the GlobalReporting Initiative standards has been increasingat more than twice the rate of non-finance sectorreporters.

“The change is major and accelerating,” confirmsStephen Hine of the ethical investment researchhouse EIRIS.

PaybackSuch activity has been paying off in reputationalterms. While the sector has received better thanaverage press throughout the last ten years, figures

Finance and CR

Beyond the tipping point

By Andrew Newton, Finance Editor

Financial institutions under systematic pressure to reform have promised greater responsibility on all fronts. Now the hard part starts

“It is easier fora bank to besustainablethan an oilcompany” Jules Peck,WWF-UK

Special report: Finance • Ethical Corporation Overview 5

from Covalence, a research company, show thatbanks have, since January 2005, received a morepositive balance of press coverage than any othersector covered (see chart 1).

The change is not superficial. While non-govern-mental organisations and activist investors rightlydemand proof of performance against theseemerging standards, they also report greater accessto senior executives and a greater sense of mutualunderstanding.

Even as structural conflicts of interests havemounted challenges to progress – most notablythose in investment banking, insurance and mutualfunds successfully challenged by New Yorkattorney-general Eliot Spitzer – the sector’s naturalinclination to innovate and lack of significant sunkcosts has enabled it to improve faster than sectorsmore heavily invested in old ways of doingbusiness. “It is easier for a bank to be sustainablethan an oil company,” admits WWF’s global policyadvisor Jules Peck.

Peer groups and pressureNGOs, also, have proved innovative in getting togrips with the financial behemoths backing theworld’s dirtiest – and brightest – industries, turningfrom virulent high profile campaigns to sensitiveboardroom negotiations to hammer out some of themost effective dynamics of self-regulation yet toemerge in corporate responsibility.

Systematic campaigns have been conducted inthe US and in countries across Europe. All theoriginal Equator Principles signatories had been thetargets of NGO campaigns beforehand.

And no let up seems likely. Recently, Les Amis dela Terre, an NGO, launched a broadside againstFrench banks, giving them a two year deadline toadopt sustainable practices or else face a broad andaggressive campaign.

In 2003, a group of NGOs got together to formBankTrack, a coalition focused on commercial finan-cial institutions. In January this year Banktrack andWWF issued “Shaping the Future of SustainableFinance”, a report grading the efforts of 39 interna-tional financial firms on sustainability. It found nonethat met the majority of their criteria even at the levelof policy development, let alone implementation.

HSBC’s performance was rated average by anEIRIS report in 2003, but has since pulled away tolead the pack. However the D+ rating awarded byBanktrack makes the FT award winner merely thebest of a bad lot. It is a picture echoed in Covalence’snews coverage trend data (see chart 2).

French and Asian banks scored especially low inthe Banktrack survey. The French result does notsurprise Anne-Catherine Husson-Traore, editorialdirector at research house Novethic. As recently as2001, when Novethic launched, the French financialsector showed no interest in these issues, she says.

For the real contenders, the bar is being further

Too little isbeing done toshare withstakeholders themanner andextent of policyimplementation

Ethical Corporation • Special report: FinanceOverview6

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Chart 1. Positive spin – cumulative instances of positive news minus negative newsSource: WWF-UK’s Covalence EthiQuote, 10 sectors, indexed to 1 January 2005

Special report: Finance • Ethical Corporation Overview 7

raised. The Collevechio Declaration – the NGO-drafted set of sustainable banking commitmentslaunched at Davos in January 2003 – is set to berevised over the coming year to provide a morecomprehensive vision of what a sustainable bankshould look like.

Since the FTSE4Good index was launched in2001 the number of financial firms meeting its stan-dards has dropped slightly, while the total numberof firms in the index has risen by over a quarter. Inthe September 2005 six-monthly review ofFTSE4Good constituents, half the companiesdeleted were financial firms that had failed to meettougher environmental criteria.

A mountain to climbEven without raising the bar there are large gaps incurrent approaches.

Most obvious is the immaturity of the sector’shandling of social impacts. While F&C AssetManagement’s REO report has noted an increasingrecognition by banks of the impact of human rightson their businesses, this year’s report by WWF andBanktrack found that only one bank – Rabobank –had adopted the UN Draft Norms on Human Rights,and almost none have human rights guidelines.

Unsurprising then, that discrimination remains aproblem even in financial sector workplaces.

Then there are gaps in the range of finance activ-ities covered by emerging standards. NGOs arekeen to see those policies currently developed forproject finance being rolled out bank-wide.

Goldman Sachs’s issue of an NGO-acclaimedenvironmental policy covering indirect environ-mental impacts last year served to underscore theabsence of any such policy at fellow investmentbanks Merrill Lynch and Morgan Stanley. Pressureis likely to grow for policies covering social andenvironmental due diligence on the underwritingof securities issues.

China looms large on everybody’s list ofconcerns. Lingering state ownership makes much ofChina’s economy – including the banks – a tool ofgovernment policy, and that policy often placesmeeting China’s growth-led thirst for resourcesabove human rights and environmental concerns.Now that western banks are piling into strategicstakes in their Chinese counterparts, which stan-dards will prevail?

The role of private finance in development is alsorising up the agenda. Following the G8’s debtforgiveness initiative, NGOs are investigating thenature and extent of commercial banks’ exposure todeveloping world debt. There are concerns tooabout the provision of money transmission servicesto corrupt elites siphoning off national resourcerevenues and avoiding tax, about the finance ofmilitarisation, and of projects impacting water use.

There are opportunities, too. Addressing envi-ronmental impacts includes the finance ofrenewable energy companies and projects – aburgeoning market. Faith-based finance, particu-larly Islamic finance, is mushrooming into amainstream force, although compliance has yet toextend beyond basic prohibitions to embracebroader religious tenets.

Advances being made, however, risk being under-mined by a persistent lack of transparency affectingeven those who are instituting progressive policies.Too little is being done to share with stakeholders themanner and extent of policy implementation. Corpo-rate responsibility reports are seldom verifiedindependently. ‘Don’t just tell me, show me’ is arecurring concern expressed by NGOs and investors.

Given that much of the progress in responsibilityacross the financial sector has taken place during aperiod of some of the most favourable economicconditions seen in years, transparency is alsoneeded to ensure these gains are not lost once finan-cial firms find themselves in a more testing phase ofthe economic cycle.

Banks carry too influential a role to be allowed toslip back into old habits. Fortunately, it will be realpeople within these institutions, not abstractmarkets, who decide which interests will prevailand how. n

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HSBCABN AMROBarclaysBank of AmericaCitigroupJP Morgan ChaseDeutsche BankBNP ParibasUBSCredit SuisseMorgan Stanley

NGOs haveproved innovative in getting to grips withthe financialbehemothsbacking theworld’s dirtiest- and brightest- industries

Chart 2.Ten players – cumulativeinstances of positive news minusnegative newsSource: WWF-UK’s Covalence EthiQuote, 10 banks, 2001 - 2006

We can helpmake yourbusiness trulysustainable.*Corporate responsibility is an increasingly significant area for every business. But it’s not just about improving your green credentials. It’s about business fundamentals: strategy, performance management and reporting all have a role to play in creating long-term economic, social and environmental value for your stakeholders. The Sustainable Business Solutions team at PricewaterhouseCoopers have extensive experience of the corporate responsibility agenda, including ethical issues and the consequences for brand and reputation. Our wide-ranging industry expertise enables us to offer clients detailed, practical advice. To find out more visit www.pwc.com/sustainability

© 2006 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to the United Kingdom firm of PricewaterhouseCoopers LLP (a limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

1055-Ethical Corp DPS.indd 1 26/9/06 16:33:32

Areport released in 2006 by WWF/BankTrackcredits “outside pressures” – high profile NGO

campaigns against banks – with the recent majorshift in approach to responsible finance.

True, the concerted campaigning against irre-sponsible finance in recent years has been animportant catalyst, but this does not explain whythe industry itself has moved to embed change at aspeed that has surprised even campaigners.

Where the focus on “outside pressures” missesthe mark is its failure to acknowledge the crucialrole played by internal advocates.

Rainforest Action Network, the NGO behind ahighly successful campaign against banks in the US,recognises this in pursuing what Paul West, thentheir communications director, termed an “outside-inside” strategy.

External campaigns help create an internal envi-ronment favourable to conscious individuals withinthe firm speaking up about the issues and helpingdevelop the solutions that will embed change. Someare in a position to lead from the top while otherswill lead from the narrower confines of their role.

As the financial sector places ever greateremphasis on individual autonomy and personalaccountability, it becomes harder to expect people toleave their values outside the door each morning.The rapid development of corporate responsibilityin the sector is in the end the work of a growing

diaspora of aware individuals, both inside andoutside the firm, such as those featured opposite.

Those suggesting responsible finance is just apassing fashion might do well to recall it comesdown to individuals. Consciousness is not readilyreturned to its box.

Change agents

The Pandora principle


What fuels the movement for financial institution accountability?

Ethical Corporation • Special report: FinanceKey figures10

Externalcampaigns helpcreate aninternal environmentfavourable to consciousindividualswithin the firm

Build those dialogue bridges

Michelle Chan-FishelGreen Investments Programme Manager, Friends of the EarthChan-Fishel has headed up the finance campaign at Friends of the Earth in the US for some tenyears, making her one of the longest-standing voices on this issue. She has done much to buildcapacity on finance issues in other NGOs around the globe.

Chan-Fishel’s activism was sparked at an early age by international travel and school lessons in social justice. “My economics teacher took an entire class across the border into Mexico to visit a maquiladora factory that was filled with female workers around our same age.” Studying development at UCLA while the WTO was being formed provided her with a critical perspective on international economic institutions.

Jane AmbachtsheerGlobal Head of Responsible Investment, Mercer ConsultingAmbachtsheer has helped turn Mercer Investment Consulting into the first and most articulateproponent of responsible investing among consultants to pension fund trustees. With managementbacking, Ambachtsheer launched responsible investment as a business unit. With people on theoutside pushing, “you need people on the inside to develop intellectual capital,” she explains.

Although armed with a Masters in international development and political economy, it was aperiod of years spent in Europe in the midst of a finance career that helped Ambachtsheer make the connection between sustainability and her work. The UK Pension Act had just come out, theimplications of which she found “fantastically interesting”.

Karina LitvackDirector, Head of Governance and Socially Responsible Investment, F&C Asset ManagementLitvack heads up the largest governance and SRI team in Europe. F&C released two ground-breaking studies on the financial sector covering environmental policies (2002) and human rightspolicies (2004).

Litvack recalls running an anti-litter campaign as a child. “I grew up in the 1970s,” she explains.Entering investment banking in the mid-1980s, Litvack made early choices not to work on deals fordefence and tobacco companies. She recalls the recruitment sign-up sheets from that period at heralma mater, Columbia Business School: “No one signed up for Philip Morris. A great, sexy, treasuryjob.”

Paul WatchmanPartner, Freshfields Bruckhaus DeringerWatchman authored the UNEP Finance Initiative’s landmark report surveying the ability and insome cases the obligations of pension fund trustees in jurisdictions across the world to considerenvironmental, social and governance factors in investment decision-making.

Starting out as a lawyer in the 1970s at legal clinics in Glasgow, Watchman’s professional careerdeveloped at a time when the limitations of the legal process had stimulated calls for legal reform.Watchman became interested in how the law could be used to provide business with a platform to achieve improvements in standards. He says: “I was not a hippie lawyer. I was a professionalfootballer for a long time and played for Scottish Amateurs when I was 14.”

Jon WilliamsHead of Group Sustainable Development, HSBC Holdings plcWilliams took on the principal role in HSBC’s newly created sustainable development team in 2005,placing him in the limelight as the senior corporate responsibility manager at what is now theworld’s biggest bank. He has the additional challenge of advising how HSBC can live up to itsaccolade as the Financial Times Sustainable Bank of the Year.

A corporate and investment banker with HSBC for 19 years, Williams returned to the UK fromperiods in Asia and Europe to a broad role that included environmental risk. When HSBC was chal-lenged over Asian forestry financing, he was an obvious person to get involved. Subsequently, giventhe choice of a traditional risk role or focusing entirely on environmental risk, he chose the latter.

“The interest stemmed from my family. My father was head of the World Orchid Congress andgrew most of the orchids at Kew. I’ve also seen environmental destruction first hand,” he says. n

Special report: Finance • Ethical Corporation Key figures 11

Interview: Henry Paulson

An environmentalist at the helm

Henry Paulson, the new US Treasury Secretary, was previously head of Goldman Sachs and chairman of TheNature Conservancy, the largest conservation NGO in theworld. Speaking to Ethical Corporation prior to his recentappointment, he explains here his environmentalist roots

For as long as I can remember, I’ve had a love of the outdoors. Myenthusiasm was reinforced by my parents and by a very influ-

ential 7th grade teacher. I was inspired by, among others, John Muir, Henry David

Thoreau and Teddy Roosevelt who, memorably, said: “A nation thatdestroys its soils destroys itself, forests are the lungs of our land,purifying the air and giving fresh strength to our people.”

In high school I read Rachel Carson’s book “Silent Spring”,which had a powerful effect on me. In the 1970s, I became aware ofthe impact that DDT, in particular, was having on birds of prey,especially bald eagles and peregrine falcons. I have had a life-longinterest in these remarkable birds and served for quite some time asthe chairman of The Peregrine Fund.

Later, my wife, Wendy, who is a dedicated conservationist andan inspiration to me, was instrumental in getting me involved withThe Nature Conservancy where she already played an active role.It was she who introduced me to John Sawhill, who was presidentof The Nature Conservancy at the time. It was through him that Igot involved in the Asia-Pacific Council of The Nature Conservancy.That body has engaged in some really pioneering work with theChinese government, in particular The Yunnan Great RiversProject.

Historical awarenessI don’t think there was a single moment of enlightenment or aseries of events that … made me make the connection [betweenenvironmental impacts and decisions taken at Goldman Sachs]. I’vealways been concerned about environmental issues and, as a result,have always been very conscious of the impact on the environmentof decisions we make.

[At Goldman Sachs] we’ve always been very thoughtful in ourapproach to projects and, in particular, to ones which affect, or havethe potential to affect, the environment. And I don’t think weconsciously determined that something hadto change. But the process of developing ourenvironmental policy framework has beenvery helpful in further informing ourthinking on the subject. We consultedwidely and we’re very grateful to the manyenvironmental groups that took time toprovide thoughtful comments on the development of our policy.

My strong belief was, and is, that we should do some of thethings that we do best, by which I mean deploying our people,capital and ideas, to help find effective market-based solutions toaddress things like climate change, ecosystem degradation and

other critical environmental issues.I think the firm has always tried to do the right thing. We’re by

no means perfect, but I think our corporateheart is in the right place. Different peoplehad different ideas about how best toproceed, but there was no outright opposi-tion either to the development of the policyor its implementation and, as I hope ourfriends in the various NGOs with whom we

have consulted know, we’re not in the business of paying lipservice. We say and do what we mean. n

The above is extracted from a longer interview with Henry Paulson The complete interviewis available at www.ethicalcorp.com.

Ethical Corporation • Special report: FinanceKey figures12

A nation that destroys its soils destroys itself

Teddy Roosevelt

Paulson: Sign of a greener US shift?

Wherever we go,we always make a difference

Barclays Bank PLC. Registered in England. Registered No: 1026167. Registered Office: 1 Churchill Place, London E14 5HP.

At Barclays, we’re constantly working to make sure that we take full account of theenvironmental, social and ethical consequencesof our actions. It’s our aim to be a globalleader in corporate responsibility because werecognise one thing – that everything we doshould make a positive difference.

www.barclays.com/corporateresponsibility

016733 BAR Ethical Corps ad_V2 15/8/06 12:48 Page 1


Equator Principles banks and their NGO critics are hammering out a global regulatory relationship with implications beyond project finance

improved efficiency and relations with clients andinternally.

The EP have now been adopted by 41 institu-tions representing more than 80% of global privateproject finance capacity. Project finance advice suchas that offered by Ernst & Young, PwC and KPMG isnow covered.

Rachel Kyte, director of environmental and socialdevelopment at IFC, concluded recently that “theEP brand has become synonymous with environ-mental and social risk banking”.

Relationship dynamicsNot everyone is quite so sanguine. The co-operationamong the banks had the effect of prompting the

NGOs to become more cohesive.Twelve organisations pooledtheir resources and financeadvocacy agendas in a newnetwork, BankTrack.

While welcoming the EP, andparticularly the revisions to theEP introduced earlier thissummer, BankTrack points tocontinuing EP bank funding ofcontroversial projects includingSakhalin II as evidence that theEP have not yet fulfilled theirpotential.

Over three years on from the launch of theEquator Principles (EP) it is easy to understate

its significance.A report issued by ISIS in 2002 gives a snapshot

of what life was like back then. The survey of tenbanks highlights the inconsistent application ofpolicies internationally, perfunctory training, and alack of systematic performance measurement,management and reporting of project environ-mental impacts.

Engagement with stakeholders was limited andconfrontational.

Caught off-guard by unpredictable NGOagendas, banks were exposed to reputational risk.All the original EP working group members hadbeen targeted previously byNGO campaigns over their asso-ciation with controversialfinancing decisions.

The legitimacy of the banks’involvement in economic devel-opment seemed in question.

Happy bankersFor the EP banks the launch ofthe principles has been a consid-erable success. Banks havereported that the greater clarityand common language has

Equator Principles

A convenient truce

Ethical Corporation • Special report: FinanceProject finance14

The co-opera-tion among the banks hadthe effect ofprompting theNGOs to becomemore cohesive.Twelve organisationspooled theirresources

Counting social costs is now key to theEquator Principles

Although the revised EP set out a new obligationon banks to report periodically on their applicationof the principles, this falls far short of the level offirm and project-level transparency sought by Bank-Track and responsible investors in order to assessbank compliance.

Banks assert that they lack the leverage with theclient to make greater disclosure a requirement.Without that transparency, however, it seems a tallorder to expect BankTrack to succeed in ensuringpublic confidence in self-regulation of projectfinance impacts.

If the Equator Principles-IFC-BankTrack systemfails to deliver compliance, stakeholders will ceaseto use it and seek out more effective ways toregulate their relationships with financiers. Onerecourse being explored by NGOs is that of holdingcommercial banks liable for “knowingly permitting”social or environmental issues linked to finance. Incertain jurisdictions, “liability may attract”, confirmsPaul Watchman, a partner at Freshfields BruckhausDeringer.

There is no reason why the Equator Principlesshould suffer the ignominy of being side-stepped infavour of more vigorous actions of this kind. Theinitiative is beginning to prove itself a steadyplatform for raising sustainability standards acrossall new institutional finance, not just project

finance. The principles themselves are evolving,with human rights appearing set for a morethorough treatment.

Banks need to find a way to reconcile obligationsto their clients and the need for transparency intheir usual innovative way. n

BankTrack is consistently critical, for example,about the lack of accountability mechanisms builtinto the EP. There is no secretariat or other mecha-nism within the EP arrangements to ensure thatthere are no banks free-riding on the reputationalbenefits of association.

Dissatisfaction, however, is the NGOs’ job.

Not so reluctant regulatorsThe reason that the EP has been so successful ingenerating legitimacy for its participants despitelacking an explicit accountability mechanism is thatthat role has been left implicitly to the NGOs.

Barclays’ head of environmental risk policy ChrisBray once observed that the EP banks are “alreadyregulated by the fact that they operate in the glareof NGO scrutiny.” Kyte recently welcomed the factthat “You [BankTrack] and others will play your partin holding us all to account.”

This is the Equator Principles-IFC-BankTrackregulatory system.

BankTrack, with the aid of its extensive globalnetwork, assesses banks on issues any other regu-lator would focus on: deficiencies in procedures,training, and monitoring; and specific performanceissues. It also pushes for the higher standardssketched out in the NGOs’ Collevechio Declaration,soon to be revisited.

In return for conferring legitimacy on EP banksthrough their scrutiny of performance against theprinciples, however, NGOs should implicitly be ableto engage directly with firms and obtain whateverinformation they need.

Banks and NGOs alike enthuse about the moreopen and constructive relationship that now existsbetween them. Banks also value the NGOs’ advice.

Transparency, however, remains an obstacle toBankTrack performing its implicit regulatory over-sight function.

Special report: Finance • Ethical Corporation Project finance 15

The EquatorPrinciples:Key facts

• The revised EP apply to all project financing withcapital costs above $10million. This is lower thanthe previous threshold of $50 million

• The revised principlesapply also to projectfinance advisory, and toupgrades or expansions of existing projects

• EP banks report on their performance onimplementing the principles annually

The Equator Principles: No paper house

Can the bull be tamed without waking the bear?



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ECM October 2006 29/9/06 10:21 Page 2

Faith-based investment of all denominations hasbeen enjoying a period of remarkable growth.

The post-9/11 clash of civilisations rhetoric andrecent oil price hikes, moreover, have combined todrive a flood of money into Islamic financial institu-tions in the Middle East and South-east Asia.

Although a market in retail Islamic products isemerging, much of the growth is in institutionalfinance markets where new ground is being brokenconstantly. In July, a three billion Saudi riyal ($800million) sukuk – the Islamic finance equivalent of acorporate bond – was issued by Saudi Basic Indus-tries Corporation, the hydrocarbons conglomerate.

Sukuk issuance is not confined to Muslim clients:a $200 million sukuk is to be launched by KuwaitFinance House for a Chinese company financingexpansion of a power plant.

In project finance, HSBC Amanah recentlyadvised Saudi Aramco and Sumitomo Chemical onthe $600 million Islamic facility for the Rabighrefinery and petrochemical project, the largest suchIslamic facility to date. An up-tick in project financedeals is expected to help lift growth in Islamicfinance overall to 25% per annum.

Spreading the profitsIslamic finance complies with the Sharia, or Islamic,law. Much attention is focused on the prohibition ofgambling and of riba, or interest. This leads Islamic

finance innovators to construct instruments equiva-lent to conventional lending, investment andinsurance products based on contracts that shareprofit and loss equitably.

There is considerable debate between Islamicscholars as to the extent to which some of thesedevices avoid Sharia prohibitions, impedingattempts at international standardisation ofcontracts.

Islamic banks establish boards of Sharia scholarsin order to advise on and attest to the compliance oftheir products with Islamic law. These scholars arein short supply, and few are banking experts. Somecommentators have blamed this for the approval bySharia boards of the more controversial Islamicbanking contracts, such as tawarruq, a kind ofpersonal loan.

There are also concerns that while Sharia boardsare empowered to consider Sharia in the round, inpractice they focus on a few narrow prohibitionsand contractual concerns.

Stakeholder IslamThe Islamic faith creates an entire social order. Whileprivate property is defended, individual rights aresubject to the rights of others in the community tobenefit from environmental resources such as water,forests, air and sunlight. These are held in commonby all members of society. If you degrade a resource,

Faith-based finance

Islamic finance at the crossroads


As Islamic finance picks up speed in the global mainstream, are Islam’s social and environmental concerns getting left behind?

Ethical Corporation • Special report: FinanceSharia lending16

you are accountable for its use and liable for itsrepair.

There is even a process in Islam akin to theassessment of impacts on stakeholders and the reso-lution of conflicts between them so as to maximisethe overall public interest, known as maslahahmursalah. Special care is taken to prioritise the inter-ests of the weak and vulnerable.

Islamic finance is expected to follow suit. Morethan one commentator has suggested that Islamicbanking could establish a model by which modernbanking could be re-imbued with ethical norms.

Scholars argue that banks are falling short,however.

At this year ’s Harvard University Forum onIslamic Finance, Rafe Haneef, the head of Islamicfinance at ABN-AMRO, questioned whether Islamiclegal stratagems such as qardh had helped give riseto a debt culture. Sharia supervisor and senior imamAbdul Kadir Barkatulla critiqued the focus on expe-dited transactions at the expense of Islam’squalitative concerns – such as customer relations,and the health of future generations – in keepingwith the broader spirit and philosophy of the law.

Elsewhere, specific concerns have been raisedabout the compatibility with Islamic social concernsof entire transaction categories, such as privatisa-tions and private sector involvement ininfrastructure development.

Islam’s environmental and social concerns areechoed in the Equator Principles and the UN Princi-ples for Responsible Investment, yet no Islamic

financial institution has signed up to these instru-ments, leaving secular institutions to lead the way.Adapting the Equator Principles for Islamicpurposes might represent a way forward that doesnot stretch the already overburdened Sharia boardsystem.

Who pays the piper?The lack of transparency even on contractualcompliance matters is disquieting. Sharia boardmembers are paid by banks to deliver fatwa (rulingsbased on the Sharia). Although these may bedisclosed to institutional clients, Islamic financeconsumers and affected communities are left toaccept the ruling of umpires chosen and paid for bythe other team.

Neither the Accounting and Auditing Organiza-tion for Islamic Financial Institutions nor the IslamicFinance Services Board have yet succeeded ingetting Islamic financial institutions to explain howthey are addressing Sharia obligations regardingenvironmental stewardship or social equity in theirapproval of finance transactions.

This includes Sharia obligations concerning themanagement of and accountability for the use ofexhaustible natural resources.

Given the extent to which the growth in Islamicfinance amounts to a recycling of surging oil-gener-ated wealth into new hydrocarbon-related projectfinance, institutions offering Islamic finance havesignificant credibility challenges ahead. n

Special report: Finance • Ethical Corporation Sharia lending 17

Islamic financeinnovatorsconstructinstrumentsequivalent toconventionallending, investmentand insuranceproducts basedon contractsthat share profit and lossequitably

Working for mutual benefit

Sukuk issuance ($m)

*Data up to May 2006 onlySource: ISI Emerging Markets’ Islamic Finance Information Service

0

2000

4000

6000

8000

10000

12000

CorporateSovereign

2003 2004 2005 2006

Timeline

What happened, and whenThe financial sector’s path to a responsibility tipping point has been hard won on both sides

Ethical Corporation • Special report: Finance1986 to present18

Year

1986

1989

1992

1995

1996

1997

1998

Business and multistakeholder initiatives

• UNEP and a group of commercialbanks launch the UNEP Statement byBanks on the Environment andSustainable Development, catalysingthe UNEP Banking Initiative.

• UNEP launches the UNEP Statement ofEnvironmental Commitment by theInsurance Industry.

• US Export-Import bank decides not tofinance the Three Gorges dam citinginadequate environmental impactinformation. Tries lobbying otherOECD states to accept common environmental standards.

• Launch of the VfU reporting indicators(internal environmental footprint).

• UNEP Banking Initiative becomes theUNEP Financial Institutions Initiativeand issues revised Statement byFinancial Institutions on the Environment & Sustainable Development.

• [Following FoE campaign (see right)]ABN AMRO publishes environmentalpolicy.

Political and legal activity

• Friends of the Earth campaign againstMerrill Lynch and Morgan Stanley overfinancial links to Three Gorges damproject in China.

• EPA report on non-disclosure of environmental risks by companies.

• FoE’s Michelle Chan-Fishel and JulieTanner start financial campaigningcapacity building projects with otherNGOs.

• PIRC and NGOs propose shareholderresolution demanding environmentaland human rights actions from Shell.

• FoE and National Wildlife Federationinitiate Quantum Leap project to trainenvironmental NGOs about commercialbanks.

• FoE Netherlands campaign against ABNAMRO over finance of FreeportMcMoRan mining.

• Corporate Sunshine Working Group

Business and multistakeholder initiatives

• British Bankers Association launchesfirst code of practice for banks to loudcriticism from the National ConsumerCouncil.

• July – British Bankers Associationintroduces revised banking code withundertaking to name and shamebanks that fail to sign up.

Political and legal activity

• UK Financial Services Act establishesstatutory basis for self-regulation ofinvestment-related services and newself-regulatory organisations withdisciplinary powers.

• UK government’s Jack Committeereports on the law relating to bankingservices standards.

• Publication of “Wall Street – How It Worksand for Whom” by Doug Henwood.

• UK chancellor Gordon Brownannounces establishment of a newfinancial super-regulator bringingtogether regulators of seven differentsectors under one roof.

• December – Consumers Federation ofAmerica accuses the credit cardindustry of irresponsible lending.

Environmental and social impacts Consumer/economic impacts

1999

2000

2001

2002

• EPI-Finance indicators (external environmental footprint) in 2000.

• FORGE I guidelines issued coveringmanagement and reporting of environmental risks.

• Bank of Shanghai becomes firstChinese bank to join the UNEP FinanceInitiative.

• London Principles for sustainablefinance launched during WorldSummit on Sustainable Development.

• IFC and ABN AMRO host workshop with other lenders on social and environmental project risks.

• SPI-Finance initiative’s financial sectorreporting guidelines on social impactsreleased, although only the socialindicators were adopted in 2002 as yet still draft GRI sector supplement.

• FORGE II guidelines issued onmanagement and reporting of CSR.

• November – socially responsibleinvestor Real Assets filed shareholderresolutions with Canada's “big five”banks in an effort to force greatertransparency on social, environmentaland ethical issues in their annualreports.

forms to enforce and expand SECcorporate social and environmentaldisclosure requirements.

• US NGO Rainforest Action Networkstarts campaigning on finance relatedissues.

• Protests at WTO meeting in Seattle.

• Campaign for Community BankingServices launches in UK to fight forlocal access to banking services.

• Labour groups and NGOs jointcampaign against PetroChina initialpublic offering in New York attributedwith reducing success of the offering.

• Ilyse Hogue joins RAN and RANlaunches global finance campaign.

• RAN launches campaign againstCitigroup.

• NGO Corner House publishes acampaigners guide to the financialmarkets.

• NGOs campaign against Wall St firmsinvolved in bond issue for Chinesebank financing Three Gorges dam.

• May – the SEC issues a memo tocompanies clarifying that shareholderdivestment campaigns and consumerboycotts can be considered “material”,or significant, and thus subject todisclosure under SEC rules.

• West LB subject to NGO campaign over role as lead funder of Ecuadorpipeline.

• FoE, RAN, WWF-UK and the BerneDeclaration form informal networkto promote sustainable finance in the commercial sector.

• South Africa’s King 2 Report on corporate governance requires financial institutions to implementtriple bottom line reporting.

• January – Equitable Life launchescourt proceedings to gain approval forbonus cuts on endowment policies,unleashing a scandal over brokenpromises.

• Wall St securities firms agree codecutting reporting links betweenresearch analysts and investmentbanking units and end tying ofanalysts’ pay to deals won by thebank.

• Wall Street settlement over conflicts of interest. Total cost to the ten investment banks involved: $1.4 billion.

• New York state attorney general EliotSpitzer investigates E*trade overtrading problems and launches inves-tigation of the online share tradingindustry.

• Ex-SEC lawyer Mercer Bullard establishes FundDemocracy.org to fight for investor rights. He publishesarticles on potential market-timingabuses for TheStreet.com, later cited in Eliot Spitzer’s complaint.

• July – Japan’s Financial ServicesAgency super-regulator is formed out of the merger of the FinancialSupervisory Agency and the Ministry of Finance’s Financial System PlanningBureau.

• US Congress holds hearings to investi-gate concerns about stock analystconflicts of interests.

• NY AG Eliot Spitzer launches investiga-tion into Wall St analyst conflicts ofinterests.

• Enron Corporation collapses amidaccounting scandal.

Special report: Finance • Ethical Corporation 1986 to present 19

• January – US consumer groups urgeFederal Reserve to stop abusive bankoverdraft charges.

• May – Ireland establishes newfinancial super-regulator, the Financial Services Regulatory Authority

• September – NY AG Eliot Spitzerlaunches investigation into latetrading and market timing abuses in the US mutual fund industry.

• Fund Democracy publishes a Pro-Investor Blueprint for MutualFund Reform, elements of which are subsequently implemented.

• August – Citigroup’s massive sale andsmaller buyback minutes later ofgovernment bonds raises the hacklesof competitors, regulators andEuropean government treasuries.

• September – Citigroup’s privatebanking unit is closed by Japaneseregulators for compliance problems,prompting regulators in South Koreaand Taiwan to launch reviews of theirown on local Citigroup operations.

• November – NY AG Eliot Spitzerlaunches investigation into conflicts of interest and corruption in theinsurance sector.

• The Hong Kong insurance commissioner calls in the territory’s

Ethical Corporation • Special report: Finance1986 to present20

2003

2004

• February – second meeting of bankers in the Equator Principlesprocess, following which stakeholderconsultations ensue.

• April – word leaks out aboutEquator Principles, including a draft,identifying ABN Amro, Barclays,Citibank and WestLB as adoptees.

• May – third meeting of bankersregarding Equator Principles in whichit was decided the principles wouldapply across the globe rather than just to emerging markets.

• Barclays, as a member of the BusinessLeaders Initiative on Human Rights,undertakes to “road test” the UNNorms.

• UNEP’s Financial Institutions Initiativeand Insurance Initiative merge to formthe UNEP Finance Initiative.

• June – Official launch of EquatorPrinciples with ten signatories.

• September – Senior vice-president atBank of America quoted by San Fran-cisco’s Contra Costa Times as saying:“We are struggling whether we shouldhave a [corporate social responsibility]report … We really don’t haveanything that is urging us in thatdirection.”

• October – Mizuho Financial Group Incbecomes the first Japanese bank toadopt the Equator Principles.

• October – NGO Netwerk Vlaanderenlaunches campaign against Belgianbanks over financial support of armsindustry.

• November – the International Finance Corporation (IFC) announcesits intention to include human rights in its sustainable developmentsafeguard policies.

• January – Citigroup and RAN reach accord on new Citigroup environmental commitments.

• February – funding closes on BTCpipeline.

• April – a leaked draft letter appears to indicate that some EquatorPrinciples signatories are lobbying theWorld Bank to reject proposals in theExtractive Industries Review to stopfinancing oil and coal projects indeveloping countries.

• May 2004 – eleven of the banks thathave adopted the Equator Principleshave write a joint letter to the WorldBank president, James Wolfensohn, toexpress their views on the Extractive

• A group of eight NGOs draft theCollevecchio Declaration on FinancialInstitutions and Sustainability.

• NGO campaign against financial firmsfor financing rainforest destruction by Indonesia’s Asia Pulp & PaperCompany.

• March – RAN agrees ceasefire withCitigroup pending outcome of negotiations.

• May – more than 30 internationalbanks and corporations are suedunder the Alien Torts Claims Act (ATCA)for $100 billion in damages for theirrole in supporting apartheid in SouthAfrica.

• July – former senior director at CantorFitzgerald, the US-owned brokingfirm, wins almost £1m in damages forbeing forced from his job by theobscenity-laced bullying of his boss.

• October – Swiss Re announces intention to go carbon neutral.

• January – NGOs’ Quantum Leap andFocus on Finance project is replaced byBanktrack, an NGO network focusingon the environmental accountabilityof commercial finance.

• Banktrack report attacks financing ofBaku-Tbilisi-Ceyhan pipeline project.

• March – a group of Italian NGOs formsMancaIntesa (meaning “lacks understanding”), to coordinate a RAN-style campaign against Italianbank Banca Intesa over environmentaland ethical issues.

• May – FoE UK commences campaignagainst HSBC regarding its failure touse influence through banking relationship over palm plantation

• July – Barclays Bank attacks thefinancial services industry forirresponsible marketing and encouraging unsustainable debtlevels.

Special report: Finance • Ethical Corporation 1986 to present 21

2005

2006

Industries Review (EIR). Another banksends a separate letter to Wolfensohnstating its concerns.

• May – EKF of Denmark becomes thefirst export credit agency to adopt theEquator Principles.

• May – BBVA adopts the Equator Princi-ples, first Spanish bank to do so.

• May – European Investment Banksubscribes to Equator Principles forprojects outside the EU.

• June – Unibanco of Brazil becomes thefirst emerging market bank to adoptthe Equator Principles.

• July – banks meet with NGOs todiscuss progress on the EquatorPrinciples.

• December – Banca Intesa withdrawsfrom the BTC project.

• December – financial institutions callfor extension of IFC safeguard reviewperiod.

• March – Equator Principles signatoriesmeet with NGOs in Zurich.

• July – KPMG report on sustainabilityreporting finds financial services sectordoubled the number of reports sincethe previous survey in 2002.

• August – BES adopts the Equator Prin-ciples, the first Portuguese financialinstitution to do so.

• October – UNEPFI publishes a legalframework for the integration of envi-ronmental, social and governanceissues into institutional investment,providing critical legal commentary topension fund trustees.

• November – Nedbank is the firstAfrican bank to adopt the EquatorPrinciples.

• December – Goldman Sachs introducesenvironmental policy of its own initia-tive. First investment bank to adoptsuch a policy.

• February – IFC adopts new environ-mental and social standards.

• May – UNEPFI and UN Global Compactlaunch the Principles for responsibleinvestment with signatories representing $4 trillion of funds under management.

• July – Equator Principles are revised to reflect new IFC standards. Currentsignatories comprise 85% of globalcommercial finance capacity.

• July – Shanghai Pudong DevelopmentBank becomes first Chinese bankto issue a CSR report.

owner Lonsum, accused of keepingvillagers away from reclaiming landthat had been forcibly taken fromthem.

• September – responsible investorF&C and accountants KPMG issue“Banking on human rights” report.

• SEC agrees to establish an Office ofGlobal Security Risk to examinecompany disclosures regarding theiroperations in countries that mightsupport terrorism and improve disclosure of such risks to investors.

• December – HSBC announces intention to become carbon neutral.

• United Nations commences International Year of Microcredit.

• April – Credit Suisse First Boston, findsitself the target of new global protestsfor its decision to underwrite Shell’scontroversial Sakhalin II pipeline.

• July – $54 million was paid to 67employees by Morgan Stanley in NewYork over discrimination and sexism at work.

• August – activists to banks: behavebetter in the Boreal. Market activistsinvite bank executives to develop new best practices.

• November – three female brokers who used to work at Merrill Lynch & Co have won $2 million from thecompany in what their lawyers say isthe largest sex-discrimination awardin a National Association of SecuritiesDealers arbitration.

• March – French NGO les Amis de laTerre challenges the French bankingindustry to integrate sustainability intotheir corporations within three years,or face heightened activism.

• August – New York judge refuses todismiss $1.4bn claim by six femaleemployees against Dresdner KleinwortWasserstein for alleged genderdiscrimination related to pay andequal rights.

• February – Citigroup CEO Charles Princeannounces five point ethics plan,including group-wide ethics trainingand performance management.

• April – UK banks threaten end to era of free current accounts.

self-regulatory organisations to ensurethey are enforcing the insurance code.

• UK banks ordered by Office of FairTrading to reduce charges for latepayments on credit cards.

• Which? the consumers associationlaunches campaign against high bankoverdraft charges.

• May – Japanese Financial ServicesAgency proposes new regulations tocurb abusive practices in consumerlending.

• August – UK Office of Fair Trading indicates coming crackdown on excessive overdraft penalty fees.

You cannot yet hear the crossing of swords, butactivists are nevertheless preparing to rattle

their sabres over Chinese banks. “China’s banks are the big fear,” says Karina

Litvack, F&C Asset Management’s head of gover-nance and socially responsible investment. “They’rebottom feeding on those things international banksare not touching,” explains Jules Peck, global policyadvisor at WWF-UK.

Critics fear that China’s state-owned banks willassume the same role in finance that China NationalOil Company and its state-owned brethren havedone in oil production, venturing to finance projectsand corporations that western banks with theirfreshly-minted social and environmental policiescould not touch.

Worse, it now looks like these same westernbanks could be helping their Chinese counterpartsdevelop stronger capabilities to fulfil that role, andprofiting from it.

As a prelude to liberalisation at the end of 2006 inline with WTO commitments, China is permittingforeign banks to take minority stakes in domesticinstitutions in exchange for capital injections and,crucially, knowledge transfer.

The table on p26 reveals the breathtaking extentof the response being mounted by foreign banks.But it is far from clear they are ready for the chal-lenges they face.

Growing painsAny financial firm that stakes its brand on high stan-dards of conduct runs a risk when it acquires astrategic stake in another firm anywhere in theworld.

China’s banks, however, present particular chal-lenges. They need to evolve from beingstate-directed agencies channelling funds to state-owned enterprises, into banks mobilising savingsfor investment and lending. Currently, governanceand risk management systems are based on thatlimited traditional mandate. This lies at the heart ofa non-performing loans problem that official figuresestimate at $130 billion even following the injectionof tens of billions of dollars into the major lenders.

Where even cash flow analysis is a rare credit risktool, social and environmental risk assessment andmanagement figures barely at all.

There are other challengesLarge scale restructurings continue, resulting in theshedding of tens of thousands of jobs amidemployee protests.

With the closure of thousands of branches inremote locations by the state-owned ‘big four ’banks there arise concerns about financial exclusion.

Chinese insurance companies succeeded earlierin destroying consumer trust through widespreadmis-selling. Now banks risk repeating the debacle in

Chinese banks

How the other half lends


Activists and responsible investors are sounding alarm bells about Chinese banks

Ethical Corporation • Special report: FinanceChina22

Critics fearthat China’sstate-ownedbanks willfinance projects andcorporationsthat westernbanks could not touch

Special report: Finance • Ethical Corporation China 23

The Chinesegovernmentneeds todevelop acompetitive andcommerciallydriven bankingsector that canmobile domesticsavings to investin infrastructureand so help fuelsustainablegrowth

the dash for market share in the nascent consumercredit market (see p25).

Again, there are opportunities as well as risks.For example, China stands to become the biggestmarket in the world for renewable energy andenergy efficiency products.

The untouchablesIt is the fear of “bottom-feeding” by Chinese banks,however, that is attracting the most attention fromactivists at present.

China National Petroleum Corporation’s devel-opment of Sudanese oil fields is an example. Thecompany’s activities help provide the governmentin Khartoum with funds that it can use to imple-ment the genocide in Darfur. Even if western banksback away from financing CNPC, CNPC can fallback on its regular Chinese financial backersincluding the policy bank China Export ImportBank, and Bank of China in which a foreign consor-tium headed by Royal Bank of Scotland has a 10%stake.

On the domestic front, most infrastructurelending comes from Chinese banks. Violence associ-ated with some infrastructure development projectsshould make any investor pause. In December 2005,for example, several villagers in Dongzhou villagenear Shanwei were shot by police while protestingat inadequate compensation for land seized by thegovernment for the construction of coal and windpower plants.

So long as Chinese banks are prepared to gowhere others will not, emerging international stan-dards like the Equator Principles for project finance– to which no Chinese bank has so far committed –risk being undermined.

Stark choicesAs the state’s ownership begins to fragment, thesource and ownership of financial services used insupport of controversial activities becomes easier toidentify. That associative link can only becomestronger with these strategic investments, andboycotts of banks and their financing instrumentswill then be less of a blunt instrument.

For strategic investors whose opportunity to exitin the short term is limited, the choice appears stark.They can be associated through these substantialinvestments and knowledge exchange with theperpetuation of a finance sector that so far pays littleattention to stakeholder interests.

Or they can be a force for positive change, asso-ciated with the development of industry-widecapabilities that recognise stakeholder interests andnegotiate responses.

Most investors see benefits in engagement withChinese banks on such issues. Rather than notinvest in a country until it achieves internationalstandards, Jon Williams, HSBC’s head of groupsustainable development, says the bank takes a

medium-term view, engaging over time to improvestandards.

If engagement is the answer, it appears likelystrategic investors will need to prove that they aretransferring the capability to meet their varioussustainability commitments detailed in the table,and that that engagement is working to raise stan-dards.

Small stakes, big influenceOne concern for F&C’s Litvack is that havingbought their respective stakes, western banks willhave “only limited influence” on management. Eventhe question of whether a bank has any latitude torefuse government pressure to lend on a particulartransaction “presupposes there is a separationbetween bank, government and [Communist] Partywhich there is not,” according to Paul French, Chinaanalyst at Access Asia and China Editor at EthicalCorporation.

If this reflects the true limits of strategic investorinfluence, it throws into doubt the collectivewisdom of parting with $35 billion over the last twoyears for stakes in banks with major risk manage-ment failings.

The cost to China of poor bank management isvery real: a bailout for Agricultural Bank of Chinawill likely cost the equivalent of 10% of China’sforeign reserves, according to government esti-mates. Rather than carry such a liability, the Chinesegovernment needs to develop a competitive andcommercially driven banking sector that canmobilise domestic savings to invest in infrastructureand so help fuel sustainable growth. Elsewhere inthe world, commercial banks such as these havebeen learning the importance of managing theirsocial and environmental impacts.

The government has been keen to emphasisethat they seek the knowledge transfer implicit instrategic investment, rather than merely financialinvestment. To back this up, investments are invari-ably accompanied by stringent co-operationagreements. ANZ’s deal with Tianjin City Commer-cial Bank, for example, provides for seats on the

Whose standards will prevail?

The Partyappearsconscious of theneed to addressthe seeds ofsocial disquiet

board, management positions and veto rights.Newbridge Capital is so far the only foreign

investor to have obtained management control of aChinese bank: Shenzhen Development Bank. AsSDB’s single largest shareholder, Newbridge isentitled to a majority of board seats.

Such influence is not limited to smaller banks.Industrial Bank and Bank of Communications areequity accounted as associates in HSBC’s latestannual report. This reflects HSBC’s “significantinfluence” over the banks out of proportion to thesub-20% equity stake in each. Standard Charteredadopts the same treatment in relation to its 20%holding in Tianjin Bohai Bank, the new bank it co-founded earlier this year.

Green shootsAnother reason why foreign investors mightreasonably expect genuine influence is the impactthat economic growth is having on the environ-ment.

China’s State Environmental Protection Agencyestimates that pollution cost the country 10% of its$2.26 trillion gross domestic product in 2005. SEPAofficials are also concerned that serious environ-mental problems are stimulating rising social unrest.

The government’s 11th Five-Year Plan includesspecific environment-related targets for energy effi-ciency, industrial water consumption efficiency andreductions in pollutant emissions.

The plan also places environmental and socialconstraints on the kinds of project that will receivestate financing.

New rules on environmental impact assessmentintroduced in 2003 mandate public consultation forenvironmentally sensitive projects.

SEPA has stepped up its enforcement activities,and in 2005 succeeded in stopping construction of30 power projects that had not met the legislativerequirements before construction commenced.Many of the country’s commercial banks arethought to have been financiers to these projects.

But the agency’s impact hangs in the balance.

“Just tell the government that SEPA is stoppinginvestment or growth and they [the agency] disap-pear, ” Paul French says. The People’s Bank ofChina’s plan to revise its basic regulatory instru-ment – The General Rules of Loans – to includespecific environmental policy and proceduralrequirements for loans should at least add weight.

Anger managementThe government is selective as to which other stake-holder voices it hears. Divestment campaigns andother actions by foreign NGOs appear to beignored, and local NGOs are “only allowed tooperate until they annoy the government”, saysFrench.

Even so, the Party appears conscious of the needto address the seeds of social disquiet, such as thatstemming from growing rural-urban income dispar-ities.

Consumer protests, too, appear to be permitted,and are much in evidence. In 2004, dozens ofprotesters participated in sit-ins and protestsoutside the head office of the Bank of Communica-tions demanding return of their money on a Jinsintrust fund product promoted through the bank. Inthe same year, merchants launched a boycottagainst payment cards in protest at the level of feesthey pay for accepting card payments.

Most recently, Dell Computers has discovered toits cost the power of the internet in bringingtogether a small army of disgruntled Chineseconsumers to mount a legal challenge.

Assuming foreign strategic investors can bringthe necessary influence to bear, environmentallyand socially sensitive finance could become thepreserve of lower-tier commercial banks and of thethree state policy banks and the governmenttreasury itself.

The political and financial risks associated withsuch projects would in this way come home to restat the seat of the policy that creates them, ratherthan be dispersed amongst foreign strategicinvestors and their shareholders. n


Assess that social impact, say lenders


Banks havetraditionallytargeted corporations,not consumers,but as incomelevels rise this is changing fast

China: retail credit

Slaves to aconsuming fashionBy Andrew Newton, Finance Editor

The rapid growth of the consumer creditsector combined with a lack of experiencedealing with its risks mean that banks inChina could face an irresponsible lendingscandal

For many foreign investors in Chinese banks, theprincipal objective is to gain broad access to a

barely tapped market for consumer credit includingcredit cards, personal loans and mortgages.

Banks in the country have traditionally targetedcorporations, rather than consumers, but as incomelevels rise this is changing fast. ConsultantsMcKinsey & Co expect revenue from credit cards togrow 54% a year, mortgages 20% and auto loans25%, through to 2013. For international credit cards,this translates to between 30 million and 75 millionprospective customers by the end of the decade,according to estimates by Visa International andMasterCard International.

Banks are scrambling for market share. The battlehas seen banks drop annual fees, offer high creditlimits and give away free gifts. China MerchantsBank led the charge some three years ago. Withmore than five million cards issued, CMB nowclaims over 30% of the existing market.

Others are catching up. Bank of Communica-tions has issued over one million of its cardsco-branded with HSBC, claiming an 8% marketshare. Citigroup’s partnership with ShanghaiPudong Development Bank will have issued over400,000 cards by year-end. And through an alliancelaunched this year, Royal Bank of Scotland and

Bank of China have already issued 450,000 cards.This haste has some analysts unsettled. Although

the Chinese government has set up a nationalconsumer credit database, there are no creditbureaus and bank employees have not historicallybeen trained in credit risk assessment. Insurers thathad begun to offer car loan default policies havestopped after finding that banks are not screeningapplicants carefully. There are concerns that creditcard growth may outstrip banks’ risk managementcapabilities.

Young consumers, such as those to be targetedby Citibank and Shanghai Pudong DevelopmentBank’s new WOW card, have shown themselvesparticularly open to accumulating debt.

Lessons from TaiwanBanks will need to take care not to repeat the condi-tions that produced a $24.7 billion consumer creditimplosion in neighbouring Taiwan. A vocalcampaign supportive of “card slaves” and mountedby the Pan-purple Alliance, a collective of civilsociety groups, helped garner significant publicsupport for deeply indebted borrowers.

In May, 31% of outstanding cash card loans werewritten off. Political pressure fed through into aproposed law that would have capped the interestrate spreads lenders could charge on card loans.There has also been pressure for personal bank-ruptcy legislation.

Similar legislation has helped crystallise substan-tial problems for UK lenders this year – includinglenders behind the current credit card push inChina.

GE Consumer Finance, which stands ready toinvest $100 million in Shenzhen Development Bank,explicitly recognises the risk presented by “aburgeoning population of previously unbankedindividuals entering the credit market in … devel-oping countries.”

Its Responsible Lending Standardsnow running in Asia, the Americas andEurope set out 30 guiding principlescovering issues at every stage fromproduct development, disclosure andunderwriting through to collections andtraining. Each country business developsa localised set of Responsible LendingStandards subject to approval and audit.

For banks involved in the Taiwancrisis, restricting loan growth, tighteningrisk assessment and restricting cardissuance have all helped subsequently todeal with the problem. If Chinese banksand their foreign partners are to avoidthe costs – reputational and financial –experienced across the Taiwan Straits,responsible lending practices such asthese need to be embedded from theoutset. nThe new must-have in China


Foreign investment in China

Backing the financial dragonCorporate responsibility commitments of strategic investors in Chinese banks

Industrial and Commercial Bankof China4

$685bn, 4.69%

Agricultural Bankof China $610bn, 26%

Bank of China $591bn, 4.9%

China Construction Bank$472bn, 3.4%

Bank of Communications $161bn, 2.14%

China CITIC Bank$84bn, 2.51%

China Merchants Bank57

$103.3bn, 2.3%

Goldman Sachs1, American Express9, Allianz1238gc

(Collectively $3.8bn, 10.0%)Expected to list simultaneously in Hong Kong and Shanghai inOctober 2006, with a further listing under consideration forNew York or London.

No foreign investment at present. Reforms expected over thenext two to three years, including a search for foreignstrategic investors. China Life Insurance Co has declared anintention to take a stake.

Temasek Holdings ($1,500m, 5%)Royal Bank of Scotland1238gc ($1,500m, 5%)Merrill Lynch149 ($750m, 2.5%)Li Ka-shing Foundation ($750m, 2.5%)UBS129 hk ($500m, 1.6%)Asian Development Bank1 ($75m, <1%)Hong Kong IPO in May 2006 raised $11.2 billion. A simulta-neous private placement with 12 additional corporateinvestors including Bank of Tokyo-Mitsubishi UFJ1238gc, ChinaLife Group, Ping An Insurance Group56 (19.9% owned byHSBC1234689gc) and Bank of East Asia brought in a further $2.2billion. The July 2006 listing in Shanghai raised $2.5 billion.

Bank of America1238 ($2,500m, 9%)Temasek Holdings ($1,470m, 5.1%)Listed in Hong Kong. Mainland listing being considered.

HSBC1234689gcpri ($2,100m, 19.9%)Listed in Hong Kong. Mainland listing expected in 2007.

Barclays123489hk is reported to be in line to buy a 5% stake.Previously JPMorgan Chase & Co1238 had been rumoured to have sealed the deal. Other banks that have shown an interest in the 5-10% stake reportedly on offer includeCredit Suisse123gchk, BNP Paribas1gc and Banco Bilbao VizcayaArgentaria1238gc.Expected to list in Hong Kong by the end of 2006, andconsidering a Shanghai listing.

No foreign investors, although reported to be seeking strategicinvestors among Hong Kong billionaires.Listed in Shanghai and to be listed in Hong Kong inSeptember 2006.

China Minsheng Banking Corporation $62bn, 2%

Industrial Bank Co $59bn, 2.33%

Shanghai Pudong Development Bank$57bn, 2.45%

China Everbright Bank$49bn, 11%

Hua Xia Bank$45bn, 3.04%(NPL figure being reviewedby regulator)

Guangdong DevelopmentBank4

$38bn, 25%

Ping An Bank$33bn, NA

Bank of Shanghai2

$30bn, 3.92%

Shenzhen DevelopmentBank$26bn, 10.29%(NPL figure being reviewedby regulator)

Temasek Holdings (NA, 3.9%)IFC148 ($23m, 1.08%)Though discussions are rumoured to have been held withpotential foreign investors including National Australia Bank28

and Société Générale128 ($370, 5%-10%), the bank is nowunderstood to be delaying new foreign investment until 2007.Listed in Shanghai. Agreed private placement to institutionalshareholders. Temasek Holdings rumoured likely to increaseits stake.

Hang Seng Bank138 (62.14% owned by HSBC1234689gc) ($209m, 16%)Temasek Holdings (NA, 5%)IFC148 ($52, 4%)Seeking regulatory approval for a listing in Shanghai in 2006.

Citigroup13489 ($70m, 4.62%, with option to increase stake to 19.9%)Listed in Shanghai. Additional listing rumoured for HongKong.

China Everbright Group (NA, 21.4%)ADB14 ($20m, 1.9%)Ping An Insurance Group56 (19.9% owned by HSBC1234689gc) isunderstood to be in talks potentially with a view to taking astake in the bank.

Deutsche Bank128gc ($330m, 9.9%)Sal. Oppenheim (NA, 4.1%) Listed in Shanghai.

Citigroup123489 is seeking “effective control” through building a consortium with Chinese investors including China LifeInsurance Co. to take a combined 80% of the bank, biddingagainst a consortium including Ping An Insurance Group56

(19.9% owned by HSBC1234689gcpri) and Société Générale128.

Ping An Insurance Group56 (19.9% owned by HSBC1234689gc) (NA, 73%)HSBC1234689gcpri ($18m, 27%)

HSBC1234689gcpri ($64m, 8%)IFC148 ($50m, 7%)Shanghai Commercial Bank (Hong Kong) (NA, 3%)

Newbridge Capital (NA, 17.9%)GE Consumer Finance16 ($100m, 7%) (pending shareholderapproval of share reform plan)Lehman Brothers9 is reported to be close to securing a 1%stake for an investment of $20m to $30mListed in Shenzhen.

Institution Assets, non-performingloans (%)

Strategic investors(size of investment, % held)




Bank of Beijing $29.9bn, 4.06%

Shanghai Rural Commercial Bank$14bn, NA

Jiangsu Bank$10bn, NA

Shenzhen Commercial Bank$9bn, NA

Tianjin Bohai BankNA, NA

Tianjin City Commercial Bank$9bn 7%

Huishang Bank$5.6bn, NA

Nanjing City Commercial Bank$5.5bn, 4.2%

Hangzhou City Commercial Bank$4.8bn, 2.3%

Ningbo Commercial Bank$4.6bn, 1.2%

Dalian Bank$4.2bn, 5%

Xi’an City Commercial BankNA, NA

United Rural CooperativeBank of Hangzhou(formerly Hangzhou RuralCredit Cooperative Union)$3.8bn, 1.5%

ING Group138 ($215m, 19.9%)IFC148 ($50m, 5%)A listing is planned for 2007.

ANZ128 reportedly in talks for a 19.9% stake costing around$200m, target completion December 2006.

Forming in 2006 through merger of 10 city banks in JiangsuProvince, including Suzhou City Commercial Bank.

Ping An Insurance Group56 (19.9% owned by HSBC1234689gcpri) is tobuy a 89% stake for $614 million.

Standard Chartered123489gchk ($128m, 20%)

ANZ128 ($112m, 20%)

Bank of Montreal1238 had previously been reported interested,but now Development Bank of Singapore is reported to beconsidering a 10%-20% stake. Pangaea Capital Managementis also seeking a 5% stake.

BNP Paribas1gcpri ($87m, 19.2%)IFC148 ($27, 5%)Awaiting regulatory approval for a listing in Shanghai.

Commonwealth Bank of Australia1 ($75m; 19.9%)ADB14 ($30, 5%)

Oversea-Chinese Banking Corp ($71m, 12.2%)Employees own 20%

Hoping to join forces with Scotiabank123 and/or NationalAustralia Bank28 by early 2007.Listing expected in Hong Kong in 2006.

IFC148 ($19.9m, 12.5%)Scotiabank123 ($3, 2.5% with regulatory approval for up to12.4%)

Rabobank1238gc ($21.8m, 10%)IFC148 ($10.9m, 5%)

Jinan City Commercial Bank$2.8bn, 7.1%

Urumqi City Commercial Bank$2.2bn, NA

Rizhao City Commercial Bank$1.1bn, NA

Nanchong City Commercial Bank$0.23bn, NA

Langfang City Commercial Bank6

NA, NA

Quanzhou City Commercial BankNA, NA

Chongqing City Commercial BankNA, 4.93%

Shaoxing County RuralCooperative BankNA, NA

Tianjin Rural Cooperative BankNA, NA

Liaoning Rural CreditCooperative UnionNA, NA

Commonwealth Bank of Australia1 ($17m, 11%, with option to expand up to 20%)Listing expected in 2007.

Habib Bank is reported to be in talks to acquire 19.9% of UCCB.

Nanjing City Commercial Bank (19.2% owned by BNP Paribas1gcpri,5% owned by IFC148) is reported to be buying a 20% stake for$18.8m, which would make it the largest shareholder.

German Investment and Development Bank (DEG)1 ($4m, 10%)Sparkassen International Development Trust, Savings BankFoundation for International Co-operation ($1, 3.3%)

Planning to list in 2007.

Reported to be in negotiations with National Australia Bank28.

Seeking foreign investors to take up to 24.9% of the bank bythe end of June 2006, with a view to listing overseas by theend of 2008.

American United Bank is reported to have “made a proposition”.

Rabobank1238gc has signed a preliminary cooperation agreement, and is rumoured to be close to investing. Previously, ABN AMRO12389gchk was reported to be interested intaking a stake in the bank.

Rabobank1238gc has signed an agreement to set up a jointventure bank with the cooperatives in 2007.





Sources: Company websites and press reports

Key to corporate responsibility commitments:1 Company has published own social and/or environmental policies2 UNEP Finance Initiative signatory3 Equator Principles signatory4 Member of the Chinese Business Leaders Forum5 Member of the Chinese Association for Corporate Social Responsibility6 Member of the China Committee of Corporate Citizenship7 Member of the China Business Council for Sustainable Development8 Global Reporting Initiative reporter9 Member of the Global Business Coalition on HIV/Aidsgc Member of the UN Global Compacthk Hong Kong Corporate Social Responsibility Charter signatorypri Asset management arm is a UN Principles for Responsible Investment signatory

Sir Fred Goodwin, chief executive of Royal Bankof Scotland, was challenged last year on whether

human rights issues had been a consideration whendeciding to take a stake in Bank of China. He repliedthat these were issues for the Chinese government,adding, according to The Herald newspaper, “It’simportant that we don’t get involved in that inChina, or any other countries we do business in.”

Such a threadbare policy response is notunusual. A report issued earlier this year by WWFand the private finance focused NGO coalitionBankTrack found only 20% of banks surveyed hadintroduced a human rights policy. Only Rabobankhas committed explicitly to follow the draft UNNorms for Business, and not even they disclose howthey will do so.

These findings are corroborated by the resultspublished this year of a survey undertaken by JohnRuggie, the UN secretary-general’s special represen-tative on business and human rights. The surveyfound that only 26.6% of financial sector respon-dents had a set of corporate principles specificallyon human rights, and only 33.3% covered humanrights in operational guidance notes.

Human interestWhilst it is up to banks to address their ownimpacts, NGOs can play a valuable role in raisingconsciousness and catalysing action.

But, where have the human rights NGOs been?Most of the pressure on human rights issues hascome from environment-focused NGOs sweepingup human rights into their ongoing critique ofproject finance.

Only Netwerk Vlaanderen, a Belgian NGOpromoting sustainable investment, has conducted asustained campaign against commercial financeinstitutions. Their campaign, “My Money. ClearConscience?”, has targeted Belgian bank groupsover investments in the arms industry since 2003,and more recently over investments in companiesthat commit serious human rights violations. Thecampaign has produced some notable changes inbank policies.

By contrast, Amnesty International has focusedits arms strategy on urging governments to intro-duce a global arms treaty and tighter controls onarms exports.

Below the radarAmnesty UK’s Peter Frankental blames the currentlack of attention to the finance sector on limitedresources, a view echoed in BankTrack’s 2005annual report.

Integrating human rights into objectively meas-urable impact assessments has also proved achallenge, though Frankental believes that attemptsat codification such as the Global Reporting Initia-

Human rights

Amnesty interminable


Scrutiny of the human rights impacts of financial institutions has remained largely an activist-free zone, but for how much longer?

Ethical Corporation • Special report: FinanceSocial activism28

Much of thehuman rightscampaigningagainstfinancial firmshas beenundertaken byenvironmentalNGOs alongsidetheir activismagainst theenvironmentalimpacts ofproject finance

tive and the Global Compact have helped definebusiness’ obligations in more concrete terms.

The most detailed of these codification attemptswere the draft UN Human Rights Norms forBusiness. When these were kicked into JohnRuggie’s newly established court, however, thefollow through from the human rights NGOcommunity in general was muted.

This was surprising given Amnesty’s role in theintroduction of the Voluntary Principles for Securityand Human Rights used today by many energy andextractive industry companies.

That initiative clearly recognised that the spheresof influence of the new transnational economicpowers created by globalisation bring new andactionable corporate responsibilities and new oppor-tunities to create de facto human rights safe havenswithin the territory of abusive regimes and societies.

That understanding, however, does not appearto have permeated Amnesty International’s broadercampaigning strategy.

The role of corporations is treated on theirwebsite within a separate campaign headed“economic globalisation”, viewed as a destabilisinginfluence that may, principally through privatisa-tion, result in degradation of human rights. Only inAI’s introduction to the UN Norms are corporationsidentified as an additional category of internationalactors that could play a role across a variety ofcampaigning issues and contexts.

Given this struggle to engage with the role ofbusiness in general, it is hardly surprising thathuman rights NGOs have barely begun to addressthe indirect impacts of financial institutions.

Joining the dotsThis may be about to change. Frankental offers thatthere will be “closer connections” between Amnestyand BankTrack, a priority confirmed in the latter’s2005 report. Amnesty’s ‘economic globalisation’campaign has received a shot in the arm thanks to thefurore over internet company complicity in China’sinternet censorship. Activist investors including F&Cand Insight Investment have also indicated theirintention to engage banks on social impacts.

Specific issues on activist agendas include:• adoption of human rights policies based on the

draft UN Norms;• getting banks involved in the Extractive Indus-

tries Transparency Initiative in order to addressthe role of banks in helping corrupt regimes steala nation’s wealth;

• the sector’s impacts in conflict-prone, conflict andpost-conflict zones;

• G8-style forgiveness of developing country debt; • the financial sector’s response to the HIV/Aids

crisis; • the elimination of human rights exclusions in

project finance host country agreements.

While notable initiatives such as the FinancialCoalition Against Child Pornography and therevised Equator Principles extend the considerationof social impacts into new areas, progress remainspatchy. The convergence of activist forces nowunderway leaves just a short window for a majorinstitution to demonstrate leadership on humanrights. n

Special report: Finance • Ethical Corporation Social activism 29

Given thestruggle toengage with therole of businessin general, it is hardlysurprising thathuman rightsNGOs havebarely begun to address theindirect impactsof financialinstitutions

Withholding investment can help here

People policies are increasingly important for big banks

It is Deutsche Bank’s turn on the discriminationaction merry-go-round. In August the US Equal

Employment Opportunity Commission (EEOC)issued the firm’s New York office with a letter ofdetermination finding “reasonable cause” to believethat Deutsche Bank had subjected senior sales-person Leigh Short “and a class of similarly situatedfemale employees on the Asian and Australian salesdesks” to sex discrimination. The letter invitesDeutsche to negotiate a settlement or face an EEOCsuit. Deutsche has denied the allegations.

The most noteworthy feature of the case is itscompletely unexceptional nature. It blends in seam-lessly with a procession of discrimination actionsoriginating from major banks since actionableemployment equality legislation emerged in the1960s. “You don’t have to be a rabid left winger tosee this is going to keep me in work for a long timeto come,” observes Jeff Liddle, partner at Liddle &Robinson, a firm representing plaintiffs in severaldiscrimination cases.

The cases paint a picture of a sector that onlyvalues the diversity of outlook afforded by aconcentration of young, aggressive, white, straightmales. It is an impression confirmed by the statistics:there is a gender-based pay differential of 44% inUK financial services – the worst of all sectors –according to the Equal Opportunities Commission.

And while women represent 48% of all workers

in the US, they occupy just 37% of all jobs in thesecurities industry and just 20% of executivemanagement posts.

Lost in the detailSeeking to understand why the finance sector ’sgender diversity is so dire, Louise Roth, assistantprofessor of Sociology at the University of Arizona,interviewed 76 men and women on Wall Street atthe height of the bull market. In a new book, Rothdescribes how the highly variable pay structurefacilitates a subtler form of gender discriminationthan could be perpetrated against those on hourlyrates on a factory floor.

Insiders defend the system as promoting thesurvival of the fittest, but Leigh Short is alleged to havebeen a top producer at Deutsche who was subse-quently undermined, suggesting that fitness is beingdetermined by something other than market forces.

Roth argues that individuals are promoted or heldback based on a “masculine conception of competi-tion that ignores success factors at which womenexcel.” The profession “values male qualities likeshooting from the hip,” says Roth, “while women sitback to make a more educated assessment”.

Unconscious biases of managers, co-workers andclients influence performance appraisals and pay,but also the tools such as business leads, referralbusiness and sales support on which an individual’s

Diversity

Extracting the male from a malefaction


Employees are arguing financial firms still don’t value diversity. Superficial policies andtraining are unlikely to convince them – or courts – otherwise

Ethical Corporation • Special report: FinanceWorkforce diversity30

The highlyvariable paystructure facilitates asubtler form of genderdiscriminationthan could beperpetratedagainst thoseon hourly rateson a factoryfloor

productivity depends. A particular concern is theopaque and subjective manner in which clients areallocated between team members, a factor in Short’scase against Deutsche Bank.

Seeking tangible outcomesCompared to other sectors, “resistance to change isnotable” in finance, notes Elizabeth Grossman,EEOC’s New York regional attorney. Part of theproblem is that even attention grabbing settlementssuch as the $54 million secured by Grossman in 2004against Morgan Stanley are insignificant to thebanks agreeing them.

This is why EEOC and class action lawyers nowpush for settlement terms comprising initiatives, suchas training and monitoring, that combat discrimina-tion as well as seeking restitution for clients.

“Policies and procedures make fairness,” assertsGrossman. But not the standard equal employmentopportunity policies that firms have implemented inthe past. Now, she explains, they should define whatit takes to get a particular bonus, to get hired, to geta raise. Lawyers negotiating with Morgan Stanleyover a new class action suit have heralded a packageof “meaningful, novel and far-reaching” reforms.

While Roth is unimpressed by the diversity policiesand programmes she has seen, she acknowledges that

initiatives that overhaul pay and promotion practicesto deal with subtler discriminatory issues could bringreal change. New procedures could include algo-rithms for the equitable allocation of accounts,removing subjectivity by linking allocations to meas-urable qualities like experience, and the number andtype of clients with whom the individual has worked.

Another positive move would be to scrutinisedifferences in performance evaluations of men andwomen in the same job and get the appraiser tojustify differences in treatment. This is part of thesolution favoured by the UK’s Equal OpportunitiesCommission, too, in its submission to the Discrimi-nation Law Review.

What is clear is that financial firms have entered awar zone. This summer’s Morgan Stanley case wasinstigated under the National Council of Women’sOrganizations’ Women on Wall Street campaign.The campaign was launched in 2004 to provide acatalyst and rallying call for new class actions.

Discrimination and retaliation claims arising inmany financial centres have extended beyondgender into areas such as race, sexual preferenceand identity, workplace bullying and, increasingly,age discrimination. It may indeed take somethingmore “meaningful, novel and far-reaching” thandeep pockets to weather the assault. n

Special report: Finance • Ethical Corporation Workforce diversity 31

Selling Women Short: Gender andMoney on Wall Street, by LouiseMarie Roth, is published byPrinceton University Press. Seewww.pupress.princeton.edu/.

Unconsciousbiases ofmanagers, co-workers andclients influenceperformanceappraisals and pay

In June 2001, in the wake of the dotcom bust, NewYork attorney general Eliot Spitzer launched an

investigation into how Wall Street firms conductand publish investment research.

More than five years and three Spitzer-led inves-tigations later and there is much talk of structuralchange across the financial sector.

Stock analyst research has been separated offfrom investment banking. Research quality –evidenced by an increase in “sell” ratings – isreported to have improved on both sides of theAtlantic. Coverage, however, of mid-cap companieshas thinned and subtle intimidation of analysts bycompanies they cover is said to be continuing.

New SEC rules are being introduced to curb“market timing” abuses on mutual funds, thoughimplementation is expected to be delayed, andheated debate continues regarding SEC proposals torequire fund boards to have independent chairs.

While major insurance brokers have endedcontingent commission arrangements that moti-vated a bid-rigging scandal in the commercialinsurance industry, buyers themselves have beenreviewing brokers’ placement processes forevidence of fraud or conflicts.

Each Spitzer investigation has resulted in fines and restitution, and in some cases, criminalconvictions.

Consumer research published this summer by

Mintel, a research group, found that pension firms,investment managers, financial advisers and insur-ance companies have taken their places among theleast trusted professions in Britain, echoing similarresearch undertaken in the US on behalf of retire-ment product provider TIAA-CREF in 2004.

Spitzer is running for governor of New York statein the November elections. The industry could beforgiven for wanting to chalk his legacy up to expe-rience and move on. Conflicts, however, look likelyto give rise to further serious problems.

The big uglyThe first problem is continued consolidation in thecorporate and investment banking sector. Few firmscan be confident they have cracked the managerialchallenges of such scale and complexity, writesMcKinsey’s London-based Director CharlesRoxburgh in a recent The McKinsey Quarterly,before concluding, “it is far from clear that scale is anadvantage”.

The drive for consolidation also brings greaterscope for conflicts of interest. The fact that invest-ment banks and retail brokerages are permitted toreside under the same business roof made theanalyst research scandal possible. The repeal of the70-year old provisions of the Glass-Steagal by theGramm-Leach-Bliley Act 1999, however, haspermitted commercial banks to affiliate with entities

Financial supervision

Rain check regulation


Can big, complex, innovative financial groups be effectively regulated?

Ethical Corporation • Special report: FinanceConflicts of interest32

The firstproblem iscontinuedconsolidation in the corporateand investmentbanking sector.Few firms canbe confidentthey havecracked themanagerialchallenges ofsuch scale andcomplexity

engaged in securities activities and insurancecompanies, opening up further vistas for conflicts.

As diverse firms find themselves with roles onboth sides of transactions, “companies will find away to monetise that”, notes Mercer Bullard, presi-dent of Fund Democracy, the advocacy group formutual fund investors.

Complexity is breeding further conflicts all thetime. The UK’s Financial Services Authority isparticularly concerned about conflicts associatedwith investment banks buying and selling on theirown account (“proprietary trading”). Clients may bemade insiders on a forthcoming proprietary trade. Afirm may provide fee-based advice on a transactionin which it intends to make a potentially much morelucrative investment on its own account, a partic-ular problem in private equity transactions.

Clients will judge whether firms have placedtheir own interests above the clients’ own.

CapturedThe Spitzer investigations revealed a secondproblem: a lack of regulatory will to tackle seriouslyingrained conflicts of interest. US regulators werealready aware of the analyst independence issueand of some of the games played by mutual fundmanagers for the benefit of preferred clients at theexpense of long-term investors, yet had donenothing to address them.

On the insurance side, regulation has since 1945resided with the US states rather than federal regu-lators. The result has been a wide variation inregulatory standards and approaches and a race tothe bottom prompted by competition between regu-lators. Laxity has been compounded by what isreported to be an employment revolving doorbetween regulators and big insurance companies.

At the national level, there is a concern that somebanks have become too big to fail. William Seidman,a former chairman of the Federal Deposit InsuranceCorporation, remarked last year that businesscomplexity and scale made some banks “extremelydifficult to supervise and nearly impossible to takeover if they fail”.

Citigroup CEO Charles Prince recognised hisfirm had become a “quasi-public institution”. Veryapt, given that as one former SEC investigator andspecial US attorney put it: “Any prosecutor whowants to go after a very large financial institution isprobably going to have to talk to the FederalReserve first.”

Super-sized regulatorsDealing with scale and complexity is leading tosomething of a regulatory arms race, with govern-ments around the globe following the British lead increating a financial super-regulator, the divisions ofwhich reflect the complexity of their financialconglomerate charges. Calls for federalisation ofinsurance regulation in the US are part of this trend.

Such approaches reduce the scope for regulatoryarbitrage, but the inertia of the SEC in relation toembedded conflicts of interests demonstrates thatthey are no panacea. Just because the regulatedshould have no choice of regulator, stakeholdersshould not be denied access to independent over-seers. Spitzer’s policy entrepreneurialism provideda reminder of “the importance of having diverseregulators report to diverse constituencies,” saysBullard.

The constitutional importance of Spizter’s role ininvestigating conflicts in the sector is underscoredby the extent of finance sector contributions to andlobbying of the political machinery that holds theSEC’s purse strings (see Lobbying grenades atdemocracy, page 42). Upticks in political contribu-tions and lobbying spend accompany every debateabout the industry, from the implementation ofBasel II capital adequacy and risk requirements, tomutual fund regulation in the light of the scandal,and now to hedge fund regulation.

Innovating the intangibleA third problem undermining regulatory oversightis the pace of innovation in products and servicesthat even at their most basic are intangible andopaque. Retail consumers were unlikely to discoverthat mutual fund companies were permitting privi-leged clients to trade after the 4pm fund valuationpoint. While regulators and politicians wring theirhands over the growth of hedge funds and creditderivatives, they can only guess the true extent andlocation of related risks in the global financialsystem.

Growing complexity and speed can leave regula-tors caught off guard, chasing scalps after a problemhas come to light rather than helping to prevent it,leading industry groups to complain of regulationby enforcement.

Whilst independence is paramount for a regu-lator overseeing issues that are reasonably clear cut,such as those identified in the Spitzer investigations,for new issues of a more complex nature the over-riding goal may become to understand the risks andto use regulatory muscle to prompt financial profes-sionals to ask the right questions. Rather thankeeping a distance, this may mean developing arelationship of proximity to the regulated, thecourse taken by the UK’s FSA in relation to hedgefund regulation.

This is fine where risks are concentrated. Increas-ingly, however, risks are disaggregated among themultitude of decisions taken by increasinglyautonomous individuals firm-wide.

As reliance is placed increasingly on individualsto identify and manage emerging conflicts ofinterest, the strongest control response available tomanagement may be a corporate culture thatencourages all individuals simply to question. LikeSpitzer did. n

Special report: Finance • Ethical Corporation Conflicts of interest 33

The constitutionalimportance ofSpizter’s role ininvestigatingconflicts in the sector isunderscored bythe extent offinance sectorcontributions to and lobbyingof the politicalmachinery that holds theSEC’s pursestrings

Citigroup was one of ten financial institutions tosign the original Equator Principles – a set of

social and environmental standards coveringproject finance – launched in June 2003.

And the bank was actively involved in creatingthe revised principles, launched this July and signedby 41 financial institutions.

As signatories, Equator Principles Financial Insti-tutions (EPFIs) agree to incorporate social andenvironmental concerns into their internal creditrisk procedures, and require borrowers to observestandards relating to, for instance, working condi-tions and biodiversity and conservation, as acondition for lending.

The process of revising the initial principles tookaround five months, in the wake of changes to theInternational Finance Corporation’s environmentaland social Safeguard Policies, which had formed thebasis of the original Equator Principles.

Citigroup’s head of global community affairs,Pamela Flaherty, welcomes the outcome. Revisingthe principles has been “very productive”, she says,and has resulted in “a great commitment to theEquator Principles and their implementation” frominternational banks, 85% of which have now signedthe guidelines.

The revision process has further highlightedrecent changes within the financial services sector,as banks and NGOs become more willing to work

together to minimise the social and environmentalimpacts of large infrastructure projects.

But relations between the company and its criticshave not always been cordial. Citigroup was thetarget of a prolonged campaign from environmentalcampaigners Rainforest Action Network, whichclaimed that the bank was contributing to deforesta-tion through its financing of logging.

RAN dropped its campaign in 2004. Now Citi-group is on much better terms with its stakeholders.

There is “a degree of trust and a very positiverelationship,” says Flaherty. Citigroup’s latest corpo-rate citizenship report prints an endorsement fromthe Shareholder’s Dialogue Group, a self-assembledgroup of socially responsible investment funds,which includes F&C Asset Management and theinvestment programme at Friends of the Earth US.

This willingness of banks and their critics towork together comes from a realisation of mutualinterest. But it does not mean that these relation-ships are without their tensions.

How codes become lawsFlaherty disagrees with campaigners who say that aset of voluntary principles will not be strongenough to make banks enforce non-financial stan-dards. The level of interest and expectationsurrounding the principles means that its signato-ries will be called to account, she says.

Equator Principles

A point of principle

By Tobias Webb, Editor, and John Russell, Deputy Editor

Citigroup’s head of global community affairs says the revised Equator Principles willstrengthen the impetus to clean up project finance

Ethical Corporation • Special report: FinanceInterview: Citigroup34

EquatorPrinciples Financial Institutions do not have to publishinformation on their riskassessments ofspecific projects

When banks commit to the Equator Principles,says Flaherty, “they’re not voluntary internally atall”. And as soon as a bank starts incorporating theseprinciples into contracts with clients, these volun-tary guidelines become legal requirements.

But critics think that the principles still do not gofar enough on disclosure. The revised principlesrequire Equator Principles Financial Institutions(EPFIs) to report the number of deals approved andtheir level of risk, for which there are three cate-gories.

But banks do not have to publish information ontheir risk assessments of specific projects. Thereason, they claim, is that the release of social andenvironmental details would compromise thecommercial confidentiality of individual projectsand clients.

Flaherty says that, at the moment, there is not atremendous amount of pressure amongst EPFIsthemselves to single out members who are failing tomaintain standards.

“Everyone now is still in a learning mode,” she

says. “The emphasis right now is on giving peopletime to train, implement on the ground and reportout.”

The nature of large infrastructure projects meansthat they can take years to come to fruition, saysFlaherty. This means that it will take time for theprinciples to become fully embedded.

Far enough?Some campaigners would like to see the EquatorPrinciples extended to cover other types of finance.But Flaherty feels that such moves could weakenthe current guidelines.

The strength of the Equator Principles, she says,is that they are “very specific”, with a narrow focuson project finance – a type of finance where bankscovenant with clients, and therefore can exert astrong influence over their conduct.

A key revision to the principles, she says, is theinclusion of project finance advisory requirements –from the banks’ advisors who assess projects as theyare being designed. Now banks must make clientsaware of the principles, and ask clients to explainhow they plan to meet them, before they apply forfunding.

Extending the principles to cover project financeadvisory is significant because it means that theirstandards become part of project finance at a muchearlier stage in the process – at the project planningstage.

The revised principles apply to projects withcapital costs of $10 million or over, down from theoriginal $50 million, and will also cover upgradesand extensions to existing projects.

Social awkwardness?The revised principles also require banks to paygreater attention to the concerns of the communitiesin which projects take place.

The new Equator Principles put social and envi-ronmental issues on an equal footing –in accordance with the IFC standards –which include: community health,safety and security; land acquisitionand involuntary resettlement; andindigenous people.

Under the revised guidelines, banksmust ensure that borrowers consultwith local communities and put effec-tive grievance mechanisms in place.

Citigroup is one of several EPFIs tohave financed the Baku-Tbilisi-Ceyhan(BTC) pipeline – which is now trans-porting oil from the Caspian Sea to theMediterranean.

The $4 billion project showed howdifficult it can be to address the socialimpacts of large infrastructure projects,such as the resettlement of local peopleand their compensation.

In Turkey, 300 villages were cleared during thebuilding of the pipeline. Compensating villagersinvolved negotiating complex local laws – one pieceof land was owned by 800 different people – and thefact that 70% of affected land owners had no legalright to compensation.

BP managed to compensate all land owners, butstill there were disputes over what villagers wereentitled to – for example, whether corn compensa-tion was to be calculated at cost or market value,and over three years or just one.

These disputes show how messy project financecan be on the ground. The Equator Principlesprovide a secure framework for banks like Citigroupto exert their influence. But as the new guidelinescontinue to raise the bar on the social side of projectfinance, implementing the principles will not be aneasy task. n

Flaherty: happy to work closely with stakeholders

Special report: Finance • Ethical Corporation Interview: Citigroup 35

Useful link:www.citigroup.com

Flahertydisagrees withcampaignerswho say that aset of voluntaryprinciples willnot be strongenough to makebanks enforcenon-financialstandards

In 2002 a mural painted on a single Kentucky FriedChicken outlet in Northern Ireland nearly cost the

fast food chain $100 million. The reason: US public pension funds with assets

invested in KFC threatened to sell their stock unlessthe mural, which was in breach of the anti-sectarianMacBride Principles, was removed.

Four years on, the New York City EmployeesRetirement System (NYCERS) – one of the publicfunds to threaten a boycott – claims that it hasforced 80% of US companies investing in NorthernIreland to adopt the principles.

Public pension funds – which manage stateassets or the entitlements of workers in the publicsector – are starting to demand that companies actresponsibly. And as the case of KFC shows, they areputting companies under more scrutiny.

New principlesBut responsible investment is still not mainstream.

Putting an exact figure on responsible invest-ments is difficult, but experts suggest they make uparound 10% of the US market and 5-10% in the UK.

A major breakthrough came last year, when USlaw firm Freshfields judged that investors have aduty to consider long-term interests and non-finan-cial issues. This blasted the conventional wisdom, ofAnglo-Saxon markets in particular, that aninvestor’s sole duty is to maximise share returns.

Now the legal framework for considering non-financial issues is secure, institutional investors aretaking an interest.

Public pension funds were among the 40 assetmanagers to sign the UN-led Principles of Respon-sible Investment, launched in May this year, whichencourage the use of social, environmental andgovernance criteria in mainstream investing.

US aggressionApproaches to responsible investment vary acrossthe world.

For US and UK pension funds, responsibleinvestment does not mean blacklisting certaincompanies, but engaging with them on governanceand corporate responsibility – something the UNprinciples make clear.

In parts of Europe, such as Holland and Scandi-navia, public funds tend to take an explicitly ethicalstance.

In western Europe pension funds are movingtowards the engagement model pioneered in theUK. But socially responsible investments are stillrelatively small.

Pension funds in the US tend to be more aggres-sive. There the law encourages investor activism bymaking it easier for shareholders to file resolutions.

In the US, resolutions can be filed by a singleshareholder. To file a resolution in the UK requires

Long-term savings

In the public interest

By John Russell, Deputy Editor

Public pension funds are well placed to advance responsible investment. But they could domore to ensure that fund managers are putting principles into practice

Ethical Corporation • Special report: FinancePension funds36

Types ofresponsibleinvestment

• Negative screening:Funds blacklist allegedly“unethical” industries –such as alcohol, tobaccoand gambling – andcompanies with dubiousCSR performance. Popularwith retail funds, but notwith institutionalinvestors

• Positive screening:Funds target progressiveindustries, such as greentechnologies

• Investor integration:Funds start to incorporateenvironmental, social andgovernance (ECG) criteriainto their investmentanalysis

• Engagement/activism:Funds use a combinationof formal rights andinformal influence tochange corporate behaviour and strategy

100 shareholders, or at least 5% of the voting powerof the company, to come together.

Patrick Doherty, director of corporate responsi-bility at NYCERS, says US-style resolutions are “veryeffective”. He explains: “They very rarely win butthe idea is to focus the attention of corporatemanagement on the problem.”

NYCERS is making good use of this tactic. It nowfiles around 80 shareholder resolutions relating tocorporate responsibility a year, and a further 30relating to corporate governance.

Gap in the marketAcross the world all pension funds – commercialand public – face the same problem: an accounta-bility gap between trustees and fund managers.Most trustees co-sign principles of responsibleinvestment with their fund managers. But many donot ensure these principles are put into practice.

“There is a systematic problem that fundmanagers are not held to account,” says RorySullivan, director of Insight Investment, the assetmanagement arm of HBOS.

The UK typifies this accountability gap. UnderUK law, pension funds must show they are askingfund managers to address non-financial matters.

But they have no obligation to show how theyensure their policies are implemented.

To improve accountability, Sullivan says UKpension funds should start incorporating non-financial criteria, with key performance indicators,into investment management agreements.

At the moment, fund managers must report onreturns on investment. But they have no obligationto provide information on how they are addressingnon-financial issues, such as the questions asked of

companies on their social andenvironmental performance.

There are notable exceptions:the UK Environment Agency, theLondon Pension Fund Authorityand the Universities Superannua-tion Scheme, to name a few.

USS – the UK’s third-largestpension fund, with around £22billion in assets and over 200,000beneficiaries – is unusual becauseit has asset managers in house.According to David Russell, thefund’s senior adviser for respon-sible investment, this makes iteasier to oversee the incorporationof non-financial issues into invest-ment decisions.

A unique position?Public pension funds are wellplaced to spearhead responsibleinvestment.

One reason is personnel. Publicfund trustees are usually publicly elected officials,who are inclined to take an interest in non-financialissues.

Peter Scales, chief executive of the LondonPension Fund Authority, which administers thepension schemes of local authority workers in theUK capital, says political concerns mean trustees“tend to have a direct interest in ethical invest-ment”.

But political interest is a double-edged sword. For example: when CalPERS decided to divest

from Indonesia, Malaysia, the Philippines andThailand in 2002, the move prompted analysts andthe countries themselves to accuse the fund ofacting irresponsibly.

Greater scrutinyAnother reason public funds can encourage respon-sible investment is that they do not have the sameconflicts of interest as commercial funds. Experts saycommercial funds share an unspoken under-standing not to encourage investor activism.

Companies have no interest in paying theirpension fund managers to agitate. If such actionwere to become commonplace, boards would findthemselves under much greater scrutiny.

For this reason, says Sullivan, commercial fundsare “reluctant to empower” fund managers.

This raises the question of whether engagementis the best way of promoting responsible invest-ment. The advantage is that companies might bemore inclined to listen to trusted fund mangers. Thedisadvantage is that fund managers may be too cosywith companies to ask awkward questions.

What is clear is that some public pension fundsare starting to rise to the challenge. n

Special report: Finance • Ethical Corporation Pension funds 37

Responsibleinvestmentaround theworld

• In Norway, the govern-ment-owned oil fundrecently announced thatit would sell its $400million share in Wal-Mart. The $245 billionfund said it wasconcerned about the USretailer’s record onhuman rights.

• In France, the FrenchReserve Fund (Fonds deRéserve pour les Retraites)announced last year thatit would commit €600million of assets insocially responsibleinvestment funds over thenext five years.

• In the US, CalPERS andCalSTRS between them arecommitting $1 billion togreen technology.

• NYCERS, which has assetsof $100 billion, iscurrently pressurisingFortune 500 companies tostop workplace discrimi-nation on the grounds ofsexual orientation.

• Tiaa Cref, which managesthe pension plans ofmany US academics anddoctors, with combinedassets of $380 billion, thisyear launched a Socialand Community Investingdepartment.

Useful links:www.nycers.orgwww.unpri.org/principles/www.fairpensions.org.uk

Doubling up, pension funds are getting active

If every era of the stock market has its boo boys,today’s bogeymen are hedge funds. From relative

obscurity a few years ago, the hedge fund industryhas become prominent and powerful, nowaccounting for big slices of trading on the world’smain stock exchanges.

That success has spawned new financial centresin Connecticut and London, and the industry nowattracts some of the best and brightest financiers oftheir generation.

But, to many, hedge funds have a dark side. As their influence has grown, hedge funds have

come under attack from regulators, pension funds,analysts, and businesses complaining about “short-termism”, a lack of transparency, and extremevolatility in stock prices.

In a speech last year, John Sunderland, presidentof the Confederation of British Industry, blamedhedge funds for many of the markets’ ills. He saidbusiness leaders are having to justify their decision-making to investors who care little for companies’underlying performance; that hedge funds havefailed to abide by the standards of transparencyexpected in the corporate sector; and that hedgefunds have been responsible for what he called“sensational” research produced by sell-side finan-cial analysts. Shareholders, he said, should beshare-owners – “someone whose interest in thesuccess and prospects of the company lasts more

than three weeks”. The speech led to a widespread debate in the

media. A Financial Times editorial said businessleaders would have “quietly cheered” Sunderland’sremarks – a comment that was backed up when anumber of executives came forward.

But others sought to defend hedge funds on thegrounds that not all of them behave in the sameway and that, in providing liquidity, they arehelpful for the market as a whole. Defenders ofhedge funds tend to say that they have beenunfairly caricatured and that much of the criticismresults from people misunderstanding what theyactually do.

Hedge funds account for a relatively minorportion of assets under management, they say. Andthe stereotype of the “hedgie” – brash, flash,cunning and self-serving – belies an industry thathas matured into a diverse, heterogeneous collec-tion of investors, many of whom never “short”stocks, and often behave more like typical fundmanagers.

ShortingThere are now at least 8,000 hedge funds, mostly inthe US and UK. The big difference from the past isthat the industry is now funded not only by a fewwealthy individuals – such as Saudi sheikhs andTexas oil-men – but also by many mainstream

By Ben Schiller

Critics of hedge funds say they exacerbate the problems of stock price volatility and“short-termism”, while campaigners also fear the effects private equity firms may haveon corporate responsibility

Hedge funds and private equity

Trading down corporate responsibility

Ethical Corporation • Special report: FinanceHidden finance38

Up to 50% of alltrades on theLondonStock Exchangeare conductedby hedge funds

Such incidents have added weight to calls forgreater regulation of the industry and have been aboon for critics who complain about transparency.One the main charges is of double standards: whileactivist hedge funds decry companies on corporategovernance grounds, they are hardly leaders them-selves. Many are based off-shore and most fail todisclose their levels of pay or provide detaileddescriptions of their activities. In fact, hedge fundstend to take pride in their secretive, outsider status.

Particularly controversial is hedge funds’ use of“contracts for difference” – derivatives that allowinvestors to bet on a change in stock price (avoidingstamp duty) without owning the underlying shares.Up to 40% of trading on the London StockExchange now relates to such contracts.

The problem for companies is that they do notknow who owns their shares – particularly alarmingwhen in the midst of a takeover battle, or whentargeted by funds seeking changes to managementor strategy.

Secret “stake-building” was a contentious issuewhen the London-based Children’s InvestmentFund blocked Deutsche Börse’s bid to buy theLondon Stock Exchange in late 2004. At the time, theinvestment fund said Deutsche Börse was over-paying for the LSE, but academics have sincecontended that TCI had also taken a secret shortposition in LSE shares – providing an alternativeexplanation for its activism. Such alleged double-dealing alarms those who say that underhandmanoeuvring during takeover battles is becomingmore important than the merits of the deals them-selves.

Not thinking aheadMany think the rise of hedge funds has deepenedthe problem of “short-termism”. Certainly theaverage stock ownership period has fallen duringrecent years, from an average of two years in 1998,to 14.6 months in 2000 and just 9.4 months now.

With fund managers turning up the heat onexecutives, the penalties on those managers who fail

sources as well.About half of the $1.1 trillion under management

comes from institutions, including venerable USpension groups such as CalPERS and even someuniversity endowment funds and central banks.Some would like to see retail investors, who havebeen excluded from hedge funds in the past, giventheir chance too. Forecasts project the hedge fundindustry to grow by about 300% over the next fiveyears.

Though they control only about 5% of totalglobal assets, the influence of hedge funds is widelyfelt because they tend to trade much morefrequently than other types of investor (oneestimate says up to 50% of all trades on the LondonStock Exchange are conducted by hedge funds) andbecause they borrow heavily against their assets toincrease their stakes.

What concerns company executives is thatfrequent trading causes wild price fluctuations.Some hedge funds will “short” stocks at the slightestsign of deterioration in performance, howevertemporary, causing price movements that are out ofall proportion to a company’s prospects, they say.(Short-selling is the practice of borrowing shareswith a promise to give them back at a later time. Thetrader sells them when the share price is high andbuys them back – to fulfil the promise – after theprice falls, thus making a profit from a fall in shareprice.)

Some major companies have seen their shareprices fall by 30% in a single week after hedge fundshave gone after them.

Executives argue too that investment banks,which generate commissions from trading, areaiding hedge funds. “The brokers are looking acrossthe market and seeing who are the groups that aremost likely to play. There has been an increasinginterest in dealing with hedge funds,” says ArthurProbert, an associate at the think-tank Tomorrow’sCompany and co-author of a 2004 study on the UKinvestment climate.

Hardly helping their reputation, hedge fundshave also been accused of trying to deliberatelyforce down prices. In the US, the chief executive ofOverstock.com, Patrick Byrne, says hedge fundsconspired with research firms to produce negativereports about his company. In another case, a UShedge fund allegedly started a letter-writingcampaign aimed at triggering an SEC investigationinto a company it had invested in (there was indeedan SEC investigation).

There have been other abuses too. The FinancialServices Authority, the UK markets regulator,recently levied a £1.5 million fine against GLGPartners, one of London’s leading hedge funds,accusing it, and one of its staff, of “improper”trading. French regulators have also investigatedGLG and its co-founder Pierre Lagrange for allegedinsider dealing.

Villains orangels?

• Hedge funds are growingin size and power,buoyed by institutionalmoney.

• Not all funds fit themould of destructivewheeler-dealers butsome raise concernsabout stock price fluctua-tions, transparency, andshort-termism.

• Critics of the industry aredemanding greater trans-parency and regulation.

• Private equity firms havebenefited from short-termism, snapping upcompanies that want toescape public markets.

• The jury is still out onwhat private equitymeans for corporateresponsibility, but theindications from somecompanies are not prom-ising.

Special report: Finance • Ethical Corporation Hidden finance 39

Four times asmany of theworld’s topchief executiveswere sacked last year aswere sacked ten years earlier

Transparency of asset ownership is moving high up businessagendas

Ethical Corporation • Special report: FinanceHidden finance40

Defenders ofhedge fundstend to say that they havebeen unfairlycaricatured and that muchof the criticismresults frompeople misun-derstandingwhat theyactually do

to deliver strong returns are stiffening. According toconsultants Booz Allen Hamilton, four times asmany of the world’s top chief executives weresacked last year as were sacked ten years earlier.

The past year has seen a slew of studies warningof the dangers of short-term attitudes, with manyblaming hedge funds, at least partly, for the extremepressures on executives. In the US, business groupssuch as the Conference Board, and Business Round-table, and CFA Centre for Financial Market Integrityhave all recently published reports saying that anobsession with short-term earnings is hurtingcompanies’ ability to create long-term value andhindering efforts to strengthen corporate gover-nance.

The Roundtable study recommended endingquarterly “earnings guidance” – an idea secondedby consultants McKinsey and by companies such asPfizer and Cable & Wireless.

Unions have also been adding their voice to thedebate. In March, the TUC, representing UK unions,published a report titled “Investment Chains:addressing corporate and investor short-termism”,arguing that short-termism was hurting the Britisheconomy, its businesses and its workers, and wasone reason why investment by British companieslagged well behind that in France, Germany and theUS.

The argument is echoed by Don Young, a veteranUK executive and author of the 2004 book “Havingtheir cake: how the City and big bosses areconsuming UK businesses”.

Evidence suggests that short-term pressures onexecutives limit investment in all kinds of areas. In asurvey last year of 400 senior US executives by theJournal of Accounting and Economics, four-fifths ofrespondents said they would cut spending onresearch and development, advertising, mainte-nance, and hiring to meet their quarterly targets.Corporate responsibility campaigners argue that

ethics also get left to one side when companies arepressured to hit their numbers.

Workers are one group that suffer, says TomPowdrill, the TUC’s senior policy officer. Oneexample is when companies, under pressure fromfund managers, seek mergers or acquisitions.Powdrill says the history of mergers proves thatthey often fail to increase long-term value butfrequently lead to large-scale job cuts.

Hedge funds are said to be prime movers behindthe spate of recent takeover activity in Europe andthe US. Investment bankers say that by buildinglarge positions in companies that are likely takeovertargets, hedge funds become loud voices in favourof deals taking place. So-called “merger arbitrage”was the second most lucrative strategy followed byhedge funds in the second quarter of 2006,according to figures from Morgan Stanley.

Self-defeatingAll in all, the increasing power of hedge funds is asource of worry when considering long-term valuecreation and corporate ethics. That said, the amountof money pouring into hedge funds is likely to havea limiting factor on some of the more questionableactivities. Already some of the buccaneering spirit ofthe old days has given way to more conventionalinvesting as mainstream money has moved in.

It is hard to believe that regulators will not seekto tighten rules relating to hedge funds – forinstance, concerning secret stake-building, and thefunds’ own disclosure requirements.

More significantly, the volume of recent noiseabout short-termism indicates that a range ofmarket participants are waking up to the dangers ofone of group of investors having so much say overhow markets, and companies, are run.

In the end, the danger for markets is that ifcompanies see too many downsides to beingpublicly quoted, they will seek capital elsewhere, assome are already doing by going private. If thattrend continues, it would have consequences forhedge funds as well as everyone else.

When Kohlberg Kravis Roberts bought out foodand tobacco conglomerate RJR Nabisco in 1988, itwould have been hard to imagine that the $31.4billion takeover – still the largest buyout by a privateinvestor – would be surpassed. But with privateequity firms now going after larger and largercompanies, some commentators speculate that therecord could soon be broken. Among the companiessaid to be “in play”, according to a recent article inBusiness Week magazine, are Vivendi, Time Warner,Deutsche Telekom, and Unilever.

In the past year, dozens of well-known names,including Hertz, Tommy Hilfiger, and Dutch infor-mation group VNU have been taken into privatehands. Others, including cable group NTL,Vodafone and Trinity Mirror (owner of the UK’sMirror newspaper) are thought to be possible

Hedge funds: capitalism on the edge, or out of control?

Special report: Finance • Ethical Corporation Hidden finance 41

Private equitymanagers saythey are thevery opposite of hedge funds,in the sensethat they relievepressure onmanagementto deliverregular returnsto shareholders

The problem forcompanies isthat they do notknow who ownstheir shares

targets for private equity investors. Up to the end of the second quarter this year,

European private equity firms had completed €77billion worth of deals. Worldwide, the private equityindustry is thought to have about $300 billion incash, which could amount to $1 trillion in spendingpower if firms borrow against their capital,according to Ernst & Young.

Private equity vs transparencyThe question is what the worldwide movement toprivate ownership might mean for corporateresponsibility. The worry among campaigners isthat going private will reduce companies’ visibilityand accountability, causing a steady run-down ofresources set aside for corporate responsibilityefforts.

“When you have something in private equityyou don’t have the public visibility about corporateresponsibility activities in the same way as withpublic companies,” says Arthur Probert fromTomorrow’s Company. “It is reasonable to wonderexactly what happens next, because the privateequity houses are not particularly open about theirviews on corporate responsibility.”

One sector already causing concern is retailing.This May, Somerfield Stores, a mid-ranking UKgrocer, pulled out of the Ethical Trading Initiativeafter being bought out by private equity group ApaxPartners and other investors, and delisted from theLSE. In leaving the alliance, which includes most ofthe major UK retailers as well as non-governmentalorganisations and unions, Somerfield said it neededto reconsider its “short- and medium-term businesspriorities” and refocus its marketing strategy (newslogan: “giving you what you want”).

Other retailers, such as Debenhams, have alsorecently gone private, but it is too early to say whateffect their new status might have. News thatprivate equity firms are circling GAP – no strangerto controversy – has worried campaigners in the US.

Corporate responsibility was also an issue whenPhillip Green, the UK retail entrepreneur who ownsboth Arcadia and BHS, wanted to buy Marks &Spencer in 2004. Comments were published in theFinancial Times saying Green's capture of M&Swould put its strong corporate responsibilitycredentials at risk.

Green is well known for squeezing his suppliersand has been criticised by anti-sweatshop groupssuch as Labour Behind the Label. This April, he wasexposed in the Observer to be using factories inCambodia where workers were treated harshly andunions were outlawed.

BITC says it is now talking internally about howto approach private equity firms and companiesthat have been taken private.

Buy, strip, flipThe main criticism of private equity firms is that,after buying out companies, they load them withdebt, take out the cash, and then sell on the emaci-ated carcass a few years later. In Germany, privateequity firms have famously been described aslocusts for their asset-stripping activities.

Other critics say private equity firms, like hedgefunds, operate in secret nether worlds, providingscant information about their activities and resistingall attempts by regulators for greater public scrutiny.

However, Peter Linthwaite, chief executive of theBritish Venture Capital Association, which repre-sents private equity firms, says the image does notfit the reality.

First, he says, private equity firms are account-able to their own shareholders, such as pensionfunds. Second, they have no interest in destroyingthe reputation of a company they would like to sellon at a later date. “By being on the boards, by beingfar more closely involved in the company than ashareholder in a public company, they are inti-mately involved in these issues,” he says.

Senia Rapisarda, head of the private equity insti-tute of the London Business School, says there hasbeen a marked shift in attitudes towards corporateresponsibility in the industry in recent times.

Private equity managers say they are the veryopposite of hedge funds, in the sense that theyrelieve pressure on management to deliver regularreturns to shareholders. Some executives, includingRichard Lapthorne, chairman of embattled UKtelecoms group Cable & Wireless, have cited theshort-termism of the public markets as reason totake cover as a private outfit.

The long-term question is whether private equityis really the antidote to the problems of stockmarkets, or whether private stewardship of compa-nies will simply put back efforts to encouragegreater corporate accountability and transparency.

Certainly private equity firms would do well tostart talking more frankly about their activities andstart thinking about their responsibilities as owners. n

Private equity: reflecting modern values

Lobbying grenades atdemocracy


Transparency is overdue on financial firms’ political contributions and lobbying

Financial firms have as much right as any other stakeholder torepresent their views to regulators. The process is public and

consumers and market counterparties have the opportunity torespond. When firms go by the back door to influence the legisla-tors who hold regulators’ purse strings, however, that needsjustification.

Corporations are prohibited from making contributions inconnection with US federal elections, but may set up Political ActionCommittees (PACs) and cover the administration and fundraisingcosts of these. According to figures compiled by the Center forResponsive Politics (CRP) from Federal Election Commission data,individuals and PACs connected to commercial banks, insurancecompanies, and securities and investment firms contributed a totalof $162,171,913 to US political candidates and parties in the 2004election cycle, and $80,480,337 so far in the 2006 cycle.

Figures compiled by CRP from semi-annual lobbying disclosurereports filed with the Secretary of the Senate’s Office of Public

Records show financial firms spent a total of $203,004,446 on lobbyingin 2005. American International Group alone spent $8,496,000.

If firms were transparent about what agenda they were pushingand how, that would help quell allegations that financial institu-tions and their senior executives are skewing democraticinstitutions and processes towards the interests of those wieldingfinancial power. Political influence buying, however, is a neglectedarea in corporate responsibility reports.

In the 2006 election cycle, for example, Citigroup made politicalcontributions of $1,639,141 and lobbying expenditure of $3,420,000,making it the most active influencer among commercial banks.While Citigroup sets out a broad policy statement on political giving,there is no detail on the agenda being pursued by such giving or byits lobbying spending. This is particularly worrying given that Citi-group’s progenitors pulled off the biggest lobbying coup in USfinancial history by bringing about the repeal of the Glass-SteagallAct to permit banks to be affiliated with insurance companies.

Among UK firms, HSBC states that in keeping with its long-standing policy it made no political contributions in 2005. HSBC,however, has inherited what is now the HSBC North America Polit-ical Action Committee (H-PAC) following its purchase ofHousehold International. H-PAC has contributed $1,833,526 tofederal election campaigns and other PACs during the 2006 electioncycle. Next year’s corporate responsibility report ought to explainwhether HSBC Bank USA’s contributions to the congressionalcampaign of David Yassky, a New York City councilman, representsa change of policy or just a control lapse.

HSBC and others also need to account for political contributionschannelled through trade groups. HSBC is a member of the Finan-cial Services Roundtable, a group that includes Citigroup andBarclays among its members. The Roundtable pushes an agendathat includes a policy attacking “excessive regulation” and spent$5,700,000 on lobbying in 2005 and $258,678 on political contribu-tions in the 2006 cycle.

Legislators were lobbied on issues including the recapitalisationof banks by bank directors – a proposed guard against excessive risktaking by bank boards that is supported by the FDIC – and againstrules that would make mutual fund boards more independent.

HSBC asserts that they do not generally lobby politicians or legis-latures, other than in the US where it is considered essential “inorder to manage business risk.” HSBC Bank USA spent $2,320,000 onsuch risk management in 2005, helping legislators “to frame lawsthat are fair to consumers, society at large, and the finance industry.”

Transparency might help consumers and society decide whethertheir views on fairness were being adequately represented. n

Ethical Corporation • Special report: FinanceBuying influence42

Source: Center for Responsive Politics. 2006 figures are based on part-year data.

0

$2m

$4m

$6m

1998 1999 2000 2001 2002 2003 2004 2005

0$50m

$100m$150m$200m$250m

1998 1999 2000 2001 2002 2003 2004 2005

Commercial Banks Securities & Investment Insurance

0$500m

$100m

$150m

$200m

1990 1992 1994 1996 1998 2000 2002 2004 2006

Commercial Banks Securities & Investment Insurance

Annual lobbying spend by financial firms

Political contributions by PACs and individuals connectedwith financial firms

Financial Services Roundtable lobbying spend

Recent influence scandals continue to dog both business and politics

Untitled-5 1 14/8/06 4:53:22 PM

Return your comments to: The Co-operative Bank p.l.c.,Ethical Policy Unit, Corporate Affairs, FREEPOST NWW 8564A, MANCHESTER, M4 9HA.

NO£20 million of finance to oil

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primary agents of climate change. The Bank declines involvement in their extraction and processing.

Sometimes it’s our business to say NoThe Co-operative Bank’s Ethical Policy is based on the ethical concerns of its customers. It directs which businesses we will and will not provide services to.

During 2005, the Bank turned away some 30 businesses whose activities were in conflict withour customers’ ethical concerns. As a result, income worth some £10 million was forgone by the Bank.

At the same time, we directed significant monies to businesses whose activities were supportive of ourcustomers’ ethical priorities.

We have committed to regularly review our Policy,and would like to invite you to suggest any issues that you think should be considered for inclusion in our Policy.

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Strategy and Management for Global Ethical Banking

The Sustainable Finance SummitThe Sustainable Finance Summit28th and 29th November 2006 • Regent’s Park Marriot Hotel • London

management strategies for big banks. Witha primary ongoing conference theme ofpragmatic approaches, this is anopportunity you won’t want to miss. Butplaces are limited, so register today toensure your place.

And these sessions are only the start.Following on, you’ll hear from, networkwith, and talk off the record to, leadingthinkers and practitioners across thebanking and finance spectrums. Just checkout the programme opposite to see whatwe mean.

You’ll also be hearing about how socialissues have become strategic in globalfinance. With the International FinanceCorporation and many others now focusingmuch more on thinking about social impactsof project lending, your organisation willincreasingly need to understand these trickyissues…you’ll hear from industry experts onjust how best practice works. Among thosespeakers will be:

F&C Investments, Karina Litvack, Director, Head of Governance & Socially ResponsibleInvestment

The Co-operative Bank, Barry Clavin, Ethical Policies Manager

Barclays, Helen Wade, Associate Director, PFI & Structured Project Finance

Standard Chartered, Chris Smith, Head of Sustainability,

Wall Street Journal, Matthew Kaminski, Editor, Editorial Page

Canadian Imperial Bank of Commerce (CIBC), Pat Hayles, Member of the Board

John Plender, Financial Times Columnistand author of All You Need To Know AboutEthics And Finance

Standard Chartered Capital Markets, Ann Grant, Vice Chairman

FTSE, Will Oulton, Strategic Advisor

Barclays, Peter Kelly, Head of Financial Inclusion

…and many more!

navigate your way forward. With bestpractice case studies, in-depth, off therecord discussions and packed withnetworking time, it’s not just thesustainable finance event of the year – it’sthe only serious conference you shouldconsider attending.

Consider this: The newly revisedEquator Principles now represent some85% of global project finance, and thatpercentage is going up almost daily. If youare a big company who uses project finance,as most do, you’ll want to register for thisconference today to hear how the new 2006Principles AND the International FinanceCorporation’s lending strategies willchange the way you do business tomorrow.

How banks can manage profit andsustainability will be addressed early on byJon Williams, a leading thinker andpractitioner who is also Head of GroupSustainable Development at financialbehemoth HSBC Holdings. Jon will takeattendees through his vision of the state –and future changes – in global bankinggovernance. This is a session and insightsyou can’t afford to miss if you work andwant to progress, in a serious financialinstitution or large company.

Then, the Sustainable Finance Summitbrings together not just one but two topfinancial institutions on the same panelsession to talk through their views on oneof the trickiest management issues to raiseits head in recent years – stakeholderengagement. You’ll hear from GarryHoffman, Group Vice Chairman atBarclays, and Chris Smith, Head ofSustainability at Standard Chartered, fortheir views on how stakeholderengagement has changed the way banksview the world forever.

But this isn’t some high fallutin’academic conversation. Oh no. They’ll bediscussing how engaging with bothcustomers, clients, regulators andcampaign groups has opened up a broadernew world of investment and

The Financial Times recent awards forsustainable banks in 2006 show how theseissues have gone properly mainstream.Bank strategies are front page news, andtheir misfortunes are too, as many recentstories illustrate. As banks go truly global,many for the first time, they are entering awhole new world of trust, risk – andopportunity – that must be well managed.This conference will enable YOU to

So why ethical and sustainable finance, and why a conference now?

The business solutions you need: Fresh perspectives and practical advice that’s easy to implement

Places are limited, register now – call +44 (0) 20 7375 7575

Places are limited, don’t missout on your chance to attend,register today! Other issues covered at this event, whichhas limited numbers of attendees tomaximise networking will include:

n Responsibility for indirect impacts on human rights

n The UN Principles for ResponsibleInvestment – How can they bemainstreamed – is this happening?

n Mutual funds – ensuring investor interests are safeguarded through good fundgovernance

n Divestment campaigns – what value dothey really have?

n Obstacles to work place equality in theCity and on Wall Street and how toaddress them

n Emerging NGO visions of sustainablebanking

n Tackling HIV / Aids

n Financial inclusion and microfinance

n Financing renewable energy

n Ethics in consumer finance in emergingmarkets

n The Carbon Foot printing of investmentfunds

Sustainable finance has never had it so good. Now that recognition of the key role of financial institutions in

stable and sustainable development has come, here’s the tricky part: implementation, and opportunity

recognition. This leading-edge conference will show you the way forward on these difficult, but essential

issues. A glance at the programme overleaf will show you that.

And that’s not all... Every attendee will get a FREE copy of Ethical Corporation’s 15,000 word special report on Sustainable Finance

in 2006. This 40 page publication, written and edited by our Finance Editor Andrew Newton and other expert contributors, will give

you a perfect framework for further thinking and the latest insights into best practice.

The earlier you book, the less you pay. Register by October 27th and save £200!

Exhibition and sponsorship opportunitiesWant to do business with the leading Banks and Financial Institutions?The Ethical Corporation Sustainable Finance summit gives you all this…and more!

Throughout the summit a select number of leading solutionproviders will have the opportunity to discuss and advise on their latestproducts, solutions and services to a targeted finance-focusedaudience.

You’ll have every chance to talk with the clients and prospects youwant to do business with and kick start your sales. All under one roofand all in just two days – saving you both time and money!

If you have a product or service that would benefit from extraexposure, please contact Ethical Corporation today and we’ll detail theopportunities available.

Contact us now as exhibition places are strictly limited and will beallocated on a first come, first served basis and are already bookingfast! Call: +44 (0) 20 7375 7188 or 1 800 814 3459 x 310 (US) to speak toAndrew Bold. Email: [email protected]

Great reasons to attend!

n The Ethical Corporation Sustainable Finance Summit bringstogether the biggest names in global ethical banking.Industry experts from companies operating in Europe andworld-wide will share their wealth of experience,knowledge and passion with you and ensure that youunderstand how you can deliver big opportunities fromyour operations.

n We’ll only be talking Sustainable Finance - on a big scale.

n The Ethical Corporation Sustainable Finance Summit is theonly specific event addressing the opportunities for biginstitutions that exist in the European region.

n Driven by experts, this is your opportunity to listen to,network with and learn from the best on how to navigateyour way around the challenges the industry faces.

Over 12 hours of networking!The numerous networking opportunities throughout the two daysprovides you with a perfect opportunity to network with the biggestplayers in the Sustainable Finance industry and meet with those thatface the same complex challenges as you. Furthermore, the summitexhibition allows you to meet with many experts all under one roof,saving you time, resources and money.

Get the full briefing!Where do opportunities exist for you world-wide? And how do youfunction within the boundaries of expectations? Nowhere else givesyou the answers to these questions and more. The Ethical CorporationSustainable Finance Summit has the major players from every verticalwithin the industry ensuring your business gets the best, most timelyand detailed roadmap to finance success.

Independent forumsThe Ethical Corporation Sustainable Finance Summit is an independentevent. We’re not here to sell you a particular idea, piece of research orvendor solution.

We are here to make sure you receive a well-balanced, innovativeand informative briefing to enable you to make the best decisions foryour business.

Bring your team and receive discounted tickets!Come along to the event with your team and make substantial savingson your ticket prices. Not only will you receive an expert briefing butyour team will also take away best practice tips that stretch right acrossyour business, enabling you to steal the march on your competition.Call +44 (0) 207 375 7575 now!

Great feedback from past attendees!These are just some of the positive reviews we have received for EthicalCorporation Summits;

‘I greatly enjoyed the conference...’

‘A tremendously valuable event...’

‘Very interesting and well prepared event...’



FAX This form to +44 (0) 20 7375 7576

EMAIL The Ethical Corporation Registration Team

on [email protected]

MAIL This form to Ethical Corporation,

7–9 Fashion Street, London, E1 6PX, U.K.

ONLINE Go to www.ethicalcorp.com/finance and

submit your details for instant confirmation

of your place

The Sustainable Finance Summit 2006Strategy and Management for Global Ethical Banking

Keynote speech

Banking on sustainability: howfinancial institutions can manage profit and sustainabilityMost public companies are facing – or will soon face – thechallenge of maximising profits in a world increasinglyfocused on maintaining social and environmentalcapital. In some markets, this is compounded bychanging regulatory frameworks relating toenvironmental protection, and major shifts in publicperception of corporate roles in society. The companiesbest positioned to tackle this challenge have alreadymoved beyond a compliance mindset to take an activerole in identifying the business opportunities fromsustainable development. Hear how this leadinginternational bank is building a culture focused on profitand sustainable development.

n The changing role of the financial sector in sustainabledevelopment, including the drivers of change

n How to link core business strategy to sustainability

n Key issues in improving environmental and social performance

HSBC Holdings plcJon Williams, Head of Group Sustainable Development

HSBC Holdings plc is the Financial Times’ Sustainable Bank of the Year2006. It also recently topped the Banks and Diversified Financials sector inthe Carbon Disclosure Project 4 Climate Leadership Index.

Panel

Opening up: banks and stakeholder relationsCorporate governance in the financial sector has beenextended to incorporate notions of stakeholdergovernance over the last five years. But how profound isthat change? In this session you’ll hear from a leadingexecutive on:

n Beyond regulators, the emerging models of stakeholderengagement for banks

n What has Barclays learned in recent years about effectivestakeholder relations?

n Have these engagements improved their risk radarand returns opportunities?

BarclaysGarry Hoffman, Group Vice Chairman

Standard CharteredChris Smith, Head of Sustainability

Moderated by: Ethical CorporationAndrew Newton, Finance Editor

Speech

Can the current financial system deliver the necessary change?Michael is going to explore some of the charges againstthe current financial system’s ability to providesustainable finance. With a focus on climate changeissues, Michael intends to explore:

n Some of the technical and structural issues surrounding long-terminvestment in sustainable financial projects

n The deeper societal problems he feels are actually atthe core of the need for change

n Initiatives underway to see how financial services can bettersupport longer-term sustainable investment

Z/Yen LimitedProfessor Michael Mainelli, Executive ChairmanMercers’ School Memorial Professor of Commerce at Gresham College

Speech

A non-executive director’s view ofsustainability in the financial industryIs corporate governance the missing link in financialsector sustainability strategy? How does this complexand emerging issue impact the way boards view risk,strategy and decision-making? In this presentation, PatHayles will address:

n Where do sustainability issues intersect with the Director’s role?

n The key drivers that put environmental and social sustainability onthe agenda for boards of directors. What should a good non-execbe doing in response?

Canadian Imperial Bank of Commerce (CIBC)Pat Hayles, Member of the Board

The earlier you book, the less you pay – Register by October 27 and save £200!

DAY 1 MORNINGAGENDA

Who should attend?

Directors, Heads and Managers of:

Risk

Corporate Responsibility

Sustainability

Sustainable Development

Overseas Expansion

Inclusion and Diversity

Project Finance

Public Affairs

Government Affairs

Communications

External Affairs

Investor Relations

Business Development

TRACK ONE TRACK TWO

Equator Principles II: the challenges ofimplementationThe corporate perspective: arethe Equator Principles impactingcorporate performance? The newperformance standards: how doyou judge non-compliance?Move over BankTrack: arewestern NGOs shut out from thedebate? Extractives industryfinance: is it compatible withbroad community support?

ABN AMRORichard Burrett, Managing Director,Sustainable Development, WholesaleClients

Wall Street JournalMatthew Kaminski, Editor, Editorial Page

ICMMKathryn McPhail, Principal

Moderated by: Sustainable FinanceLeo Johnson, Co-Founder

Divestment campaigns – what value do they really have?Recent high profile campaignshave been all over the media. What impact do they really haveon the countries they aresupposed to affect via corporateproxies? What are the issueshere, positive and negative,around such campaigns andwhere are they headed when itcomes to countries such asSudan and others?

FTSEWill Oulton, Strategic Advisor

KLD AnalyticsPeter Kinder, President

Keynote address

Finance and leadership: howto tackle the big ethics issuesIf European finance can learn muchfrom the Americans, as institutionsgo global values and value mustbecome better aligned. In thispresentation leading commentatorJohn Plender will address:

n Can European banks and institutions learn about ethics from the US, and vice versa?

n Values come from the top down, whyleadership is vital

n What does that mean in practice, how do the best finance bosses act, and why?

n What are the likely implications of better leadership for emerging markets and financial stability?

John Plender, Financial TimesColumnist and author of All You Need ToKnow About Ethics And Finance

Keynote

What do consumers wantfrom responsible banks?The Co-Operative Group has inrecent years become a leading UKexpert on trends in ethical buying.In this session, they will reveal theirlatest findings from 2006 researchand discuss in detail:

n The latest UK ethical consumption research - what does it mean forthe finance sector?

n What are the impacts for growth of ethical finance?

n What can ethical finance providers - and others - learn from otherethical consumer markets?

The Co-operative Group, Barry Clavin, Ethical Policies Manager

Group discounts available – Forward this to your colleagues!

Mainstreaming ESG factors into investmentmanagementThe UN Principles for ResponsibleInvestment – How can theybe mainstreamed – what doinvestee companies view as best practice engagement on ESG issues?

ABN AMRO AssetManagementDavid Morrow, Global SRI Products Specialist

GES InvestmentJohn Howchin, VP International Operations

UBS Investment BankJulie Hudson, Managing Director, Headof Socially Responsible InvestmentEquity Research

Mutual funds – ensuringinvestor interests aresafeguarded through good fund governance The role of independentdirectors and trustees. What arethe current issues investor groupsare concerned about, and whatare the opportunities forimprovement? What doesengaged best practice look like,who is doing it, how and why?

F&C InvestmentsKarina Litvack, Director, Head ofGovernance & Socially ResponsibleInvestment

Henderson GlobalInvestorsMark Campanale, Head, SRI BusinessDevelopment

AGENDA DAY 2 MORNINGAGENDA DAY 1 AFTERNOON

TRACK ONE TRACK TWO

Panel

Emerging NGO visions of sustainable banking NGO campaigning against the financesector has been extremely successful.Where is their agenda for changeheading next? What does asustainable bank look like? What isthe likely shape of Collevecchio 2?What concerns are being expressedabout developing countryindebtedness to private financialinstitutions following the G8 debtwrite-off plan?

BankTrackJohan Frijns, Co-ordinator

WWF-UKJames Leaton, Senior Policy Adviser

SmartLogik Action GroupJustin Jones, Founder

Netwerk Vlaanderen vzwChristophe Scheire, Researcher andCampaigner

Case Study

Financial inclusion and microfinance Emerging trends for financing thebottom of the pyramid – how shouldapproaches differ between emergingand mature economies?

BarclaysPeter Kelly, Head of Financial Inclusion

Case Study

How financial firms can tackle HIV / Aids In Africa, Asia and elsewhere, financialinstitutions as major employers have arole to play in curbing the spread ofthe disease. Find out here howleading banks are taking a cuttingedge approach to tackling the issue – and what the results are.

Standard Chartered CapitalMarketsAnn Grant, Vice Chairman

Panel

Financing renewable energy Currently undergoing a boom, is the financing of renewable energytechnologies a case of the marketcoming to the rescue of the planet, ora noisy deviation from the real workthat needs to be done on divertingfinance away from greenhouse gasproducing power generation andother dirty industries?

BarclaysHelen Wade, Associate Director, PFI & Structured Project Finance

InnovestAndy White, Strategic Value Advisors, MD, Global Head of Research

Jupiter Asset ManagementEmma Howard Boyd, Head of SRI &Governance

Equator principles as a de facto emerging platform for responsibility inprimary markets Beyond project finance, to whatextent are the Equator Principlesbeing used for corporate debtsyndication, new issues of debtand equity instruments, andventure capital? What are theissues in transferring the EP inthis way? What are the logicallimits of this extension of theframework? Do the projectfinance principles issued recentlyby European development banksrepresent a challenge or anunhelpful diversion from the EP?

Ergon AssociatesStuart Bell, Policy Director

The carbon foot printing of investment fundsThis session will discuss currentforms of accreditation andevolving standards of practice:What does certification within SRI & CSR look like? Having beenranked recently, are funds set toimprove performance, and whatare the barriers to change andopportunities?

EconomieBrian Spence, Founder

Reserve your place now • www.ethicalcorp.com/finance • Email: [email protected]

AGENDA DAY 2 AFTERNOONAGENDA DAY 2 MORNING

CONFERENCE ENDS

Why you can’t afford tomiss this conference

PROVEN SUCCESSn Over 2000 of your peers have

attendedn Over 5 years of Ethical Corporation

conferences

SENIOR EXECUTIVEPARTICIPATIONAttracting senior strategic decisionmakers with top-level speakers, closeddiscussion forums, interactiveroundtables, knowledge-sharing panelsessions, in-depth workshops andsuperb networking

TOP LEVEL STRATEGIC COVERAGEof all the major issues in the biggestEuropean and US markets

OUTSTANDING NETWORKINGn Over 200 delegates will register for the

2006 event!n New for 2006 -Speed-networking

sessions!


FAX This form to +44 (0) 20 7375 7576

EMAIL The Ethical Corporation Registration Team

on [email protected]

MAIL This form to Ethical Corporation,

7–9 Fashion Street, London, E1 6PX, U.K.

ONLINE Go to www.ethicalcorp.com/finance and submit your

details for instant confirmation of your place

Dates and VenueNovember 28-29 2006, Regent’s Park Marriott Hotel, London.(further details provided when you register)

Hotel DiscountsWhy not extend your stay in London? We have negotiated a special room rate at the Regent’s Park Marriot. Reservation and price details will be sent to youwhen you register.

Group discountsBuy 3 passes and get the 4th one free! When you purchase 3 full price tickets!Please note that this offer is not in conjunction with any other offer.

Cancellation PolicyPlaces are transferable without any charge. Cancellations before 27th October 2006 incur anadministrative charge of 25%. If you cancel your registration after 10th November 2006 we will beobliged to charge the full fee. Please note - you must notify Ethical Corporation in writing of acancellation, or we will be obliged to charge the full fee. The organisers reserve the right to makechanges to the programme without notice. All prices displayed are exclusive of VAT unless otherwisestated but, vat will be charged, where applicable, at the prevailing rate on the invoice date and therelevant details will appear on the invoice. Please see terms & conditions onwww.ethicalcorp.com/finance for more details about prices.

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Reserve your place now • Phone: +44 (0) 20 73 75 75 75 • Fax: +44 (0) 20 7375 7575

Places are limited, register now – call +44 (0) 20 7375 7575

3 SIMPLE STEPS TO REGISTER NOW!1. Your Choice of Registration Package

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Supporting partners:

Strategy and Management for Global Ethical Banking

A two-day conference focusing on cutting-edgestrategy and management for sustainable finance

Key issues you’ll hearabout at this conference:

n Reaching outside the home market:sustainability and growth

n Learn how to turnstakeholderengagement intobusiness opportunity

n Customers and churn:better sustainabilitycommunication = moreloyalty

n Engaging clients onsustainability issues:what works, what doesn’t?

n Why ethical strategiesimprove employeemotivation and ease of recruitment


The Sustainable Finance SummitThe Sustainable Finance Summit

Speakers confirmed so far (many more to be added):

Barclays, Garry Hoffman, Group Vice Chairman

Standard Chartered Capital Markets, Ann Grant, ViceChairman

HSBC Holdings, Jon Williams, Head of Group SustainableDevelopment

F&C Investments, Karina Litvack, Director, Head of Governance & Socially Responsible Investment

The Co-operative Bank, Barry Clavin, Ethical Policies Manager

Barclays, Helen Wade, Associate Director, PFI & StructuredProject Finance

Barclays, Peter Kelly, Head of Financial Inclusion

John Plender, Financial Times Columnist and author of: “All You Need To Know About Ethics And Finance”

Standard Chartered, Head of Sustainability, Chris Smith

Standard Chartered, Ann Grant, Vice Chairman

UBS Investment Bank, Julie Hudson, Managing Director, Head of Socially Responsible Investment Equity Research

ABN AMRO, David Morrow, Global SRI Products Specialist

ABN AMRO, Richard Burrett, Managing Director, SustainableDevelopment, Wholesale Clients

Wall Street Journal, Editor, Editorial Page, Matthew Kaminski

Canadian Imperial Bank of Commerce (CIBC), Pat Hayles,Member of the Board

Group discounts available – Forward this PDF to your colleagues!


28th and 29th November 2006 • Regent’s Park Marriott Hotel • London

financial sector responsibility - andrew...

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