Banks must be held to high standards in public
The green bond market lets investors scrutinise the way issuers use their money, promoting good behaviour. Now, the focus is turning to the middle men: the banks. It is a welcome iteration, given their importance in financing either a green or brown future, but we must push them further.
The International Finance Corp is to judge the 40 or so banks with which it regularly does business on matters such as how many fossil fuel providers they have as clients, what exposures they have to polluting sectors, and how they engage with clients to help them develop sustainability strategies.
The IFC will encourage banks that score poorly in the questionnaire to improve, and says this will be a factor in awarding future bond mandates.
If the supranational has a hard-and-fast environmental, social and governance (ESG) criteria by which it will mandate dealers, it isn't saying what it is. So this is only a small step in holding banks accountable for practising the sustainability they preach to clients.
But it is another step towards a system where a comprehensive pursuit of good ESG outcomes is rewarded with commercial success.
It is encouraging to imagine a world where banks might miss deals for insufficient commitment to the ESG goals of their clients, or because they finance things that do as much — or more — damage to the environment as the green bonds they arrange bring a benefit.
Of course, the IFC's questionnaire will have a limited impact in itself. Even if the supra snubbed a bank, the missed fees would hardly break the syndicate desk's year, let alone the overall bank's, which might be making far more P&L lending to brown companies.
But it’s a start, and it sends a message. Issuers serious about ESG are hypocrites if they hand fees over to banks which are not.
The next step is to make the scores public.
The goal has to be to create commercial incentives for socially responsible behaviour. But as good a carrot as mandates are in this regard, the whole market knowing a bank is missing them because its ESG isn't good enough is one heck of a stick.