The public image of banks has slumped to a record low. But despite all the criticism, banks play a pivotal role in managing the money flows that keep the wheels of the economy turning. It is crucial for the future of the industry that banks manage to exercise this function with more sustainable business models. In the latest sustainability study, "Credit all used up – time for a sustainable dawn", Bank Sarasin examines the progress the banking industry is making in this area. Of the world's biggest banks, the most sustainable are Nordea, Standard Chartered and Toronto Dominion Bank. Switzerland's two banking giants, Credit Suisse and UBS, are on the losing side.
From a sustainability perspective, the critical issues for the banking industry include systemic relevance, the integration of sustainability criteria into the core business and compliance. There is substantial pressure on the entire industry to change its business models and internal control processes and this pressure is unlikely to ease off any time soon. Although some initiatives for more effective control of environmental and social risks are evident in the core business, none of the large institutions studied have comprehensive sustainability strategies in place for their core business. In addition, the "too big to fail" problem has still not been resolved despite the regulatory measures already implemented. In some countries it has actually worsened following the merger of various banks in the wake of the financial crisis. We are still a long way from seeing a general trend towards more sustainable business models and less risk-taking in general.
Three sustainability champions
The sustainability ratings produced by Bank Sarasin for the large financial institutions listed on stock markets show that Nordea, Standard Chartered and Toronto-Dominion Bank (TD Bank) are the most sustainable banks. TD Bank operates primarily in North America, Nordea mainly in northern Europe and Standard Chartered largely in Asia. All three institutions are heavily engaged in retail banking and tend to be risk-averse overall. Their internal control mechanisms are relatively effective. Standard Chartered is notable for its small number of compliance violations which is remarkable for an institution operating in so many emerging market and developing countries. All three institutions score better than average in relation to staff which suggests that they follow the popular mantra “our employees are our most valuable asset” seriously. Another thing common to the banks with above-average scores is that they all came through the financial crisis relatively unscathed. In contrast, the ratings of most other financial institutions remain in the midfield and there is very little difference between them.
CS and UBS drop out of Bank Sarasin's sustainable investment universe
With below-average sustainability ratings, the two major Swiss banks, UBS and Credit Suisse, no longer qualify for inclusion in the sustainable investment universe. UBS is struggling with persistent compliance problems, raising many questions with regard to incentive mechanisms and internal controls. Between 2008 and 2010 the crisis-hit bank laid off around 17% of its workforce and in August 2011 it announced it was cutting another 3500 jobs. Credit Suisse had already been on permanent watch by our sustainability research team for some time in view of its borderline rating. CS has had a number of different compliance problems in recent years: in July 2011 the institution announced it was cutting 2000 jobs and making further redundancies due to the integration of Bank Clariden Leu.
Sustainability helps reduce financial risks
As lenders for all kinds of projects and business activities, banks have a strong influence on sustainable development. Sustainability analysis complements financial analysis, where the focus is mainly on business performance, and identifies those banks which are well positioned for long-term commercial success without entering insupportable risks for the company and society as a whole. Admittedly, the banks rated as sustainable could not escape the general stock market trend but even so, their stock market performance in recent years has been significantly better than the industry as a whole.