money

SINGAPORE, Dec 27 — Banks which had, just a few months ago, been bailed out with public funds are now paying their staff millions in bonuses. This has outraged many, but not Dr Sanjeev Khagram.

As far as the American academic is concerned, people are missing the wood for the trees. The big worry is not so much how fat bonuses can get, but how lax lending practices could harm the world.

If banks do not follow socially responsible lending practices, it could result in even more crises and also broader problems down the road.

“This is an imperative,” says Dr Khagram, 41, the Wyss Visiting Scholar at Harvard University and international associate at the Centre on Asia and Globalisation, a Singapore think-tank. He was in town earlier this month to conduct a seminar organised by the centre as part of its long-running project to develop new insights on global governance.

Speaking to The Sunday Times separately, he wastes no time stressing that banks “still rule the world”.

“When you look at the global 500 (ranking of companies), 60 banks more or less are in there and have been so for a number of years...Despite the financial crisis, there hasn’t been much shift in the number of large banks that are part of the global 500.”

He concedes that the massive government bailouts played a part in the rebounds of the likes of Goldman Sachs and AIG. But the bailouts themselves showed just how much clout the banks wield.

The statistics he cites are sobering.

A good estimate of how much governments have spent in responding to the global financial crisis through bailouts, fiscal stimulus and otherwise is US$10 trillion (RM34 trillion) over the last two years or so, he says.

“The best climate experts estimate that it would take US$5 trillion for a global deal on climate change,” he adds.

In other words, the wrangling over carbon emission cuts and the transfer of green technology witnessed at the Copenhagen climate summit recently could have been easily resolved if the countries were willing to spend just half of what they mustered in a heartbeat to fight the financial meltdown.

Unfortunately, many deem the health of banks far more important than the health of the planet.

Financial institutions oil the wheels of the economy. “Where banks and financial institutions don’t invest, there can be a dramatically negative impact on broader social environmental goals. And where they do invest, there can be a potentially positive impact.”

But as the popular saying goes: With great power comes great responsibility.

“Like all businesses, banks have a social licence to operate. And that social licence means they have to contribute in some way to society.”

In the past, banks were deemed to have done their part for society and the economy when they generated profits. But that is no longer sufficient, he says.

The lead author of the United Nations Secretary-General’s report on the global downturn’s impact on the world’s poor knows just how much is at stake here. With millions of people kept below the poverty line by the crisis, banks these days should be assessed by how much their lending activities lead to desirable outcomes for society and the environment, he says.

Instead of relying on typical philanthropic activities to do good, banks should integrate them into their business.

One simple way is for banks to make potential borrowers systematically review the social and environmental risks of their projects before agreeing to underwrite them. Banks could also extend cheaper loans to companies that agree to rigorous environmental controls.

Once companies realise that there are financial benefits to be gleaned from reducing pollution or treating their workers well, for example, they will naturally fall in line, Dr Khagram reasons.

This approach is good for the banks’ bottom lines too.

“Suppose you have a large hydro- electric project that is dependent on a certain hydrological model of the river, a model mapping the water flow. Banks are brought in and they provide funding for this public-private partnership project.

“Now, given climate change, we know changes in hydrology are happening all the time, and they’re going to be much more severe. If the banks don’t pay attention to, in a systematic way, whether or not the project has been built with real consideration about what the future hydrological model is going to be, they’re going to be in a high-risk situation.”

If the flow of a river changes, the project would not be able to generate the amount of electricity predicted. This would jeopardise the future earnings of the funding bank.

There is already some precedent to the practice Dr Khagram is suggesting.

In 2003, a number of banks launched the Equator Principles, a set of voluntary guidelines for the finance sector to ensure that the major projects it funds are developed in a socially and environmentally responsible way. These have been adopted by more than 60 financial institutions, including Barclays, Citigroup and the HSBC Group.

The guidelines, which were updated in 2006, require companies borrowing from participating banks to look into issues like community health and the impact of the project on indigenous peoples.

Dr Khagram suggests that governments could nudge banks into socially responsible lending by extending cheaper credit to such banks when needed.

Meanwhile, civil society can play its part too, by helping to police the bad hats and highlighting the good lenders.

In this way, a virtuous circle is created. Rather than just patching up the loopholes that created the recent financial meltdown, the world could chart new and socially responsible ways to make money.

He is optimistic about its prospects, given how inventive the banking sector can be.

“What led to the current global financial crisis is that the financial sector is incredibly creative, (devising) instruments like collateralised debt obligations and all these exotic ways of making money.

“We want to support that financial sector innovation in every way. Imagine 10 per cent of that creativity being used to create new financial sector instruments for broader social and environmental goals.”

There is no doubt that banks “can continue to make lots and lots of money, and their executives can make lots of money”, he says.

The champagne can still flow, if bankers put their minds to the right causes. And banks, which rule the world, can still save the world. — The Sunday Times