October 2020 – It is not just businesses, but also banks as their lenders who must pay greater attention to the topic of sustainability. As of 1 October 2020, the Hamburg Commercial Bank codified all aspects of sustainable business in its lending guidelines. Likewise, the hurdle for its own activities is high.
"Heal the world, make it a better place. For you and for me, and the entire human race”, sang Michael Jackson in 1991, lamenting the state of the planet in his song "Heal the World." Taking stock of the situation three decades later, little has changed. Quite the opposite, if one follows the young environmental activist Greta Thurnberg , whose message is clear and urgent: "We have to act like our house is on fire, because it is."
But despite temperatures increasing across the globe and new record annual highs for carbon dioxide emissions, the Swedish founder of "Fridays for Future", the environmental movement which has now spread across the globe, remains hopeful: "But the opportunity to do so will not last for long. We must start today. We have no more excuses."
In the search for ecologically prudent, economically viable and technologically feasible solutions to what is surely the biggest challenge in human history to date – climate change – states, investors and business are all obligated to act. Banks also have a positive contribution to make here.
Among specialist circles, but also the wider public, there is a consensus that it is not enough for lenders to focus solely on their conditions for issuing loans and the solvency of their clients. Rather, they must consider the common good and address the question of whom they should entrust their capital to and what exactly each company intends to do with it. In a globalised world, going to any lengths necessary for the purposes of investment or acquiring funding is no longer tenable. Lavish profits, generated by child labor, the exploitation of minorities or to the detriment of animal and plant life are no longer socially palatable or acceptable.
For some considerable time now, the Hamburg Commercial Bank has closely inspected the details of financing projects, scrutinizing many aspects – and refusing applications for loans if these fail to meet its high standards of compliance with ESG criteria. "E" stands for environment, "S" for social issues relating to sustainability and "G" for governance – good and transparent corporate management, which protects the rights of all employees and treats them fairly.
On 1 October 2020, sustainability criteria were formally integrated into the bank's lending standards and clear guiding principles for the bank's own actions were agreed. "At the beginning of October the bank's lending standards were comprehensively expanded to incorporate ESG criteria. These will be analyzed for each individual business and evaluated against clear benchmarks, specific to the respective business area," explains Martin Jonas, who is leading the sustainability project at Hamburg Commercial Bank together with Anna-Maria Saake and Oliver Scholz. What is most significant here: It isn't just prospective loans that must adhere to ESG standards – the existing portfolio will likewise be examined with regard to sustainability and reevaluated where necessary.
In real terms, in future the evaluation of ESG criteria for real estate financing, for example, could play out as follows: The bank examines the energy consumption of the project with regard to environmental criteria, evaluates the building materials and the emissions during the construction phase and subsequent operation of the building. With a view on the social issues, experts at the HCOB are increasing their efforts to ensure that the rights of employees are taken into consideration. As for governance, the goal here is to guarantee that all legal regulations are complied with and ideally that business partners have an established code of conduct.
"The ESG commitment of the Hamburg Commercial Bank is not limited to its own dealings, it extends to the actions of its business partners, too", explains expert Jonas. This includes compiling a blacklist of countries and business areas, which will be automatically prohibited from acquiring financing: among which are countries with high levels of corruption and business areas such as weapons production and the nuclear industry. Likewise, companies who do not conform to minimum social requirements will simply not be considered as potential business partners for the bank.
At the same time, in fall 2020 the bank establishedand agreed on the international framework to which it will conform. First and foremost, this pertains to the 17 sustainability development goals of the UNEP (United Nations Environmental Program), as well as standards for sustainable recycling of ships. In addition, HCOB will continue to reduce its carbon footprint: Business travel by plane is to be minimized or, where unavoidable, at the very least the associated carbon dioxide emissions will be compensated for and the journey rendered carbon neutral through participation in a carbon-offsetting initiative.
With the implementation of the ESG goals, the bank is fulfilling regulatory provisions which have become significantly more stringent in the past few years. But, of its own volition, the bank is going much further: "Alongside regulatory requirements, our project is very clearly focused on those of international investors", says Jonas. "It is our aspiration to become one of the leading banks in the field of sustainability. Sustainability is becoming increasingly important to our clients, something that holds true with regard to both assets and liabilities. Jonas maintains that the goal here is to significantly expand the investor base through refinancing by issuing green bonds and to improve funding costs over the long term. "The greener our assets, the better our ESG rating will be. And the more favorable our funding with green bonds. Sustainability is increasingly a decisive factor in the decision-making process for investors."
Jonas is doubtful that the ESG criteria will substantially limit the options for generating new business. "Since defining our blacklist, we have only identified one case of financing which we must remove from our books in the next three years. And as for new business, there are sufficient alternatives – we must always ask ourselves how fruitful doing business with companies that do not operate sustainably really is."