• Monday, May 27, 2024
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Global crisis creates opportunities for sustainable banking

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PETER SANDS

American philosopher Leopold Kohr once likened the modern industrial economy to a ship caught in the increasing pull of the Niagara river a mile above the falls, with policy makers from the ideological left and the right trying in vain to repair the sides of the overgrown hull even as the ship teetered towards the brink. He advocated smaller organisations and a simpler form of life. That was in the 1970s. To many observers the world economy seemed to have again come close to such a precipice last September. Fast forward half a year and we appear to have circumvented the worst of the financial upheaval. But have we seen the back of the unsustainable economic imbalances which led us to the edge in the first place?
The answer is, unfortunately, no. If anything, the financial turmoil has accentuated some of those imbalances, by pushing millions of people, particularly in the developing world, back into poverty, increasing the divide between the rich and poor and threatening to set back the cause of environment-friendly and sustainable development by several years.
In banking, the inordinate level of risk-taking and the systemic failure of corporate governance and supervision, the unprecedented complexity of financial products, and the excessive leverage at many financial institutions simply became unsustainable.

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Is it then time to seize the opportunity to create a new world order? Certainly, if that means rebuilding trust in banks, prudently regulating the financial system, harnessing human ingenuity to generate thousands of jobs in small-scale industries or putting greener technologies to work while making sure we keep the best of the existing economic system which has helped lift millions out of poverty.
It is time for candour — the global economic order needs fixing if we want to leave our children with a world better than we found it, and sustainable banking has a critical role to play in shaping the new international order. Global commercial banks can do so broadly in three ways: first, by encouraging world trade to reinvigorate economic development; second, by imparting global best practices through engagement with their corporate customers; and finally, by fostering investment in infrastructure and technologies that address pressing environmental challenges.
Let us examine them one by one, by delving into our own experience of banking in the emerging markets.
Firstly, banks must continue to facilitate global trade, particularly in developing economies which are hardest hit by the shortage of trade finance caused by the global financial crisis.
April’s G20 summit, which brought together the developed and emerging economies at the same table to address the world’s significant challenges, is a harbinger of a new approach to development. Among the major outcomes were the decisions to strengthen global financial institutions such as the IMF and the World Bank in order to make them more effective at serving the needs of the developing world and to make their governance structures mirror the shift in the balance of power from the West to East.
Another outcome from the meeting was the consensus to grease the wheels of international trade and commerce by channelling greater funds into developing countries through regular banking channels, in partnership with multilateral institutions. As part of this, Standard Chartered has partnered with the IFC in the Global Trade Liquidity Program, which is expected to support trade flows of $5 billion per year in Asia, Middle East, Africa and Latin American countries. It is worth remembering that this role of enabling the flow of trade is fundamentally why global banks exist.
Secondly, global banks can support sustainable development through sharing international best practices with emerging economies.
Take the case of the ship-recycling industry, concentrated in South Asia . The sector employs about 150,000 low-wage workers, sometimes even children employed by unscrupulous ship breaking yards, spending long hours each day wearing not so much as plastic flip flops as protective equipment. The work of breaking ships for scrap metal could put their own health and the water resources at risk from toxic materials.
The industry indirectly supports over 300,000 members of the workers’ families and provides work to thousands of small enterprises, not to mention the positive role it plays to facilitate the phase out of single-hull oil tankers by breaking down the dated ships. Banks have three choices with regards to the way they can engage with the industry:
First, terminate all financial services to the industry — what we don’t see or hear is not our responsibility; the second would be to carry on financing while ignoring the debilitating conditions; and the last would involve supporting this recycling industry but only after working with clients on plans to implement environmental and social standards for workers based on International Labour Organization conventions and International Maritime Organization recommendations.
When seen from this perspective the choice is clear. Once the commitment has been made to support the industry banks must assess their clients’ commitment to reduce and mitigate the environmental and social impacts of the industry and their capacity to adhere to the international norms governing health and safety for their workers. Banks must then monitor client performance to ensure that the standards are being met.
Standard Chartered’s experience shows that such an approach is realistic. Out of more than 19 prospective ship-breaking clients, the bank provides financing to four customers which meet our established standards. We do not maintain any Wholesale Banking business with the other 15.

Finally, banks can address pressing environmental challenges by deploying capital to facilitate targeted investment in infrastructure and the uptake of green technology.
Take the case of the emerging scarcity of fresh water, one of the basic necessities of both life and economic development. There is an opportunity here for companies, commercial banks and multilateral institutions to join hands to invest in water infrastructure and be a force for good.
A recent report by Standard Chartered economist Alex Barrett estimated that as many as 2.8 billion people, mainly in Asia, Africa and the Middle East , will face severe water scarcity by 2025 as a result of population growth, economic development, rapid urbanisation, agricultural and industrial pollution and climate change.
Many countries are taking these challenges head on. China , for instance, aims to keep its gross water usage at the same level in 2020 as today. That compares with a forecast doubling of usage based on current economic growth rates. This is a challenge which can only be tackled with the help of investments in infrastructure.
As another example, consider three countries in Asia which are at different stages of development and which can benefit from mutual cooperation in the area of power generation technology. There is an opportunity for banks in the region to foster this development through the provision of project finance, private equity and venture capital expertise or through advisory services.
China , the world’s fastest growing economy with an insatiable appetite for energy and reliance on coal-based energy, has committed to have16 per cent of its primary energy derived from renewable resources by 2020 from the current 7.5 per cent.
Just across the border, in Korea , Standard Chartered has helped finance the 25-megawatt SinAn-Gun solar power project, Asia’s largest photovoltaic plant. The unit can generate enough power to supply about 7,000 households, saving 4.8 million litres of oil and 20,000 tons of carbon dioxide each year. That’s the equivalent of emissions from 23,000 cars a year.
Indeed, the government in Korea has launched a greener growth campaign, consistent with, if not more ambitious than, those announced by Prime Minister Gordon Brown in the UK and President Barrack Obama in the US , to promote low-carbon and environment-friendly growth policies.
The Korean campaign is aimed at overcoming the current financial crisis whilst generating opportunities for new growth by linking energy security, climate change and the current economic downturn. The recession is therefore seen as opportunity to embark on a low-carbon growth trajectory rather than getting locked-down in carbon intensive infrastructure which will last for the next 10 to 20 years.
And then there is Japan next door, home to some of the world’s most energy-efficient industries. Japan accelerated its push towards energy saving after the 1970s oil shock in order to reduce its dependence on imported oil. It has a lot to offer the developing economies of Asia, Africa and the Middle East in terms of technology and expertise.
As governments, led by the US , China , Korea and Japan , spend trillions of dollars to build new infrastructure such as power generation, rail networks and healthcare facilities to counter the downturn, the global financial and investment community have a once-in-a-lifetime opportunity to influence the way the funds are spent.
Just as the 1970s oil shock moved Japan to implement energy-efficient economic policies, the current economic crisis can become the launch pad for the rest of the world to embark on the next wave of go-green campaigns.

The time to act is now.
Global policy makers showed in London that they are ready to set a new course for the world. It is now time for governments, financial institutions and businesses to act. They may yet save the world and prove Professor Kohr wrong.