Banks are more than ever being held to account for the conduct of their clients. How should banks respond to this scrutiny? A transparent decision-making process guided by clear policies and expert advice are key.
We finance some socially and environmentally sensitive industries, and our increasing presence in Asia and the Pacific means doing business in some countries with developing legal and governance frameworks.
Some stakeholders would prefer us to exclude entire sectors or cut ties with clients who are facing challenging social and environmental issues with their business. This approach can be counter-productive, especially if we fail to assist a client with all the good intentions to improve their practices.
Deciding whether to fund a new project such as a coal mine illustrates the complex questions we face. Coal is a finite resource and its processing into energy generates significant carbon emissions.
Yet while Australia's economy transitions from its heavy reliance on fossil fuels, the coal industry continues to have significant socio-economic value, delivering substantial benefits to Australian communities through jobs, electrical power that underpins our industries and dollars earned through exports.
So what is our role in these circumstances? First, we screen our clients for opportunities to help those operating in sensitive sectors manage their impact effectively.
In the case of a coal mining client, this could be, for instance, through finance for investment in clean coal technology or carbon trading services to help them reach emissions performance targets.
Second and most important, any time we do decide to become involved in these projects, we have a responsibility to apply sound social and environmental standards to our decisions, ensuring the client is either developing the project in line with those standards or has measures in place to improve their performance. And it is important these standards are applied consistently and transparently.
A CONSISTENT PROCESS
Our commitment to the Equator Principles is consistent with this philosophy. The Principles set out a step-by-step process for project financiers to ensure the proper assessment and mitigation of social and environmental issues, such as pollution, conservation of endangered species and sensitive ecosystems, and impacts on affected communities and Indigenous peoples.
The value of the Principles was highlighted in 2007 when we were asked to consider financing a pulp mill proposal in Northern Tasmania.
The proposal has attracted wide-spread attention over concerns about the potential social and environmental impacts of the mill and government approval processes were the subject of heavy scrutiny.
We have been the target of email protest campaigns co-ordinated by environmental organisations throughout the year and a number of shareholders and customers questioned our commitment to responsible lending.
This issue has posed significant risks to ANZ and has highlighted for us the need to be clear with our stakeholders about the process we would take to make a decision on funding the mill.
Equally important was clearly articulating the issues that were relevant to us as a potential financier (and by implication, those we were not involved in).
Our focus is on ensuring that any significant social or environmental issues posed by the mill can and will be managed by the client in line with government regulations. The Equator Principles have provided the framework for this assessment.
We commissioned an independent expert review of social and environmental risks which is focused on the issues our client needs to manage. As at the end of September 2007, we are using this review to examine our client's proposed response to issues raised in public State and Federal Government assessments.
We continue to communicate our progress to stakeholders throughout the process, via our monthly stakeholder update, direct contact with interested parties and public statements posted on our website. We have put in place measures to ensure all correspondence to us about the mill received a response which included information about our decision-making process.
PUBLIC STANDARDS
We are also making public the social and environmental standards that guide our business decisions. This year we consulted widely on our Forests Policy, the first of what will be a series of social and environmental management policies for Institutional clients.
Feedback from clients on our draft Forests Policy suggests they are seeking this certainty - not only to help them secure finance with ANZ, but also to better understand what they need to do to improve their social and environmental performance, and ensure the long-term sustainability of their business - especially clients in emerging economies, where environmental management practices are still developing.
And while our strong preference is to help clients improve their understanding and management of these issues, we must also be prepared to walk away from the business relationship if they are unwilling or unable to respond to the standards we set.
We also hope these policies will focus our interaction with non-governmental organisations (NGOs), removing doubt about our lending standards and clearing the way for more constructive conversations about how these standards are being applied in practice.
In addition to our Forests Policy, Institutional lending policies on water, mining and energy are currently being developed and will be the subject of consultation with stakeholders in 2008.
PREPARING FOR FUTURE DILEMMAS
We are now using this approach to set the 'ground rules' for our involvement in emerging markets. For example, this year we set out to establish the principles upon which we might finance the production of palm oil.
Demand for palm oil is growing internationally, both as an edible oil and for use in the production of biofuels. However, as oil palm can only be cultivated in tropical areas of Asia and the Pacific (mostly Malaysia and Indonesia), its development has raised social and environmental implications, including tropical forest conversion, soil erosion and conflicts between local communities and landowners and developers.
Our plan was to take a proactive approach and set up clear standards before we embarked on this activity rather than wait to respond to issues as they arise. We consulted with clients, expert consultants and key NGOs on what our guiding standards should be. After considering the feedback, we decided to adopt best practice principles developed by the Roundtable on Sustainable Palm Oil (RSPO). The RSPO is a global initiative established to promote the sustainable growth and use of palm oil, and includes representatives across the palm oil chain, including growers, manufacturers, banks and investors and environmental and development NGOs.
The principles cover issues such as the preservation of soil fertility in oil palm nurseries, mitigation of impacts on natural resources and biodiversity (including forests) and responsible consideration of employees and communities affected by oil palm plantations and mills.
'Setting a clear policy is far better than over-promising what business can and should do and, worse still, bragging about claims of environmental virtue.'
George Littlewood, Adjunct Professor, Corporate Citizenship Research Unit, Deakin University, Melbourne, Australia