By Louis Caditz-Peck, Portfolio Analyst and Lending Project Manager, Self-Help Credit Union | Self-Help Ventures Fund
Can a large bank get ahead of the market and lead sustainable change? That was the question on my mind at the CSE’s conversation with Citi Director of Sustainability Val Smith (UNC Kenan-Flager MBA ’02) on November 15th.
I came to gather best practices in sustainability that we could consider in my work at Self-Help, a Community Development Financial Institution (CDFI) that makes responsible loans in low-wealth communities. And, as I consider MBA programs, I wanted to see firsthand what the sustainable finance conversation looks like at UNC Kenan-Flager.
Val Smith pointed to some impressive work. Close to my heart was Citi’s launch of a $200 million fund, with the Opportunity Finance Network, to provide CDFIs liquidity to lend to small business in low-income areas. Citi has also recently financed the largest solar energy project in the US to date, and in 2003 was one of the first firms involved in developing the Equator Principles, a framework for environmental and social finance. These ten principles build consideration of social and environmental impact into the lending process, for projects of $10M or more.
I was equally impressed by the direct questions UNC students asked. One student plucked his question right from my mind: In addition to funding sustainable projects like profitable solar developments, when does a firm like Citi stop financing unsustainable projects, like coal-fired power plants?
It turns out this is something Citi has put some thought into. In 2008, it joined with JP Morgan Chase and Morgan Stanley to establish the Carbon Principles, intended to bring carbon-related externalities into the decision making processes of banks, power companies, and utilities working on coal-fired power plants. There has been interesting debate about whether or not this collaboration has successfully influenced business practice, summarized here.
Smith described Citi as motivated to address sustainability for business reasons, rather than for marketing or reputation. Citi’s sustainability advocates have gained the most traction promoting change that is profitable. Smith described advances in energy, water, and waste efficiencies in Citi’s thousands of locations across the globe—efficiencies that benefit both Citi’s balance sheet and environment.
So, can sustainability-minded leadership effectively move a firm like Citi away from unsustainable business, if there is not an existing financial incentive to do so? The Equator Principles that Citi helped develop make room for banks to require of more of themselves. Based on these principles, Citi requires approval from specialized Environmental and Social Risk Management staff for the bank to move forward with loans to projects that expected to do social or environmental harm that is “diverse, irreversible, or unprecedented.”
Citi certainly deserves the praise it has received from consumer groups for its leadership on debit card overdraft fees. While other banks were changing consumers $35 for each debit overdraft, which hit low-income consumers the hardest, Citi got out ahead of the market and chose to simply turn down debit transactions at the point of sale if the consumer did not have sufficient funds. With Citi support, new consumer-friendly regulations were enacted in 2010 that require all banks to take Citi’s lead on this issue, unless consumers “opt-in” to allow overdraft. (Citi, and consumer advocates, believe better legislation would ban abusive overdraft practices altogether.)
I don’t know enough to say whether or not the Equator Principles and sustainability programs at Citi are moving the bank ahead of the market. But it is clear that Citi has taken initiative to make social and environmental sustainability part of the conversation in its management and lending practices.
After Val Smith’s talk, I chatted with some of the sustainability-minded MBAs that Kenan-Flagler has attracted by establishing itself as leader in sustainability. One was focused on financing sustainable agriculture, another had worked in green energy finance policy, and a third had background in energy sector bond trading and sustainable venture capital. These perspectives, combined with the critical mass of academic leaders and staff gathered to focus on sustainability, make Kenan-Flagler one of the most exciting places to continue the sustainable finance conversation.