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What to Make of Banks’ Hesitance to Lend to Environmentally Dubious Projects

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The New York Times reports on a welcome development: some banks are getting cold feet about lending to projects that are legal but still produce environmental damage:

After years of legal entanglements arising from environmental messes and increased scrutiny of banks that finance the dirtiest industries, several large commercial lenders are taking a stand on industry practices that they regard as risky to their reputations and bottom lines.

The article does note that in some cases, there may be less to this than meets the eye. Some banks may simply be using good citizenship as a cover for exiting businesses in which they are not competitive. Although the article emphasizes pressures applied by various environmental groups on a wide range of issues, this does not seem a sufficient proximate cause.

It seems instead that the banks in question are recognizing that the lines are shifting in this area and that concerns about global warming and resource scarcity mean the odds are high that taxes or more restrictive regulations may be imposed that could have a significantly detrimental impact on the profit of companies that engage in questionable practices (the Times story clearly mentions the financial considerations but does not present them as central). Thus while the Times presents the banks as reluctant cops, it might be more accurate to see them as leading indicators, since they have the most to lose if wrong footed by changes in government policies on environmental damage.

Thus the banks’ growing caution is a sign that more stringent environmental protection standards are indeed likely in the years to come

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8 comments

  1. attempter

    I read this earlier and bookmarked it for further consideration because if it’s for real it seems odd. It seems to contradict all other indicators.

    For example, it wasn’t that long ago that the facts of climate change seemed to have triumphed even in the MSM. But over the last few years we’ve seen a severe retrogression.

    In general it seems that the economic crisis is being used as a disaster capitalist pretext to roll back environmental advances. It’s part of the general neo-feudalist campaign.

    I’ve also taken it for granted that as Peak Oil sets in we will not rationally transform the fossil fuel economy to a post-oil economy but will hunker in the bunker and try to extract every drop and lump we can, environmental and human well-being be damned.

    Certainly even the BP cataclysm doesn’t seem to have engendered any broad-based soul-searching. Instead the most fierce debate has been over a picayune “moratorium” and a paltry escrow fund (which is clearly intended to set an extremely low ceiling on what these criminals will have to pay out).

    It’s true that Wall Street likes climate change legislation because the cap and trade scam is another disaster capitalist gambit. It’s really intended to set up another rent extraction point and blow up another bubble while just pretending to mitigate GHGs. (Offsets, free allocations of permits, off-ramps, safety valves, grandfathering in Big Ag and its destructive indirect carbon effects, gutting EPA command and control authority; all this proves these bills are frauds.)

    As for mountaintop removal, of course it’s a hideous environmental and socioeconomic atrocity, and brazenly illegal according to the Clean Water Act (but the rogue administrations and courts have simply refused to enforce the law), but since when do big banks care about that? I wondered if their gradual shunning of Massey was over its latest murder. One of the things I was going to try to look up if I decided to write about this was to see if they were shunning only Massey, or all the MTR rackets.

    But again, even after yet another in the long line of Massey safety floutings leading to multiple homicides, society hardly seems to care much. Is there really that much pressure on the banks to “do better” in the sense of doing good?

    So to sum up I wasn’t sure what to make of this. By now I always assume the worst, in this case that it’s just greenwashing. I wouldn’t be surprised if these banks are still extracting rents from MTR, just having the money laundered through other entities.

    BP itself had until recently been putting across one of the most successful greenwashing scams, even as it had one of the worst records in the industry.

  2. anon

    “[T]he banks’ growing caution is a sign that more stringent environmental protection standards are indeed likely in the years to come.”

    I hope so. But in reading the NY Times article, it seems to me that the banks want to use future legislation as yet another opportunity to extract even more money from the economy.

    From the NYT article: “Globally, banks and environmental advocates are . . . developing best practices and other voluntary standards. Citigroup, JPMorgan Chase and Morgan Stanley helped initiate the Carbon Principles, which aim to standardize the assessment of “carbon risks in the financing of electric power projects” in the United States.

    From “The Carbon Principles”:

    “9. Do the Carbon Principles financial institutions support regulation of carbon?
    The Carbon Principles financial institutions have stated their support for market-based frameworks to help regulate carbon emissions.”

    Like cap and trade, which seems to be more designed to give profits to financial institutions and other financial intermediaries than to slow pollution.

    “We recognize the complex process by which legislation is developing in the United States, as well as the contribution to this effort of the various state and regional initiatives. We believe it is important to provide a framework for clients and financiers in this interim period while legislation is being crafted and that the experience derived from the Principles could also help inform the development of new and revised policy.
    . . . We believe the learnings from the development of the Carbon Principles and their implementation could be helpful to policy makers, including public utility commissions, as they develop standards and in some cases legislation to help reduce carbon emissions.”

    IOW, we want to develop and test the scam (i.e., proposals that we’ll push) now so that we can give plausible cover to the pols we’ll buy off to implement it.

    Maybe I’m too cynical but this just seems like the MSM pushing yet another story about big business acting responsibly when their activities are mainly designed to steal yet more money by buying off politicians and the MSM.

  3. craazyman

    The banks have been pressured for over a decade by shareholder activists from the so-called “socially responsible investment” community to develop and implement policies that recognize and reduce the environmental impact of financed projects, particularly in developing nations.

    I work on a consulting basis (but not directly in this area) with one such firm. Some of these firms manage money for religious institutions, others channel the American transcendentalist zeitgeist and offer money management that incorporates that vision, and some are state pension plans.

    They often form groups that represent non-trivial amounts of stock, get management’s attention, and work together on initatives with companies. All see themselves as stewards of the assets they manage, and see their stewardship as requiring an ethically engaged ownership of shares, not a passive and disengaged implicit cooperation with whatever management wants to do.

    Because the banks are large bureacracies, they inevitably have some staff who take this quite seriously and are very gung ho about having a job that lets them steer the company to “do the right thing” ethically, others see it as a fig leaf, while some see it as a distraction to be surmounted in the chase for profit. As in any bureacracy, there are factions that compete for influence.

    Ironically, if my memory serves, I believe a contact at my client related to me that BP in a cost-cutting effort fired its staff in this area several years ago (I’m not 100% sure of my facts but I think there was something along these lines that happened there). We can see how wise a move that was, or at least what it represents about the franchise value inherent in preserving good citizenship.

    One can smile sardonically about whether any of this will ever make a difference. But changing the way big organizations work can take time, a lot of time. I’ve actually be quite impressed by the successes these shareholders have had over the past two decades or so on a lot of fronts.

    I don’t believe the developments described in the NY Times article would have happened without the multi-year campaigns by these activist “socially responsible” shareholders.

  4. Ed

    I think people might be reading too much into this. The example of BP shows that a company can rack up sufficient environmental liability to hurt itself financially, or even jeopardize its existence. From a purely financial point of view, this risk should be priced into the prices of the debt and equities that it issues, but its difficult to price this sort of risk and environmental risk may have been underpriced until we started getting prominently reported environmental disasters.

  5. Justicia

    Hypocrisy is the tribute vice pays to virtue.
    – de la Rochefoucauld

    The hypocrite at least acknowledges that there is a virtuous alternative. In this regard, the banks and other corporations that pay tribute to sustainability and social responsibility have taken a step in the right direction.

    However, as one who’s worked for activist institutional investors, I concede that this only gets us so far. Companies can only be responsible at the margins and to the extent that it doesn’t make them un-competitive. The ad hoc approach to corporate virtue is no substitute for effective regulation.

  6. bob

    I think you are putting two things together which are separate. Most environmental issues arise out of past uses of property.

    The first, and most important, is what has the property been used for in the past. Most commercial RE loans require what is called a “phase 1″. That is, essentially, a look back through the past owners of the property to determine is the property “could be” spoiled.

    There are then two results. One being that the property could have some environmental liabilty associated with it, and before the bank will lend against it it wants a further investigation, usually drilling or sampling a part of the property(very small part).

    The second is that the property is deemed “clean”, that there are no red flags in its history. This does not mean that the property is clean, it just means that there has been some level of due diligence.

    Neither of these choices gives the property a clean bill of health. There is no guarantee of being clean even after very expensive and invasive sampling.

    What is happening now, in my mind, is that the banks are realizing that there never was any guarantee that the property was clean. They were more than happy to dish out credit when things were moving along in the RE space. They might not have even been the owners of the mortgage in 5 years.

    Now they see a longer time line for holding, and the “risk” associated with possible past contamination of the property increased when the overall volume of commercial RE loans went down. They are probably going to be holding it for a longer time, thus increasing the risk of unseen liability. Note that this is usually based on past activity, not necessarily current activity.

    Interestingly, one good thing about OSHA, and DOT regulations is that the producer of the “chemical” is now responsible for tracking its disposal. This has resulted in much less “dumping in the hole in back”. It is the very old property, contaminated by god knows who with god knows what, that is the biggest risk to the banks.

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