Will Money Talk? Banks Shy from “Dirty” Projects

One of the biggest breakthroughs in the area of corporate social responsibility came when major corporations looked at their social and environmental impact beyond their own doorstep and thought about their supply chains. Major brands with global networks such as Nike, Starbucks, Coca-Cola and Walmart made positive changes in where their goods were made or their resources harvested or how their finished products were packaged and delivered.

A New York Times article recently focused on changes occurring in another part of the supply chain for companies that practice mountaintop removal mining – their supply of money. Many major banks that have funded projects for companies in “the dirtiest industries,” as the Times’ describes them, are reconsidering their investments and having something to say about how those companies go about their business.

The article references a study published in May by the Rainforest Action Network and the Sierra Club that concluded that nine banks were the primary lenders for companies engaged in mountaintop removal mining in Appalachia and that since 2008 they had provided nearly $4 billion in loans and bond underwriting to the primary mining companies such as Massey Energy, Patriot Coal and Alpha Natural Resources.

The banks cited in the report include Bank of America, Citi, Credit Suisse, GE Capital Corp, JPMorgan Chase, Morgan Stanley, PNC, UBS and Wells Fargo. All have apparently made changes in their lending practices, according to the report, and not just in lending to coal companies. For example, the RAN/Sierra report noted that Bank of America was listed as one of the “syndication agents” on a $175 million revolving line of credit to Massey Energy in 2008, but has since eliminated all its connections to Massey. Similarly JPMorgan, which had once underwritten $180 million in debt securities to Massey, no longer has any financial ties to that company.

Even though Congress passed a law in 1996 that limited the exposure of lenders on environmental problems caused by their clients, most major banks have developed environmental risk management divisions as part of their commercial banking due diligence efforts. No doubt one reason for that is additional caution about their liability through companies to whom they lend. Another is a growing sense of corporate social responsibility. Still a third is likely pressure applied by environmental activists.

But those banks are also all public companies and it is reasonable to assume their investors have raised questions as well. Socially responsible investing has caught on to the point where its growth outpaced the rest of the market from 1995 through 2007, the most recent data available, according to the Social Investment Forum. A fundamental screen among SRI mutual funds is a company’s environmental impact. If a firm’s activities harm the environment, the fund won’t buy its stock. If a bank finances companies that harm the environment, it won’t make the cut.

No doubt mining firms will find other lenders to finance their projects. But the industry is shrinking. Total employment in the wind power industry surpassed that of the coal mining industry in 2008, according to the American Wind Energy Association and the federal Department of Energy. Whether the major banks are acting on virtue or business priorities, it is still significant that environmental considerations have become more prominent in their lending decisions. The supply of money can be the dominant influence on how companies interact with the environment.

One response

  1. This corporate trend is definitely an interesting development, especially with the BP oil spill as a backdrop. I guess amidst all of this is a pragmatic calculations by corporate America that at one point, eventually carbon will be priced and in this upcoming environment being “clean” is going to be good for the bottom line.

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