Major-bank sustainability focus: CommBank

For Commonwealth Bank of Australia (CommBank), it is more important than ever to have corporate responsibility at the heart of what the bank does. Using its lending book as an example, the bank demonstrates how it is putting its principles into practice for the benefit of all stakeholders.

Vision: do good as good business practice

Corporate responsibility at CommBank is not just about supporting environmental or social projects. Instead, the bank is working to place its principles at the heart of its business in a way that makes them the driver. Kylie Macfarlane, general manager, corporate responsibility at CommBank in Sydney, explains: “We have a vision that guides what we do as an organisation. Our vision is to secure and enhance the financial wellbeing of people, businesses and communities.”

The bank has a refreshed roadmap on corporate responsibility that has evolved from a set of eight Opportunity Initiatives – which are set to be reviewed in November 2017. These are areas CommBank sees as being of strategic importance to the organisation, broadly covering education, innovation and good business practice.

Opportunity Initiatives is CommBank’s corporate-responsibility plan, outlining a set of goals and associated targets the bank is focused on delivering and reporting against. The initiatives are mapped to the United Nations’ Sustainable Development Goals (see table below). They are delivered in collaboration with stakeholders across the government, nongovernment, not-for-profit and corporate sectors.

CommBank has also been involved in education initiatives for more than 85 years, including providing the world’s largest financial education programme of its kind, Start Smart. Focused on building financial capability, over the last decade more than 2.7 million Australian school children have participated in a Start Smart session.

“We see innovation as part of the CommBank DNA, and what are we doing here is ‘innovating for good’ through the organisation,” Macfarlane explains. “This includes the digital solutions we’ve been developing around financial wellbeing and the role CommBank’s Innovation Lab plays in creating a collaborative environment to work with community partners across the government, non-government, not-for-profit and commercial sectors.”

The bank’s focus on good business practice covers a broad spectrum of initiatives from diversity and inclusion through to the role it plays in limiting climate change to below two degrees and how the bank lends, invests and procures responsibly.

Working with partners is an important component of the Opportunity Initiatives, whether this is with CommBank customers or in the wider market – illustrated by its partnership with the Clean Energy Finance Corporation (see box below).

CommBank, CEFC and energy-efficient lending

In 2016, Commonwealth Bank of Australia (CommBank) and the Clean Energy Finance Corporation (CEFC) launched the energy-efficient equipment-finance programme. This programme is an addition to a partnership the bank has had with the CEFC since 2012, as the first major bank to strike an agreement with the investment firm.

The programme supports business investment in energy-efficient and lower-emissions vehicles, equipment, machinery and fixtures that meet the CEFC’s investment guidelines. Eligible investments include fuel-efficient vehicles, energy-efficient lighting and fittings, farm machinery, commercial lighting and rooftop solar panels.

Approved borrowers will gain a 70 basis point discount on CommBank’s standard asset-finance rate on amounts between A$10,000 (US$7,944) and A$5 million. Initially for A$100 million of lending, the programme was extended due to strong interest from customers.

“We do an assessment of the asset and its energy efficiency and the CEFC agrees to it, as the assessment is done on the basis of boundaries the CEFC sets,” explains Joanna White, managing director, business lending at CommBank. “The asset needs to be better or ‘greener’ than its previous iteration, or recognised by the CEFC as industry-leading in its fuel efficiency.”

White adds: “The programme has encouraged CommBank customers to upgrade the assets they use in their businesses to become more fuel-efficient, and therefore less costly and better for the environment. It has been received well and is a great way we’ve helped our customers reduce their energy costs and emissions as a part of what we do every day.”

In August 2017, CommBank released its inaugural Climate Policy Position Statement which was a goal under Opportunity Initiative #8. The statement formalises CommBank’s commitment to playing its part in limiting climate change to well below two degrees, in line with the Paris Agreement, and supporting the responsible global transition to net zero emissions by 2050. This commitment goes to the top: the bank’s board will oversee and monitor the effectiveness of its measures, including adopting the recommendations of the Taskforce on Climate Related Disclosures (TCFD) and undertaking climate scenario analysis.

CommBank’s corporate-responsibility team has oversight of the policy, but Macfarlane says it was critical from the start that the policy is embedded across the business. “It has to live and breathe within the organisation and it has to reflect what we’re doing today as well as what we will be doing in the future,” she tells KangaNews.

The policy has therefore been put together in collaboration with CommBank’s institutional bank (Institutional Banking and Markets), business bank, wealth-management, and other pertinent stakeholders internally – such as the group’s property division. For example, CommBank’s sustainable-property strategy speaks to the goal to reduce its own direct carbon footprint, down to 2 tonnes of carbon dioxide emissions per employee by 2020 from 2.6 tonnes today.

“We have committed to embedding these environmental, social and governance principles and guidelines into our project-finance practice. Our lending due diligence includes a lot of steps covering environmental aspects as well as social aspects.”

Responsible lending

Perhaps an even greater focus is how CommBank can bring a positive influence to bear externally, among its client and supplier base. Again, the first step is making sure the bank’s principles and policies – which are designed to cover both its own behaviour and its role in society – are embedded in specific business areas.

Corporate responsibility operates as a matrix structure throughout the organisation, to make sure the bank has a holistic view and can help advise, guide and embed it throughout the organisation. Responsible lending is a key example of this concept in practice.

Joanna White, managing director, business lending at CommBank in Sydney, says: “The backdrop is the public expectation, which we share, that we can build stronger communities by being more conscientious about the assets to which we choose to lend.”

Louise Hatton, executive director, responsible lending at CommBank in Sydney, sits within the project-finance team of the institutional bank. She is in daily contact with personnel from across the bank, from corporate responsibility to client coverage, risk, finance, and product. Her role sees her involved in multiple group projects relating to sustainability and responsible lending.

Responsible lending is not a new commitment for the corporate-lending business at CommBank, though. Hatton has been with the team for nearly four years, initially focusing on signing CommBank up to the Equator Principles – which was achieved in May 2014 – and contributing significantly to the issuance of the bank’s first climate bond, in March 2017. To date, this is the largest Australian dollar climate bond from an issuer in the bank sector.

“We have a vision that guides what we do as an organisation. Our vision is to secure and enhance the financial wellbeing of people, businesses and communities.”

Although CommBank was already doing a lot of the required due diligence on its own initiative, it did not rush to sign up to the Equator Principles. Hatton explains the catalyst was growing desire from investors and shareholders that CommBank commit to the principles, combined with the bank’s view that the latest version of the principles, EP3, which was launched in 2014, had greater governance and was more stringent.

“We have committed to embedding these environmental, social and governance [ESG] principles and guidelines into our project-finance practice,” Hatton explains. “Our lending due diligence includes a lot of steps covering environmental as well as social aspects. Every project that qualifies goes through detailed due diligence and considers environmental elements as well as social aspects like stakeholder engagement, community consultation, grievance mechanisms and the like.”

Fast forward to 2017, and CommBank now reports on the assessed carbon emissions of its lending book each year. Macfarlane says: “We are the first bank in the world to report on the emission intensity of the whole lending portfolio. Our annual financed emissions reporting is an important part of our ongoing disclosures against our target to decrease the average emissions intensity of our business-lending portfolio over time.”

Formalising the process through initiatives like the Equator Principles and now CommBank’s own principles framework is very important, Macfarlane adds. “It’s one thing to be doing something, but it’s quite another to have formal mechanisms and governance around how we do it, ensuring our people understand how and why they are doing it, and then being able to report continuously on the impacts and outcomes of this process,” she tells KangaNews.

ESG in practice

CommBank’s more recent work around its lending book has therefore been focused as much on understanding and reporting the ESG component as it has on changing its composition. The bank’s renewables book has reached A$2.8 billion (US$2.2 billion), and has involved some extremely innovative project-lending techniques and case studies (see box below).

White explains: “We didn’t have specific concerns about the quality of our loan book or the risks inherent in it. However, going back a few years, we didn’t have a formal mechanism for tracking ESG and there also wasn’t anything we could point front line employees to that made our ESG standards clear when they were originating or refinancing loans.”

Renewables lending and Sundrop

Commonwealth Bank of Australia (CommBank)’s lending exposure to renewable-electricity generation continues to increase. At 30 June 2017, it stood at A$2.8 billion (US$2.2 billion) – up by A$600 million year-on-year. Recent years have also seen the completion of landmark transactions in Australia and overseas.

“We are very proud of our A$2.8 billion renewables portfolio, which we have been working really hard to build,” says Louise Hatton, CommBank’s executive director, responsible lending. “There’s a big presence offshore and our local business has also grown a lot in the last 12 months.”

CommBank has been able to find local renewables-lending opportunities despite ongoing policy uncertainty in Australia, which has been a challenge for many in the industry.

Hatton adds: “We have been actively supporting the domestic renewables market when we can find the opportunities, but there are also a lot of assets we lend to in Europe, North America and Canada. Wind and solar projects are the main sources of growth both domestically and offshore.”

The first step was to put together responsible-lending commitments, to make clear CommBank’s lending appetite based on individual borrowers’ ESG risks. The bank also wanted a tool to assure itself it was appropriately assessing the risks within these customers and clients.

Hatton says the tool CommBank designed fits into its credit-decision process and the outputs end up on the back of credit papers. “ESG issues are discussed in any credit process, and in depth,” she explains. “It goes into a fair bit of detail – looking at seven factors including biodiversity, pollution, climate and energy, water use, labour and human rights, workplace health and safety, and anti-corruption and governance.”

White adds: “What we have developed is like nothing I’ve seen anywhere else in the market. It requires our front-line bankers – those who are closest to the customers – to go through a really robust process of understanding the ESG impacts of any particular client. We can record this and thus get a good understanding of the ESG risks we are taking within our book.”

Once more, the underlying principle is integrating ESG into the heart of the CommBank business. “The most important thing for me is that our people have a good understanding of who their customers are. Everything else flows from this. To have everyone be clear on what our appetite is, and then to have these conversations with their customers, is the key,” White says.

“What we have developed is like nothing I’ve seen anywhere else in the market. It requires our front-line bankers – those who are closest to the customers – to go through a really robust process of understanding the ESG impacts of any particular client.”

Moving forward

The balance sheet is only the first step. White continues: “The vast majority of customers in the institutional business borrow from us. But there are some that don’t – they might, for example, have more liability products. The next phase is to look at customers in even more depth – whether or not they borrow from us – and roll out ESG impact assessment.”

When it comes to group-wide buy-in, CommBank offers its institutional bank employees an ESG fundamentals e-learning course and more than 5,000 employees have been trained on responsible lending, investing and procurement policies and practices.

“This gives everyone an understanding of the expectations and what we want from our clients,” Hatton tells KangaNews. “Our people have to do a lot of e-learning but we have had many people tell us the ESG topic is really interesting and that it is about issues that mean something to them.”

To date, 1,800 CommBank staff are trained on the detailed ESG tool and the bank has also conducted face-to-face training on the Equator Principles. “There is a lot of awareness and capability building,” Hatton confirms. “As these considerations have escalated, the conversation has become much deeper and better informed in senior review panels. We are certainly aware we are building the capability of the whole organisation.”