BID® Daily Newsletter
Oct 30, 2006

BID® Daily Newsletter

Oct 30, 2006

IT IS EASY BEING GREEN


Wachovia is the latest bank (along with Citigroup, Wells, BofA and 30 other banks) to adopt the "Equator Principles." This international benchmark was a directive of the World Bank/ILC back in 2003 and was designed to make banks more environmentally sensitive. While the Principles mainly apply to loans over $10mm, several notable independent banks have also adopted these standards in hopes of not only promoting socially responsible lending, but also tapping into the growing marketing trend of environmental activism. One aspect of the Principles is the review of loans to see if they support environmental goals. For example, a loan to a logging company would receive a lower environmental score than a loan supporting energy saving technology. For each loan, an environmental assessment is prepared that compares the project's impact on renewable natural resources; protection of human health, cultural properties, and biodiversity (including endangered species and sensitive ecosystems); use of dangerous substances; creation of additional hazards to occupational health and life safety (fire, etc.); responsible land use; efficient use of energy; pollution prevention and waste management. Based on this assessment, banks then make agreements with their clients as part of the loan documentation process on how the borrowers can better improve their score over the life of the loan. Sometimes, covenants and even loan pricing are included to further ensure compliance. In addition to lending, the Principles also include guidance on how banks can be more environmentally friendly in the design and operation of their branch system. For Wachovia, this means replicating their group of Texas branches that are run by wind power. For other banks, they have found it successful to utilize photovoltaic cells on their roofs. If all this seems a little too unconventional, consider that in addition to contributing to the environmental welfare of the planet, banks can boost profitability by adopting a "Green" stance. Many of these banks have received tax credits and deductions to partially offset the initial costs of energy plans. This, combined with annual energy savings, ends up reducing expenses over a 7 to 11 year time horizon. Further, by marketing environmentally sound deposits, evidence suggests that an interest cost savings can be had from 20bp to 80bp. Being more environmentally astute also helps in capturing loan business, as it serves as a non-price differentiator in the marketplace. Finally, being an environmentally friendly bank helps attract and retain a certain cross-section of employees that are looking to make a difference in this world. While adopting the Equator Principles may not be for every bank, it is increasingly important to find a way to differentiate your bank's mission. In this age of competition, helping the environment can pay off in many ways.
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