On May 29, a fuel tank at a thermal power plant owned by a subsidiary of Norilsk Nickel (Nornickel) in the Russian Arctic failed, flooding the surrounding rivers and subsoil with 21,000 tonnes of diesel oil.
Nornickel claimed the accident was due to melting permafrost. Russian authorities – and environmental groups – disagreed, blaming it on negligence and lack of investment in infrastructure. The company was asked to pay a record Rb148 billion ($2 billion) in compensation.
This was not an isolated incident. Nornickel has a long history of egregious pollution, both deliberate and accidental. It is the world’s largest producer of sulphur dioxide, which it regularly emits in quantities sufficient to cause health damage in communities in Russia, Finland and Norway.
This summer’s spill was also the second in less than four years. In September 2016, contaminated water from a Nornickel metallurgical plant in Norilsk turned the Daldykan river blood red.
Barely three months after its latest environmental disaster, Nornickel was able to raise $500 million of funding in international markets
Maintaining a proud tradition of lack of transparency, the company tried for several weeks to deny any link to that incident. Similarly, Greenpeace Russia has reported repeated attempts by Nornickel and the compliant local administration in Norilsk to block investigation of this summer’s spill.
Yet barely three months after its latest environmental disaster, Nornickel was able to raise $500 million of funding in international markets through a eurobond sale.
When the deal was announced, some questioned whether environmental, social and governance (ESG) considerations would affect demand. (In the event, debt investors grappling with rock-bottom interest rates showed few qualms about buying a bond yielding more than 2.5%.)
Environmental malefactor
What went largely unremarked was the involvement in the deal of a number of western investment banks that have positioned themselves as global leaders on sustainability.
All five international firms that acted as bookrunners on Nornickel’s bond have signed up to a plethora of global initiatives designed to protect the environment. Four are signatories to the UN’s Principles of Responsible Banking.
Yet none apparently felt constrained when it came to raising funds for a notorious environmental malefactor that has shown little appetite for reforming its polluting and obstructing ways.
The banks in question – Bank of America, Citi, Societe General, UBS and Unicredit – either declined to comment on the deal or did not respond to requests for comment.
Is it fair to hold them to account for their involvement in a fairly routine transaction? Up to a point, undoubtedly. If sustainability commitments are to mean anything, they should surely mean passing up a mandate from Nornickel three months after its latest ecological disaster.
At the same time, the number of banks involved – and the lack of adverse comment on their involvement – points to a broader, industry-wide issue.
While US and European banks in particular have made decent progress on integrating environmental considerations into areas such as project finance and even corporate lending, investment bankers have so far faced few – if any – sustainability-related restrictions on their activities.
Tentative moves
This year has seen a few tentative moves in that direction, in the form of commitments from the likes of JPMorgan, Credit Suisse and Societe Generale to restrict the provision of advisory and capital markets services to the more recidivist players in the coal sector.
As a signal of intent, and an indication that sustainability is becoming part of the conversation in investment banking, this is encouraging. In the context of the volume of financing arranged by these banks and their global peers, however, such tightly targeted sectoral restrictions are fairly meaningless.
What should sustainability-minded banks be doing instead? A good start would be to ensure that all investment banking transactions are subject to a stringent corporate and social responsibility (CSR) assessment.
In theory, this is already happening at a number of leading investment banks. The presence of some on the Nornickel deal, however, suggests that either the assessments are insufficiently rigorous or CSR teams are losing the battle against their revenue-generating colleagues.
Investment banking… is not an area that has traditionally been involved in sustainability topics
Simone Dettling, PRB
Perhaps it is unfair to expect much more at this point. ESG is a new, complex and rapidly evolving area. Like everyone else, investment banks are still struggling to work out how to balance the conflicting requirements of clients, shareholders and other stakeholders when it comes to sustainability.
They can also claim, quite correctly, to have played a crucial role in the development of sustainable finance. Without them, corporates and investors would not today have access to a smorgasbord of ESG debt, equity and derivatives products.
At the same time, they are doing extremely well out of it. Sales of green, social and sustainable bonds could reach $375 billion this year, according to Moody’s. That represents a substantial chunk of investment banking revenue.
Clearly it is in banks’ interests to present themselves as champions of sustainability. Unfortunately, while they continue to act for issuers such as Nornickel, such claims will ring slightly hollow.
What might help is an industry-wide response, possibly coordinated by an independent international body. One obvious candidate would be the Principles for Responsible Banking (PRB), which was launched by the UN in September last year.
While the initiative has struggled to gain traction in the US – of the big American banks, only Citi has so far signed up – it has been supported by most of the main sustainable finance players in Europe and Asia.
Signatories are required to conduct an impact analysis of their portfolios across retail, corporate and investment banking. Initial feedback suggests that the latter will be low on the list of banks’ priorities – but the PRB’s proponents are keen to push it further up the agenda.
“Investment banking, outside of green bonds, is not an area that has traditionally been involved in sustainability topics,” says Simone Dettling, who runs the PRB. “In terms of both understanding and market practice, it is easily 10 years behind areas like corporate lending or mortgages.
“Good industry practice and standards are needed and we are working on starting to develop them.”
Whether any principles will succeed in curbing the animal spirits of investment bankers remains to be seen. If nothing else, they could help to kickstart an overdue conversation on the role of sustainability within the industry and give valuable leverage to hard-pressed CSR teams.
Only when the industry as a whole faces up to the problem will investment banks be able to exert the type of pressure on clients that could prevent the next ecological disaster, in the Arctic or elsewhere.
