A responsible road
15 September 2016
ING does about 6,000 wholesale banking transactions each year. How do we make sure none of them pose too much risk to the environment, people and communities? And how do we help clients become more sustainable? Meet the ESR team.
On site: Andrew Scott from the ESR team went to Eastern Africa and witnessed the dangers of the road first hand.
There’s a road in Eastern Africa that’s known as one of the most dangerous in the world.
Stands selling food and supplies are lined right at the shoulder, local farmers cross it with their herds, and kids walk along it to school. Fatal accidents are inevitable—and they happen far too often.
ING is one of several banks financing the construction of a railway running parallel to the road, which will eventually relieve some of its heavy traffic.
But in order to build the railway, workers must use that very road to truck goods to the construction site—and in doing so, they were involved in traffic accidents causing some fatalities.
What do we do?
That’s the question on the table at the weekly meeting of ING’s Environmental and Social Risk (ESR) team. The six members are running through the deals of the moment.
“All our lending deals go through ESR filters. The most risky ones are analysed by us and get discussed in our meeting,” says Mercedes Sotoca, head of the ESR team.
“Those are actually only the tip of the iceberg, as the front office takes it so seriously that most challenges get addressed before they even come to us.”
Here’s how it works. A corporate client or potential client comes to the ‘front office’ (departments with client contact that originate transactions) with a request for financing. If it has potential, the transaction gets evaluated on three levels: is it commercially viable? Is it legal and compliant with regulations? And lastly, is there any potential environmental or social risk?
If the answer to that last question is yes, the transaction gets sent to Mercedes’ team and evaluated. The team also assesses all deals in sensitive sectors such as mining and oil & gas, or when they involve high-risk countries. In 2015, there were about 350 transactions that came for assessment—out of the 6,000 wholesale banking transactions in total.
The early days
It wasn’t always that way. Back in 1999/2000, banks didn’t have an approach to manage ESR risks, according to Mercedes. The turning point was in 2003 when the Equator Principles emerged and ESR management became mainstream in a handful of banks.
Spanish-born Mercedes lived and worked in places including Lebanon and Ecuador before joining ING in 2008.
“The ESR organisation was smaller and flat then, but still advanced and with a tremendous positive impact given ING’s international footprint, which is why I wanted to come here,” she said. ING had policies in place, but Mercedes’ job was to really embed them in the company.
“In the early days I got quite a few people upset – ‘who are you, you cannot stop my transaction!’,” Mercedes jokes. The Board was committed, but the organisation had to catch up. Mercedes and her still-growing team spent a lot of time talking with colleagues around the company to understand each other’s challenges.
“Now we’re much more welcome,” she says. “The mindset and commitment of ING, and we’re in a good position to compare, is beyond what market practice is.”
For sustainability, ING has ESR on the risk side and Sustainable Finance on the opportunity side.
“But it’s not only that we have those departments, it’s that we have access to the transactions, strategy and policies and to the top decision-makers of the bank. You need to be in the DNA of the organisation if you think it’s an important topic, and we are.”
The ESR team, located within the global Credit & Trading Risk department, doesn’t only mitigate risk—they also help clients become more sustainable.
“We say yes or no, but most often we say ‘yes, BUT’,” says Mercedes. “We let the client know which requirements we’d need them to meet, and then make that a condition of awarding the financing. If they refuse, the deal doesn’t go ahead. If they agree, which is the majority of cases, we monitor them to make sure they adhere to them.”
For example, one palm oil and rubber producer is a longstanding ING client. They’ve historically faced significant sustainability challenges in their plantations, and have relied on ING’s advice to make important steps that have let us expand the financing we give them.
They improved governance by hiring a sustainability director and health and safety staff; improved employee health; and created a process for interacting with the communities impacted by their business, including stakeholder meetings, giving explanations door-to-door, discussions on potential compensation, as well as a way to file complaints (collectively known as a ‘grievance mechanism’).
So what do we do?
The discussion around the traffic accidents in Africa continues. The situation is an ‘outlier’, according to team member Andrew Scott, who visited the project site and witnessed the danger of the road firsthand. The issue there arose after the initial project was assessed positively, which means there’s also risk to ING because the project is already on our books.
So back to the question on the table: what do we do?
First, Andrew is working to make sure the project monitoring is up to speed and they are promptly informed of any issues. The initial approach is to work with the contractor to make sure the drivers are obeying the speed limits and are given sobriety tests before beginning. The long-term approach that ING advised the client is to work with authorities on lowering and enforcing the speed limit and helping schools educate students about the risks involved with walking on the road.
“To be honest, that road is terrifying,” said Andrew.
“It’s a comfort to think that ING and the other banks involved will help improve people’s lives by helping to improve the road’s safety. It’s situations like these where our environmental and social risk approach really comes to life.”