Week 13: The real reason why Credit Suisse collapsed

In this issue: ▸ Why Credit Suisse collapsed ▸ Interview with CDP’s Laurent Babikian

Dear all,

Defeat is an orphan. 

There are a zillion analyses done on Credit Suisse over the course of the last couple of weeks. On how it could happen, and why a bank with over 150 years of history got buried over a weekend in Zurich. 

There is no need to go through it again and state the facts or reiterate some of the angles that led to a funeral. It was rather a slow build up of a snowball that eventually crashed on to Paradeplatz. All of the bad signs were there for years. 

My take is that Credit Suisse has been an orphan for a long time, mistreated by its own management, ignored by authorities and politicians in Switzerland and eventually abandoned by its clients and partners. It is a tragedy for a Swiss identity and people in Switzerland know this. A mortal blow to Swiss banking identity pointing at one particular thing. Culture. Reckless culture cooked in no accountability gravy served as a Raclette. Looking tasty but smelling like defeat. Banks don’t end up in these situations because of the bad products they offer, or bets they make on certain sectors, or lack of digital solutions they think their clients need. They do so because of a row of management-made decisions fostered in the culture of “it is all about the money”. Nothing else matters. 

This was reflected on the ESG side within the Credit Suisse too. The bank was late to the ESG party and was struggling with significant exposure to the oil & gas sector, while at the same time, trying to catch up with peers on climate commitments and targets. 

Credit Suisse was poorly rated by several ESG rating providers, but mostly for its lack of climate-related action, not really for the repeated scandals and misconduct. In the financial world, these scandals are not “material”. Banks break the rules, pay fines (if they got fined) and they carry on. The CEO or Board presents “we are strengthening our internal processes”, analysts nod and the game is on again. Fines are usually pocket money for the banks and gain of breaking the rules is usually far more profitable than any fine they, eventually and maybe, have to pay. Potential fines are discounted in Discounted Cash Flow (DCF) models and eventually all of it is forgotten.

Yes, I have seen it from the inside. I have participated in these very discussions and all I can say is that, believe it or not, it works. Every time. Reputation may be affected and management knows this, but in time, all of this will be forgotten. You keep your head down, you stress your “new” internal process, maybe you recruit a new Head of Risk or Compliance. You shift around your organisation, you meet the FSA (where people are paid fraction of what you get and where most of the people there will eventually work for your, or some other, bank) and you present your case with stellar conviction that “this will not happen again”. You know that politicians are on your side (although they rant in public, banks this and that). You know that you are systemic, important for so many businesses, and you know that friends at the FSA need months maybe years, given the scarce resources they have, to pin you down. Clients forgive and go on until they don’t. Only when large and wealthy clients start abandoning the ship in volumes do things get very spooky. And when that avalanche starts it is sort of game over. Large and wealthy clients have been abandoning Credit Suisse ship for a long time. In volumes. Enough said about the banking for this newsletter.  

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Interview with CDP’s Laurent Babikian

I have had the pleasure to interview Laurent Babikian, Global Director Data Products from CDP (formerly the Carbon Disclosure Project). This is the organisation that has been working with climate-related disclosures for a very long time and some of the answers Laurent has provided are rather alarming.

Laurent, you have been working in climate finance capitalism nexus for a very long time. People know who you are and what your organisation is doing. What is wrong with the current state of  play?

Neoliberalism without effective regulation is a problem. Our economy today is largely characterised by the maximization of profit for shareholders at the expense of our planet and most of its people. Treating our planet and its natural resources as an unlimited free resource has created our warming planet, which now threatens the lives and livelihoods of millions, not to mention future generations. Until the world’s governments, businesses and central banks are held accountable and step up with serious action, I am afraid that the damage this version of capitalism has done, and is doing, to the environment will continue.

Companies report and report, but we don’t see significant changes in how they operate. Why do you think that is the case?

In 2022, CDP saw record-breaking disclosure figures as nearly 20,000 organisations disclosed environmental data covering their impacts on climate change, forests, and water security. That was a 38% jump year-on-year, the highest number of disclosing companies that CDP has seen since its inception over two decades ago. There is unprecedented agreement among stakeholders that environmental disclosure is a necessity to measure and drive progress to show impact and it clearly now sits at the top of the boardroom agendas and government policies. Just look at the European directives being currently implemented now to mandate it.

• 76% of companies on the CDP A List for climate change have an approved science-based absolute emissions target

• 100% of companies on the A List for forests have a forest-related target linked to a no-deforestation/conversion commitment for the commodity they score an A for

• 67% of companies on the A List for water security have water withdrawal, water pollution reduction or WASH (water, sanitation and hygiene) targets.

Change is happening, but we cannot ignore that these companies are in the minority. Most are still not managing all environmental issues holistically, and far too many are remaining complacent or failing to respond at all. 29,500+ companies worth US$24.5 trillion are failing to disclose their environmental data to CDP including ExxonMobil, Aramco, Chevron and Tesla. Companies must step up to the challenge as CDP continues to lift the bar for what qualifies as leadership, and since there is no route to 1.5°C without nature, we must see companies speed and scale up their progress in tackling deforestation, biodiversity and water risks as well as climate change.

There is plenty of ESG money around and so many financial players that pledge and pledge. Is this for real or just a play for the audience?

Financial resources and green investments are needed to address climate change, to both reduce emissions, promote adaptation to the impacts that are already occurring on the environment, and to build resilience. Countries recognised the need for specific climate financing in the Paris Agreement which calls for making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. Responding to the climate crisis requires collective action from all countries, cities, financial actors, businesses, and private citizens.

More than 500 financial institutions have joined the Glasgow Financial Alliance for Net Zero (GFANZ), which is the overarching alliance of all net zero coalitions, but only a few have set realistic reduction targets on 100% of their scope 3 emissions.

However, in the 2022 Emissions Gap Report, released last October, the United Nations (UN) reported that current climate pledges are falling far short of where they need to be to keep global warming within the 1.5°C goal. Global emissions increased by 1% in 2022 while they should be decreasing by at least 5% a year to achieve net zero. Finance for adaptation continues to make up a small percentage of climate finance overall, about 20%. The Global North only provided $80 billion towards the Global South in 2020 despite their long time promise to supply $100 billion in climate finance and adaptation. During Covid, the banking system created $14tn of fresh money that landed on stock markets instead of creating GDP - thus increasing the wealth of asset owners in an indecent way. And we are not even able to fulfil our commitment to provide $100bn a year to the south. This is unethical.

Therefore, although the agreement reached at COP27 in 2022 on a new ‘loss and damage’ fund for vulnerable countries is a step in the good direction, it will take a long time before new funding arrangements are established. This means that developing countries will continue to suffer the adverse impacts of climate change. At this COP, nothing was mentioned about the phasing out or down of oil. This was a COP where an absurd number of oil lobbyists were accredited. I don’t want to imagine how many more will be accredited at the next COP in Dubai which will be chaired by the CEO of the national oil company. Are we serious about what’s at stake?

I’m sure there are some positive things too. What would you mention and why do you think it makes a difference?

Investors have been supporting CDP in driving corporate transparency and action on environmental issues. In 2022, more than 680 financial institutions worth over US$130 trillion in assets, including Allianz, Amundi, AXA, BNP Paribas, CaIPERS, Capital Group, the European Investment Bank, the French central bank, State Street and Vanguard requested nearly 10,400 companies worldwide – worth US$105 trillion in market cap - to disclose data on their environmental impact.

In 2022, La Banque de France joined CDP as the world’s first central bank requesting companies to disclose environmental data. Sustainability-linked loans were the fastest growing segment of sustainable debts in 2022, which is a very good sign. Indeed, this type of loan can lower the cost of capital if the environmental targets are met. For example, the Spanish bank BBVA recently launched a new sustainability-linked loan with Europe’s second-largest electric utility, Iberdrola. The loan’s interest rate is tied to the company’s water footprint, using CDP water security scores. If the footprint decreases over time, the interest rate paid to the bank diminishes and vice versa.

Towards the end of last year, Euronext also launched the CAC SBT 1.5°C. This is the first ever stock index based on SBT 1.5°C approved companies by the Science Based Targets Initiative. The yearly CDP SBT campaign offers CDP capital markets signatories the opportunity to play a key role in accelerating the adoption of science-based climate targets in the corporate sector, by collaboratively engaging companies. CDP’s progress report in September 2022 shows that 60% more financial institutions (220) supported the 2021 campaign than in 2020. European capital markets (55% of all supporters) appear more mature than their American or Asian peers on engaging companies to set targets.

All these milestones make a difference because they show a higher level of awareness and commitment towards environmental protection. They also send a strong signal to the market that financial institutions are more and more focused on companies leading the transition to a sustainable economy. But this is not going fast enough.

Do you think it is possible at all to change the way companies operate in the current system, or do we indeed need a change of the system before we can see tangible outcomes?

An economic system that, by design, widens the gap between the richest 1% and the rest of the world, over-consumes natural resources without regenerating and pricing them, and leads to a fall in purchasing power for future generations compared to their parents (for the first time in the history of capitalism) cannot be considered efficient and ethical. As I mentioned earlier, there is a need to invent and regulate for a version of capitalism that will contribute to the green transition we are all talking about - instead of only focusing on maximizing profit for shareholders at the expense of society and nature.

Change is possible. Through incoming sustainability standards, the EU has shown leadership and is making companies report all of their impacts on our planet and society – not just risks for shareholders. The EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR) have also been introduced by the European Commission to improve transparency in the market for sustainable investment products and to prevent greenwashing. Investors in capital will have to mitigate financial risk within their portfolios by selecting companies that are best positioned in a climate-constrained future. This will drive 1.5°C-aligned ambition and action across the economy. We must collectively implement a carbon tax agreed by nations so that we can send financial markets the right signals to price assets at their true value. But oil lobbies do not want this because it destroys shareholder value. We must incorporate natural and human capital in the accounting principles (True Cost Accounting) if we are to safeguard those resources. It’s only when we will have this trilogy in place that we will be able to monetize impacts of companies so as to be able to add to the Return on Equity (ROE) the Return on Impact.

How important is integrity when you work in this space? You have a lot of it, and it is not really common.

While many initiatives make commitments to align finance with the Paris Agreement and Sustainable Development Goals, an important question remains: How do we assess the integrity of commitments and track progress towards meeting them? Increasing integrity and accountability can be positively reinforcing. Yet despite an accelerating pace of sustainability and net-zero pronouncements by a range of actors, there is no universally accepted framework of what robust commitments should include and against which to measure progress. There is also currently no organisation that is tracking the progress of the financial system overall, nor analysing the impact, separately or in aggregate, of the commitments. Very few financial institutions report their scope 3 emissions making it impossible to assess the carbon footprint of the financial sector. Similarly, the many institutions that have not made commitments are also not routinely identified and tracked.

And although the Glasgow Financial Alliance for Net Zero (GFANZ) initiative aims to be an overarching coalition umbrella for the private sector, we do not yet see enough real action. We need to see more ambition, not less. For example, 80% of GFANZ members are not supporting CDP’s finance backed SBT campaign this year, which we believe is the most important thing driving 1.5°C-aligned ambition and action across the economy.

To achieve net zero, the fiduciary duty of investors should shift away from the maximization of financial performance in the long run for their clients, to the maximization of their impact on nature and society in the long term.

A common global framework is needed to address climate adaptation, biodiversity and nature, pollution, just transition, and the needs of developing countries in order to reinforce climate change goals.

You are looking for new frontiers. What drives you and what do you want to achieve?

CDP’s vision then and now is for a thriving economy that works for people and planet in the long term. We work with investors, companies, cities and governments on building a sustainable economy by measuring and acting on their environmental impact. 

We want to see all companies setting emissions reduction targets aligned with 1.5°C and taking real action to make sure their entire value chain is within the natural limits of our planet. We want financial institutions to drive an urgent reallocation of capital and shift the trillions to drive the transition to a net-zero, nature-positive economy. This means disclosing 100% of their Scope 3 emissions and setting Science-Based Targets (SBTs). We want cities and regions to play a dual role in the climate crisis and contribute their fair share through:

• Ambitious climate adaptation and mitigation plans

• Setting SBTs and driving real change in their procurement, particularly in key areas like the food system.

And finally, we need governments and policymakers to upgrade their Nationally Determined Contributions (NDCs) so they align with 1.5°C because what has been agreed so far at COP27 will not limit global warming.

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Have a great ‘victory has many fathers’ week!

Best regards

Sasja