Latin Finance - November/December 2010 - 69

sustainable banking

only 1%, between all three areas. “Banks with a less well-balanced sustainability scorecard, such as BBVA Bancomer with 24 percentage points, can be expected to have imbalances throughout their management,” says Cox. For Santander, its Brazil operation ranks first in social responsibility with a perfect score of 100%. Yet no other Santander bank ranks highly, revealing weak central management, according to Cox.

Buyer Beware

According to M&E, there are only a few governance standards with teeth. Most are mere formalities that did nothing to prevent the banks from investing in bad assets in a blind search of returns, leading to Lehman’s implosion. “Investors need to look at executive compensation packages,” says Cox. “Are they being compensated for a balanced scorecard involving a healthy mix of financial parameters along with developing personnel, gaining market

share and avoiding risk?” He adds that the audit committees need to be invested with real powers. And investors should find out whether all shares have equal voting rights, and if minority shareholders are represented on the board. “Dilution of ownership remains a key weaknesses in shareholder control over management,” says Cox. He notes that this is not a problem at mid-cap banks such as MiBanco and BicBanco, since the IFC owns 6.5% of Mibanco and Accion about 15%. “These big institutional investors are more likely to control management than an annual meeting attended by hundreds of shareholders,” says Cox. According to M&E’s analysis, the Dow Jones Sustainability Index beat the MSCI World benchmark by 607 basis points in dollar terms, effective end-2009. It adds that investors appear to like sustainability as a safe haven. “These sizable spreads are increasingly being considered the sustainability spreads,” says Cox.

However, Cox concedes that a true link to sustainability cannot be proven. “At such a consolidated level, any number of factors could coincide to produce these results. The only accurate approach is to measure the net present value of all sustainable projects and add up their free cashflows,” says the analyst. M&E notes that LatAm banks and blue chips in general still hold the view that sustainability investments cannot be assessed according to such standard return methods as NPV or IRR. “With Bradesco spending an estimated 600 million reais on sustainability-related expenses, not including major IT investments, shareholders deserve to see returns for these expenses,” says Cox. M&E estimates that $2.24 billion of Bradesco’s $59.24 billion market capitalization effective end-2009 can be attributed to sustainability, or 3.8%. And according to M&E, sustainability investments, properly managed, have strongly positive cashflows. LF

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November/December 2010

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Latin Finance - November/December 2010

Table of Contents for the Digital Edition of Latin Finance - November/December 2010