Ethical Loan Book
£100m: The new business they rejected

Its loan book is galloping ahead. It is winning awards. It has fewer bad debts. What makes The Co-operative Bank sing? ANDREW STONE investigates the success of ethical banking.

In the giddy days before the financial crisis, Richard Wilcox, Head of The Co-operative Bank’s Sustainable Banking Unit, could have been forgiven for feeling he worked for an outmoded organisation.

“I was looking after our syndications portfolio back then and we got weekly approaches from investment banks to do all sorts of synthetic bundles of collateralised loan obligations. There was no internal pressure to lend more, as I imagine there might have been in other banks, but there was certainly external pressure. People were saying: ‘Come on guys, you need to move with the times’. We resisted them all, thankfully.”

Three years on, it’s The Co-operative Bank’s long-established model, founded on ethical business and straightforward lending, that is proving itself. As faith in other institutions faltered, the bank saw deposits flow in from commercial, corporate and retail customers.

Clearly, ethical banking is paying off and it continues to expand its loan book, while turning away business that fails to pass ethical muster. Last year it rejected £100m of new business on ethical grounds yet grew its loan book to £8.3bn. The Co-operative Financial Services, meanwhile, capped a strong year by claiming the FT’s prestigious Sustainable Bank of the Year award.

It’s not surprising that a significant chunk of its lending (25%) and more than half its commercial deposits in 2009 were with companies with an expressly ethical, environmental or co-operative ethos. Wilcox declines to put a likely figure on 2010 lending, but says: “We expect to lend as much if not more in 2010 than in 2009.”

Interest in ethical banking and its growth looks set to continue as the political, economic and social mood music moves into closer harmony with the Co-operative’s founding ideals.

Investment in renewable energy and energy efficiency, sectors in which the bank sees itself as a pioneer, should leave it well placed to benefit from the ever more urgent pursuit of energy sustainability, says Wilcox.

“These are two really important areas going forward. We now have a team of 20 people just doing UK small scale renewable projects, which makes it probably the biggest renewable energy team in that sector in the UK.”

Alongside sustainable energy, the kind of non-public sector social and community organisations that the bank backs look set to benefit from the new Coalition government’s ‘Big Society’ philosophy.

“The government is talking extensively about private-public partnerships, a bigger role for charities, and support for social enterprise,” says Wilcox. “All those happen to be areas where people want something other than just your standard banking package.”

He believes the bank adds value in these sectors because it shares the same principles as many of its customers. So it offers a true partnership approach and better service than banks more focused on a single rather than a triple social, environmental and financial bottom line.

“If you genuinely treat the customer as a partner because they’re part of the same world you inhabit, it tends to follow that decisions you come to between you have more tendency to be the best for both,” argues Wilcox.

He insists there’s a strong business case for ethical banking and for turning away business where necessary. Identifying customers that share its values or ones striving to form long term partnerships leads to more stable businesses, more collegiate relationships and less customer churn.

It also means fewer bad loans. “We have a greater percentage of ethical enterprises among our customers than any other and a smaller corporate bad loan charge than any other bank in the UK. Can I prove the two are linked? No, but it would seem to make sense that there is a link.”

In a less certain world, values and trust have gained a new importance, qualities that play to the bank’s founding principles. “At our heart we are a simple institution that likes to lend its customers’ money to businesses it understands. We did not see those complex investments, thankfully, as part of our role.”

The fact these principles are embedded in its structure and governance meant it resisted the siren song of looser or more complex lending, says Wilcox. “There’s no internal or shareholder pressure. Our shareholder is the Co-operative Group, which has the same interest as us in providing long term support for UK industry, not short-term gain for institutional shareholders.”

It’s an ethos that chimes with medium-sized UK firms, which The Cooperative Bank seeks to woo in greater numbers and to support through their growth phases. Says Wilcox: “If you’re an owner-managed business, you tend to value the concept of partnership more. We have seen a real net gain of corporate customers and that business has continued to grow significantly. They want the bank to be there for them over the long term and we have proved we will do that.”

Auditing the ethical risks

Before the bank even considers a business relationship, it conducts an ethical audit. Firms involved in fossil fuel extraction, animal testing, which trade with oppressive regimes or harm the environment need not apply. Only after the ethical audit will it consider other factors such as credit risk.

Says Richard Wilcox. “Yes, it takes out certain sectors of the market but increases positive choice for customers who will come to us because of it. Our view is that the latter outweighs the former.”