Analysis
Updated
Photo:
Craig Meller and Catherine Brenner departed AMP following the royal commission revelations. (AAP: David Moir)
The banking royal commission and this week's APRA report into the Commonwealth are a litany of banks, and AMP, behaving badly.
And for investors concerned about more than just profit, it has raised the question: should they buy shares in them?"Banking done right is ethical — the challenging question is, is it being done right in particular cases, organisations? That's the challenge," said Stuart Palmer, the head of ethics research at super fund, Australian Ethical.
In the world of "ethical" investing, corporate social responsibility looms large.
"Ethical" funds don't just look at profits, but also whether a company is making a positive contribution to people, animals, and the environment.
At the banking royal commission, it's been anything but.
Fees for no service, lying to the regulators, doctoring so-called independent reports and so it goes on, adding to the negative sentiment around banks from the "ethical" investing sector.
"Banks have been on watchlists or been excluded from ethical funds for a while, for a whole range of other issues, whether they be financing the fossil fuel industry, or issues along remuneration or board performance, for example," said James Thier, a director at FutureSuper, which also calls itself an "ethical" investor.
And while the royal commission has highlighted serious misconduct in the banks, including fraud and bribery, for "ethical" investors, the fossil fuel issue is at least as important.
"We need massive shifts of capital to renewables energy storage if we are going to limit warming to below two degrees, so we need to get the big banks on board," Mr Palmer said.
"We've assessed that Westpac and NAB have been doing a better job around that than ANZ."
Ethical super funds treat banks with caution
Australian Ethical has never held shares in CBA or ANZ but does hold NAB and Westpac.FutureSuper has no bank shares and the royal commission is highlighting why.
"Banks have always had issues and for more than a decade people have lost trust in banks to different degrees," said Mr Thier.
"I think this is the high-water mark of the issue making itself aware to people."
Probably the biggest surprise at the royal commission has been that the bad behaviour at AMP went all the way to the boardroom.
Which is why Australian Ethical says AMP will now have to clear some high hurdles to persuade it not to sell its stake.
"We'd need to be satisfied that the board and the senior executive team has, one, the commitment, and two, the capacity to manage these incidents, to stop them occurring with the regularity they have been occurring," said Mr Palmer.
Even those who don't describe themselves as "ethical" investors, say the banking royal commission is affecting their decision to hold bank shares.
"If they're behaving unethically then that negatively reflects on that brand and diminishes the attractiveness of that as an investment because it diminishes the actual outlook for the business," explained Stuart Jackson, portfolio manager at Montgomery Investment Management.
Repairing brand damage should be a front and centre for the banks, with AMP possibly facing criminal charges.
From a customer point of view though, there are those in the advertising industry who say the banks' brands aren't as damaged as we may think.
"The public makes more of a deal about Chloe Kardashian giving birth to a baby while the partner is out having an extra marital affair than they care about the banking system in Australia," said Glenda Wynyard, principal of the Media Precinct.
Ms Wynyard argues the public already knows banks do bad things, but at the same time, banks know those same people won't desert them.
"Nobody moves, or rarely do they move. It's quite difficult.""The banks have actually got quite loyal customers for all of their flaws."
What the royal commission will lead to is banks taking a tougher approach to people's ability to repay home loans.
Which is why Mr Jackson warns anyone heading to an auction with a loan pre-approved should check their bank will stand by that commitment.
"The last thing you would want is a situation where you have won on an auction, you have paid your deposit and you are on the hook with no cooling off period for the settlement of that, to only find once you go through the application process the bank can no longer lend you as much as they had pre-approved before."
For investors, the next showdown will be next Thursday's AMP Annual General Meeting, where some big shareholders are threatening to vote against all directors standing for election, and executive pay packets.
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