National Australia Bank’s Sustainability Challenges

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Table of Contents

Introduction
National Australia Bank: Sustainability Challenges
Regulatory Issues Facing the Corporation
Analysis of the Future Developments in Law and Regulation
Conclusion
References

Introduction

National Australia Bank (NAB) is a major corporation in Australia that provides various banking services to its customers. As it is known, the domain of business is highly complex due to large numbers of different sustainability challenges, issues related to law and regulations, compliance obligations and the associated problems, and more. These complications are even more crucial for the banking field as it is directly connected to many financial operations, and banks are often responsible for significant amounts of money belonging to Australian citizens. This paper is a business report related to sustainability challenges and regulatory issues that NAB faces within its business activity, additionally addressing the bank’s compliance obligations. This report aims to provide detailed information on the issues mentioned above, followed by the analysis of the likely future developments in law and regulation that can potentially influence the current state of affairs and play a significant role in dealing with the issues under discussion. Furthermore, this report is supposed to contribute to the executive decision-making process in NAB, advising on the regulatory context, risks, and prospects for the company.

National Australia Bank: Sustainability Challenges

National Australia Bank is one of the four major financial institutions in the country, consisting of 859 branches and business banking centers and 1572 ATMs. The company currently possesses almost a fourth part of the market, holding 21.5% of the market share with the stock price of 28.86 AUD as of October 22, meaning that NAB is the first business lending in the industry (NAB, 2021d). One of the reasons for the success of NAB is the overall strategy of the company, which focuses its capital management on adequacy, efficiency, and flexibility, maintaining the economic balance to support and strengthen the bank simultaneously (NAB, 2021a). Moreover, the capital management and the corresponding financial strategies have clearly identified primary objectives, including optimizing the returns to stockholders, supporting the company’s overall growth and development, and ensuring that the capital amounts in the bank’s possession are sufficient to cover the potential risks (NAB, 2021a). Capital management is the most critical concern for such a large financial enterprise as NAB because the firm cannot be in control of other people’s money if it cannot conduct a solid strategy for operating its own money.

However, capital management is also a method of addressing other activities related to the banking field. They involve efficiently mixing the capitals of Tier 1 and Tier 2, ensuring the sufficiency of financial resources available to comply with the regulatory requirements, and meeting the expectations of rating agencies (NAB, 2021a). Furthermore, the company targets wholesale funding, maintaining a well-diversified portfolio with access to a range of funding institutions among senior and subordinated markets, market of secured debt, and the hybrid market of domestic retail (NAB, 2021a). Such a broad scope of funding activities contributes to the growth and development of NAB, which mixes investment funds, maturity profiles, and geographies to ensure that the bank’s activity is efficient in terms of business and economics, service quality and customer satisfaction, and financial profits (NAB, 2021a). The bank uses a broad range of funding programs and strategies, which enables access to various markets of the major wholesale funding, allowing NAB to achieve the corresponding objectives (NAB, 2021a). Everything mentioned above explains the bank’s success since the prudent implementation of the described strategies provides NAB with a diverse range of business opportunities.

However, ensuring the company’s business efficiency is not the only goal of NAB as there are various sustainability challenges that require to be addressed in order to improve the general outcomes of the bank’s activity, increasing its positive influence on the outside world and reducing the negative impact. For instance, such a large corporation as NAB, operating through almost a thousand technical facilities, severely influences the environment, which is why the bank has created a separate program related to the care of nature, using significant financial resources to implement the program and achieve its goals (NAB, 2021c). In recent years, NAB has reduced paper usage by 60% and science-based emissions of GHG by 41% from the 2015 baseline and has completed transactions of renewable energy for more than 10 billion dollars’ worth (NAB, 2021c). Moreover, the bank aims to commit 70 billion dollars to environmental financing by 2025 to contribute to the favorable climate change and the corresponding improvements in the planet’s health and the state of its nature (NAB, 2021c). At the same time, there is much that has already been done to help the world.

Aside from everything mentioned above, NAB uses all the available opportunities to improve the environmental health of the Earth. The following are some essential points of the bank’s activity related to climate change in terms of what has been already achieved:

A science-based target to reduce greenhouse emissions;
Several commitments helping address climate change and support the transition to low carbon economy;
NAB is the first carbon-neutral bank in Australia;
The company uses its carbon-neutral status as an example for other firms and corporations (NAB, 2021b).

However, the desire to make the world a better (and cleaner) place is not the only reason NAB cares so much about its environmental influence. The bank’s reported exposure to different fossil fuels, such as coal, oil, and gas, has increased by 30% in 2019, making the company “the most exposed” one of the four major banks of Australia since ANZ’s exposure increased only by 9%, and Commonwealth Bank’s and Westpac’s exposure decreased by 18% and 16%, respectively (Market Forces, 2019). Therefore, NAB has to put effort into improving the situation.

Furthermore, the bank cares about its social impact on other people and tries to consider the consequences of its every action in order to ensure a positive influence on each person separately and the community at large. NAB assisted 66 thousand Australians with small partnership loans with Good Shepherd and contributed almost 43 million dollars and more than 6 thousand volunteer days to the communities in 2020 (NAB, 2021e). In addition, the bank cares about diversity, and there are around 40% of female representatives on the company’s subsidiary boards (NAB, 2021e). NAB applies a diverse range of various tools and instruments to address societal issues and help the community, using community grants and volunteering initiatives, providing people with workplaces, and encouraging them to achieve indigenous success and create a stronger society (NAB, 2021e). Everything described above makes NAB not only a provider of banking services but also a large and multifunctional corporation that pays attention to many different issues and contributes to solving them.

Regulatory Issues Facing the Corporation

Aside from sustainability challenges and the own goals set by NAB, the bank faces various regulatory issues. The most significant of them is the so-called Paris Agreement, which is “a legally binding international treaty on climate change,” adopted by 196 parties at the 2015 United Nations Climate Change Conference in Paris, later entering into force on November 4, 2016 (UNFCCC, 2021, para. 1). The primary goal of this Agreement is the limitation of global warming to a position below 2 (preferably 1.5) degrees Celsius, which requires all the occupied countries, including Australia, “to reach global peaking of greenhouse gas emissions as soon as possible to achieve a climate-neutral world by mid-century “(UNFCCC, 2021, para. 3). The Agreement is supposed to be implemented by complete social and economic transformation and works on a cycle of 5 years, at the end of which all the countries involved share their plans on further actions, communicating with each other to achieve the highest level of efficiency (UNFCCC, 2021). Being a major Australian enterprise, NAB significantly contributes to the Paris Agreement, and the details have been discussed in the previous section of this paper.

Additionally, the Paris Agreement has established a unique framework that is specifically related to the banking system. This framework is called “The principles for responsible banking,” and it consists of 6 primary principles “designed to bring purpose, vision, and ambition to sustainable finance” (UNEP, 2021, para. 2). These principles include alignment, impact and target setting, clients and customers, stakeholders, governance and culture, and transparency and accountability (UNEP, 2021). NAB, among many other banks, has committed to embedding all of those principles within all the business domains and at all levels of economic activity.

Another regulatory issue that NAB is facing is the digital innovation called Open Banking. It is an instrument of digital finances that enables customer data sharing between third-party providers of financial services and incumbent financial institutions (Zeller & Dahdal, 2021). The Open Banking initiative emerged after the massive financial crisis of 2008 with the help of the rapid progress of mobile communication technologies, and nowadays, researchers call this innovation “a part of a broader international movement to disrupt the traditional financial order” (Zeller & Dahdal, 2021, p. 4). This phenomenon has acquired popularity among people and started to develop rapidly because of distrust and antipathy to traditional banks established after the global financial crisis mentioned earlier (Liu, 2020). Although Open Banking may potentially simplify the working process for the providers of banking services, it can also decrease the demand for them if the innovation will allow people to receive those services independently of the banks’ assistance. Therefore, the innovation under discussion should be thoroughly and constantly investigated so NAB can be ready to confront the consequences of Open Banking’s implementation.

Furthermore, the Great Recession of 2008 mentioned in the previous section was not the only financial crisis that shattered the economic world. Although Australia did not experience a severe banking crisis like most other countries, such occurrences significantly alter the global financial market since they promote the corresponding reforms and innovations (Bells & Hindmoor, 2019; Pagliari & Wilf, 2021). Many reasons explain such a state of affairs since a severe crisis can weaken influential people or organizations which have been opponents to regulations or provide an opportunity for policymakers to implement their regulatory projects (Pagliari & Wilf, 2021). Though Australia has managed to avoid the crises, for now, the history illustrates multiple financial catastrophes in the past 20 years, which proves that such an issue occurs periodically, and there is no guarantee that it will not touch Australian banks next time (Bells & Hindmoor, 2019). Thus, NAB should learn and reflect on the experience of foreign banks because if a financial crisis occurs and the bank is not ready to face it, it can deal critical damage to the company or even destroy it.

Finally, there are some regulations that involve the types of activities that banks can maintain, namely commercial and non-commercial actions. Many policymakers around the world believe that banking business and commercial business should be separated and have nothing in common, and the corresponding initiative is called the banking/commercial separation doctrine (Ford, 2019). This doctrine is not yet a part of the Australian regulatory regimes, and it is severely weakened in other countries, such as the United States, Japan, and Singapore, yet researchers claim that the initial concerns that caused the creation of the doctrine’s creation are still powerful (Ford, 2019). The banking business is associated with a certain number of risks, and people want to mitigate them, “protecting state deposit insurers from over-commitment and maintaining a functioning market for financial services” (Ford, 2019, p. 3). However, there are other ways to meet the concerns mentioned above, without the necessity to separate banking business and commercial activities.

Based on the information gathered from the research, the doctrine itself does not currently pose any danger for the banking system at large and NAB, specifically. However, that conviction should not be a reason to ignore the problem as it may be late to address it in the future. According to Ford (2019), the issue raised by the doctrine can be addressed adequately through various regulatory requirements by focusing explicitly on the concerns described in the previous paragraph. Therefore, NAB should pay additional attention to the development of that discussion in the banking world so the bank can be ready if it will have to confront the issue and contribute to its solution without the distinction of “banking” and “commercial.”

Analysis of the Future Developments in Law and Regulation

The information gathered in the previous sections of this report can be used to conduct an analysis of the future developments in law and regulations, which is essential to assess the NAB’s readiness to face those potential alterations that might affect the bank in a positive or negative way. First, the Paris Agreement and the entire world’s intention to improve the environmental health of the planet can lead to new regulations in this field that will apply additional requirements that the bank will have to address. The success of the campaign launched by the Agreement might promote further development of various environmental programs since the corresponding strategies have been implemented in the long term for many decades forward (UNFCCC, 2021). However, NAB is ready for any further regulations regarding environmental health as the bank is currently putting many efforts into nature’s protection, meaning that it will not be challenging for the corporation to adopt new programs and strategies related to the protection of the environment.

Second, the Open Banking program can severely impact NAB and the banking system at large since it is a first step in the complete transformation of the banking business that can entirely change the current “financial order” of the world. Even if that happens, banks all over the world will not be wholly utilized – they will only be weakened by the reduced demand for banking services. Nonetheless, NAB is a large corporation and the first business lending in Australia in the domain, meaning that it has enough power and resources to restructure the business to adapt to the transformed banking world even if it is established eventually. The banking industry is constantly transformed nowadays due to various crises and rapid technological progress, and Open Banking is just another potential transformation (Zapotichna, 2019). Still, it is strongly advisable for NAB to keep exploring the innovation and model the corresponding strategies for immediate implementation in case the “banking revolution” occurs.

Third, the Great Recession of 2008 and other financial crises that occurred over the past 30 years caused policymakers to take action and create regulatory reforms that shaped today’s banking system. There is a chance that a new financial crisis can occur at any moment, followed by the corresponding regulations, and it is not guaranteed that Australia and its banks will remain unharmed this time. However, crises are not a rare occasion in this world, and being ready for them is essential for such a large corporation as NAB to be an efficient banking enterprise. The bank is ready for any financial disaster while maintaining solid corporate and marketing strategies and allocating the organizational resources wisely.

Finally, there is a chance that future regulations will touch the high market concentration of the Australian banking system. It has been maintained by the policy of the “big four” for a long time, yet the Australian government tried to restrain the four banks’ power and promote market competition in the industry (U-Din et al., 2017). However, even if the government tries to launch such a campaign again soon, it may probably decrease the market concentration in the Australian banking industry and bring more competitors to the field, but that restraint will not be enough to reduce the NAB’s market power.

Conclusion

Overall, NAB is currently in “superposition” regarding the opportunities to transition to a more sustainable business model that aligns with emerging regulations and changing societal expectations. The bank is currently not experiencing any significant pressure from policy regulations or other institutions, and its commercial success allows NAB to use the available resources to strengthen the bank’s internal structure and expand its external influence. Moreover, NAB is not a single-functional banking corporation as it is involved in many activities unrelated to the provision of banking services, yet they are no less significant. The bank always considers its impact on society, providing support and assistance to other people. NAB also makes considerable contributions to the environmental health of the planet, following the six principles for responsible banking and making crucial financial investments to the natural care programs. In other words, NAB is currently in an excellent state, and that can be used now to improve the corporation’s overall performance, strengthen its internal structure, increase commercial profits, and address the potential issues that the bank might confront in the near future.

References

Bell, S., & Hindmoor, A. (2019). Avoiding the global financial crisis in Australia: A policy success?. In Luetjens, J., Mintrom, M., & Hart, P (Eds.), Successful Public Policy (pp. 279-301). Australian National University Press.

Ford, C. (2019). The banking/commercial separation doctrine in comparative perspective. SSRN.

Liu, H. W. (2020). Two decades of laws and practice around screen scraping in the common law world and its open banking watershed moment. Washington International Law Journal, 30(1), 28-63.

Market Forces. (2019). NAB 2019 policy update analysis.

NAB. (2021a). Capital and funding.

NAB. (2021b). Climate change.

NAB. (2021c). Environment and sustainability.

NAB. (2021d). Shareholder centre.

NAB. (2021e). Social impact.

Pagliari, S., & Wilf, M. (2021). Regulatory novelty after financial crises: Evidence from international banking and securities standards, 1975–2016. Regulation & Governance, 15(3), 933-951.

UNFCCC. (2021). The Paris Agreement.

UNEP (2021). Creating the future of banking.

U-Din, S., Tripe, D. W., & Kabir, M. (2017). Market competition and bank efficiency: A post-GFC assessment of Australia and New Zealand. SSRN.

Zapotichna, R. A. (2019). Contemporary issues in multinational banking: an overview. Economic Studio Journal, 26(4), 56-58.

Zeller, B., & Dahdal, A. M. (2021). Open banking and open data in Australia: Global context, innovation and consumer protection.Qatar University College of Law, Working Paper Series of Qatar University College of Law, 21(1), 1-23.

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