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Case Code: FINC120
Case Length: 20 Pages 
Period: 2009-2017    
Pub Date: 2017
Teaching Note: Available
Organization : HSBC
Industry : Banking and Financial Services Institutions
Countries : Colombia
Themes: Sustainable Finance  
Responsible Finance  
Corporate Sustainability  
Case Studies  
Business Strategy
Human Resource Management
IT and Systems
Leadership & Entrepreneurship

Financing Drummond in Colombia: Is HSBC Risking Sustainability Goals?

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The coal sector being the heart of the Colombian economy, the government declared it as an “engine of development” for the country. Colombia ranked as the sixth largest exporter of coal in the world, contributing 5.4% of the total value of coal exports by countries in 2015 (See Exhibit VI for Coal Exports by Countries in the World in 2015). According to the US Geological Survey, coal mining production had been increasing by 80% in Columbia since 1999. In its review of the mineral industry of Colombia, the US Geological Survey projected that the Colombian government expected the production of coal to increase to 134.2 Mt in 2019. Coal mining in Colombia was undertaken entirely by private sector mining companies with Drummond being the second largest coal producer in Colombia behind Carbones del Cerrejón Limited....

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Since 95% of Drummond’s operations were based in Colombia, the financial institutions focused their attention on the company’s Colombian operations. Drummond issued US$ 250 million in bonds in 2009 and enjoyed two revolving credit facilities of US$ 550 million in 2010 and US$ 750 million in 2012 respectively. HSBC had financed US$ 5.4 billion for coal projects including US$ 232.5 million for Drummond since 2010. HSBC had been a major contributor to Drummond’s Colombian operations, financing the project in two revolving credit facilities in 2010 and 2012 along with six other leading financial institutions (See Exhibit VII and VIII for Financiers of Drummond). But the bank was caught in a controversy for supporting Drummond, which was accused of murders and displacements in Colombia.
Concerned about the human rights abuses at Drummond, civil society organizations around the world slammed HSBC for being complicit in the human and environmental disaster in Colombia. At the HSBC AGM, protestors from the World Development Movement accused HSBC of fuelling climate change and ruining the lives of people through the adverse effects of coal mining worldwide. PAX supported the victims of paramilitary violence in the Drummond mining area through its ‘Stop Blood Coal’ campaign. In 2011, PAX investigated reports of links between the paramilitary violence and the Drummond mining company operating in Cesar. In 2012, PAX examined legal testimonials which indicated that mining companies including Drummond had supported the paramilitary forces in several ways, including requesting their establishments and financing them. In its June 2014 report titled “The Dark Side of Coal”, PAX reported that the Drummond mining company had links with the paramilitary forces who indulged in serious human rights violations including selective killings, massacres, murders, human rights violations, and forced displacement of communities.
In a private report titled ‘Stranded assets: what next?’, HSBC advised its clients to get out of fossil fuels which would become “economically non-viable,” but the bank continued to support Drummond with substantial investments. HSBC had invested a whopping US$ 8 billion in global coal financing between 2005 and April 2014. While the bank claimed its increasing support to low carbon sectors, the fossil fuel portfolio of the bank dominated over the period (See Exhibit XI for HSBC Loans to the Selected Companies). Observers were of the view that the bank’s marketing slogans about sustainability and its sponsorship of various climate change projects sounded admirable and reasonable, but the bank stood for a very different reality as it failed to move away from fossil fuel investments.
In response to a letter from BankTrack in April 2015 urging HSBC to suspend the Drummond financing, the bank stated, “HSBC does not and cannot discuss individual customers, nor do we confirm whether an individual or business is or has been a customer, for reasons of client confidentiality.” In the Paris COP21 climate summit held in December 2015, Gulliver differed from the views of other banks and investors who favored withdrawing from carbon intensive sectors altogether. Rather, he urged the companies and governments around the world to come forward and support the funding of moving to a low-carbon economy. “We have to work with clients and support them through a just and orderly transition – not simply walk away and ignore the problem,” Gulliver said. Thermal coal generated 41% of the world’s electricity, and provided electricity to billions of people. Coal was also a key requirement for manufacturing new steel, and the coal industry was a source of livelihood for many people.
By April 2016, Gulliver had received over 300 letters requesting that HSBC withdraw from its coal mining investments. Activist organizations around the world unanimously felt that HSBC would have to suspend its business relationships with Drummond until the company contributed substantially to effective reconciliation for the victims of violence. But Drummond had not taken any concrete steps toward compensating the victims, they observed. Analysts pointed out that the horrendous human rights controversies involving Drummond which HSBC helped to bankroll, was in addition to the heavy toll on the global climate change and any continued investments by the bank in the company would only aggravate the situation.
Exhibit I:Largest Global Banks by Assets (As of March 2016)
Exhibit II: Consolidated Income Statement of HSBC Holdings (Quarter Ended).
Exhibit III: HSBC’s 10-point Sustainable Operation Strategy.
Exhibit IV: Sustainable Standards of Mining and Metals Sector Policy
Exhibit V: Guidelines in Mining and Metals Sector Policy
Exhibit VI: Coal Exports by Countries in the World in 2015.
Exhibit VII: Financiers of Drummond.
Exhibit VIII: Banks Financing Drummond (2009 – mid-2013)
Exhibit IX: Letter to Stuart Gulliver as Part of Move Your Money Campaign.
Exhibit X: HSBC Loans to the Selected Companies (2004-2014).
Exhibit XI: HSBC Coal Loans and Underwriting for Selected Companies, 2010-14.