Banco Real: Banking on Sustainability

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________________________________________________________________________________________________________________ Professor Rosabeth Moss Kanter and Senior Researcher Ricardo Reisen de Pinho of the Latin America Research Center prepared this case, with assistance from Research Associate Ryan L. Raffaelli. Contributions from Jose Pedro Lins (KSG 2004) are acknowledged. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2005, 2007, 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

R O S A B E T H M O S S K A N T E R

R I C A R D O R E I S E N D E P I N H O

Banco Real: Banking on Sustainability

“Instead of just the next quarter, how about the next quarter of a century?” — Headline on ABN AMRO Holding N.V. Corporate Ads

Fabio Barbosa, CEO of BANCO REAL bank, had just finished a meeting on a hot summer day in January 2005 with Jose Luiz Majolo, COO, and Maria Luiza de Oliveira Pinto, Executive Director of Education and Sustainable Development. A guest from their parent company in the Netherlands, ABN AMRO Holding N.V., was about to land on the roof of headquarters, after taking the bank’s helicopter from São Paulo airport with two security guards. Before they greeted the guest, Fabio wanted to make sure that they were clear about the next steps in their sustainability strategy.

The initiative was important to the bank as a central part of its culture and brand. It was also important to the Dutch global holding company for whom Brazil was a major market and role model; to the various NGOs (from Friends of the Earth and Greenpeace) and the World Bank’s International Finance Corporation that had influenced the bank’s programs; and to the nation, as Brazilian President Luis Inácio Lula da Silva expected private sector involvement in solving Brazil’s formidable social problems.

As the 4th largest privately-owned bank in Brazil, and #15 on the list of Brazil’s most-admired companies, BANCO REAL was in the spotlight. In the four years since the sustainability theme was created, the bank had initiated actions in a variety of areas, such as socio-environmental screening for credit analysis, environmentally-focused products, micro-finance, socio-environmental tests for suppliers, internal reduction of waste and recycling, and workforce diversity. But Fabio knew that the journey had just begun.

Brazil and the Financial Services Industry

Brazil’s rich and diverse population was the largest in Latin America and the Caribbean (See Exhibit 1 for data on Brazil.) Following three centuries under Portuguese rule, Brazil became an independent nation in 1822. Due to its vast natural resources and large labor pool, Brazil quickly became South America's leading economic power and a regional leader. However, since the 1980’s

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the Brazilian economy suffered from declining real growth, runaway inflation, unserviceable foreign debt, and a lack of policy direction.

In 2003, President Lula, a former labor leader from the Partido dos Trabalhadores, PT (Workers’ Party), took office. He surprised the public with his business-friendly approach. Temporarily setting aside the social platform that got him elected, he aimed to reduce government spending and committed to reducing foreign debt. Brazil’s GDP grew by 5.2% in 2004, the fastest in a decade.

Despite Brazil's economic advances under Lula, the poorest one-fifth of Brazil's 170 million people still accounted for a 2.2 percent share of the national income. More than one-quarter of the population lived on less than $2 a day – 13 percent lived on less than $1. Environmental deficiencies afflicted the country; less than 10 percent of wastewater was treated and up to 40 percent of the country's solid waste (40,000 tons a day) was not collected. Poor transportation networks and bureaucracy were notorious for raising costs for ordinary citizens as well as for businesses. In São Paulo, transportation cost consumed one-fifth of a poor person’s income, and more than 2.5 hours a day in commuting time.1 Crime also plagued the 82% of people who lived in the country’s cities. "Rio de Janeiro is one of the world's most violent cities, with a homicide rate of around 50 per 100,000 residents. Rival drug gangs control many slum areas and defy authorities," wrote an Associated Press reporter, commenting about mass homicides in two impoverished Rio suburbs.2

The Brazilian Banking Sector

At the beginning of the 1980’s, the Brazilian banking system was divided among federally-owned, state-owned, private Brazilian-controlled, and foreign-controlled banks. These groups each had separate and diverse interests and business strategies. Banco do Brasil and Caixa Econômica Federal, both large federally owned banks, developed extensive branch networks that competed directly with private retail banks.3

During this period, inflation veered out of control, reaching annual levels in excess of 200%. Banks became overly dependent on ‘float’ revenues, the inflationary gains made on the distorted spreads between the interest and indexation on assets, and the cost of their non-indexed and non-interest or low interest bearing funds.4 The float revenues became an easy source of income.

In response to hyperinflation, government sponsored economic policies resulted in two periods of consolidation within the banking industry between 1994 and 2004. The first consolidation phase was prompted by the “Plano Real” program in 1994; a program to control inflation using the exchange rate as an anchor. Ten state-owned banks disappeared and twelve were privatized as a result of the program. Although the program was credited with having created long term stability for the Brazilian economy, structural problems of the financial system became evident after implementation. Federal and state banks found it difficult to support their administrative structures because of inefficient scale and a dependency on the float revenue.

1 The World Bank Group, “Brazil Country Brief,” accessed March 28, 2005.

2 Michael Astor, "Police Suspected of killing 30 in Rio suburbs," Boston Globe, April 2, 2005.

3 Paulo Miron, et al, “Brazil – Inflationary Years Leave Financial Players Fitter,” The Banker, Financial Times Business Limited, October 1, 2004.

4 Ibid.

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The second phase of consolidation came in response to international financial crises in Mexico (1995), Asia (1997), and Russia (1998).5 The crises forced the Brazilian government to abandon its pegged exchange rate regime. Local interest rates increased significantly and unexpectedly. The Brazilian Central Bank identified institutions with problems and required action from shareholders or transfer of control to the state before the condition worsened. Many international banks entered the Brazilian market for the first time, acquiring several medium-sized private sector banks caught up in the after-effects of the situation.

Bradesco, Itaú, and Unibanco had been the main players in the acquisition process since 1985 (See Exhibit 2.) The acquisition of Banco do Estado de São Paulo S.A (Banespa) by Banco Santander Central Hispano S.A. in 2000 was considered the most important because it shifted the ranking of the five largest private banks.6

The New BANCO REAL: Creating the Bank of Value

In 1998, as part of the wave of consolidation in the Brazilian financial sector, ABN AMRO S.A. acquired Banco Real. ABN AMRO was the Brazilian subsidiary of a Dutch multi-national financial holding company tracing its origins to 1824 and its activities in Brazil to 1917. Banco Real was a well-respected financial group founded in 1925 as a cooperative to finance farmers. The acquirer had a European parent (the 11th largest bank in Europe and the 20th largest in the world), 50 branches and 3,470 employees; and specialized in wholesale and automobile financing. The acquired bank had 726 branches and 716 sub-branches in other facilities; 17,331 employees; and a focus on retail, with over 2 million retail customers. Fabio Barbosa, then head of ABN AMRO S.A., recalled, “When we finished signing the acquisition contract, the first question that came to our minds was, ‘Who bought whom anyway? Which culture would prevail?’”

The new BANCO REAL faced a classic merger integration challenge: how to build a new culture and a new identity in the marketplace after an acquisition.7 It competed with banks that were bigger, had better IT, lower cost funding because of the scale of their retail networks, stronger brand recognition, and longer experience with state-of-the-art practices such as customer segmentation.

Because of the political, economic, and social context in Brazil, (and the values and vision of bank leaders), the discussion of a corporate brand took an unusual direction. Fabio Barbosa, Jose Luiz Majolo, and Maria Luiza Pinto were among those leading the effort. (See Exhibit 3 for bios.) Along with a focus on close customer relationships, the bank chose to emphasize “value creation” as its distinctive theme, encapsulating it in a mission statement, “Satisfying clients, generating value for stockholders, employees, and the communities in which we operate by having an ethical posture in business, differentiating ourselves by the quality of our products, services, and especially our customer service.” (See Exhibit 4 for BANCO REAL’s model.)

5 BBVD Securities, Inc., “Brazilian Banks Enjoy Their Day in the Sun,” February 11, 2005.

6 Tamara Berenholc and Daniel Araujo, “Despite Turbulence, Brazilian Banks Opt for Consolidation,” Standard & Poor’s., December 20, 2002.

7 The new entity’s legal name was Banco ABN Amro Real S.A. In the Brazilian marketplace, however, it was still known as Banco Real.


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First Steps: Setting the Theme

By 2000, operational integration was far along, and leaders could turn to the question of mission, management model and brand. The leadership group tuned into the environment to identify needs and opportunities, and challenged themselves to think creatively. Informal brainstorming meetings were held on Wednesdays, with a group of about 8 bank executives and occasional external consultants. An embryonic concept of “Banco de Valor” (Bank of Value) started to be developed through discussions that roamed over many topics, from the physical environment to problems of poverty to employment policies.

Leaders gathered information and assessed themselves. In 2001, a self-evaluation based on social responsibility parameters developed by the Ethos Institute8 helped the organization to identify, for example, environmental risks in the subsequent years:, the bank sponsored Formula-1 races, had outdoor displays in environmental protection areas, and the water that supplied its head-office derived from an illegal artesian pond. Some of the bank’s executives participated in a seminar that was organized by an NGO coalition, including Friends of the Earth and the International Finance Corporation (IFC), the World Bank’s private branch. Leaders also read socio-environmental evaluation reports produced by Unibanco, a competitor.

Could risk-averse, conservative banking address the social and ecological challenges presented by NGOs? Fabio’s answer was Yes. He explained:

Behind all those sometimes incoherent ideas, we were guided by the feeling that we were creating something different. We wanted to put aside the thought that social responsibility could only be obtained through philanthropy, which lessens difficult situations, but does not overcome problems. Our focus had to be strategic, with corporate responsibility seen as doing the right thing in a systematic way. In other words, to do the right thing right.

Two other events in 2001 – one positive, one negative – sent important signals and served as symbols for both the opportunities and the challenges.

The alley next door One of the bank’s directors pointed out a filthy, abandoned alley just beside the bank, home to thugs and drug dealers. Changing the world was not a credible goal if the bank couldn’t change the alley next door. Rather than turning to the police, the bank decided to take responsibility. With the involvement of the local community, a garden was created, pavement and lighting replaced, and two kiosks employing teenagers from low income families installed, making the street safe and pleasant. “From that point on we knew what had to be done. If each one of us made changes to the alley next door we could change the world,” an executive said.

The bond after death A bank employee had sold a bond to a 70-year old gentleman that would not mature for decades, and would incur a loss if cashed early. When the customer’s family found out, they took to the Internet to denounce the bank’s lack of ethical professionalism. Leaders quickly cancelled the transaction, but harm had already occurred. The lesson: It was better to lose a deal than a relationship. Fabio said:

We couldn’t possibly build a brand focused on customer satisfaction, social responsibility, and environmental sustainability, if we didn’t experience the culture. From this point on, we knew that actions should be implemented from the inside.

8 For more information about Ethos Institute, see www.ethos.org.br.


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In May 2001, a report was issued, “A New Bank for a New Society,” which explained the Bank of Value concept and identified initiatives already underway that exemplified it. The bank also decided to postpone external communication until internal processes for corporate socio-environmental responsibility were in place. It was not until late in 2002 that the “Bank of Your Life” campaign went to the media. “The process will be slower than what many had hoped for, and deeper than what many believed it would be,” observed an executive from Amsterdam headquarters.

A Structure to Guide the Process

In November 2001, a formal department was created under the direction of Maria Luiza de Oliveira Pinto, a former human resources executive. (See Exhibit 5 for organization chart.) Initially called the Social Responsibility Directorate, it was renamed in 2004 the Directorate of Education and Sustainable Development, to emphasize the educational mission as well as the target. It was meant to be temporary, a means for instilling social responsibility in the bank’s culture and disappearing as its mission was accomplished. “It’s a biodegradable department,” Maria Luiza explained.

In order to broaden the discussions, one of her first actions was to create three committees of executive directors and managers from throughout the bank: market (responsible for products, customers, and credit risk analysis); management (eco-efficiency, employee diversity, and suppliers); and social action (social investment and community involvement). These committees would oversee projects and programs and also help the concepts penetrate all levels of the company. By 2002, the executives who had discussed the Bank of Value proposition were serving as champions of the ideas and sponsors of projects. BANCO REAL had developed relationships with a variety of NGOs for education, analysis, or direct assistance with ventures. Some projects were managed by the Directorate directly, some were guided by the three committees, and some were run by business departments. By the beginning of 2002, Maria Luiza’s group also took on coordination of the bank’s social action initiatives, encompassing education, environment, diversity, and income generation. (See Exhibit 6 for a social action overview.)

Customers and Markets: Actions at the Core of the Business

BANCO REAL’s leaders had decided that the bank would be customer-focused, stressing relationships rather than transactions, and also a leader in corporate social and environmental responsibility. Some executives viewed this concept as an impossible business strategy, as it was not feasible “to give everything to everyone,” as some interpreted the promise.

Steps toward the customer focus goal included: increasing decision-making autonomy for branches to solve small problems on the spot; reviewing communications with customers; and encouraging dialogue across areas inside the bank. In addition to segmenting customers into four major segments (business, standard, special, and premium), the bank identified affinity groups for whom they could design customized products (lawyers, retired pensioners, dentists, military personnel, university students, teachers and professors, doctors).

The social responsibility goal was more complex. Some managers feared that they would lose clients and deals while numerical goals would be kept the same. Socio-environmental standards meant walking away from some customers, refusing to do business in sectors that posed large socio-environmental risks, such as military hardware or asbestos production. Fabio told a reporter:

We had a case of a lumber company that was working illegally in the Amazon. We told them that we weren’t interested in continuing our business relationship with them. We also had a client whose fish harvesting operation in the coastal swamps of Brazil’s Northeast were causing problems, only this time there was a happy ending to the story. They claimed they


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didn’t know the practice was harmful, so they asked for our help. We put them in contact with an oceanographer who got them to change their methods and stop polluting.9

By December 2004, the number of companies removed from the client list was very small, but the symbolic effect was very large.

Raising the stakes In May 2002, the bank launched a training program, in partnership with IFC, for widespread education about social and environmental risk analysis and policy, starting with approximately 100 bank executives. From July 2002 to February 2003, Friends of the Earth partnered with BANCO REAL in training another 1,750 employees, including branch managers, middle market and large accounts relationship managers, and credit analysts. Despite the fact that the program was unprecedented in scope, there were still doubts regarding its efficacy. “It didn’t matter how many employees there were, but how much each one of them was into the process,” COO Jose Luiz reflected.

In June 2003, BANCO REAL’s corporate parent, ABN AMRO N.V., joined a group of ten international banks to announce the voluntary adoption of the “Equator Principles,” a set of guidelines set by the IFC that established social and environmental criteria for financing over US $50 million. (See Exhibit 7.) Environmental impacts on flora and fauna and the need for compensatory actions for people affected by a specific project began to be a part of the evaluation.

Credit risk analysis A major issue was how to incorporate socio-environmental matters into the company’s credit evaluation and risk management policies – and how to do it in such as way as not to jeopardize customer appeal. Jose Luiz offered a solution by proposing that the organization should evaluate not only the clients’ results, but also their attitudes. “The bank needed to evaluate if the company’s executives knew of its problems and were prone to take actions to solve them. In fact, this had been an old rule when we used the 5 Cs of credit [character, capacity, capital, collateral, and conditions]. The first one is character,” he explained.

The risk analysis department created procedures to get information from commercial customers to add to the usual financial credit screens. Those customers were sent questionnaires every six months on social and environmental aspects of their activities, on matters from work accident indexes to toxic waste treatment processes. Data were analyzed for financial and socio-environmental impact and then cross-checked against public information, increasing the analyses’ complexity.

One of the problems was whether paper reports such as financial statements were trustworthy. Financial reports were not always audited in Brazil, especially for smaller companies. Moreover, socio-environmental matters such as child employment or compliance with environmental regulation were hard to prove. On the other hand, some environmental matters were apparent from site inspections, and, according to some of the company’s executives, were closely correlated with business practices. One leader expressed his belief that “A company that treats its employees well and maintains a healthy relationship with the environment has a higher probability of being economically sustainable.” Site visits were important for the customer management process, but they were also time-consuming.

Customer benefits Leaders felt that the increased requirements imposed on customers were accompanied by benefits. Rather than reject projects, the bank could propose changes that would make projects feasible and help clients achieve their goals. A large operation involving VCP, a world

9 Aydano André Motta, interview with Fabio Barbosa, published in O Globo newspaper, Caderno Especial: Suplemento Especial – Razão Social, July 5, 2003.


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leading pulp and paper producer and one of the bank's main clients, was a significant example executives cited. “Before coming to us, VCP went to several banks, including BNDES – the National Economic and Social Development Bank. The VCP proposal was at the beginning everything a bank that called itself socio-environmentally responsible did not like to hear,” Jose Luiz said. The project involved planting eucalyptus, a source of pulp for paper, but also a tree which arguably dries the soil and drives out birds and animals, over a wide area – itself an environmental risk if all the land was devoted to eucalyptus. The bank would be involved in about US$30 million of financing directly to about 3,500 small farmers in an impoverished region for up to 21 years.

Using the bank’s screening procedures, BANCO REAL staff discovered that eucalyptus production would be restricted to 40% of the area; the remainder could be divided between replanting native forests and subsistence agriculture. Client spread would decrease credit risk, and VCP’s guarantee to buy wood would make farmers feel comfortable about spending, contributing to lifting the local economy. In a region with serious social problems, an estimated 20,000-25,000 people could benefit from the deal. Furthermore, VCP planned to invest about US$1.0 billion in a paper and cellulose factory, putting BANCO REAL on the inside track to be the potential partner bank.

Acumuladoura Moura, a leading car battery manufacturer based in Pernambuco in the northeastern region of Brazil, provided another example of benefits to customers. Due to potentially high levels of lead, a toxic metal, in employees’ blood, the firm had been under scrutiny by government health agencies and included on a watch list by Greenpeace, a leading environmental NGO. After thorough investigation (including talks with the labor union representing employees), BANCO REAL staff were convinced that the company had made changes to comply with Brazilian regulations. The bank retained the client and also communicated with Greenpeace to try to remove Acumuladoura Moura from its “Environmental Corporate Crimes Report.”10

These kinds of experiences confirmed proponents’ views that subjecting customers to a social and environmental screen for risk analysis could strengthen the loan portfolio while bringing benefits to customers. (One customer said this was the first time a bank was willing to listen to problems and find a solution.) Skeptics, on the other hand, wondered whether more customers would be lost than gained. The biggest resistance came from those working with large commercial customers, who were not always happy at being subjected to an audit; this was also where the greatest potential for uncomfortable situations could arise.

New Products and Lines of Business

While focusing on socio-environmental needs, bank leaders were clear that this was not philanthropy, and they would not put the company’s financial results at risk. Fabio said:

Our position was clear from the start. We’re not a green bank and don’t wish to be seen as one. Our final goal was, is, and will continue to be the maximization of our shareholders’ profits. However, we believe the best way to achieve this goal in the long run is to create conditions in the short and medium terms that allow sustainability. We don’t subsidize interest rates, reduce taxes, nor evaluate credit operations for longer periods than the ones allowed by the market. However, we will always seek to adapt our clients’ needs to our capacities.

Ethical mutual fund In November 2001, BANCO REAL Asset Management launched a first product for socio-environmental investors: an equity fund comprised of companies that practiced sound corporate governance and integrated economic-financial and socio-environmental considerations. The bank’s research department developed a screening process to select potential

10 For more information see http://www.greenpeace.org.br/toxicos/pdf/corporate_crimes_port.pdf, available in Portuguese.


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candidates for the equity fund. Companies whose activities involved the production of asbestos, alcoholic beverages, tobacco, or firearms were not even analyzed, while other industries were carefully scrutinized.

In December 2004, over 3 years after its launch, the Ethical Fund was composed of stocks from 25 companies, had R$75 million under management, and had a 159.5% return since its inception, compared to 112.8% from Bovespa, the São Paulo stock exchange index. Although the fund’s asset was still a fraction of the R$29.4 billion managed by the company in Brazil, it showed that investment in socio-environmentally responsible companies could pay off in the long run.

The fund was seen as a model by its competitors. Discussions were opened with Bovespa for creating of a new index based on the Dow Jones Sustainability Index. However, the choice of name, the Ethical Fund, posed a dilemma for BANCO REAL, by implicitly signaling that other funds managed by the bank did not meet an “ethical” standard.

Socio-environmental financial products The bank saw a market in financing projects to improve socio-environmental performance. For commercial customers, the bank developed lines of financing for treatment of effluents, control of atmospheric emissions, and other environmentally-oriented projects. In 2003, a credit product was created for gas stations, to help them comply with a new law requiring facility upgrades. For consumers, the bank offered to finance the conversion of cars from gasoline to natural gas, in partnership with equipment manufacturers, or to buy solar-powered water heaters, always bearing in mind that all products should carry the triple bottom line (people, planet, profit) and be applied to finance educational, environmental and social projects.

World Bank loan pool In January 2004, after assessing BANCO REAL's procedures, the World Bank took the unusual step (a first for Brazil) of granting US$51 million to the bank to lend for socio-environmental and corporate governance improvements. The IFC allowed the bank to have full autonomy to approve projects, reducing deadlines for approval and release of resources.

Micro-finance Micro-credit was among the first areas the bank tackled under its new mission. Made famous by the Grameen Bank in Bangladesh, micro-finance involved small loans to very poor people for income-generating self-employment projects. It was viewed by the bank as an opportunity to tap a new market while doing good, especially given intensive competition for more affluent customers. “It was clear that we should analyze micro-credit as a self-sustainable business, without subsidized interest rates. It is no good lending money for purchasing goods if these are not intrinsically connected to productive activities for life improvement,” Jose Luiz said.

A micro-credit development group was created by the sustainability directorate, which established a partnership with Acción International, an NGO that had worked on micro-finance in many countries. Real Microcredito, a joint venture, was formed in 2002 and had 22 employees.11

Micro-credit required a new sales channel. Professionals were sought who had previous experience in commercial credit evaluation and often lived near, or in similar places, to the areas they served. New products and methods of credit analysis and approval were required, as well as new communication strategies. The first experience with micro-lending was Heliópolis’ favela (shantytown), the largest low income community in the city of São Paulo, and Brazil’s second largest. Only 40% of the streets from the one million square meters region were paved, and 80,000 of its

11 BANCO REAL owned 80% of Real Microcredit’s stocks, while Acción International, responsible for technical support, whose costs were mostly covered by a US$750,000 donation from the United States Aid for International Development (USAID), owned the rest.


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inhabitants had family income lower than three minimum wages.12 Three thousand small businesses, ranging from bars and bakeries to beauty salons and video stores, were counted by the owners’ association. The initial communication work included banners and sound cars, as well as brochures. To overcome initial skepticism, multiple visits involving personalized service were required. Clients needed to guarantee their income individually or through solidarity groups, in which peers served as each other’s guarantors.

Reactions were reported in a bank magazine, Human and Economic Values, Together:

• Bank credit agent Rosimeire da Silva: “I never imagined it would be so difficult to lend money in a shantytown. It was really difficult to get these people to trust me.”

• Video shop owner Gilberto Lopes Martins: “It was a surprise when Real sent people here. Before that, the only people the banks ever sent to these parts were to collect debts.”

• Diaper shop owner Ivanice Cardoso: “I thought my credit would be refused, just like all the other financial institutions and banks I had applied to.” She had been on the verge of closing because she lacked capital to replenish stocks. She used her R3,000 loan to buy more diapers, which increased customer visits by 10%.

Real Microcredit’s analyses showed that nearly 70% of its prospects were to be found in the Credit Protection Service (CPS) or Serasa – two credit information agencies. The company decided to bend its rules to make lending feasible. By 2005, 52% of 1,500 credit applications had been approved.

The average loan amount was R$1,350; the average term was 7 months (paid on a monthly basis). A portfolio of 13,000 to 14,000 active clients was required for sustainability, since every credit agent had an average of 185 active clients. Expanding the service to other areas in São Paulo was difficult. Many clients did not have the capability to manage their business growth. And interest rates were considered high, at 2-3.5% per month, according to some clients. Still, the default rate was only 4%, compared to a 7% rate for banks in general. Real Microcredito forecast a portfolio growth of approximately R$20 million in 2005, if expanding to other areas in São Paulo and Rio de Janeiro.

Influencing Suppliers

In 2001, just after the informal discussions about sustainability were underway among leaders, a bank executive using the private parking garage at the bank’s headquarters noticed a group of employees from the external cleaning service having lunch amidst smoke from car exhausts. What might have been unnoticed or taken for granted was now seen as an aberration to be reported to the company’s managing board. Jose Luiz recalled:

It was unacceptable for us to think that this was the responsibility of the hired company and not of us, the contractor. We should therefore analyze not only our clients and employees, but also our suppliers. How could we develop relationships with companies that degraded the environment, used child labor, or did not pay their Social Security taxes? This type of behavior from our potential partners was clearly unacceptable. Furthermore, we were conscious that, due to our company’s size, visibility, and relationships, we could – and should – act to multiply our ideas and practices.

12 Adapted from the Instituto Brasileiro de Geografia e Estatística (IBGE), accessed March 30, 2005.


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At the same time, the 2001 Ethos research exposed weaknesses in the bank’s relationship with suppliers that could compromise the company’s credibility with its stakeholders. “We weren’t so sure we’d like to be our own suppliers,” declared Fabio. “For instance, we found out that 30% of our payments to suppliers were systematically late with no apparent reason except lack of discipline.”

Convening suppliers BANCO REAL undertook to forge a new kind of relationship with its 4,000 active suppliers, beginning with a pilot effort. The supplier mobilization committee (a small group working with Maria Luiza’s team) selected 15 very diverse companies (totaling 882 employees) – from giants such as IBM with high-skill professionals to small local service suppliers. The idea behind combining companies apparently so different was to create a mutual learning process. The selected suppliers were invited to a meeting at the company’s headquarters in November 2001, to discuss the still-vague concept called “Bank of Value.” None of the suppliers knew what would be discussed – but they feared it involved cutting costs. An IT executive described reactions:

When we arrived at the bank, we were fearful of what might happen. Even though we had a long-standing relationship, it was not common for us to be called in for discussions of any sort. Since we were near the end of the year, our first reaction was that there would be a renegotiation of contracts. When the CEO walked in and began speaking, my first thought was, ‘Whatever this is about, it is serious.’ Ideas about ethical principles and better practices were explained until someone questioned when they would begin discussing commercial relationships, and, most important, how this would impact commercial terms.

BANCO REAL’s goal was not to revise contracts. Fabio and Maria Luiza wanted suppliers to partner with the bank and to adopt the principles of corporate social responsibility themselves.

“I was relieved and excited by the meeting,” said Ione Antunes, owner of Help Express, a small motorcycle courier company. “Motoboys” were known as “mad dogs” because of reckless driving; they worked under high levels of stress. Help Express, which already offered better pay and benefits than its competitors, was stimulated to write a code of ethics (e.g., forbidding drivers to cut in on other drivers) and get employees more involved in helping needy communities. Help Express reaped benefits from fewer accidents and a virtual elimination of customer complaints.13

The “encounters with suppliers” meetings were continued, and another 45 companies were invited to join. At a typical meeting in 2003, 150 people listened to a talk by the Ethos Institute and split into seven small groups to compare notes on a social responsibility self-assessment. Suppliers were included, along with customers, when an American business professor came to speak in 2004.

Idea sharing led to joint projects. Advanta, an IT supplier, began a computing qualification program for youngsters from economically disadvantaged communities near its headquarters. NEC (among others) provided equipment, another bank supplier installed it, and Advanta employees handled training. Two centers with a training capacity of nearly 1,000 students were created.

New terms In 2003, guidelines for supplier relationships were defined by a task force reporting to the procurement department, which was working to systematize socio-environmental responsibility procedures. The idea was not to develop a “black book” by which suppliers would be put aside if they did not adapt to principles, but a “white book” that could stimulate good practices regarding human resource management and relationship with the community.

13 ABN Amro Real Human and Economic Values, Together, April 3, 2005.


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Suppliers were asked to sign terms of service declaring that they know the bank’s policies and are willing to follow them, and that BANCO REAL could also monitor and evaluate the fulfillment of contracted obligations through personal inspection. Maria Luiza explained that the bank could make demands for legal compliance and transparency but was limited in its ability to force suppliers to go beyond this to full social responsibility.

BANCO REAL suggested that furniture suppliers obtain a “green seal” (wood certification) for their production lines, signaling that it could disqualify suppliers which did not comply with this rule. New suppliers emerged that met the requirements, including a competitive price. But this was still a marginal effort within an extremely complex and still unknown universe of possibilities.

Shaping the Culture inside the Bank: The 3R’s and Diversity

To Fabio and other leaders, it did not make sense to encourage its collaborators to be socio-environmentally more responsible if the organization itself did not practice it. This would also extend awareness to customers and suppliers through demonstration.

The bank launched an internal campaign called the 3 Rs: reduce, re-use, and recycle. The eco-efficiency committee targeted garbage, whose storage and treatment had a huge environmental impact, and water, energy, and paper, whose extraction in nature was complex and expensive.

Awareness about reducing waste was a first step, and it started at the top. A meeting for top management was held in partnership with Menos Lixo (Less Garbage), an environmental NGO. Participants were shocked when a man came into the room carrying a black garbage bag and tossed its contents on top of a clean glass table. A participant recalled: “My first reaction was a mix of surprise and repugnance. There were many torn or kneaded waste papers, plastic cups, and leftovers from snacks, all immersed in a smelly coffee puddle. I was sad to learn that this came from three small trash bins used by bank employees in the morning, and collected moments before the meeting.”

Activities such as Environment Week in June 2002 were launched to involve every part of the bank. One subsidiary, Aymoré Financiamento, left all garbage collected at headquarters (with the exception of organic matter) at the building’s entrance for a week. This had a big impact and was followed by a major recycling campaign, with receptacles widely available and actions such as distribution of re-usable china coffee mugs to cut down on paper use. In 2004, 498 out of 755 tons of garbage produced by the bank were recycled, and 39% of the branches were major recyclers.

Paper was an important target; 1,720 tons per year were used for office printing and reports. One big move was to negotiate with Suzano, one of Brazil’s largest paper manufacturers, to use only recycled paper for printing. But the paper was low in quality, did not meet technical criteria, and was 30% more expensive than normal paper. Rather than give up in the middle, bank staff persisted. They developed a multi-company pilot project, in which Suzano developed a product to meet BANCO REAL’s needs, companies such as IBM and Xerox worked on the technical side, and the bank financed raw material suppliers for Suzano through micro-credit. By 2004, recycled paper constituted 49% of the bank’s consumption, at the same price as normal paper.

By the middle of 2003, the sustainability directorate issued a manual for all employees about eco-efficient practices in the workplace as well as homes and schools. It included guidelines for saving energy and water. It described, for instance, that the conventional flush for toilets consumed 22 liters of water; with a system of Reduced Flushing Volume (RFV), only six liters were required for the same result. One indicator of success was that reductions of 4.01% and 9.57% in energy and water expenses respectively were recorded in administrative buildings for the year 2004 when compared with 2003.


12

Employee Diversity: “We’re All Different”

Bank leaders saw diversity as a potential competitive advantage – attracting a broad segment of the population that was poorly served in other companies as well as stimulating employee creativity. But they recognized that its employees were not representative of the Brazilian population. Only 10% of the bank’s employees were Afro-Brazilian, only 9% of managerial positions were held by women (all of them white), and a mere 10% were over 45 years of age. (See Exhibit 8.) The disabled population was close to zero, though a 1991 non-discrimination law required larger employers to have the physically challenged constitute 5% of their staff; and there was a potentially large market of nearly 15% of the Brazilian population suffering from some kind of disability.14

A diversity program started in 2001 with the appointment of a committee. Diversity goals were communicated through written material, lunch seminars, and videotapes, but with few results. Leaders recognized a very sensitive issue involving personal values, and added support to integrate diversity within the bank. To make the concept clearer, the HR department turned a Friday in June 2002 into Diversity Day. The entire staff was encouraged to wear a shirt that showed a side to their identity. Thousands of employees exposed their political, sport-related, religious, and social preferences. Soon, staff with different sexual orientations began to go public, and religious minorities felt freer to appear in religious dress, e.g., Muslim women’s chador or Jewish men’s kippah.

A diversity committee was expanded and divided into 5 subgroups on specific action areas such as recruiting or training. The groups presented 44 proposals to top executives, and implementation took off in 2003. Community organizations were invited to the bank and asked for help recruiting Afro-Brazilians. Wheelchair access ramps were installed, and specific products developed, such as financing adaptation of cars for disabled people.

Some said that the greatest impact came from hiring of a visually-impaired employee in July 2003, a woman with a bachelor’s degree in law who had been blind since the age of four. She worked in a department that analyzed customer information. Maria Luiza described the reaction:

No one in the company knew how to deal with a visually-impaired person and a guide dog. Some people were extremely attentive while others tried to be politically correct, avoiding expressions that involved sight. Everyone had to adapt. But exposing problems and deficiencies was seen by many as a growth process and not a weakness anymore.

The bank began assessing the impact of diversity on customer relationships. One survey focused on minorities, in order to learn more about the embarrassments these groups encountered, and their expectations regarding treatment by the company.

The culture Overall, employee participation and creativity were encouraged. Employee development was valued; for example, in 2003, 79,433 e-learning sessions took place. Communication was abundant, and employee ideas were solicited. Bank leaders wanted to continue their “organic and inspirational approach” while further embedding sustainable development in the organization and the mindset of the staff.

14 Instituto Brasileiro de Geografia e Estatística (IBGE), for more details see www.ibge.gov.br.


13

Results and Challenges

The 2003 acquisition of Sudameris Bank solidified BANCO REAL’s position as the fourth largest privately-owned bank in Brazil, and made Brazil the third major market for the parent company. BANCO REAL entered 2005 with 1,890 branches and facilities; 28,571 employees; and 9.2 million customers. It provided 10% of the revenues and 7% of the profits for ABN AMRO worldwide. (See Exhibit 9 for financials.)

BANCO REAL was increasingly perceived as a bank with an attractive differentiated proposition. In 2004, 21% of interviewees in a national study comparing banks indicated that BANCO REAL would be their bank of preference if they chose to leave their current ones, up from 15% in 2003, and second only to Itau’s 28% preference rating. One customer, a director of one of the largest advertising agencies in South Brazil, declared that now that he was aware of the bank’s projects in social responsibility and its commitment to the environment, he would transfer his entire business to BANCO REAL; he was also the president of two NGOs.15 On a satisfaction index, 78% of current BANCO REAL clients were completely satisfied.

Employee satisfaction was also high. Surveys in 2003 showed that 95% of staff said they are proud of working for the bank, with only 4% neutral and 1% negative; 93% said they trust in the institutional communication they receive from the company. The bank was routinely on lists of the 150 best places to work in Brazil and the 40 best companies for women.

In 2004 BANCO REAL reached #15 on Carta Capital magazine’s list of Brazil’s most admired companies, up from #153 in 2003, and was #2 in banking, up from #5. Fabio’s leadership was singled out as a factor. An admired executive, his name had been mentioned in connection with a significant economic role in President Lula’s administration; he did not comment on the rumors and remained at the bank, although he agreed to serve on the national Social and Economic Development Council.

Fabio had gone public with BANCO REAL’s commitments, and he acted as a role model for the values. In January 2003, he received a letter from Sônia Mesquita, a disgruntled customer from Angra dos Reis, in Rio de Janeiro state, who had read in a bank newsletter about the bank’s discussions of how to make capitalism more humane and inclusive. She questioned whether it was possible to reconcile that goal with high interest rates. To her surprise, Fabio responded, inviting her to headquarters in São Paulo for a dialogue in May 2003. A partial transcript was published in a bank report, Human and Economic Values, Together. (See Exhibit 10 for excerpts.) Fabio said, “When people complain, they believe that things can improve. I regard this type of protest as healthy. So long as there is dissent in this country, there will be hope.”

Openness and transparency, were coupled with high standards. But this stance became risky when a company and its leaders subject themselves to public evaluation or to NGO tests that were hard to meet. The parent company was criticized by animal rights groups for financing companies that used animal testing for medical purposes; the World Wildlife Fund commented on an oil pipeline project, questioning whether the company’s values failed under pressure.16 In Brazil, NGOs that had been skeptical at first of BANCO REAL’s commitment were generally very positive now, but there was always room for disagreement. Would NGO's, sensing receptivity, push for changes beyond the bank's capacity, or actions that would put financial results at risk?

15 Sustainability Report 2003, ABN AMRO Holding N.V.

16 Ibid.


14

Another dilemma was how to strengthen the brand differentiation and business benefits BANCO REAL derived from sustainability, while at the same time sharing its experience externally with customers, suppliers, and competitors. Fabio believed the mission required encouraging other banks to adopt similar practices. “Communicating is also part of our corporate responsibility,” he declared. A member of the eco-efficiency committee agreed, saying: “To break the indifference cycle and create a long term conscience that can extend itself beyond our own frontiers is more important than to produce a short term result.”

For example, Fabio was a vice president of FEBRABAN, the powerful Brazilian bank federation, which was discussing adopting BANCO REAL’s recycled paper initiative. If other companies got involved in supplier certification, standardization and economies of scale would reduce BANCO REAL’s costs. It would also help the bank if the idea of sustainability became more familiar to customers and shareholders, reducing the vulnerability associated with being out there alone on potentially controversial issues.

But would adoption of the bank’s innovations by others undermine its own competitive advantage? BANCO REAL was ahead of other banks in developing new products and approaches. By 2005, however, corporate social responsibility was a familiar refrain, and Itaú, a formidable competitor, had also started using it as a theme in its marketing. Similarly, if the success of micro-finance made the favelas a more attractive market, would that invite increased competition, while Real Microcredit had still not achieved scale?

Continuing to innovate was essential. “Being focused on our culture and not only on processes is the key to getting sufficient innovation to keep us ahead of our competitors,” Fabio said. The bank wanted to enlarge its portfolio of products with positive social and environmental impact and to grow the assets in the Ethical Fund. That brought other challenges. Fabio no longer worried about acceptance of programs inside the bank, but he wondered if mindsets had changed sufficiently to seek and produce the next innovations. Relatively easy goals, such as taking care of the garbage, had been accomplished, and there was little low-hanging fruit left to pick. Criticism and doubts remained as an undercurrent in some areas, especially in what was known as the “middle age, middle management” group (who were also the ones dealing with important commercial customers). Fabio observed, “In the beginning of this journey, almost 5 years ago I used to say we have 1/3 fully committed, 1/3 who converted by convenience, and 1/3 still skeptical. Today I can see that we have more committed people, but we must persist.” What more should be done to embed sustainability, deepen commitment, and stimulate innovation?

Finally, there was the impact question. With so much going on in the bank, on so many fronts, was the overall effort sufficiently focused to get depth and show benefits, in financial terms as well as socio-environmental impact? Or were there too many activities, reducing communication clarity and competing for top executive attention? And were there opportunities they were missing?

How should impact be measured, with so many disparate activities? How could staff inside the bank know if they were making progress? Moreover, the needs in Brazil were great, and the bank’s efforts were just a drop in the ocean. Should they be continuing current efforts with customers, suppliers, and even competitors; or should they make changes, whether doing more or cutting back?

And was the sustainability effort itself sustainable? What would happen when a major conflict arose, such as socio-environmental weaknesses in a really big customer, or downturns in the economy making financial results harder to achieve?

The heat was rising in São Paulo on that summer day in January 2005. Fabio, Jose Luiz, and Maria Luiza knew that the guest from the holding company was looking to BANCO REAL for answers.

Fabio said, “We cannot fail. Brazil is seen as a role model.”


15

Exhibit 1 Selected Brazilian Social and Economic Indicators

Demographics 1980 1990 1996 2000 Population Total 119,002,706 146,825,475 157,070,163 169,799,170 By Gender (%) Men 49,7% 49.4% 49.3% 49.2% Women 50.3% 50.6% 50.7% 50.8% By Age (%) 0-14 years 38.2% 34.7% 31.5% 29.6% 15- 64 years 57.7% 60.4% 62.8% 64.5% Over 65 years 4.0% 4.8% 5.4% 5.8% By Home (%) Urban 67.6% 75. % 78.4% 81.3% Rural 32.4% 24.4% 21.6% 18.7% 2000 2001 2002 2003 Life Expectancy (in years) 70.4 70.7 71.0 71.3 Birth Rate (per 1,000 inhabitants) 20.0 19.9 19.7 19.5 Death Rate (per 1,000 inhabitants) 6.7 6.7 6.7 6.7 Infant Mortality Rate (per 1,000 live births) 29.6 28.7 27.8 27.0 Fecundity Rate 2.2 2.2 2.2 2.1 Literacy Rate (people over 15 years old) 12.9 12.4 11.8 11.6 Habitation 2000 2001 2002 2003 Number of Houses 46,570,967 47,606,323 49,195,925 Rural 14.8% 14.4% 14.3% Urban 85.2% 85.6% 85.7% Water Source 81.1% 82.0% 82.5% Sanitization 66.7% 68.1% 69.0% Garbage Collection 83.2% 84.8% 85.6% Electric Illumination 96.0% 96.7% 97.0% Telephone 58.9% 61.6% 62.0% Macroeconomic Indicators 2000 2001 2002 2003 GDP Growth 4.36% 1.31% 1.93% -0.22% GDP (US$bn) 601.86 509.96 460.12 492.87 GDP Per Capita (US$) 3,536.8 2,958.25 2,634.77 2,786.51 Inflation (CPI) 7.04% 6.84% 8.45% 14.71% Unemployment rate 7.1% 6.2% 7.1% Wealth Distribution (as a % of wealth) 1992 1996 1998 1999 50% poorest 14.0% 13.0% 13.5% 14.0% 1% richest 13.1% 13.5% 13.7% 13.1% HDI 1980 1990 1995 2002 Human Development Index 0.680 0.714 0.739 0.775

Source: Adapted from IBGE, Censo Demográfico 1980, 1991, 2000 e 2002 e Contagem da População 1996, available at http://www.ibge.gov.br/; Brazilian Central Bank, available at http://www.bc.gov.br/; Human Development Reports available at http://hdr.undp.org/.


16

Exhibit 2 Selected Data about Brazilian Banking Industry

Main Mergers and Acquisitions in Brazil: 1995-2002

Main Mergers & Acquisitions in Brazil Year Acquired Institution Acquirer Stake (%)

1995 Nacional Unibanco 100.00

1997 Bamerindus HSBC 100.00

1997 BCN Bradesco 100.00

1997 Banerj Banco Itaú 100.00

1997 Banco de Crédito Real de Minas Gerais Bradesco 99.99

1998 Banco do Estado de Minas Gerais- Bemge Banco Itaú 90.74

1998 Banco Noroeste Santander 100.00

1998 Banco Real ABN Amro 100.00

1998 Bandepe ABN Amro 99.97

1998 Excel Economico BBV n.a.

1999 Banco Baneb S.A. Bradesco 99.92

2000 Banco Boavista Interatlântico Bradesco 100.00

2000 Credibanco Unibanco 100.00

2000 Bandeirantes Unibanco 98.11

2000 Banestado Banco Itaú 88.04

2000 Fininvest Unibanco 50.00

2000 Meridional/Bozano Santander 100.00

2000 Banespa Santander 100.00

2001 Banco do Estado de Goiás Banco Itaú 84.46

2001 Lloyds TSB Asset Management (LAM) and

Lloyds TSB Private Banking Banco Itaú 100.00

2002 Deutsche Bank Investimentos DTVM Bradesco 100.00

2002 Banco Mercantil de São Paulo - Finasa Bradesco 82.17

2002 Banco do Estado do Amazonas - BEA Bradesco 88.68

2002 Banco Cidade Bradesco 100.00

2002 Banco BBA Creditanstalt Banco Itaú 95.75

2002 Banco Fiat S.A. Banco Itaú 99.99

Source: Standard and Poors, “Despite Turbulence, Brazilian Banks Opt for Consolidation,” December 20, 2002. <http://www.standardandpoors.com/europe/francais/Fr_news/Brazil_20-12-02.html>

Brazilian Banking Ranking – Private Owned Banks (as per December 2004 – in R$ billion)

Bank Credit Assets Total Assets Credit/Total Assets Deposits ROE

Bradesco 62.8 184.9 34.0% 68.6 20.1% Itaú 47.4 130.3 36.4% 42.0 27.0% Unibanco 31.8 79.3 40.1% 33.5 15.8% BANCO REAL 29.5 61.6 47.9% 32.3 15.9% Santander Banespa 21.6 69.6 31.0% 22.7 19.3% HSBC 16.2 34.4 47.1% 23.0 19.7%

Source: Adapted by case writers from Brazilian Central Bank reports and companies’ Annual Reports and Financial Statements.


17

Exhibit 3 Career Highlights: Fabio Colletti Barbosa, José Luiz Majolo, and Maria Luiza Pinto

Fabio Colletti Barbosa The Institute for Management and Development – Switzerland Fundacao Getulio Vargas (FGV) – SP

MBA Bachelor of Science in Economics

Banco ABN Amro Real S.A. Nov 1998 – Present President ABN AMRO Bank Brazil Aug 1996 – Nov 1998 President Sep 95 – Aug 1996 Executive Director for Corporate Banking

& Finance LTCB Latin America (Brazil) May 92 - Aug 1995 President Citicorp/Citibank Feb 1991 - May 1992 Managing Director International Corporate

Finance Jan 1988 – Jan 1991 Head Exposure Management Group Feb 1986 – Dec 1987 Head Financial & Risk Control Nestle Feb 1984 – Jan 1986 Assistant Treasurer – Switzerland Jan 1983 – Nov 1994 Assistant Treasurer Stamford – USA Jan 1980 – Dec 1992 Treasury & Control –Brazil José Luiz Majolo Fundacao Getulio Vargas (FGV) – SP Fundacao Getulio Vargas (FGV) – SP

Master Degree in Finance (incomplete) Bachelor of Business Administration

Banco ABN Amro Real S.A. 1998 – Present Vice President - Risk Management (Credit, Market, Operational Risk),

Information Technology, Operations (Retail and Wholesale) and Legal

ING Bank N.V 1992 – 1998 Assistant General Manager - Risk Management, Financial Control, General

Services, Operations Information Tecnology

Banco Barclays S.A 1989 – 1992 Risk Management Director Banco Iochpe S.A. (Bankers Trust) 1987 – 1989 Head of the Credit Department Multibanco S.A. (Bank of America) 1981 – 1987 Head of Credit Department Banco Lar Brasileiro (Chase Manhattan) 1977 – 1981 Trainee, Credit Analyst, Account Officer Maria Luiza de Oliveira Pinto Michigan University Pontifícia Universidade Católica in São Paulo

Specialisation in Human Resources Bachelor of Psychology

Banco ABN Amro Real S.A. Nov 2001 – Present Executive Director of the Education & Sustainable Development Directorate

1999 to 2001 Executive Vice-President of the Global Human Resources Dept. in the

Commercial & Consumer Clients Strategic Business Unit. (Amsterdam)

1995 to 1999 Senior Vice-President of the Human Resources Area in the Regional Office

for Latin America and Caribbean Banco Nacional 1998 to 1994 Human Resources Manager – HR

Planning & Development Sharp Corporation 1986 to 1988 Human Resources Analyst

Source: BANCO REAL’s Human Resource Division.


18

Exhibit 4 The New BANCO REAL's Strategic Model

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20

Exhibit 6 Examples of Main Projects and Institutions subsidized by BANCO REAL

Foundations and Institutes maintained by BANCO REAL Escola Brasil Institute Volunteers of BANCO REAL adopted public schools, raising

funds and encouraging sports and cultural activities Bandepe Cultural Institute Spreads out the culture of Pernambuco state through cultural

displays from northeastern Brazil, and through citizen partnership

Institutions subsidized by BANCO REAL ADD – Associação Desportiva para Deficientes (Sports

Association for the Disabled) Provides opportunities for the disabled.

Alfabetização Solidária (Pro-literacy) Sponsors the eradication of illiteracy in Brazil. Associação Viva o Centro (Urban Revitalization) Revitalizes the old center of São Paulo city through urban,

cultural, functional, social, and economic improvements. Care Brasil Helps the world’s poorest communities solve their most

threatening problems. Casa de Cora Coralina NGO Restores of the Casa de Cora Coralina museum, part of the

historic heritage of the city of Goias. Catedral da Sé Restores of Catedral da Sé, São Paulo city’s largest church

and a historic landmark. CEERT Sponsors the Educar Prize for Social Equality – Experiments

in Furthering Racial/Ethical Equality in the School Environment.

Cidade Escola Aprendiz Develops revitalization projects. Fundação Dom Cabral Sponsors Fundação Dom Cabral’s new educational campus. Fundação Mario Covas Enhances citizenship, and innovative ethical gov. mgmt. Instituto Brasil Voluntário Stimulates volunteer projects. Programa McDia Feliz (McDonald Happy Day) Donates coupons to all employees, which are then given to

institutions that treat children with cancer. Instituto São Paulo Contra a Violência Develops projects to reduce violence in São Paulo. Programa Banco na Escola Improves management at public schools and involves the

community in the process. Universidade Solidária Develops social projects btw universities and poor

communities. Projeto Autonomia Fiat Sponsors 2 simulators to assess the limits of people with

disabilities, to allow further adjustments required by cars.

Source: BANCO REAL’s Sustainability 2002 Report.


21

Exhibit 7 The Equator Principles17

We will only provide loans directly to projects in the following circumstances:

1. We have categorized the risk of a project in accordance with internal guidelines based upon the environmental and social screening criteria of the IFC as described in the attachment to these Principles.

2. For all Category A and Category B projects, the borrower has completed an Environmental Assessment (EA), the preparation of which is consistent with the outcome of our categorization process and addresses to our satisfaction key environmental and social issues identified during the categorization process.

3. In the context of the business of the project, as applicable, the EA report has addressed: a) Assessment of the baseline environmental and social conditions b) Requirements under host country laws and regulations, applicable international treaties and agreements c) Sustainable development and use of renewable natural resources d) Protection of human health, cultural properties, and biodiversity, including endangered species and

sensitive ecosystems e) Use of dangerous substances f) Major hazards g) Occupational health and safety h) Fire prevention and life safety i) Socioeconomic impacts j) Land acquisition and land use k) Involuntary resettlement l) Impacts on indigenous peoples and communities m) Cumulative impacts of existing projects, the proposed project, and anticipated future projects n) Participation of affected parties in the design, review and implementation of the project o) Consideration of feasible environmentally and socially preferable alternatives p) Efficient production, delivery and use of energy q) Pollution prevention and waste minimization, pollution controls (liquid effluents and air emissions) and

solid and chemical waste management 4. For all Category A projects, and as considered appropriate for Category B projects, the borrower or third party

expert has prepared an Environmental Management Plan (EMP) which draws on the conclusions of the EA. The EMP has addressed mitigation, action plans, monitoring, management of risk and schedules.

5. For all Category A projects and, as considered appropriate for Category B projects, we are satisfied that the borrower or third party expert has consulted, in a structured and culturally appropriate way, with project affected groups, including indigenous peoples and local NGOs. The EA, or a summary thereof, has been made available to the public for a reasonable minimum period in local language and in a culturally appropriate manner. The EA and the EMP will take account of such consultations, and for Category A Projects, will be subject to independent expert review.

6. The borrower has covenanted to: a) Comply with the EMP in the construction and operation of the project b) Provide regular reports, prepared by in-house staff or third party experts, on compliance with the EMP and c) Where applicable, decommission the facilities in accordance with an agreed Decommissioning Plan.

7. As necessary, lenders have appointed an independent environmental expert to provide additional monitoring and reporting services.

8. In circumstances where a borrower is not in compliance with its environmental and social covenants, such that any debt financing would be in default, we will engage the borrower in its efforts to seek solutions to bring it back into compliance with its covenants.

9. These principles apply to projects with a total capital cost of $50 million or more. The adopting institutions view these principles as a framework for developing individual, internal practices and policies. As with all internal policies, these principles do not create any rights in, or liability to, any person, public or private. Banks are adopting and implementing these principles voluntarily and independently, without reliance on or recourse to IFC or the World Bank.

17 Adapted from “Equator Principles” – International Finance Corporation – IFC, accessed on March 21, 2005, and available at http://www.ifc.org/ifcext/equatorprinciples.nsf/Content/ThePrinciples.


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Exhibit 8 BANCO REAL’s Employee Profile

% of Total Employees

% of Total Senior Management Positions

Held % of Total Management

Positions Held

2001 2002 2001 2002 2001 2002 Woman, Asian 0.98 1.03 0 0 0.26 0.34 Women, Caucasian 44.33 44.61 10 9.17 19.74 21.06 Women, Indigenous 0.09 0.08 0 0 0 0 Women, Afro light 4.22 4.32 0 0 0.78 1.09 Women, Afro dark 0.37 0.36 0 0 0 0 Men, Asian 0.83 0.86 3.64 2.5 0.43 0.76 Men, Caucasian 43.52 43.12 85.45 88.33 74.14 71.81 Men, Indigenous 0.07 0.06 0.91 0 0 0 Men, Afro light 4.99 4.96 0 0 4.57 4.87 Men, Afro dark 0.60 0.60 0 0 0.09 0.08 Disabled 0.12 0.13 0 0 0.09 0.08 Aged 45+ 10.80 10.94 37.27 46.67 33.45 30.96

Source: ABN Amro Real Human and Economic Values, Together, April 3, 2005.

Brazilian Population Data

Total Amount % of Total

169,872,856 100

Distribution, by color or race

Caucasian 91,298,042 53.74Asian 761,583 0.45Indigenous 734,127 0.43Afro Dark 10,554,336 6.21 Afro light 65,318,092 38.45

Distribution, by gender

Men 83,602,317 49.21Women 86,270,539 50.79

Disabled

Disabled 24,600,256 14.48

Source: ABN Amro Real Human and Economic Values, Together and IBGE, “Censo Demográfico 2002”, available at http://www.ibge.gov.br/.


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Exhibit 9 BANCO REAL's Financial Statements (as per December – in millions of Reais)

2000 2001 2002 2003 2004 Total Assets 27,514 31,811 36,952 55,417 61,628 Total Deposits 8,425 9,457 15,770 26,731 32,323 Credit Portfolio 11,701 14,065 17,359 26,965 29,476 Provision 605 975 978 1,714 1,419 Net Worth 2,939 3,762 4,729 6,658 7,776 Net Interest Income 3,159 3,878 5,122 6,491 6,891 Fee Revenue 835 953 1,093 1,561 1,932 Total Revenue 3,995 4,831 6,214 8,053 8,823 Provision Expenses (272) (731) (638) (1,217) (1,029) Personnel Expenses (1,251) (1,278) (1,655) (2,037) (2,298) Administrative Expenses (1,521) (1,683) (1,841) (2,210) (2,661) Insurance 68 87 21 157 208 Fiscal expenses (263) (306) (442) (563) (698) Subsidiaries 9 31 23 (4) 38 Other oper revenues 637 584 498 404 544 Other oper expenses (603) (771) (1,063) (1,004) (1,025) Non oper result (1) (6) 55 (38) 12 Profit before Tax and Profit Sh. 799 757 1,173 1,539 1,914 Taxes (78) 142 155 (217) (436) Employee profit sharing (72) (115) (120) (175) (198) Extraordinary result - - - (10) (43) Net Profit 649 784 1,208 1,137 1,237 Net Interest Income/ Avg. Loans 27.0% 27.6% 29.5% 24.1% 23.4% Net Interest Income/Loans (NIM) na 30.1% 32.6% 29.3% 24.4% Provision/Credit Portfolio 5.2% 6.9% 5.6% 6.4% 4.8% Provision Expense/Credit Portfolio 2.3% 5.2% 3.7% 4.5% 3.5% Fee Rev/Pers, Profit Share & Adm Exp 29.4% 31.0% 30.2% 35.3% 37.5% Fee Rev/Personnel Exp.,& Profit Sharing 63.2% 68.4% 61.5% 70.6% 77.4% ROE (annualized) 22.1% 20.8% 25.5% 17.1% 15.9% ROA (annualized) 2.4% 2.5% 3.3% 2.1% 2.0% Efficiency Ratio 69.4% 65.0% 63.8% 58.1% 60.3%

Source: Adapted by case writers from BANCO REAL’s Financial Statements.


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Exhibit 10 “The CEO and the Customer”: Excerpts from a Dialogue between Fabio Barbosa and Sônia Mesquita

Sônia Mesquita: I never thought you would answer my letter. I wrote because I wanted to find out how it would be possible to change the situation in a country with as many problems as Brazil. One big problem is our interest rates. How do you explain such high rates?

Fabio Barbosa: Interest rates are indeed high. To reduce them, we have to understand and act on the causes that are at the root of the problem, and not just focus on the rates themselves. Allow me to simplify the issue, beginning with the law of supply and demand. When money is scarce, as is the case in Brazil today, the tendency is for money to be more expensive. There are also taxes on certain financial transactions, which cause bank products and services to be more expensive. It is in our interest to increase the supply of credit from banks so that we can further strengthen the bases of our business activities, and thereby facilitate sustainable economic growth. Before this, however, there are still many other points to be considered, such as inflation, compulsory deposits, legislative changes, and the existence of an informal economy. While a discussion on interest rates does not only include these issues, with dialogue and participation from all sectors of the economy, we will become an even better bank for our customers.

Sônia Mesquita: It bothers me the way that banks treat their customers. Often, bank staff will be very courteous to anyone in a suit and a tie. At the same time, they will look down on people with a more humble appearance. Yet these are precisely the customers who would most benefit from specialized assistance to help them handle their financial affairs.

Fabio Barbosa: I agree with you. That’s why we are working to make our staff aware that satisfied customers make our banking business viable. And to satisfy our customers, we must all, whatever our area, give the very best of ourselves.

Sônia Mesquita: What do you mean by giving the best of yourself?

Fabio Barbosa: Well, this shouldn’t ever be anything artificial, like obliging the staff to say good morning to everyone that comes into the branch. It goes deeper than that. Staff members who feel respected by the bank will be polite to the customers. If any employee is not on good terms with the organization, he or she will never have the right attitude to deal with the public. In the most recent internal study we conducted, we found that over 90% of the employees feel proud to work at the bank and 89% like what they do. This level of job satisfaction will help us reach our goals.

Sônia Mesquita: In theory, everyone pays taxes so that the State will return this money in the form of public services. In practice, however, many people stop paying taxes because they believe that a good deal of this money is not used to benefit society. This eventually creates a huge, vicious circle. I know many people who are indignant at having to pay for a private school for their children, because standards at our public schools are not high enough. Isn’t it difficult to break this vicious cycle?

Fabio Barbosa: Those who do not pay have no right to complain about poor services. It would be hypocritical not to pay your taxes and then complain about holes in the road. The solution to the problem begins with a change in values. We must change the values of the people and the country. Over the course of our history, we have created an environment in which it has become acceptable to be above the law. I remember when I was in school. I had always been a good student, but in college, because I wanted to be part of the group, I would tell the other students that I hadn’t studied the night before a test, and had stayed up watching TV, because anyone who studied was definitely ‘out’. When I went to live abroad, I found the reverse. There, anyone who didn’t study when they should have was out. It was a culture shock, but it helped me realize how much our society cultivates mistaken values. Fortunately, however, this is changing.

Sônia Mesquita: I am concerned when I see this wave of outsourcing. This is a tool used by many companies to become more competitive. To compete, many of these suppliers can only offer low cost services by not registering their employees.

Fabio Barbosa: Outsourcing is not bad in itself, but it depends on how it’s done. Outsourcing can generate more jobs or even further the development of cooperatives. In the bank, we have developed a working group where we discuss with suppliers ways of putting social and corporate responsibility into practice. If everyone does their part, we will change the world.

Sônia Mesquita: I agree that each of us has to give a little of our time to fix what is wrong. I’m pleased to know that ABN AMRO REAL is really determined to practice a new form of capitalism. Take this meeting for instance… It really shows the bank is willing to enter into a dialogue with society.

Source: ABN Amro Real Human and Economic Values, Together, April 3, 2005.

Documents

Banco Real: Banking on Sustainability