Growing strong

The sustainable banking industry is constantly changing shape, while the term itself seems to take on new meaning every year. Once confined to a niche strategy of filtering out ‘sin stocks’, such as tobacco, military or alcohol-related stocks, the concept of sustainable banking now encompasses a much wider range of approaches, and has become far more deeply embedded in mainstream finance. What’s more, it is currently gathering fresh momentum, spurred by a push from governments worldwide, as well as the ever-mounting bulk of evidence supporting the business case for sustainable finance.

More than ever, financial institutions are taking environmental, social and governance (ESG) factors into account and offering socially responsible investment products (see Fig 1, overleaf). At the same time, the prominence of the newer guises of sustainable banking, such as impact investment and shareholder engagement, is increasing. According to a paper published by the Global Sustainable Investment Alliance, sustainable, responsible and impact investment assets totalled $22.89trn worldwide in 2016. This was up by 25 percent compared with 2014, which was in turn was up 61 percent from 2012.

However, while the amount of growth in the industry is striking, there is still a long way to go. For instance, according to an enquiry by the United Nations Environment Programme, green bonds still form less than one percent of total bond issuance, despite marked growth in recent years. Moreover, as it stands, only between five and 10 percent of bank loans are considered ‘green’ by existing national measures.

Measuring up As the industry matures, it has become vital to focus on some standardised techniques for measuring the non-financial aspect of sustainable banking strategies. In recent years, some useful developments include the fine-tuning of common standards for sustainable investments and the launch of ratings indexes that focus on ESG factors, such as the Dow Jones Sustainability Index and the MSCI family of ESG indexes.

And yet, values-based banking is a complicated endeavour. It is extremely difficult to pinpoint a set of universally agreed principles for sustainable banking, and more difficult still to compare separate banks’ performances. Not only is the definition of a sustainable investment highly subjective, its environmental and social impact is profoundly difficult to quantify and verify. This is exacerbated by the fact that the necessary data often remains undisclosed. Of particular concern is that while the volume of ESG assets is growing substantially, investment managers often fail to disclose specific information about how ESG factors are incorporated into their decisions.

This year has seen an important development, however, with the launch of a new bank sustainability scorecard by the Global Alliance for Banking on Values (GABV). This developed system has been in the making for several years, and marks an important step in the effort to create a metrics tool that provides a common approach to reporting the economic, social and environmental impact of banks. The principles that the GABV invokes in its scorecard can be summarised as a ‘triple bottom line’, under which firms must deliver on both environmental and social positives, without sacrificing their financial viability. The scorecard combines basic requirements such as transparency with both quantitative and qualitative measures relating to banks’ impact in promoting environmental and social causes.

By creating a tool that measures the impact of a bank’s sustainable practices, the scorecard will enable a scenario in which its sustainability performance can be judged against that of other banks. This, in turn, could guide individual financial institutions towards better understanding how they can create a positive impact through their day-to-day decisions.

In the long run, the GABV sees the scorecard becoming an industry standard for assessing any given bank according to its alignment with environmental and social values (see Fig 2). Such a tool could have the effect of placing substantial pressure on the banking sector as a whole to better promote positive causes.

Fuelling growth “Increasingly, people are becoming aware of the interdependence of the real economy, social cohesion and our natural ecosystem, something values-based bankers have long understood, and which is at the heart of the business model,” noted the GABV’s 2016 annual report. Indeed, a focus on the sustainability of investments is moving from exception to rule in the banking sector, with customers becoming evermore conscious of the moral implications of their investments and often demanding a change in approach.

An increase in awareness is also prompted by technology. The internet ensures that ordinary customers can tap into a wealth of information regarding the sustainability of their investments, forcing banks to cater to a new kind of customer. A model example is the recent launch of the investment app Grow, which is one of a rising number of robo-advisors that monitor investments for their wider societal effects, as well as financial returns.

Bold steps This year has also seen growing international momentum behind the sustainable finance effort. This is illustrated by the content of a recent G20 dialogue paper, which called for greater institutional support for sustainable banking. The paper, entitled Fostering Sustainable Global Growth Through Green Finance, underscores the importance of a coordinated effort to spur the private sector into channelling more funds towards green investments. The effort, according to the paper, will require the involvement of all actors in the financial system, not only including banks and institutional investors, but also insurance companies, central banks and financial regulation authorities.

Several bold policy measures to back such a shift have been put forward, including new methods for supporting markets for green bonds and securitised products. The paper also proposed ideas for the creation of disclosure guidelines for environmental and financial risks, and advocates greater knowledge sharing in the field. Translating these G20 propositions from proposals to practice will require both time and effort, but the industry looks set to embrace many such changes in the coming years.