At the start of the global health crisis in March 2020, historian Yuval Noah Harari wrote: "The decisions people and governments take in the next few weeks will probably shape the world for years to come."
This statement is especially pertinent to the banking sector; its financial intermediation decisions have historically influenced inequality in wealth, access and use of technology, and exposure to climate-related disasters. The decision criteria and risk models that inform banks' financial intermediation decisions have significant impacts on society. If assets available today are worth more than those in the future, what Mark Carney has referred to as the 'tragedy of the horizon', environmental degradation is one likely outcome.
As the world experiences what some consider the worst recession since the Second World War, several governments continue efforts to re-orient capital flows, mainstream sustainability in risk management, and foster transparency and a long-term perspective. For example, the European Commission adopted a renewed Sustainable Finance Strategy on 6 July 2021 that sets out initiatives to support the transition to a sustainable economy in the EU, and to work closely with international partners to build a sustainable financial system.
The good news is many are listening, some unexpectedly, as indicated by nuanced and important criticism of Milton Friedman's view that "a corporation's only social responsibility [is] to increase its profits." Luigi Zingales's essay, in particular, offers a useful perspective on the limit to the societal value creation of a focus on maximizing shareholder value.
Also, more financial institutions recognise that climate change is real and demands urgent action. A review of climate initiatives by the Partnership for Carbon Accounting Financials highlights extensive opportunities for financial institutions to scale their efforts in this critical area. The world must change direction not to exceed the goal of limiting global warming to 1.5°C, well below 2°C as defined by the Paris Agreement. For a chance to succeed, climate-related risks and opportunities must be better understood (and managed) by investors and financial institutions, as well as regulators. Among others, a report published by Finance Watch provides concrete recommendations about how banking prudential regulation can tackle the link between financial instability and climate change.
The Global Alliance for Banking on Values (GABV) sees other encouraging developments in the sector; the more established including UNEP FI's Principles of Responsible Banking with its 214 signatories and the UN-convened Net Zero Asset Owners Alliance committed to transition investment portfolios to net-zero Greenhouse Gas (GHG) emissions by 2050. In addition, key market actors are also sending clear signals on climate action. Recently, Blackrock, the world's largest asset manager, indicated what it would expect companies to do regarding climate risk and the potential consequences of unmet expectations. Others are in progress, including the World Benchmarking Alliance's Financial System Benchmark, which will rank the 400 most influential financial institutions on their contribution to the achievement of the Sustainable Development Goals, and the ISO Technical Committee 322 on Sustainable Finance, which foresees a standardisation in the field of sustainable finance.
Values-based banks and banking cooperatives practice banking with a holistic focus on the real economy and have consistently shown that serving the real economy delivers better and more stable financial returns than those shown by the largest banks in the world.
The real economy relates to economic activities that generate goods and services as opposed to a financial economy that is concerned exclusively with activities in the financial markets. These sustainable banks, members of the GABV, who operate in numerous markets, serve diverse needs, use distinct business models but share a common strategic foundation: the Principles of Values-based Banking. They address the authentic banking needs, especially access to credit, of enterprises and individuals within their communities.
The societal, environmental, and financial benefits of 'doing good' are not limited to values-based banks. Research co-sponsored by the GABV, the European Investment Bank, and Deloitte indicates that for the largest 100 commercial banks by market capitalisation, as of September 2018, strong performance on sustainable materiality issues leads to better financial performance relative to returns to investors. Claims that a focus on social and environmental objectives lowers shareholder returns are not borne out by the evidence.
Despite the growing consensus that banks should deliver positive social and environmental impact, differences in opinion persist about the pace of change and its scope. For example, the European Commission announced a delay in implementing an essential requirement for funds to provide information on the ESG risks in their portfolio and reduced the number of metrics that investment managers must report. However, that banks are accountable to society for the societal and environmental impacts of their financial intermediation is now widely accepted and has prompted growing interest in values-based banking by a broader group of banks. There is also evidence of support for values-based banking by regulators in developing markets.
Although the full impact of the global health pandemic on the financial sector will not be known until 2022, at the earliest, a survey of 42 values-based banks conducted in early autumn 2020 provides a helpful, albeit early, an indication of the direction of travel. This is particularly true in light of the disconnect observed between the performance of stock markets and the real economy and makes it even more critical to revitalise inclusive and sustainable real economic activity intentionally.
Why isn't all banking done this way?
The data is clear: the business case for values-based banking is compelling. So why aren't all banks and banking cooperatives adopting this model? The reasons are many, ranging from inertia and the power of the status quo, including existing personal incentive structures; a lack of courage and innovation by banking executives and shareholders in changing course; and limited awareness of the data provided by this and the other reports cited.
However, there is rapidly growing recognition of the need for change in how banks and banking cooperatives behave and operate, and some examples of much-needed leadership in the mainstream banking industry. Over time, this recognition should result in the growth of values-based banks and increased focus on this approach by other banks and banking cooperatives within the overall financial ecosystem. In addition, there are growing signs that investors are beginning to seek more stable returns from their investments in banks and banking cooperatives. They can also verify that their capital supports the real economy, creating value for society.
Global Alliance for Banking on Values
The Global Alliance for Banking on Values (GABV) is a network of banking leaders from around the world committed to advancing positive change in the banking sector. Its collective goal is to change the banking system so that it is more transparent. It supports economic, social and environmental sustainability, and is composed of a diverse range of banking institutions serving the real economy.
Triodos Bank was a co-founder of the GABV when it formed in 2009.