Can values pay?
Early in 2012 a new report challenged conventional views of the banking industry. For some there’s always been an assumption that values-led banking goes hand-in-hand with a financial trade-off for individuals, businesses, investors and shareholders.
“GABV members represent huge diversity in terms of the customers they serve and how they do so, but share a genuine commitment to social or environmental change”
Strong, Straightforward and Sustainable Banking Report
Critics have argued that a financial penalty is an inevitable consequence of basing financial decisions first and foremost on the needs of people and the environment. After all, with many goods and services, ethics come with a premium of some degree or another. But while this may sound intuitive, the report from the Global Alliance for Banking on Values (GABV) showed it is by no means inevitable. In fact, quite the opposite is true, with sustainable banks outperforming the world’s largest in a number of areas, lending proportionally much more from positions of greater capital strength and offering comparable or better financial returns.
The report’s findings challenge conventional expectations, concluding that values-based banks were twice as likely to invest their assets in loans, lending on average more than 70% of their assets during this period.
GABV is a network of 20 leading sustainable banks. With combined assets exceeding $40 billion and touching the lives of more than 10 million people in 20 countries, collectively they represent a significant constituency with a powerful voice. Operating in markets ranging from Mongolia and El Salvador to Canada and Switzerland, GABV members represent huge diversity in terms of the customers they serve and how they do so. What they all have in common is a minimum balance sheet of $50 million, a retail offering that serves a large number of customers and a genuine commitment to social or environmental change. Crucially, this balance of social, environmental and financial concerns must be embedded within the organisation, not sit on its periphery.
The report, ‘Strong, Straightforward and Sustainable Banking’ was commissioned by GABV and co-financed by the Rockefeller Foundation and published in March 2012. It is one of the first substantial empirical comparisons of values-led banks against their mainstream competitors. Over the period of 2007-2010 the report compares 17 sustainable banks – most of which are GABV members – with 29 of the world’s largest and most influential banks. These have been defined as ‘globally systemically important financial institutions (GSIFI) by the Financial Stability Board, an international body which monitors and makes recommendations in the interests of global financial stability. While you may not have heard of the collective term before, the chances are that you’ll know the individual banks. Often described as too big to fail, they include Barclays, Deutsche Bank, Goldman Sachs, Lloyds Banking Group and HSBC.
Profits and principles
The report’s findings challenge conventional expectations, concluding that values-based banks were twice as likely to invest their assets in loans, lending on average more than 70% of their assets during this period. Lending increased 50% between 2007 and 2010, while large banks increased their lending by just over 20%, highlighting the focus of values-based banks on expanding business in the real economy. The values-based banks also appear to be stronger financially with higher levels of, and better quality, capital. The equity to assets ratio, an important measure of a bank’s capital strength, averaged 9.3% during the period studied, compared with 5.1% for the large banks. The sustainable banks analysed in the report also delivered higher financial returns than some of the world’s largest financial institutions.
While these findings are very encouraging, they don’t come as a huge surprise to Triodos Bank. We’ve always believed that a sustainable approach makes good business sense too. Values-led banks invest the funds entrusted in them into the ‘real economy’ – whether that’s providing loans to micro-entrepreneurs or financing the physical infrastructure of renewable energy – avoiding opaque financial instruments such as derivatives. As such sustainable banks don’t just put more back into the economies in which they operate – they also haven’t been exposed in the same way to the risks inherent in products like derivatives – risks only exposed when the repackaged sub-prime mortgage lending that was a catalyst for the financial crisis went sour.
The report also examined both sets of banks’ financial performance. Return on assets, the measure increasingly considered most relevant for judging a bank’s financial performance, averaged above 0.5% for the sustainable banks while the big banks earned an average of just 0.33%. Values-based banks also had returns on equity averaging 7.1%, compared to 6.6% for the GSIFI banks. The returns from the sustainable banks were also much less volatile during a well-documented period of economic stress.
Good times and bad
It was, however, precisely this period that critics saw as a weakness in the analysis. Surely it is no coincidence that the world’s leading banks saw a downturn in their fortunes during a global recession and arguably the worst period for banking in generations? So to test how the analysis stacks up over a longer period, the report was extended to include the 10 years until 2011. Crucially this extended period examining the boom years prior to the financial crisis as well as the lean years that followed.
“The findings of this report show that a sustainable approach to banking offers all of us the prospect of a stable, prosperous future.”
Peter Blom, Triodos Bank chief executive and GABV chair
The results – published in November 2012 – don’t fail to disappoint, showing that the trends shown during the initial post-crisis era were still prevalent during the pre-crisis period and over the 10-year cycle when examined as a whole. While the data presents some variations, the differential between the two groups being less pronounced during the pre-crisis period compared to post-crisis, the sustainable banks still continued to outperform the GSIFIs both in terms of meeting the needs of their stakeholders and in conventional financial measures.
Peter Blom Triodos Bank chief executive and GABV chair believes the reports cement a compelling business case for sustainable banking. “Doing good is beneficial for banks and society not just in a theoretical and ethical sense, but also financially, when measured against conventional benchmarks such as the financial bottom line.
“The findings of this report are crucial for a global banking industry which has tremendous potential to affect positive change through its ability to lend money to finance entrepreneurs and stimulate local economies. Most importantly, it shows that a sustainable approach to banking offers all of us the prospect of a stable, prosperous future.”
It may be too much to hope that GABV’s report is causing a stir in the boardrooms of GSIFI banks across the world. But at a time when policymakers and the public are looking for better ways to bank in the aftermath of the financial crisis, and when the biggest banks globally struggle to produce the returns they’ve promised to investors, it makes a compelling case for sustainable banking.
words by Will Ferguson
Sustainable Banks 72.4%
Sustainable Banks 72.5%
Sustainable Banks 7.5%
Tier 1 Capital/Risk Weighted Assets
Sustainable Banks 12.2%
Return on Equity
Sustainable Banks 9.7%
For a download of the complete study and more information on the GABV, visit www.gabv.org
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