Recent banking scandals have raised interest in corporate governance and organisational culture as make-or-break features of what makes a responsible financial institution. These can also be found in a longer list of sustainability expectations of financial institutions that have crystallised over the last two decades. In my work with Incite we have identified the ten core normative requirements found today in leading international ESG initiatives for the financial sector (banks, insurance, investment). They relate to:
- Compliance
- Corporate Governance
- Decision-making
- Risk Management
- Products and Services
- Internal Operations
- External Value Chain
- Monitoring and Reporting
- Stakeholder Dialogue
- Collaboration with Industry, Research Community and Regulatory Bodies
Other than governance and the quality of management in the institutions, two key features that emerge from the above is the requirement to integrate environmental, social and governance (ESG) criteria in risk management and business decision-making, and the requirement to develop products and services – “solutions” – explicitly dedicated to ESG themes. While the former lends itself to a focus on mainstream, core business and business strategy as addressed earlier in this three-part series on “Banking and Sustainability”, the latter fits more easily with an explicit sustainability strategy that targets what is – leider, hélas – still a niche market.
It is known that insurance companies take their time in introducing new products and services. They need the relative certainty of historical data before rushing into new terrain. But banks are better positioned to introduce ESG-labelled solutions in the short term. This implies the promotion of ESG themes. It implies systematically addressing for example environmental goals when investigating the “purpose of the loan” and “use of proceeds” in making loan underwriting decisions
A good collection of innovative examples of Green Financial Products and Services has been published by the North America Task Force of the UNEP Finance Initiative (2007). These include solutions such as green car loans and forest bonds. Some bank managers have expressed to me their fear that introducing ESG-labelled products and services may expose them to accusations of greenwashing and PR. Yet the introduction of such solutions sends an important signal to the market and consumers, and enables a bank to track the level of market demand for a solution to a clearly defined ESG problem. The introduction of ESG solutions can also help a bank to diversify and avoid concentration of its risk in lending areas that will increasingly face investor and regulatory pressure based on environmental and socio-economic trends.
Most banks are displaying slow progress in the use of ESG criteria – either in mainstream risk management or in the introduction of new products and services. The area of project finance, where environmental and social issues associated with large-scale infrastructure development tend to make the headlines, has been illustrative. The scale of the impact of the Equator Principles (2003), a credit risk management framework based on IFC standards, remains open to question. Project finance is nowhere near the booster for sustainable development that it can be. Amidst regulatory uncertainty, initiatives such as the Carbon Principles, launched by US banks in 2007 with a focus on the financing of electric power projects, and the Climate Principles, launched with British and French banks in 2008, have struggled to gain momentum. The Natural Capital Declaration (2012) still has to prove its impact, but expectations are high.