A sustainable real economy meeting the long-term needs of society requires a sustainable financial system. Stakeholders in the financial system should be able to transparently assess the extent to which a bank has a sustainability focused business model as well as the impact of this focus on the bank’s financial returns and its risk profile.
In September 2014, the Global Alliance for Banking on Values committed at the Clinton Global Initiative to create over five years a Sustainable Banking Scorecard that would not only provide banks with a tool for increasing the sustainability focus of their strategies and operating models but also allow stakeholders to make choices among banks. The Sustainable Banking Scorecard, based on the Principles of Sustainable Banking, is a tool for bank self-assessment and improvement as well as provide for external stakeholder assessment of a bank’s sustainability profile.
The Scorecard will deliver an industry standard assessment of an institution’s sustainability focus. It will provide banks with a tool to improve delivery of a sustainable banking agenda, and will provide transparent and public information to support choices by all stakeholders, especially clients and investors. The Scorecard will allow stakeholders to channel their business activity to those banks most aligned with their values regarding sustainability.
The Global Alliance was founded in 2009 and as of December 2013 had 25 members with nearly $100 billion in assets under management. The members are socially progressive and innovative banks focused on delivering sustainable economic development and environmental improvement throughout the world. Although they operate in many different markets and with a variety of business models, all have at the core of their activities a focus on the Principles of Sustainable Banking (see Figure 1).
These Principles were developed as part of research undertaken by the Global Alliance and funded in part by the Rockefeller Foundation to look at the capital requirements and returns for sustainability focused banks. This research identified not only these core Principles but also the need for substantial capital to support the growth of these banks. Furthermore the research, initially released in March 2012 and updated most recently in October 2014, provides support for the investment case for sustainability focused banks with higher returns and lower volatility than delivered by the largest banks in the world.
Although all the Principles are important, the triple bottom line principle is critical with its focus on economically and sustainably delivering banking products and services to clients meeting the needs of:
- People – social empowerment
- Planet – environmental regeneration, and
- Prosperity – economic resiliency
The structure of the Scorecard (See Figure 2) is a holistic approach for assessing a bank’s business model for compliance with the Principles. The Scorecard uses a combination of Basic Requirements, Quantitative Factors, and Qualitative Elements to derive a relative Sustainability Score. Members of the Global Alliance have been piloting the Scorecard over the last year and it is expected to move from its current “beta” version to V1.0 in the near future. One member is already including its Scorecard as part of its public reporting.
For banks, the critical issue relative to their sustainability focus is the extent to which they dedicate their management of money at risk, on and off balance sheet, to the real economy and within that segment to meeting triple bottom line needs. As a result, 65% of the Scorecard’s Quantitative Factors focus on these elements.
For most banks current financial accounting and internal management reporting systems do not capture this information. Developing standards and systems for addressing this information gap should be a critical task for the industry with support needed from organisations such as the Global Reporting Initiative and the Sustainability Accounting Standards Board.
For many of the Global Alliance members this effort is facilitated by their historic focus on providing stakeholders with transparent insight into their activities with a focus on sustainability. Many member banks go so far as to provide detailed lists of clients allowing stakeholders to see where money is put to work. Two good examples of this transparency can be seen at Triodos Bank and Alternative Bank Schweiz which provides a complete listing of their loans to all shareholders as part of their annual report.
Increasing the transparency and sustainability of banks will be critical to developing a sustainable real economy. The efforts of the Global Alliance to develop a Sustainable Banking Scorecard should be an important element of moving forward on this critical issue.David Korslund is a Senior Advisor to the Global Alliance for Banking on Values. He has filled a number of senior and strategic roles in banking and financial services since 1976 in the United States and The Netherlands.
 Research report available at www.gabv.org.