The Cost of Deliverance
The UN PRBs are meant to align banks with the SDGs and the Paris Climate Agreement through a single framework that “embeds sustainability at the strategic, portfolio and transactional levels and across all business areas” (UNEP FI). The principles make goal setting a priority, steering the focus towards high impact issues consistent with each particular organization’s materiality map and encouraging reporting that integrates the impact on all stakeholders. It goes further, something rarely done in initiatives like these, to declare it will delist a signatory if it does not step up. UNEP FI will need to bravely follow through with this threat for the UN PRBs to deliver past the semantics.
The UN PRBs are not perfect, but they are a desperately needed paradigm shift that will see a more innovative approach to a weary and disconnected financial system. Some of the enormous challenges include “being transparent on the scale of your contribution to targets”. Unless more work like the science-based targets initiative is done in a wider range of areas than climate change, other hair-raising issues will tend to fall off the agenda. In addition, sustainable impact takes often years to bear fruit complicating matters. The implied costs of integrating sustainability into the heart of each bank and the skillset of each banker, and spending yet more on technology after a booster year of tech spend is concerning. Who will eventually foot the bill? Banks will need to provide confidence especially to its skeptical retail customers that they won’t.
Banks have already had their share of margin erosions over the last ten years. Costs are still 25% above 2008 levels. Litigation expenses peaked to $137bn in 2014. They are now falling in line with legacy conduct improvements but that signals the expected peak of related restructuring costs (EY Global Banking Outlook 2018). Banks are also spending more on technology transformation and cybersecurity. Other risks such as reputational and conduct remain high as is “improving culture” and remaining relevant in an increasingly regulated environment with market uncertainties and socio-political differences not seen before, certainly not by the generations that make up the armies of bankers in suits today, all infringe on optimal performance of these institutions. So how will they cope with the additional pressure that embracing the UN PRBs will come with in the short term?
Banks will also need to do further stress testing against a wide range of scenarios to understand the impact of embracing sustainability goals within the organizational or business context and the greater marketplace and external forces that will result from potential wide spread adoption on their financial performance and hence their credit ratings. The impact of change on the health of their corporate clients across sectors will need to be considered as well. For example, high greenhouse gas emitters can be found in not only the energy, steel or cement sectors but also the glass, agriculture, real estate, transportation and glass sectors. Stricter environmental standards can lead to higher operating costs, which in turn can impact a client’s probability of default and hence a bank’s non-performing loan ratio, in contrary to the lower default risk UNEP FI seems to suggest.
Following the UN PRBs will require not only a change in the types of services and products offered by banks, but – if implemented in its holistic glory – drastic reformation of a bank’s belief system, its purpose of existence, its brand and communication strategy, its day to day operations, its client base, its risk management system and its approach to remunerating its people amongst other things. This is incredibly brilliant given the potential extinction of the world as we know it that we face today, but equally daunting. Everyone in the ecosystem – governments, NGOs, institutions, service providers, and community leaders – will need to help banks that are willing to work towards these reforms get there. We must see ourselves as stakeholders now and not victims.
