Round Table Explores Innovations in Social and Blended Finance

The 19th Round Table discussion continued the series of topics on the social impact sector and focused on recent developments in social impact investment and philanthropy. The underlying theme of the discussion was to understand how these can form part of blended finance supporting partnerships between investors and the public and third sectors addressing specific social needs.

Jonathan Flory (Director, Social Finance) started off by discussing the concept of social investment in the wider context of impact investing. Founded in 2007, Social Finance is a non-profit organisation working in the social impact arena, famously known for developing the first Social Impact Bond (SIB) in the UK. While the market for social investment is fluid, it forms part of a growing market of nearly USD 228 billion in impact assets and a larger movement in which governments, corporations, fund managers, investors and individuals are increasingly focusing their attention on achieving positive social outcomes by means of their investments. While social investment means different things to different people, unlike other investment approaches it focuses on addressing pressing social issues. As a UK term, it describes investments that intentionally target specific social objectives along with a financial return and measure the achievement of both.

While the Public Services (Social Value) Act 2012 clearly signalled the importance of social value in public procurement, a range of motivations continue to exist on the investor side. While international investment giants such as UBS support the “doing well by doing good” theory of impact investing, suggesting that financial returns do not have to be traded off against social objectives, they also recognise the need for softer, philanthropic capital. Given the spectrum of investors’ expectations, it is essential to align the interests of organisations with expectations of investors, but in many cases for a partnership to work there is a need for some element of soft capital in the overall funding structure.

Partnerships can play an important role in scaling up impact. A good example of this is the Positive Families Partnership, a London-based programme seeking to divert adolescents from entering the care system. The partnership brings together central government, local authorities, funders, and programme delivery partners. It applies the blended finance model and mixes grant and investment funding. Following a successful pilot by Essex County Council, the partnership model has been adopted by 5 other boroughs in London and now looks likely to be expanded to include all London boroughs.

The key challenge is putting the partnership together. For partnerships and blended finance to work, there must be a place where funders feel safe to partner. Potential solutions include building a new brand for the partnership, forming a joint venture or an innovative funding structure. The latter is particularly effective in bringing together investors with different financial needs and social objectives as the funding is often structured in tiers. An example is the Arts Impact Fund blending public, private and charitable funding in which the junior tier with first loss is provided by the Arts Council.

Social Finance is optimistic about future developments in social investment. It sees a lot of potential in improving financial inclusion by expanding affordable credit and social housing. In terms of partnership structures, more cross-developmental cooperation is on the way with funds pooled from separate budgets. There is a clear trend in themed funding, in which partners group around themes, which gives the partnership a clear focus.

Jonathan’s presentation was followed by a talk by Kenneth Ferguson, the Director of the Robertson Trust, and Christine Walker, their Head of Social Impact, who presented their innovative model of a public-third sector partnership. The Robertson Trust is a well-established organisation in Scotland with a 6o-year history of improving social outcomes for individuals and communities. It operates by means of providing grants to other charitable bodies and over the course of its history has awarded £250m to 467 organisations.

Back in 2012, the Robertson trust wrestled with the issues of sustainability and scalability of the impactful work charities were delivering. There were very few innovative financing models in Scotland. The Scottish government’s attempt to set up public-private partnerships (PPP) contained no obligation on the public sector to sustain a project while the Robertson Trust believed in the need for systemic change and moving away from high cost reactive services towards lower cost preventative models. They were eager to develop models that would expand impact to the national scale, achieving systems change on the one hand, and providing charities with much needed long-term funding on the other.

Their Social Bridging Finance concept aims to support this through the development of a contract with the public sector. The model has elements of both SIBs and PPPs, but is grant-funded. It is used to sustain projects that have already proved their effectiveness. The strength of its programme is its simplicity. The standard contract is only 10 pages long and contains a maximum of 3 success criteria. The crucial part of the process is defining the success criteria and making sure they are clear, measurable and meaningful. The success criteria are assessed at the outset by a third sector organisation in consultation with the public sector body, which creates a dynamic discussion between the two sides. The local authorities, in turn, are well-positioned to identify potential savings from an early intervention. Once the contract is signed, the Robertson Trust then fund the demonstration period, which usually lasts around 2 years. If the success criteria are met, the public body ensures the continuity of funding thereafter. This gives the charity the certainty of stable funding and for the public body it de-risks change. If the project is not successful, there is no obligation on anyone to pay back the funds. This way the Robertson Trust assumes the financial risk by providing the bridging finance to facilitate the switch to a low cost preventative model.

An example of the model is MCR Pathways, one of Scotland's biggest PPP agreements, which aims to widen opportunities for Glasgow’s most disadvantaged young people by offering a school-based mentoring and employability programme. The Robertson Trust initially supported the project by funding the demonstration period, but the premature success of the programme allowed it to expand quickly to include 200 schools across Scotland. Importantly, the model has brought in systemic change. “This model has allowed us to create a new approach which is now business as usual”, said Maureen McKenna, Executive Director of Education Services, Glasgow City Council.

A lively question and answer session followed, in which participants shared their impressions of the results achieved by the Robertson Trust. It is important to have an organisation which takes the initiative and brokers the connection between the third sector and public bodies. There was a shared concern that some investors in the impact investment landscape have high expectations in terms of the financial return, which was thought to be inappropriate in the context of funding public services. It is believed to be of the reasons why the SIB model was not fully embraced in Scotland due to some of the ethical considerations involved. Jonathan stressed that social impact requires thinking about how to support vulnerable groups of people. Impact investing is about creating value as opposed to extracting value, and it does not always imply cashable savings; rather is about spending money better and in a more productive way.

However, given the genuine interest among mainstream banks increasingly seeking to put money where it is most impactful, how can we capitalise on institutional capital in attaining compliance with the SDGs? Kenneth believes that achieving scale is not possible for any one organisation and there is a spectrum, in which every organisation involved can contribute in its unique way. The Robertson Trust currently assumes the “risk bit” and their role is to participate in the early stages of a project to demonstrate its effectiveness while capital markets can bring the project to scale. For the model to work, though, there should be more discussion about making sure philanthropic funds are available.

While both organisations attempt to scale impact, there are some differences in their approaches. While the Robertson Trust suggests that scale should be achieved in cooperation with the public sector, Social Finance aims to do so by bringing in new capital and new players. However, both organisations continue to share common aspirations to achieve social change and there are already some early examples of their models converging.

EFRT on Social and Blended Finance Slides - June 2019


UN PRB Insights: Teething Issues

Teething Issues

The UNEP FI has begun a public consultation period, which is open until May 2019. It acknowledges that there are areas of weaknesses and invites suggestions. It also provides case studies of several institutions already practicing specific behaviours in accordance with the global goals, making it easier for practitioners to benchmark and contextualise how their institution can embrace the SDGs.

1. Over Encouragement

It encourages any change towards reducing negative impact and increasing positive impact however unprecedented or imperfect, giving an example of a bank that “does not yet have all the answers” (who does!) that has set an ambitious goal and linked it to targets. It also provides references to expertise that can support a bank’s journey towards responsibility. The materiality map by the sustainability accounting standards board (SASB) is a useful taster.

The UNEP FI goes further to encourage greater adoption of sustainability practises by making it easy for even the least prepared banks in the world to sign up. Although the ability to self-declare as a starter or intermediate when becoming a signatory will greatly reduce expectations for the first two to four on early stage banks, the UNEP FI team must ensure this mechanism is not abused by advanced banks trying to manage expectations.

Furthermore, this four-year honeymoon for some means that there may be a disproportionate number of signatories who only begin contributing significantly to the global goals from 2023 onwards. Given the timebomb ticking on our planet just now is that going to be soon enough? The Intergovernmental Panel on Climate Change (IPCC) report produced in October says we have “a little over a decade” from now (Maitland AMO Green Monitor).

C-Level Responsibility

Founding members must ensure seamless alignment within their organizations as they gear up for the signing ceremony later this year. It is easy to plug a team of junior sustainability professionals in the back office while bankers tap away on the trading floor working in silos from each other. Half of the heads of sustainability at a GreenBiz Conference Board meeting in the US in 2016 reported half an hour or more of face time with the CEO three times or less in a year. Really?

Let’s not read a report ten years from now that says what E3G’s Briefing Paper said in March 2017 of the UN PRIs: “Our analysis finds that 33% of signatories directly employ no ESG staff and a further 20% employ just one. This means over 500 PRI signatories, representing $6.9 trillion, directly employ one or fewer ESG staff. On an asset under management (AUM) basis, the average PRI signatory hires one ESG specialist per $14bn of assets managed.”

Change of leadership can also dilute the process if sustainability is not properly plugged into the C-suite. Take the example of Yes Bank in India. It’s share price plummeted 34% when news surfaced in September that Rana Kapoor, its CEO, would be forced to leave (by the Reserve Bank of India) by January 2019. The fact that it has a dedicated Chief Sustainability Officer, who in fact sits on the Global Steering Committee of UNEP IF, provides comfort that this will not derail the bank from its UN PRB drive.

There have been many peer to peer initiatives that have worked hard to transform specific areas of the banking industry by producing results such as the Soft Commodities Compact that supports the reduction of deforestation, or the Equator Principles used as an environmental risk management barometer in project finance. However, an international initiative to infuse sustainability into every vein and artery of a bank across business lines indicative of the UN PRBs has rarely come to market. We welcome the boldness of the UN PRBs in spirit and urge those involved to ensure even bolder results.


UN PRB Insights: The Cost of Deliverance

The Cost of Deliverance

The UK 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 UK 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.


UN PRB Insights: The Early Adopters

The Early Adopters

It has taken 12 turbulent years of uncertainty in the financial industry to get the sell-side to align with the buy-side which has embraced the UN PRIs. It now appears the balance could indeed shift IF the UN PRBs actually work, given their alignment with the SDGs and the Paris Agreement unlike the former which takes a softer dated ESG position. A strong signal will be if we have a few champion banks announce bold targets at the formal launch of the UN PRBs in May 2019. This is very likely given that many banks involved in the drafting of the UN PRBs have been actively implementing new standards of practice that align with the principles already.

Take SocGen for instance. Just four years ago (2015) SocGen was actively increasing its exposure to coal-based projects e.g. 770 MW coal fired power station project that would increase capacity by 80,000 tonnes in the Dominican Republic. Only a year later it announced that it would phase out its outstanding loans to the coal industry to less than 20% of its power production portfolio by 2020. BNP Paribas has taken similar measures and stepped it up with restrictions on some parts of O&G financing in addition to coal.

There are a myriad of banks in the founding group that are at very different points of their sustainability journey. This is very promising to see, as it reflects some level of initiative not seen before by an industry that has an inertia to positive change until regulation dictates otherwise. Take the case of Barclays, which continues to witness great friction with stakeholders. From activist investors (Ed Bramson’s Sherborne) and a CEO fined by the FCA for lack of diligence to protests by People&Planet at its AGM against the financing of the Kinder Morgan Pipeline in Canada. All of this happened last year. As a founding member of the UN PRBs, what can we expect from Barclays this year?

We could go through the list with a fine-tooth comb, but the point here is not to shine a torch on negative impact but to highlight a joint initiative that could lead to a lot more positive impact from an industry that continues to struggle with its past. The UN PRBs could catalyze systemic change that is long overdue. It is the first set of principles launched that takes a deep and holistic approach to sustainability integration into a major industry that has impact on all the rest of them. This could have a positive ripple effect on the entire economy, especially if the majority of global banks that continue to finance projects in laggard sectors that drag their heals towards sustainable practices sign up and deliver.

One such mass are the North American banks. Neither a Canadian nor a US Bank has participated in developing the UN PRBs. Just look into one arena as a litmus test: the financing of extreme fossil fuel power at “top companies” by banks over the three years from 2015 to 2017. The top 10 that made the league table (Banking on Climate Change 2018) are primarily Chinese and North American institutions: CCB, RBC, JPMChase, ICBC, Bank of China, TD, HSBC, ABC, Citigroup, and BoA. It is hopeful on the other hand to see a Chinese bank, namely ICBC that ranks forth on the league table, participate in the UN PRB initiative.

The UN PRBs not only link deliverables to the global goals but also to “other relevant national, regional or international frameworks”. Without a relevant national framework in every country around the world, the scope is limited. Brazil, for example, champions this notion. In 2014, the Central Bank of Brazil (BCB) published a mandatory Resolution 4,327 for financial institutions to have social and environmental responsibility policies. Lobbying with local governments and policymakers around the world will be essential to see more countries do the same. Rabobank is another strong role model, actively voicing its views of the role of government in sustainable finance. In its June 2018 position paper, for example, it talks about coordinating policies at the EU level and suggests “targeted – and temporary/ evolving – subsidies, such as for green loans, for green deposits”. Financial incentives will most certainly help Banks generate more positive impact.

Therefore to maximise the impact of the UN PRBs, the world will need a lot more than 28 signatures. It will need dedication, courage, and resources from all early adopters, crafters, and endorsers to summon the masses into the UN PRBs and pressure national and local government bodies to issue and revise policies, incentives and legislations to augment it.


UN PRB Insights: The Spirit of Responsibility

The Spirit of Responsibility

The UN PRBs, unlike the UN PRIs and more like the SDGs, are expressed with proper and specific nouns first before any statement such as “we will…”. This gives it universal gravitas, and freedom to be applied in every way possible and every way that becomes possible. Given this property, the UN PRBs are relatively ageless to the UN PRIs. Here are the principles briefly reintroduced with their expansive character supported by extracts from the principles documentation issued publicly so far.

We find that a major challenge will be to understand metrics and apply frameworks and collect data that are not only standardized and normalized across banks for better assessment but also equally weighted on each SDG. Much of the supporting information provided by the UNEP FI so far is climate change heavy and cannot granulate completely how to quantify the principles’ universal and multifaceted character.

  1. Principle 1 (Alignment) beyond alignment with global goals attempts to ensure improvement continues indefinitely by recommending that targets should “exceed mere alignment with the SDGs, the Paris Climate Agreement and other relevant national, regional or international frameworks.” There are standards such as the yet to be released ISO14097 relating to climate change that will be necessary for signatories to make progress addressing issues adverse to the SDGs embedded in their business practices.
  2. Principle 2 (Impact) encourages growth into new sectors or client segments to increase positive impact as well as invest in technology and innovation for better outcomes. Banks will need to think about forward looking scenario-based assessments of risks and opportunities. Again an approach and methodology to do this in the area of climate change is provided by the Task Force on Climate related Financial Disclosure (TCFD). The PI Impact Radar can help identify impact across the greater sustainability spectrum. Banks are encouraged to “provide remediation for adverse impacts, which the enterprise has caused or contributed to.”
  3. Principle 3 (Clients & Customers) suggests mapping clients by sector to identify their impacts on the SDGs and to play a role to support their management. It covers the integration of sustainability questions in onboarding and know your customer procedures and creating a “race to the top among clients” by giving incentives to the sustainable ones. Again the use of technology is encouraged to innovate and offer better suited products to a better understood client base in line with the global goals.
  4. Principle 4 (Stakeholders) highlights the need to build relationships across the supply chain, contractual (e.g. employees and suppliers) and non-contractual (e.g. trade unions and governments), in different dosages to enable a bank to “deliver more that it could by working on its own”. It also calls for signatories to “proactively advocate for sustainable regulations and frameworks.” and to address “affected” stakeholders defined as those affected by a bank’s indirect impacts (e.g. wildlife) via NGOs. Once again, the use of technology for engagement is advocated.
  5. Principle 5 (Governance and Target Setting) is more like two principles in one. The first being governance and culture, suggesting sustainability be shifted to the core of governance. Staff should integrate this into daily work practices, decisions and reward schemes and senior management need to communicate the company’s vision and mission in tune with its sustainability targets. The second being target setting, highlighting the need to set ambitious targets in line with one or more goals at a timescale in sync with that of the goals or, even better, earlier.
  6. Principle 6 (Transparency and Accountability) draws on the need for accountability for a bank’s actions and its positive or negative impact on the global goals. 14 months after signing and annually after that, members will need to include UN PRB implementation data in their public reporting. It refers to frameworks that can be used, giving evidence that a guidance on assessing climate related risk will be released in May 2019. There will be two methods by which an external review process could be conducted: third party assurance or a defined scope review. The latter being where an accredited review partner only uses public information to assess whether a set of criteria are met by the bank.


UN PRB Insights: UN PRIs Pass the Baton

UN PRIs Pass the Baton

On 26th November 2018 28 banks from 20 countries came together as the founding members of the UN Principles for Responsible Banking (UN PRBs). In this historic move, despite a diversity in culture, beliefs and systems, these financial institutions, representing $17 trillion in total assets, showed a common interest to align business with society’s goals.

The UN PRBs, launched in draft format by UN Environment Finance Initiative (UNEP FI) at its global round table in Paris, offers the first comprehensive framework on the integration of sustainability through every function of a bank. It comes twelve years after the UN Principles for Responsible Investment was launched with 20 signatories representing $2 trillion in 2006, which has now grown to 1750 signatories with $70trillion in AUM. The global banking industry is at least twice that much in size ($134 trillion, 2016, MarketLine). It is very interesting to see this sector dislodge from its inertia and pave the way to far greater positive change than defined in the UN PRIs.

The six principles are presented below alongside the UN PRIs for comparison.

Perhaps the UN PRIs need to be updated to reflect the SDGs now. Currently, it is limited to ESG issues prime to the period when it was launched but which represent a minor area covered by the SDGs. It’s marginally effective if one part of the industry is dancing to a different tune.

Having said that, the responsible investor movement is more mature than the responsible banking movement in a greater sense. It took inspiration from the lives lost in the 2008 financial crisis, the rise of the environmental and socially conscious newer generations with growing affluence and the track record of faith-based investors since as far back as the 1600s.

It is the less mature responsible banking movement that needs a push. The UN PRBs tackle the industry’s consciousness. If implemented well, we could see greater alignment between banks and investors whether the UN PRIs are updated or not. This could unlock significantly more capital towards SDG-linked investment opportunities and the four Ps: people; planet; prosperity; peace.

During their consultation period open until May 2019, we will post insights on the UN PRBs regularly.


GEFI Round Table Discusses Ethical Finance Approaches in the Debt Capital Markets

The Ethical Finance Roundtable was held on Feb 27th at Baillie Gifford in Edinburgh. Entitled "Ethical Finance Approaches in the Debt Capital Markets", the round table covered market developments in the $1.45 trn climate-aligned bonds market (such as green bonds) along with innovative trends in ESG and SDG bonds.

Following a welcome by Chair Omar Shaikh, Graham Smith (Director - Sustainable Finance Unit - Global Banking, HSBC) provided an update on HSBC's strategy to deploy $100bn in sustainable financing and investment by 2025, and an overview of the bank's SDG bond and how it has integrated the Green Loan Principles and Green Bond Principles into its financial products and instruments:

The $100bn is typically deployed through: 1) bonds 2) loans and 3) investments where HSBC maintains a focus on returns. The green agenda is being driven by regulation where some governments are taking measures that encourage responsible lending in the private sector. The Paris Agreement, which set out national contribution guidelines in the form of NDCs, prompted legislation such as the Clean Air Act in the UK. Furthermore, in France, the Government issued Law 173 in making investors disclose green assets from brown banks are obliged to rebalance their assets with a higher ratio of green to brown.

HSBC is a leader in green finance and is committed to investing in green assets that drive the market forward. With the examples of Clean tech growing by 4% to 5% Graham suggested that investors should be interested in the space green or not.

In March 2018 the Green Loan Principles were published. Graham explained that this important development, with a similar rationale to the Green Bond Principles, applies to broader sections of business and society and has now become the “gold standard” for green loans. Banks can now offer products that they understand.

Graham explained the emergence of products (such as green, social, sustainability bonds and loans to transition loans) and that the Loan Association is likely to provide a much-needed definition for ESG loans in March this year.

With ESG products positioning businesses as good corporate citizens and green products highlighting a commitment to the environment there are PR benefits to be derived from businesses engaged in sustainable finance. In terms of pricing, there is no financial penalty for investing in green bonds but they still prove costly for issuers.

HSBC launched the world’s first bond that directly supports the SDGs and the Paris Agreement. The US$1 billion raised through the bond finances projects that benefit communities and the environment, including hospitals, schools, small-scale renewable power plants and public rail systems.

The key message is that regulations are driving the development of the market, leading to change at the commercial level. A prime example is the Task Force on Climate Related Financial Disclosure (TCFD).

Caspar Cook (Head of Analysis, Cameron Hume) then outlined Cameron Hume's client-led approach to ESG, which focuses on a combination of values-based and returns-based strategies, and how this has evolved to successfully grow the Global Fixed Income ESG Fund.

Cameron Hume, an active fixed income specialist, is a signatory to UN PRI. Caspar started by explaining the considerations of applying an ESG approach to fixed income, which differs from its integration into equity investments. There remains a lot of confusion as to the definition of ESG so Cameron Hume has divided its approaches into two categories: returns-driven (ESG factors that are material to performance) vs values-driven (implement ethical social and environmental objectives of different investors). Cameron Hume focuses on returns-driven investment and only practices values-driven investing in segregated accounts that mandate it.

Caspar believes that ESG is a good risk indicator and cited the example of PG&E, a prolific bond issuer known as the cleanest provider of energy in USA. Carbon conscious investors would have found this an interesting play but they filed for bankruptcy following their link to the California wild fires. ESG analysis, using MSCI, would have highlighted risks relating to its poor land use and diversification thereby discouraging investment.

A further example was shared by Caspar. Equifax, the biggest US credit scoring company, had a substantial data breach recently that severely impacted its shares and bonds. MSCI had ranked Equifax 1 out of 10 in data security and flagged this as a material risk. These factors do not typically appear in annual accounts or financial ratios that many investors focus on.

ESG factors help investors focus on neglected risk that leads to more sustainable long-term investing. Cameron Hume’s Global Fixed Income ESG Fund uses responsible investing to bring ESG factors in to the investment process tilted towards higher ESG rated companies.

Following the formal presentations a lively and lively question and answer session followed. Some of the key points raised included:

  • It is easier to influence sovereigns through the bond markets than corporates.
  • ESG policies in businesses tend to be top down and not always filtering to the bottom layer of people making decisions.
  • ESG factors influence investment performance but not necessarily on a consistent basis. Some studies show that it can add 0.5% to 0.8% a year in performance. Participants were skeptical because it is hard to disentangle ESG from other factors.
  • Clients have fiduciary duty towards performance so it is a challenge for fund managers to integrate a universally agreed ethical stance into a portfolio (e.g. Calpers divested from tobacco stocks 15 years ago and recently published that that decision cost them USD6bn).
  • Even if findings suggest that ESG is good for performance over the last few years there is a lack of evidence indicating that it will improve performance going forward.
  • The bond industry must evolve to ensure bonds fulfil their green promises. At the moment they just get declassified but there should be penalties. And declassification often takes place long after the bond has de-greened (e.g. Mexico City airport project).

The session concluded with a discussion on the role the debt capital market industry can play in driving standardisation in pricing, measuring and reporting. The key points raised were:

  • At the moment the industry tends to tick boxes and gets PR recognition for this (e.g. the CDP used by the TCFD).
  • There is no perfect measure for transition risk, which will play a key role in consolidating many sectors in the medium term.
  • A nuance that influences the development of the industry positively is that asset managers pay for MSCI scorings while issuers pay for credit ratings.
  • As investors increasing focus on analysing and challenging data a virtuous cycle will be created to drive up the availability and quality of data.
  • A limitation on green bond reporting is the risk of breaching client confidentiality.
  • The proof of concept is just as poor in green project proposals that are submitted for debt funding. This leads to a serious lack of viable sensible pipeline to invest in (especially in the SDG space). Large lenders end up majority invested in their own assets as a result (e.g. HSBC’s SDG Bond

Overview of Ethical Debt Instruments

Introduction 

Debt instruments that provide a coupon as well as a social or environmental return are broadly dubbed as ethical debt instruments. They come in a variety of forms, and innovative new structures are increasingly coming to market.

The major driver of this is investor demand (such as pension funds, insurers and millennials) and issuers keen to tap into this rich pool of investment capital at equal to lower cost than purely financial return focused bonds. Investors increasingly believe that these forms of debt financing better capture long term and existential risks as well as seek to provide non-financial returns.

The most important factors to focus on when evaluating such instruments is whether the issue meets a common set of Social Bond Principles, namely use of proceeds, project or investment selection process, management of funds in accordance with a pre agreed framework that has been evaluated by a third party (e.g. Sustainalytics or CECERO) and aligns with a recognized global or national set of principles (such as the Green Bond Principles, the Social Bond Principles and/or the Sustainability Bond Guidelines) and impact metrics monitoring and reporting.

Green Bonds

By far the largest ethical debt market place at the moment, with USD11.9bn issued to date in 2019 alone. Last year there was USD167.3bn in issuances. This year is forecasted to mobilise USD250bn in issues. The majority of these bond issuances are aligned with the Climate Bonds Initiative to provide environmental integrity. A few are certified by the climate bond standard which is backed by a board of investors that represent USD34tr in AUM.

Essentially the proceeds of the bond must be used in areas that are consistent with the 2-degree Celsius warming limit specified in the Paris Agreement. BNP Paribas is consistently in the top five underwriting league tables for green bonds. Several stock exchanges have a dedicated section allocated to green bonds, such as Oslo, London, Mexico, Luxembourg, Italy, Shanghai, Taipei, Johannesburg and Japan. Interestingly the US, China and France are the largest sources of labelled green bonds.

Issuers range mostly from multi sector to energy or building related. Structures are sophisticated and diverse ranging from covered bonds and asset backed securities to green Schuldschein, green sukuks, mortgage backed securities and medium-term notes. Apart from issuing its first green bond (USD500mn) as early as 2015, HSBC has also issued an equity linked green bond for EUR34mn (2017) that pegs returns to the performance of a basket of ESG compliant listed companies that are measured against 134 KPIs (STOXX Europe ESG Leaders 30 Index). The proceeds are dedicated to projects that improve energy efficiency.

SDG Bonds

SDG bonds are a type of sustainability bond that aligns the projects it finances or refinances with social and / or environmental impact linked to specific SDGs. These may include all the SDGs or only some of them, such as in the case of the ANZ SDG Bond that seeks to contribute to the achievement of nine of the seventeen goals including health, education, sustainable cities and climate action or the HSBC UN SDG Bond that uses proceeds towards projects that achieve one or more of seven specified SDGs including clean water, energy, education and infrastructure.

In both cases the proceeds can also be used on its own operating or capital expenditures as long as it contributes to the achievement of one or more of the nine SDGs identified.

In HSBCs case the bond is majority invested in two of its LEED Gold certified headquarters in the Midlands and in Dubai. The HSBC bond which was launched in 2017 was USD1bn, 3x oversubscribed and matures in 2023. The more recent SDG bond issued by the World Bank links return on investment to the stock performance of thirty listed companies that make up the Solactive Sustainable Development Goals World MV Index. Proceeds will be used to finance their development projects. BNP Paribas arranged the bond while Banque SYZ placed it.

ESG Bonds

ESG is now a mainstream topic steering investment towards it, and this will continue at a steady pace given that Millennials, who put greater emphasis on adopting these values, will become 75% of the work force by 2025. One of the challenges the industry faces however is a lack of standardization making it difficult for investment funds to set a fixed ESG criteria. In addition, the size of ESG bond issues are generally small relative to their conventional peers and are issued by those with no track record thereby making it difficult for large institutional investors to participate. In fact 50% of European investors in a recent report said they did not think there were enough ESG products in the fixed income space. Another influencing factor in the debt capital markets is that whether labelled as a type of sustainability bond or not, 85% of European investors apply ESG criteria to at least investment grade bonds. (RBC Global Asset Management & Cerulli Associates)

Blue Bonds

These are bonds that raise financing for projects that support the sustainable use of ocean resources, inspired by the green bond movement but at a naisant stage. Only one issuer has raised a blue bond so far and that is the Seychelles, an island highly dependent on the ocean for its livelihood. The issue size was a modest USD15m and the coupon is part guaranteed by the World Bank and the Global Environment Facility. Considering the size of the issue only three investors participated: Calvert Impact Capital, Nuveen and Prudential.

Vaccine Bonds

Vaccine bonds were in fact pioneered in 2006 by the International Finance Facility for Immunisation (IFFIm) launched by GAVI (The Vaccine Alliance) and began the movement by the financial sector towards developing a set of principles to hold the socially responsible bonds universe together. Vaccine bonds are directly aligned to SDG 3, which aims to end the preventable death of children under 5 years of age by 2030. GAVI has been able to raise USD5.7bn so far as effective bridge financing until grant providers can step in.

Other Bonds

Other kinds of social & development impact bonds include Tobacco Social Impact Bonds (TSIB), a rhinoceros conservation impact bond, a cocoa and coffee production bond in Peru and a youth unemployment program bond in Serbia. Sometimes referred to as a pay for success model or a social benefit bond, these innovative financial instruments tend to be driven by private investors with an interest to offer upfront capital for a particular and specific social or environmental goal. These investors work with governments, philanthropists and/or aid donors to come up with mutually beneficial structures that reward them if outcomes are met.

Conclusion

Although the green bond marketplace has taken off well over the last few years, it is not enough to fill the USD3 to USD5 trillion annual gap that is required to meet the SDGs. Banks are in a perfect situation to align just part of their broad loan books towards SDGs that are material to them to drive more capital towards the achievement of the SDGs. Certain sectors can be identified as most closely aligned and a framework for tracking and reviewing annually can be put in place based on industry learnings from the green bond issuance space. As a result, banks will not only be able to expand their product offering and client base but also support their clients who wish to similarly begin engaging with and reporting on their contributions to the UN SDGs.

References: ICMA, UN, Dealogic, MSCI, European Commission, Climate Bonds Initiative and HSBC

Ethical Finance Round Table

HSBC is an active lender in the sustainable finance industry globally and a member of The ICMA Green Bond Principles Executive Committee, The Catalytic Finance Initiative, The Equator Principles Association, The WEF Climate Leaders CEO Group, The Climate Bonds Initiative, The Social Bond Guidance Steering Committee, China’s Green Finance Committee, and the Adopted Taskforce on Climate Related Financial Disclosure. It is the founder of the HSBC Centre of Sustainable Finance and the award-winning Climate Change Centre of Excellence and the first sovereign Green Bond arranger (EUR750mn Polish Bond 2016). HSBC will be speaking at the Ethical Finance Roundtable in Edinburgh hosted by GEFI on Feb 27th 2019. To be considered for an invitation, please click here.


“THE EDINBURGH FINANCE DECLARATION” – AN INTERFAITH INITIATIVE ON ETHICAL FINANCE

MEDIA RELEASE

EMBARGO – 0001 (UK) Tuesday 23rdOctober 2018

“THE EDINBURGH FINANCE DECLARATION” – AN INTERFAITH INITIATIVE ON ETHICAL FINANCE

‘The Edinburgh Finance Declaration’ – The Church of Scotland and the Islamic Finance Council UK (UKIFC) will officially unveil an interfaith shared values framework on ethical finance at a reception in Greyfriars Kirk this evening (Tuesday 23rdOctober 2018). The event marks the end of the international Ethical Finance 2018 conference that has convened 300 experts in Edinburgh this week.

The Declaration, thought to be the first of its kind globally, represents the culmination of the first stage of an historic collaboration initiated in February 2016 when the Church and UKIFC signed a partnership agreement to co-develop an ethical finance solution open to all society, regardless of faith or ethnicity, that is built upon the shared values between the two faith traditions.

The shared values framework emerged from efforts led by finance practitioners. This included in-depth interviews, consultation papers and a series of structured round tables held over a two year period. This process engaged over 200 senior stakeholders ranging from banking and finance experts to religious theologians, parliamentarians and academics from across the UK and abroad. Six core shared values emerged that were refined to create the Edinburgh Finance Declaration.

The shared values – which include Stewardship, Love of the Neighbour, Human Flourishing, Sustainability and Purposefulness, Justice and Equity, and Common Good – align contemporary trends in the financial markets such as climate, UN Sustainable Development Goals and impact investing. The Declaration is designed to inform the development of financial products that support an ethical economy. It also provides a values framework that can inform organisational cultures to help rebuild the loss of trust in financial institutions and markets that has arisen since the global financial crisis.

Rev Dr Richard Frazer, Convener of the Church of Scotland’s Church and Society Council said:

“Since the global economic crash in 2008 public trust in financial institutions has been shaken, with seemingly little change as a result. From our Christian and Islamic faith traditions we believe that a different world of finance is possible, one in which ethics and economics go hand in hand. We believe that these shared values provide a solid foundation from which we might arrive at a financial sector that contributes to the flourishing of all.”

Faith organisations are estimated to command assets valued at $7 trillion. That jumps to $13 trillion when charities, endowments and philanthropic entities are included. As a consequence, these bodies are well placed to influence investment decisions and to demand that financial institutions are responsive to the values set out in the Declaration. One obvious starting point would be making a commitment to advancing the common good by adopting the United Nations’ 17 Sustainable Development Goals.

UKIFC Advisory Board member Omar Shaikh outlined the next stage in the journey: “Faith groups have always had an important role in promoting social causes. Moving forward, taking these values coupled with strong business acumen and a solid commercial approach we hope to develop an ethical finance solution that is both commercially sustainable and creates positive societal impact.”

The Declaration, which forms part of the Global Ethical Finance Initiative, is a symbolic development sending a strong and positive message of interfaith collaboration and furthering Scotland’s growing reputation for innovation and ethical finance.

 

Further Information

www.edinburghdeclaration.org

 

Chris Tait

Project Manager, UKIFC

chris@ukifc.com

(m) 07931 103573

 

Helen Silvis

Communications Manager

Church of Scotland

HSilvis@churchofscotland.org.uk

(m) 07817 995887

 

QUOTES   

 

“A remarkable and admirable document, reflecting very great credit on both the collaborative process and fine draftsmanship that generated it.”

Sir David Alan Walker, Former Chairman Barclays, Morgan Stanley, Spearheaded Walker Report of corporate governance

 

“This collaboration is an important example of how different communities can not only talk of, but demonstrate shared values. It is also very encouraging to see the role the faith communities can play in inspiring a more inclusive, ethical and responsible financial system.”

Lord Archbishop of Canterbury, The Most Reverend and Right Honourable Justin Welby

 

“The Christian and Islamic faith traditions share a commitment to economic justice…. By collaborating and “putting our money where our morals are” we have an opportunity to live out our common values and make a tangible change for those most affected by poverty.”

Rt. Rev Dr Angus Morrison, Ex- Moderator of the General Assembly of the Church of Scotland

 

“This is powerful example that many globally can take from, including us in Nigeria. Well done to the Islamic Finance Council UK and the Church of Scotland for showing their vision, leadership and bravery.”

His Highness Emir Sanusi Former Governor of the Central Bank of Nigeria

 

“We were delighted and astonished to discover that the Church of Scotland and UKIFC had been working together to produce a theological statement of core values. Bringing faiths together in ethical finance has never been done and this work is very impressive.”

Martin Palmer, Secretary-General, Alliance of Religions and Conservation

 

About the Global Ethical Finance Initiative

The Global Ethical Finance Initiative (GEFI) is a global movement and co-ordinated programme of ethical finance projects and activities originating from Scotland. GEFI consolidates some of the pioneering ethical finance work being undertaken in Scotland under one brand to create a compelling global proposition.

www.globalethicalfinance.org

 

About the UKIFC

The UKIFC was established in 2005 as a specialist advisory and developmental body focused on promoting and enhancing the global Islamic and ethical finance industry. As a dynamic and forward-thinking not-for-profit organisation the UKIFC’s Advisory Board Members, who provide pro bono support, have defined and evolved the role the organisation plays in making a tangible impact in the global Islamic and ethical finance sectors. Principle service areas are: Advisory, Ethical Finance, Training and Awareness and Thought Leadership.

The UKIFC has been recognised globally for its work in promoting shared values and increasing connectivity between ethical and Islamic finance stakeholders across the UK. For more than 5 years the UKIFC has been leading an award winning debate on ethical finance through a series of events based in Edinburgh.

www.ukifc.com

 

About the Church of Scotland

The Church of Scotland is Scotland’s national church and is also one of the UK’s largest charities. It serves almost 400,000 members, with more regularly involved in local congregations and our community work. Within the organisation, the Church has around 800 ministers serving in parishes and chaplaincies, supported by professional and administrative staff. The Church has a proud tradition of working to benefit those less well off in society, and campaigns on a range of economic and social welfare issues.

www.churchofscotland.org.uk

END.


Christians and Muslims unite to tackle banking crisis

The Church of Scotland and Islamic Finance Council UK have announced a partnership to create ethical financial services.

MEDIA RELEASE
Tuesday 22nd March 2016

 

The joint venture will draw on how the Christian and Muslim communities have supported ethical finance in the past and examine the practical commercial viability of new models which can tackle inequality and poverty. This pioneering initiative is the first time the Church and Islamic finance have come together to collaborate and will aim to create solutions open to everyone regardless of religious or ethnic background. This initiative has come into being through a shared belief that existing financial institutions have in recent years lost their social conscience. Following the banking crisis of 2008, further ongoing scandals of misselling payment protection and interest rate fixing have raised the question if reforms have worked. We believe this is an exciting opportunity for faith groups to work together on solutions which will benefit the whole of society, regardless of faith or belief.

On announcing the project  Rt. Rev Dr Angus Morrison, Moderator of the General Assembly of the Church of Scotland, said: “In 2012 the Church of Scotland’s special commission on the purpose of economic activity identified human flourishing and the protection of the planet for future generations as two of the most critical purposes for financial interaction. Our current system has gone badly wrong, creating massive inequality and the destruction of our shared natural resources by money-making machines overtaking commerce that serves the common good.

“The Christian and Islamic faith traditions share a commitment to economic justice and a call to an equal distribution of the gifts of God. By collaborating and “putting our money where our morals are” we have an opportunity to live out our common values and make a tangible change for those most affected by poverty. Active concern for our communities is an obligation and we look forward to meeting the challenge together.”

The Islamic Finance Council UK (IFC) is inspired by a commitment to developing a fairer, more responsible finance system. It has been recognised globally for its work in promoting shared values and increasing connectivity between ethical and Islamic finance stakeholders across the UK. For more than 5 years the IFC has been leading the debate on ethical finance through a series of events based in Edinburgh.

IFC Advisory Board Member Omar Shaikh said: “In recent years we have developed a strong relationship with the Church of Scotland and this project is a result of that positive engagement and the mutual desire to work collaboratively on a project which brings together the best of our respective faiths. The positive message of faith groups working together presents a beacon of light which we hope can inspire many others across the world.

“Scotland has a proud heritage in ethical finance with the savings bank movement able to trace its origins back to the Rev. Henry Duncan of the Church of Scotland. This model was also used as the blueprint for the early Islamic banking attempts in the 1960s, which makes it particularly poignant that this new initiative in being led in Scotland.”

The project will research, shortlist, test and then establish a viable ethical finance business solution. The consultation and business plan phase is expected to last a year, with the first workshop to take place this May in Edinburgh with theological and financial experts coming to Scotland from as far afield as Nigeria, Malaysia and Bahrain.

 

Additional Notes

International Islamic Finance

Worth over $2trn, the Islamic finance sector has witnessed tremendous growth over the past decade. Moving forward a key growth strategy for Islamic financial institutions will be their ability to successfully enter and tap the considerably larger ethical finance arena. Along with the commercial opportunity, by focusing on the inherent convergence in ethical values will increase the appeal of Islamic finance in new global markets and allow an avenue to address the aspirational dissatisfaction growing within the industry as witnessed by key stakeholders raising concerns over excessive synthetic imitation of conventional structures.

Africa and Nigeria specifically is well known for its triple heritage. Often referred to as non-interest finance, Nigeria has been taking a lead in developing this sector to promote financial inclusion.  Ex-Governor of the Central Bank of Nigeria, HH Emir Sanusi commented, “One immediate success of this initiative is how it is bringing together faith communities on their common values. This is powerful example that many globally can take from, including us in Nigeria. Well done to the Islamic Finance Council UK and the Church of Scotland for showing their vision, leadership and bravery.”

Islamic finance in Malaysia has taken considerable market share and attracted many Chinese Malays and those not of the Islamic faith.  Dr Akram Laldin, CEO of Malaysia based Bank Negara body ISRA commented, “Islamic finance is founded on moral and ethical values and these values are shared by different faiths. This joint venture with the Church demonstrates that people from different faiths can work together on the common ground that we share. Together we can strive for the betterment of humanity.”

Scottish communities show leadership

Minister for Europe and International Development, Humza Yousaf, said: “Ethical finance offers a great opportunity to diversify Scotland’s financial services industry, allowing it to grow and prosper. I’m delighted to see the Islamic Finance Council’s hard work in this field acknowledged by the EFICA. The Scottish Government is committed to creating a more socially responsible and fairer economy in Scotland and is building upon our progress to become a worldwide industry leader in the field.”

Since the issuance to the public, in 2013, of its report on the purpose of economic activity the Church of Scotland has promoted a range of new initiatives including the development of the Churches Mutual Credit Union in partnership with other UK churches and support for WEvolution, a pioneering movement developing Self Reliant Groups and social enterprise in Scotland’s poorest communities.

Rev Sally Foster-Fulton, convener of the Church of Scotland’s Church & Society Council said: “In the Church we don’t just want to talk about how we need to do things differently. We want to demonstrate how we can and are. Working with the Islamic Finance Council UK is an important part of that work. Not only are we trying to build a fairer economy together. We are also building vital friendships and relationships across our faiths. That is also really significant in today’s world where these relationships are so often defined by division.”

Scotland’s leading Sunni Muslim theologian, Shaykh Ryzwan commented, “Today marks the beginning of extensive consultation between Muslim faith representatives headed by IFC and its associates and the Church of Scotland on working towards a shared principles framework distilled from the intellectual legacy of the two great faith traditions that will inform the debate on ethical and sustainable models of economy. As the financial crisis of the last decade is being pushed firmly to the back of the collective memory, the systemic non-sustainability of the current financial model further amplifies the need to highlight alternative practice that places human nurturing and the environment at the core of deliberation on what economy should be.

In doing so, it also engages those that question the relevance of religion in the creation of the common good, and provides a new model of Interfaith engagement - moving from dialogue to action. The Scottish context of this initiative, with its unique history in the development of the Enlightenment, in ethical banking as well as its pioneering ecumenical work, serves as the perfect environment in which to embark on this journey.”

UK leading innovation as a global financial hub

Prime Minister David Cameron has stated the UK’s position as a center for Islamic finance. As the first Western government to issue a sovereign sukuk, today’s pioneering development of interfaith collaboration showcases the UK’s ability to innovation and contribute to the global Islamic finance sector.

Lord Sheikh, Patron of the Islamic Finance Council UK and Co-Chair of the All-Party Parliamentary Group on Islamic Finance and Diversity in Financial Markets, said, “The UK has successful positioned itself as the leading Western Hub for Islamic finance with over £20bn in shariah-compliant assets. This pioneering retail focused initiative presents a great opportunity to build not only a robust sustainable business but also demonstrates British communities working together building stronger, interdependent communities.”

 

For more information contact:

Chris Tait, Islamic Finance Council UK
chris@ukifc.com
(m) 07931103573

Rob Flett, Communications Manager, Church of Scotland
rflett@churchofscotland.org.uk
(m) 07764 335793

 

About the Islamic Finance Council UK

The Islamic Finance Council UK (IFC) is a specialist advisory and development body established to promote and enhance the global Islamic and ethical finance industry. Operating since 2005, the IFC Executive Board brings together a unique blend of seasoned practitioners who are recognised leaders in the Islamic finance market and have worked for leading global institutions. The Council has successfully pioneered a number of unique developmental and educational programmes.

www.ukifc.com

 

About the Church of Scotland

The Church of Scotland is Scotland’s national church and is also one of the UK’s largest charities. It serves almost 400,000 members, with more regularly involved in local congregations and our community work. Within the organisation, the Church has around 800 ministers serving in parishes and chaplaincies, supported by professional and administrative staff. The Church has a proud tradition of working to benefit those less well off in society, and campaigns on a range of economic and social welfare issues.

www.churchofscotland.org.uk

END.