GEFI & UNDP release Guide to Help Malaysian Banks Support SMEs on Sustainability
On Wednesday 29th June 2022 United Nations Environment Programme Finance Initiative (UNEP FI), in partnership with Global Ethical Finance Initiative (GEFI), published a “Guide for Malaysian Banks supporting SMEs in the Sustainable Recovery from Covid”.
The Guide, launched at the inaugural Ethical Finance ASEAN 2022 summit, aims to assist Malaysian banks in helping Small to Medium-sized Enterprises (SMEs) to embed sustainability / ESG practices as business-as-usual and suggests practical steps and examples.
The findings presented in the Guide, as well as the development of a new Framework for banks, are based on the findings of a desk-based review and interviews with 13 Malaysian and international banks that took place earlier this year.
SMEs play a vital role in the Malaysian economy and, as has been the case across the globe, the research found that Malaysian SMEs have been negatively impacted by the COVID-19 (covid) pandemic. As Governments commit to ‘building back better’ the recovery from covid provides an opportunity to align spending and initiatives towards creating a more sustainable future and taking action to combat pressing issues such as climate change.
The Guide found that SMEs in Malaysia are at an early stage of embedding sustainability as, for many, the focus has been on survival during the covid pandemic. While many corporates have made headway on sustainability initiatives, especially around net zero commitments, there is a risk that SMEs are left behind.
Banks are uniquely positioned to support SMEs in taking action on sustainability, both through finance related activities (such as developing sustainability products) and broader activities (such as capacity building). The research found that during the covid pandemic, Malaysian banks primarily supported SMEs through the disbursement of Government funding and ensuring continuity of business through digitalisation. There has been some wider activity to date but, as we recover from the covid pandemic, momentum is building amongst Malaysian banks to further support SMEs on their sustainability journey and further develop areas such as product development, capacity building, offering a one-stop-shop for sustainability initiatives and accelerator programmes.
The Guide provides a Framework for action that Malaysian banks can take in supporting SMEs in the sustainable recovery from the covid pandemic in three key areas:
- Bank Wide Approach;
- Supporting SMEs; and
- Product Development.
The Framework - which is intended to supplement existing sustainability tools, frameworks and initiatives rather than replace them - identifies 19 key suggestions for bank wide approach, supporting SMEs and provides a step-by-step guide for product development. Each of these areas is supported by several practical steps augmented with of work already being undertaken by Malaysian and international banks.
Banks can play a significant role in supporting SMEs on their sustainability journey and the Guide highlights the appetite amongst Malaysian banks to further assist SMEs in progressing their sustainability journey. Further support could be through assisting SMEs in measuring greenhouse gas (GHG) emissions, educating internal staff, capacity building for SMEs, further development of sustainability products and a greater consideration of the social and governance aspects of sustainability.
The Guide concludes that responsibility for assisting SMEs on sustainability should not lie with banks alone and support is also required from Government and other industry players to incentivise action.
Click Here to visit the UNEP FI page to access the Guide.
Net Zero Pensions at COP26
The risk posed to society by climate change is undeniable. If we fail to limit global warming to below 1.5°C, as agreed at the Paris climate summit in 2015, catastrophic effects will be felt across the globe especially to those who are most vulnerable. US climate envoy John Kerry stated earlier this year that COP26 would be the "the last best chance" to avert the worst environmental consequences for the world.
The pledges made during COP26 could limit global warming to 1.8°C1 and the commitment of international financial companies through the Glasgow Financial Alliance for Net Zero (GFANZ) to $130 trillion of private sector capital to achieve net zero by 2050 are encouraging but the implementation of these pledges and commitments will be the key if we are to meet the Paris Agreement.
The whole economy depends on achieving net zero by 2050 or sooner but pension funds could play a fundamental role in shifting the economy to protecting the planet, even if governments fail to act.
During COP26 at an event hosted at Glasgow University by the Global Ethical Finance Initiative (GEFI), senior representatives from pension funds and asset management came together to discuss net zero pensions. The event was opened with a keynote address from Ivan McKee, Scottish Government’s Minister for Business, Trade, Tourism and Enterprise who noted Scotland’s long history in the pensions industry, with the first mutual life office opened in 1815. He also noted that Edinburgh is now the biggest employer in the UK for jobs in the pensions sector. He highlighted Scotland’s commitment to combatting climate change, being one of the first countries in world to declare a climate emergency, and the need for private sector investment. He stated the ambition for “Scotland to be a superpower when it comes to ESG investment.”
Pension funds are stewards of assets
There was a challenge for pension funds to consider stewardship at the heart of their approach and to invest in a planet that is worth living on. The importance of pension funds playing a role in combatting the climate emergency was highlighted by Faith Ward, Chair of the global body leading change in the sector, the International Investors Group on Climate Change (IIGCC) and also Chief Responsible Investment Officer at one of the biggest UK public sector pensions schemes, Brunel Pension Partnership. She addressed the fears of some pension trustees who see their fiduciary duty as maximising returns by stating that there will be “no fiduciary duty if there is no functioning society or economy”. Pension funds must be active owners of companies to make sure that they decarbonise their operations rather than jettisoning carbon intensive companies from their portfolios allowing big emitters to carry on driving global warming.
Collaboration is key
There needs to be collaboration between government, regulators and industry to deliver on net zero commitments - it will be challenging for pension funds to achieve net zero without collaboration.
During the event, there was a call to government to use regulation and legislation to incentivise investment in companies that are part of the solutions to climate change rather than part of the problem.
It was highlighted that it is important for asset owners like pension funds to work together through groups such as IIGCC, a membership body with over 360 investor members with €49 trillion in assets and ClimateAction100+, an initiative for asset owners to engage with the world’s largest corporate greenhouse gas emitters to take necessary action on climate change. Tim Orton, Managing Director of Investment Solutions at Aegon UK stated that “getting to net zero is not a competitive sport it is an imperative.”
Pension funds working with their asset managers to deliver net zero is also fundamental to amplify the change. Faith Ward highlighted that Brunel Pension Partnership has a formal policy on climate change that clearly sets out the expectations for their asset managers.
Net zero is a transition to a destination rather than a quick fix
Reaching net zero by 2050 will be challenging – many pension funds who embark on the journey to deliver a net zero commitment do not necessarily know exactly how they are going to get there. Making a commitment is a signal to the market of the direction of travel. Barry O’Dwyer, CEO of Royal London, observed that the transition to net zero is unlikely to be quick and it needs to happen in a just and equitable way, this was reiterated by Faith Ward who stated that social impacts alongside climate impacts must be considered.
Action must start now
Although there are still challenges to be overcome, sufficient tools exist for pension funds to start taking action now to deliver net zero by 2050 or earlier. The IIGCC’s net zero framework provides a comprehensive strategy for asset owners to deliver on their net zero commitments. Barry O’Dwyer stated that there was “no time to be passive”.
There are challenges still to be overcome
Challenges still exist around knowing how carbon intensive a portfolio is, expertise on climate change in pension funds, and trustees putting net zero at the centre of the governance of funds. David Russell, Head of Responsible Investment at USS, noted the progress that had been made in respect of data but this has predominantly been focused on public equities, access to data for sovereign debt and private markets remains a challenge. It is important to measure the baseline but also note where climate progress is expected and set milestones for companies. Eva Cairns, Head of Climate Change Strategy at abrdn, noted that temperature metrics alone do not tell the full story, other metrics are necessary to identify transition leaders. She also noted that abrdn were currently working on valuing and calculating avoided emissions.
Tim Orton noted that to achieve net zero we need different capabilities than we have had in the past and highlighted the importance of sustainability professionals and governance structures including steering groups on net zero.
Divestment versus engagement
Engagement was seen as a positive tool to drive decarbonisation in the real economy; divesting from a high emitting company that someone else buys does not reduce their atmospheric emissions and that collective engagement through initiatives like ClimateAction100+ will drive change. It was stressed that engagement with high emitting companies must include measuring where they are now, where they need to go as well as recording the progress made. The Transition Pathway Initiative was identified as a useful tool to assess companies' preparedness for the transition to a low carbon economy.
GEFI has a dedicated net zero pensions workstream and has published two key reports on the topic, the policy positioning paper setting out the key challenges faced by pension funds in their net zero journey and the transition roadmap paper providing practical steps pension funds can take to overcome the key challenges as well as set and deliver on net zero commitments.
View all of the videos from our Path to COP26 programme at https://www.efx.global/cop26/.
UK Pension Funds Required to Report on Climate Change Impact
UK pension funds are now required to report on their climate change impact.
- New legislation puts obligations on UK pension trustees to evaluate and report on the risks and opportunities presented by climate change.2
- It is likely that from October 2021 UK schemes with over £5billion in relevant assets will be required to make disclosures in line with the recommendations from the Task Force on Climate-Related Financial Disclosures (“TCFD”)3 and this requirement may be expanded to smaller schemes as early as 2024.8
- The TCFD recommendations are designed to guide organisations in providing better information on the impact of climate change to support informed capital allocation.4
- TCFD-aligned disclosures will be mandatory across non-financial and financial sectors of the UK economy by 2025 and in New Zealand by 2023.5, 9
The impact of climate change will be felt across all aspects of society and across jurisdictions. The process of transition to a low carbon world needs to involve both individuals and governments alike. Consumer led activism has already started in the pensions industry – our recent blog on Make My Money Matter highlighted that 52% of consumers want their pensions to be part of the solution in tackling climate change. The Pensions Schemes Act 2021 (“the Act”), which achieved Royal Assent on 11 February 2021,1 is further pushing the c.£2 trillion in assets under management of UK occupational pension schemes towards considering the impact of climate change.6 The Act has also laid the foundation for a pensions dashboard to enable individuals to view their pensions online, providing greater transparency.10 The Act also includes increased Pensions Regulator powers and associated criminal offences as well as a toughening of the funding regime for defined benefit schemes.12
The Act requires trustees to ensure there is effective governance in respect of the impact of climate change as well as evaluate and report on the risks and opportunities presented by climate change.2 Guy Opperman, Minister for Pensions, said: “This Act makes our pensions safer, better and greener, as we look to build back better from the pandemic. Its passage will reassure savers that they can, and will, have a retirement they deserve.”7
Draft regulations and statutory guidance, closed for consultation on 10 March 2021, propose that schemes with relevant assets of £5 billion or more as well as all authorised master trusts and authorised collective money purchase schemes will have to produce and publish a TCFD report from October 2021. It is anticipated that these requirements will then be extended to schemes with relevant assets of £1 billion or more from 1 October 2022. An interim review will be carried out in 2023 to determine whether the regulations will be rolled out to smaller schemes, this may be as early as 2024.8
The draft regulations require trustees to:
- implement climate change governance measures and produce a TCFD report containing associated disclosures; and
- publish their TCFD report on a publicly available website, accessible free of charge.3
The TCFD was set up in 2015 to deliver a set of recommendations for voluntary company financial disclosures of climate-related risks. The intention of TCFD is to facilitate an orderly transition to a low carbon economy and ensure that climate-related financial disclosures are comparable and consistent. The TCFD recommendations provide guidance on making disclosures on the opportunities and risks presented by climate change, including physical and transition risks.4
Source: TCFD website
The TCFD recommendations are structured around four thematic areas: Governance, Strategy, Risk Management and Metrics & Targets. Each theme has a few recommended items that should be included in the disclosure. For example, the Governance disclosure includes “Describe the board’s oversight of climate-related risks and opportunities.” The TCFD recommendations are intended to be used as a tool to guide organisations on making climate related disclosures rather than an exact prescriptive blueprint.4
The use of the TCFD recommendations is more widespread than the UK pension sector. In September 2020, New Zealand was the first country to announce that the TCFD will become a mandatory framework, it is expected that c.90% of New Zealand’s assets under management will be required to report using TCFD by 2023.9 On the 9th November 2020, Rishi Sunak, the UK Government’s Finance Minister announced that climate risk reporting will become mandatory for some large companies and financial institutions in the UK by 2021 and will be mandatory across the UK economy by 2025.5 The Canadian government made TCFD reporting mandatory for recipients of covid-19 support funding.11
In the run up to COP26 in Glasgow in November, the UK is making firm commitments to force UK pension funds and other organisations to consider and disclose the risks and opportunities presented by climate change.
References
1Pension Schemes Act 2021 - Parliamentary Bills - UK Parliament
2 Pension Schemes Act 2021 (legislation.gov.uk)
3 Aligning your pension scheme with the TCFD recommendations (publishing.service.gov.uk)
4 About | Task Force on Climate-Related Financial Disclosures (fsb-tcfd.org)
5 Chancellor sets out ambition for future of UK financial services - GOV.UK (www.gov.uk)
6 Pension schemes and climate-related risks - GOV.UK (www.gov.uk)
7 Landmark moment for UK pensions as Bill receives Royal Assent - GOV.UK (www.gov.uk)
11 TCFD adoption continues to grow (accountingforsustainability.org)
12 The Pension Schemes Act 2021.pdf (lcp.uk.com)
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 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.
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.
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.- 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.”
- 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.
- 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.
- 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.
- 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.