The Radical Old Idea with Keith Skeoch | The ESG Enlightenment | Event Summary
Keith Skeoch spoke about the ‘ESG Enlightenment’ and the power of finance to translate ordinary people’s savings into a powerful force for good in the world.
In the latest Radical Old Idea session from the Global Ethical Finance Initiative, the former CEO of Standard Life Aberdeen and interim chair of the Financial Reporting Council sat down with Royal London Climate Change Lead Kaisie Rayner to discuss the legacy of capitalism, the challenge of the climate crisis and what we can learn from Adam Smith. Watch the session now, or read the summary below.
At the start of the session, the audience of finance sector experts were polled on their views around sustainability. Over 40% of respondents said that their organisations had only started putting sustainability into their decision making in the past 5 years, with a further 17% saying that they had yet to do so, while 75% of respondents felt that the finance sector was not on track to support the massive economic transformation needed to deliver climate action.
Capitalism has, over its 400 year history, been a success story, argued Keith. It has collectivised savings into a force far more powerful than individual savers could ever be. “There has never been a more important time to invest in your future and the economy’s future and it’s your savings that will facilitate those investments”, said Keith, adding that this was “a story you only usually hear during wartime.”
Reflecting on Boris Johnson’s recent claim that greed drove the development of the new COVID-19 vaccines, the former Standard Life Aberdeen CEO agreed that it represented a victory for capitalism, but argued that the real story was the success of regulated capitalism, not unfettered greed. By tailoring the approval process for the vaccine to the unique circumstances we find ourselves in, the state and the market worked together for the good of humanity.
This is a story, as Keith and Kaisie discussed, that would have been familiar to the intellectual father of capitalism himself, Adam Smith. While some of Smith’s modern advocates paint him as a proponent of pure, unregulated capitalism, this was far from the truth. Smith’s most well-known work is the Wealth of Nations, but he also wrote at length about ethics in his other great work, the Theory of Moral Sentiments, which provides the moral purpose to the Wealth of Nations.
The point of the metaphor of the invisible hand – which he only used once in the entire Wealth of Nations – is not that markets should never be regulated for the good of society; in fact, Smith was in favour of this. Seen in the context of the fragmented markets of his time, the metaphor was simply an argument not to restrict foreign trade.
In fact, context has often been a driver of economic theory, suggested Keith. From Keynes’s response to the Great Depression in the 1920s and 30s, to Friedman’s theories about runaway inflation in the 1970s, economics has always responded to the situation it finds itself in. Ironically, however, in the years since Smith, average long-run growth rates have remained roughly stable. More than anything else, economic theory has affected the distribution of resources in society, rather than the total size of the pie.
While theories have responded to economic stimuli, over time they become intellectual straitjackets, confining thinking to a narrow policy paradigm until an external shock forces a re-evaluation. With the instability we have seen over the past few year, Keith argued that, in fact, “time is ripe for a fundamental paradigm shift” in economics and finance. The question, he suggested was “what should be the future of the new policy paradigm”, outlining 5 key factors needed in this new paradigm:
- Economic models which reflect the relationship between finance and other parts of the economy
- A responsible and sustainable corporate sector
- A view of regulation as something which helps markets by aligning them to the public interest
- A recognition that good behaviour minimises the cost of regulation by building trust
- A finance sector committed to putting substance into the mantra of “build back better”
Finance has a huge opportunity to make a difference as we build back better. It is the only way we can build trust and the only way that it will be delivered is by everybody taking personal responsibility: sustainability is everybody’s business.
Path to COP26: Chartered Banker Institute launch Green Finance Essay Competition
The Chartered Banker Institute (CBI) has launched a Green Finance Essay Competition. The professional association, one of the partners of the Global Ethical Finance Initiative’s (GEFI) Path to COP26 campaign, has called for applicants to answer the question of “How can finance professionals actively encourage changes in consumer behaviour to achieve society’s goals on climate change?”, making reference to the UN’s Sustainable Development Goals and the Paris Climate Agreement.
The winner will receive £100 of ethical gift vouchers and have their essay published in the “Pathway to COP26 – the Role of Green Finance” essay series from the CBI and the Social Market Foundation (SMF), as well as receiving the opportunity to present their paper at GEFI’s prestigious Ethical Finance 2020 summit.
“Safe stewardship (of customers’ money) has been a fundamental principle of the Chartered Banker Institute since it was established in 1875. Today, we consider stewardship in its broadest sense – beyond finance to encompass the safe stewardship of our environment and resources.
The transition to a sustainable low-carbon economy is possibly the greatest global challenge for this and future generations, with green finance and green finance professionals playing critical roles.”
Chartered Banker Institute
The competition is open to people of any age in the UK or internationally, and entrants do not need to be members of the CBI. Answers to the question should be no more than 1,500 words and will be judged by a panel including the CEO of the CBI, Simon Thompson. Essays should be submitted, along with a short biography about your career and interest in Green Finance, by Friday 31st July 2020 to the Chartered Banker Institute at this link.
Round Table: Path to COP26 - Financing a Green Future
The Ethical Finance Round Table ‘Path to COP26 – Financing a Green Future’ was held on Feb 27th at Baillie Gifford in Edinburgh. Following a short welcome, Omar Shaikh, GEFI Managing Director outlined GEFI’s plans for 2020:
- Path to COP26
- “Radical Old Idea”
- Ethical Finance Round Tables
- UNDP Finance for Nature Summit
- The SDG Tartan
- Internship programme
This was followed by short presentations from Jonathan Taylor, former Vice President of the European Investment Bank for Environment and Climate Action, and Gary Lapthorn, Head of Sustainability & Responsible Business, Commercial Banking at Lloyds Banking Group.
Jonathan Taylor outlined the history of climate change action, through initial scientific warnings, to the establishment of the United Nations Framework Convention on Climate Change (UNFCCC) at the Earth Summit in Rio in 1992, and the first landmark international treaty agreed at COP3 in Kyoto (1997). Experts from the International Panel on Climate Change (IPCC) then warned that, despite the Kyoto Protocol, global warming was still set to worsen, leading to the all countries agreeing at COP21 in Paris (2015) to a global framework designed to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C.
Coming 5 years after COP21 and the Paris Agreement, COP26 in Glasgow event offers an opportunity to take stock of progress since Paris and update the Agreement where necessary. In particular, countries will present their plans and progress beyond current declared intentions, which IPCC calculate will lead to 2.6°C – 3.2°C temperature rises.
More attention than ever is focused on the role financial services can play in the fight against climate change, acting as an enabler and transition mechanism for policy, risk management and liquidity. There has been optimism around the UK’s leadership on climate-related regulation in finance, particularly through the Bank of England’s Taskforce on Climate-related Finance Disclosures (TCFD). Ensuring Glasgow is a success will require the right template to be in place for all parties to work and agree upon, and this can only happen with significant bilateral diplomatic efforts. The Global Commission on the Economy and Climate calculates that, while a lack of progress poses huge risks to the world economy, bold climate action could deliver at least $26 trillion in economic benefits through 2030.
Gary Lapthorn next outlined Lloyds Banking Group’s commitment to supporting the UK’s transition to a low-carbon economy through leadership in financing sustainability in businesses, homes, vehicle fleets, pensions, insurance and green bonds. One issue found at Lloyds was lack of knowledge and education. Many experienced financial professionals are keen to act and support the transition, but lack confidence in their ability to lead on environmental issues. To address this, Lloyds partnered with the Cambridge Institute for Sustainability Leadership to provide training.
Lloyds is making concrete commitments in terms of both its own operating emissions and those associated with its loan book. It has pledged to halve emissions associated with its loan book by 2030 and to cut operating emissions by 60% over the same timeframe and is currently ahead of schedule. It has also pledged to move to its energy consumption to being 100% derived from renewables and its vehicle fleet to 100% electric. In addition, Lloyds provides financing for a number of environmentally beneficial projects, such as £273m of direct funding for the worlds biggest offshore windfarm, Hornsea Project One.
The presentations from the two speakers were followed by a lively audience discussion, in which participants and speakers explored the practicalities of combatting emissions through finance. The discussion centred on:
- The extent to which financial institutions are making explicit trade-offs between profit and purpose – Lloyds are willing to accept slightly lower returns when companies agree to do the right thing
- Whether looser capital requirements can be used to encourage climate-related lending
- The role of innovation, and specifically financial innovation, in addressing environmental challenges
- Executive renumeration, and the extent to which commitments are enshrined in incentives for decision-makers
- Whether moves towards sustainability are making financial services an attractive career for graduates again, moving on from the “lost decade” experienced after the global financial crisis
COP26 – FINANCE SECTOR MEETS IN SCOTLAND TO BUILD GREENER ECONOMY
PRESS RELEASE FROM THE GLOBAL ETHICAL FINANCE INITIATIVE
EMBARGO: IMMEDIATE
COP26 – FINANCE SECTOR MEETS IN SCOTLAND TO BUILD GREENER ECONOMY
Leading financial institutions will come together in Edinburgh today (THU) for the start of a ‘Path to COP26’ campaign to build a greener global economy. A round table event will explore the role of the finance sector in the transition to a low-carbon and climate-resilient economy in the run-up to the global climate change summit in Glasgow in November.
To start the process of accelerating the combined efforts of the industry, the event will be addressed by Jonathan Taylor, former Vice President (Environment and Climate Action) at the European Investment Bank, and Gary Lapthorn, the head of sustainability and responsible business at Lloyds Banking Group Commercial Banking.The round table has been organised by the Edinburgh-based Global Ethical Finance Initiative (GEFI), which oversees, organises and coordinates a series of programmes to promote finance for positive change.
As part of the ‘Path to COP26’ campaign, GEFI will also host a series of events in the UK and beyond, ahead of the November summit. The campaign is designed to encourage banks, asset management firms and other financial companies to demonstrate their commitment to the climate agenda. According to the United Nations Environment Programme Finance Initiative, the climate transition will require additional investment of at least $60 trillion from now until 2050 – meaning private sector commitments are vital to tackling the climate crisis.
Bold climate action could deliver at least US$26 trillion in economic benefits through to 2030, compared with business-as-usual, a recent report from the Global Commission on the Economy and Climate found.
Gail Hurley, senior consultant to the Global Ethical Finance Initiative and former senior advisor to the UN, said:
“The eyes of the world will be focused on Scotland when senior politicians from across the globe convene at COP26 in Glasgow in November to negotiate the global response to tackling climate change.
“Climate change is a large, systemic financial risk that will change asset values as investment moves away from high carbon assets towards a low carbon economy.
“For financial institutions to become enablers and catalysts they must therefore understand the commercial risks and opportunities and know how to act on them.
“Finance can be a positive force for change, and we call upon organisations from across the globe to sign up to our Path to COP26 declaration to help us assist the financial sector to commit to practical efforts to tackle climate change.”
Jonathan Taylor, former Vice President (Environment and Climate Action) at the European Investment Bank, said:
“COP26 in Scotland will be a key milestone on the road to a successful conclusion to the fight against climate change.
“Expectations are high that countries should commit themselves to demanding targets to meet the agreed goal of the Paris Agreement to limit global warming to below 2 degrees above pre-industrial levels.
“So we should all think about what we can do to help ensure success, including financial institutions.
“The GEFI round table’s ‘Path to COP 26’ initiative makes an excellent contribution, and I am delighted to be part of it.”
Gary Lapthorn, head of sustainability and responsible business at Lloyds Banking Group, Commercial Banking, said:
“Lloyds Bank Commercial Banking is delighted to support the GEFI round table exploring the role financial institutions are playing in the transition to a low-carbon and climate-resilient economy.
“As part of the UK’s leading financial services group, Lloyds Banking Group, we can make a real difference to tackling climate change by helping to finance a greener future together.
“This will require new ways of living, working and investing for our business and our customers.
“That’s why we’re setting ourselves an ambitious goal to accelerate working with customers, government and the market to help reduce the carbon emissions we finance by more than 50 per cent by 2030, equivalent to removing the emissions produced by almost a quarter of UK homes.”
ENDS
NOTES TO EDITORS
More information is available at www.pathtocop26.com
Broadcast interview opportunities with GEFI are available.
A photo of Gail Hurley is available for download here.
A photo of Jonathan Taylor is avilable for download here.
What is the Global Ethical Finance Initiative?
The Global Ethical Finance Initiative (GEFI) oversees, organises and coordinates a series of programmes to promote finance for positive change. It brings together the world’s business, political, and social leaders to build a fairer finance system for people and the planet. The organisation is based in Edinburgh, and hosts the global ethical finance summit. More information is available at www.globalethicalfinance.org/ethical-finance-2020/
What is ethical finance?
A fairer system of financial management that combines profit with better outcomes for people and the planet. The full working definition of ethical finance: A system of financial management or investment that seeks qualitative outcomes other purely the management of returns. Outcomes sought may reflect ideas from faith, environmental and governance theories.
Why does ethical finance matter?
Although ethical finance is not a new concept the financial crisis has led to a growing interest in sustainability, climate change and social justice. This has seen a collective desire to create a fairer, more inclusive and responsible global financial system. Trust in banks is diminishing and today’s generation of consumers believes that investment decisions should reflect the issues they care about. Ethical finance in the UK is valued at around £40billion, creating thousands of sustainable job opportunities. Today, with the world facing a climate emergency there is a pressing need to develop environmentally sustainable financial solutions.
Round Table: Ethical Finance Market Update - Keynote Interviews
Baillie Gifford – EFH Roundtable
16 December 2019, 16:00 – 18:00
Ethical Finance Market Update, Market Trends
Interviewer: Gail Hurley
Panel Participants: Andrew Cave, Thom Kenrick
Summary:
In a change to the usual format this session, once again hosted by Baillie Gifford, comprised of two keynote interviews which provided reflections (from the investment and banking sector) on the evolution of the ethical finance market and how the market will adapt to on-going political, economic, social and environmental uncertainty.
The interviews were conducted by GEFI Senior Consultant Gail Hurley who has recently completed 10 years with the UN in New York as a Senior Advisor.
Gail framed the session within the context of growing interest in driving a fairer, more sustainable financial system and the fact that 2020 will be a significant year for climate issues in Scotland as it welcomes the world to Glasgow for COP26, the UN climate conference.
Andrew Cave, Head of Governance and Sustainability at Baillie Gifford, was first up and he argued that ethical investing has moved from niche to mainstream. While in the past companies would not put their best people and resources into it, today the situation is changing. According to Andrew the overall direction is positive and there is a lot of interest from institutional investors. Continuing challenges include: the complications in defining a positive impact (as the market is still in its early days) and the intractable debate over what constitutes positive social impact.
Andrew offered some fairly candid views on confusion around terminology highlighting the fundamental difference between ESG, which factors issues such as climate risk, data privacy issues and regulation into existing investment paradigms, and responsible investing, which is more directive and it aims to reach a particular outcome. It was suggested that clear rules need to be designed to avoid a risk of diverting money away from those who can make a positive contribution. Another challenge mentioned by Andrew was the lack of quality data on complex value chains. A full view of impact requires improvements in disclosure and standardisation of data, which enables more sophisticated discussions about potential transformations in transportation and production systems.
Thom Kenrick, from the RBS Sustainable Banking team, was next in line to be interviewed by Gail. Unsurprisingly, Thom began by highlighting the major changes that have taken place in the banking sector in recent years and how this has driven RBS’s journey of reform and restructure. The financial crisis fundamentally changed regulation as banks were placed under greater scrutiny by both regulators and wider stakeholders. Thom described the growing interest in ethical finance from RBS customers but pointed out that many still struggle with the lack of consistency in terminology and approaches. In relation to social finance Thom suggested that this means financial inclusion to one, diversity to another and divesting from a power station to someone else. Unlike environmental impact, there is not a right or wrong answer as so many different aspects of social life have no scientific base.
Thom felt that while international standards may help in providing consistency, he pointed out that while PRI (2005) and TCFD (2015) have been around for a number of years few signatories are genuinely delivering to the required standard. That said, according to Thom, the situation is changing as customers, investors and the public are increasingly scrutinising firms so whilst such standards are voluntary, the consequences of not following them risks deterring prospective / existing customers and investors.
Despite the challenges outlined throughout the session the discussion ended on a positive note. Younger generations are more conscious, and their demand is expected to drive ethical finance in the long term. Change takes time and previous developments in ethical finance, whether successful or not, will have played a part in shifting mind-sets and practices. Although nothing is yet set in stone leading market players, such as big Baillie Gifford and RBS, have established dedicated teams, products and services to raise awareness and drive finance for positive change.
2020 GLOBAL ETHICAL FINANCE SUMMIT ANNOUNCED
PRESS RELEASE FROM THE GLOBAL ETHICAL FINANCE INITIATIVE
EMBARGO: IMMEDIATE
2020 GLOBAL ETHICAL FINANCE SUMMIT ANNOUNCED
The 2020 global ethical finance summit has been announced, bringing hundreds of major investors, asset owners and finance leaders to Scotland.
Supported by the Scottish Government and the United Nations Development Programme, the flagship event will focus on building a more sustainable financial system.
With the COP26 UN climate change conference taking place in Glasgow next year, the summit’s theme will be protecting our future.
There will be a focus on how financial services can support inclusive economic growth without depleting natural resources, and how the sector can help deliver the Paris Agreement and the UN’s Sustainable Development Goals.
It comes after the COP25 climate talks in Madrid ended with a compromise deal on the global response to curbing carbon.
The ethical finance conference, to be held at the Edinburgh headquarters of RBS on October 6 and 7, 2020, is organised by the Global Ethical Finance Initiative (GEFI), which oversees, organises and coordinates a series of programmes to promote finance for positive change.
It follows a hugely successful conference in 2019, which included a keynote speech from First Minister Nicola Sturgeon and video addresses from former Prime Minister Gordon Brown and the Archbishop of Canterbury Justin Welby, and attracted over 350 participants from around the world.
The announcement of the 2020 summit was made today (MON) at GEFI’s latest ethical finance round table event in Edinburgh, hosted by Baillie Gifford, which addressed responsible investment and more sustainable models for the banking sector.
Omar Shaikh, managing director of the Global Ethical Finance Initiative, said:
“The 2019 ethical finance summit attracted major international attention, bringing global leaders together to discuss key challenges including products, culture, system change, regulation and maintaining returns in financial services.
“A new way requires holistic thinking which is why the summit uniquely convenes the banking and investment ecosystem, addresses the big challenges we face that rethink capitalism, and connects people to enable partnerships to produce ethical financial solutions.
“To build on this desire for positive change, we’re bringing the finance world back to Scotland in 2020 for our next global summit in October.
“With COP26 taking place in Glasgow just a few weeks later, it significantly enhances the global prominence of this year’s summit and provides an excellent opportunity to focus on climate finance.
“Moving from talk to action, our theme will be protecting the future for everyone.”
Kirsty Britz, director of sustainable banking at RBS, said:
“We are looking forward to once again hosting the Global Ethical Finance Summit next year.
“The conference will be an important milestone in an exciting year for Scotland, with world leaders set to come to Glasgow for the UN’s COP26 climate talks in November.
“As a founding signatory to the UN Principles for Responsible Banking, RBS has committed to further align our strategy with the Paris Climate Agreement and Sustainable Development Goals.
“The global ethical finance summit provides an excellent opportunity for us to work collaboratively with stakeholders, peers and partners who are leading the agenda.”
Andrew Cave, head of governance and sustainability with Baillie Gifford, said:
“Following the success of this year’s event we are delighted to be supporting Ethical Finance 2020 in Edinburgh next year.
“The global summit is an important platform for facilitating collaborative and insightful discussions that challenge and inspire asset owners and financial institutions to invest responsibly and take practical actions to deliver positive impact for people and the planet.”
ENDS
NOTES TO EDITORS
More details on Ethical Finance 2020 can be found here: https://www.globalethicalfinance.org/ethical-finance-2020/
A 2019 event summary can be found here:
https://www.globalethicalfinance.org/wp-content/uploads/2019/11/EF19-Summary.pdf
A photo of Omar Shaikh can be downloaded here
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. TSDGe 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: 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.