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 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.