This article originally appeared in Radar Issue 03: What Chance Change? Exploring Sustainable Finance.
As the world’s multinational banks move, lend, invest and protect money for customers and clients in the decades to come, they can play a major role in the context of sustainable development.
They must for three main reasons. First, they can enable sustainable growth. The unique capabilities of multinational banks, principally the large universal and investment banks, make these entities key enablers in the shift to more equitable distribution of income and the long-term investments needed to support more sustainable development.
They can also contribute to financial stability. The health of the global economy is inextricably linked with banks’ success. By better managing their own health, banks can contribute to a strong, resilient global economy that protects jobs and livelihoods, avoids collapse in the face of external shocks, and in doing so, provides a platform for more sustainable forms of growth.
Finally, multinational banks can influence financial system transformation. Banks are also at the heart of the contemporary financial system, which underpins both the physiology and psychology of modern business, and that needs to evolve significantly. Multinational banks service not only millions of individuals, but also governments, civil society organizations, and of course, businesses — large and small — across every industry. Banks can therefore leverage their collective knowledge and reach to influence stakeholders to, for example, drive integration of key externalities into the financial system.
And yet based on our tracking of corporate sustainability practices across the industry, we are yet to see a multinational bank that is systematically addressing its role across these three areas. We do, however, observe pockets of good practice emerging.
Morgan Stanley’s new Institute for Sustainable Investing, for example, offers investors a wide range of asset classes and types, covering a spectrum of timeframes and risk-adjusted returns that aims to channel $10 billion of client funds over five years.
Barclays Banking on Change collaboration with Plan U.K. and CARE International combines financial literacy training with a range of new banking products to link local African Village Savings and Loans Associations to formal savings accounts at local Barclays branches, with a target of reaching 400,000 people in 11 developing countries.
Standard Chartered has commissioned social and economic impact assessments of its activities in Ghana and Indonesia to help it better evaluate the impact of its banking products and services.
The Natural Capital Declaration, a collaborative finance sector initiative, which includes a wide range of bank signatories, and aims to integrate natural capital considerations into loans, equity, and fixed income products.
Examples such as these are well designed and illustrate many attributes we would consider best practice. And yet, up against the challenges presented by major environmental, social and economic trends, they do not deliver at the scale and pace needed. And in many cases, they still exist at arms length from core business activities.
On the surface this is perhaps unsurprising. For various reasons, the banking industry has come to sustainability later than others, and in recent years, banks have been preoccupied with multiple issues closer to home: increasingly complex regulation, weak balance sheet positions, a tough macroeconomic environment, profound structural changes, shifting consumer dynamics, subdued revenue growth and low investor confidence, to name a few. For some, survival remains the main focus, while others are reviewing their portfolios and launching major culture change programs. But much more fundamental transformation is required, not least because much of what is required is in banks’ own interest.
To begin with, many traditional drivers of growth for banks are expected to remain weak for some time. That requires them to look beyond traditional areas of growth and redefine how they deliver value to customers. Secondly, very real threats from disruptive non-bank players are emerging across many areas of banking services, including consumer finance, foreign exchange, IPO underwriting, invoice financing and small business lending. There are also increasingly loud calls being heard across many quarters for a transformation in the wider financial system, which is only likely to add external pressure to traditional models of banking. Finally, a significant market opportunity is emerging, driven by a range of macro-trends such as urbanisation, climate change, inequality, and migration. A few examples provide a sense of the scale of the opportunity:
- $110 billion to $275 billion of investment required annually to mitigate and adapt to climate change in developing countries.
- $2.1 trillion to $2.5 trillion of total unmet need for credit by all formal and informal micro, small and medium sized enterprises in emerging markets.
- 2.5 billion adults globally with no access to formal financial services.
- 30 million more international migrants by 2030 who will remit an additional $60 billion to their home countries through low-cost channels.
- World savings in 2013 estimated to be more than $18 trillion, and sponsors of sustainable projects, including large corporate clients, are increasingly searching for capital.
To truly benefit from sustainability-related challenges and opportunities in the way that leaders such as GE, DuPont, M&S and other sustainability-driven innovators have, multinational banks need to be much more systematic in how they approach sustainability. While there are many ways to improve, banks should concentrate on three areas of focus in the short-term:
- Develop a compelling and integrated corporate vision capable of motivating even the most skeptical bank employees, connecting key sustainability trends with business risks and opportunities, and drawing on the sort of language, framing and evidence that will resonate internally.
- Drive much deeper organizational change, going well beyond cultural improvements in basic conduct to build the sort of capacity and incentives that will help bank employees see the opportunities associated with sustainability differently, and then embed it into decision-making, innovation and management practices.
- Integrate sustainability much more extensively into existing financial products and services, while learning from disruptive non-bank entrants to test and scale fundamentally new offerings and business models. Do this by clarifying the full spectrum of risks and opportunities and understanding the needs of both existing and potentially new customers.
While we are seeing significant progress among the multinational universal and investment banks SustainAbility has worked with in recent years, the opportunity space for leadership remains wide open. We believe the benefits for those that fully take this up are there for the taking.