BY Kiran Dhanapala
GLOBAL GOLD STANDARD
How banks can align investments with sustainability
The Sustainable Development Goals (SDGs) present an opportunity to generate US$ 12 trillion a year in economic growth and 380 million jobs. Aligning corporate investment with SDGs and the Paris Agreement will increasingly be the business of banks.
Banks and other financial institutions often use sustainability in their branding and communications but their track record on sustainable financial commitments warrants further scrutiny.
The World Resources Institute reviewed 50 of the largest global private sector banks (at July 2019) and concluded that only about half had made a sustainable finance commitment. While a public pledge signals value internally and externally, it must be measurable and demonstrate new action to be meaningful.
The terms and definitions for sustainable finance vary, so evaluating and comparing banks’ sustainable financial commitments and targets – in addition to accounting for variations in time horizons – is a complex process.
Fossil fuel investments continue; often alongside sustainable finance targets such as for renewable energy.
The fossil fuel financing methodology lacks clarity and this makes comparisons difficult. And a lack of disclosed methodology to measure financial commitments is apparent with less than half the reviewed banks doing so. They report on progress but rarely disclose accounting methodologies. An annual fossil fuel balance report card concludes that global banks are aligned with climate disaster. It notes that 33 global banks lend and underwrite fossil fuel industry activities to the tune of US$ 1.9 trillion (2016-2018). And it calls for banks to stop financing fossil fuel expansion, and activities that negatively impact human rights and indigenous populations.
The first review of SDG achievements highlights the dangers of worsening social inequalities and potentially irreversible declines in natural environment, and calls for urgent transformation of human activities. It proposes that the UN promotes a new sustainable development investment label to incentivise and reward industry funding, and sustainable development by financial markets.
Sustainable finance is becoming more standardised globally. In September, 130 banks with 47 trillion dollars in assets and the UN launched the Principles for Responsible Banking (PRBs). They support alignment of banks’ business strategy with societal goals and provide a framework for
a sustainable banking system that contributes to society – particularly SDGs and the Paris Agreement.
The PRBs support banks to take three steps: impact analysis; target setting and implementation; and accountability. Banks conduct self-assessments and publish initial reports within 18 months of becoming signatories, and annually thereafter. Steps for full implementation are required in four years.
Sustainable finance as defined by the Sustainable Banking Network (SBN) includes part and/or all of the following: integrating environmental, social and governance considerations into investment and lending decisions; lending and investment to green industries or projects for positive impacts; and CSR initiatives including banks’ management of environmental and social footprints.
The shift to sustainable finance can be aided by regulation, industry led voluntary approaches or a mix of industry led initiatives and policy leadership, beginning with voluntary principles championed by banking associations and reinforced by regulatory action as in Sri Lanka.
Regulators are acting to strengthen the shift to sustainable finance. SBN is an IFC facilitated group of regulators, banking associations and environmental regulators from emerging markets that advocates sustainable finance, and draws on global good practices. The Central Bank of Sri Lanka (CBSL) has been among its 35 members since 2016.
In April, the Central Bank launched the Roadmap for Sustainable Finance in Sri Lanka, which is aligned with Vision 2030 on national sustainable developmental priorities. It covers the financial sector with time bound actions for each sub-sector. Sustainability considerations have also been incorporated by the Colombo Stock Exchange (CSE).
The Sri Lanka Banks’ Association spearheads efforts of Sustainable Banking Initiative signatory banks with capacity building initiatives funded by four European development finance institutions. This includes a guide to operationalising agreed principles, a website, a digital training platform, and specialised training for bank staff and consultants. It positions banks to meet CBSL’s regulatory expectations as outlined in the road map.
Sri Lanka’s achievements are documented in the SBN’s latest country progress report, which highlights progress from ‘formulating’ under the preparation stage to ‘developing’ under the implementation phase. This implies more scrutiny of how banks manage portfolios and footprints, amid greater regulation and reporting becoming the norm.